KMB_2012_3Q10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________  
Commission file number 1-225
 
KIMBERLY-CLARK CORPORATION
(Exact name of registrant as specified in its charter)

 
Delaware
 
39-0394230
(State or other jurisdiction of
incorporation)
 
(I.R.S. Employer
Identification No.)
P. O. Box 619100
Dallas, Texas
75261-9100
(Address of principal executive offices)
(Zip code)
(972) 281-1200
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
As of October 29, 2012, there were 391,285,578 shares of the Corporation's common stock outstanding.
 



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(Unaudited)

 
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Millions of dollars, except per share amounts)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Net Sales
 
$
5,246

 
$
5,382

 
$
15,756

 
$
15,670

Cost of products sold
 
3,480

 
3,794

 
10,531

 
11,062

Gross Profit
 
1,766

 
1,588

 
5,225

 
4,608

Marketing, research and general expenses
 
988

 
943

 
3,003

 
2,804

Other (income) and expense, net
 
(5
)
 
(17
)
 
(15
)
 
(27
)
Operating Profit
 
783

 
662

 
2,237

 
1,831

Interest income
 
4

 
5

 
13

 
13

Interest expense
 
(70
)
 
(70
)
 
(212
)
 
(205
)
Income Before Income Taxes and Equity Interests
 
717

 
597

 
2,038

 
1,639

Provision for income taxes
 
(223
)
 
(174
)
 
(621
)
 
(499
)
Income Before Equity Interests
 
494

 
423

 
1,417

 
1,140

Share of net income of equity companies
 
43

 
35

 
125

 
122

Net Income
 
537

 
458

 
1,542

 
1,262

Net income attributable to noncontrolling interests
 
(20
)
 
(26
)
 
(59
)
 
(72
)
Net Income Attributable to Kimberly-Clark Corporation
 
$
517

 
$
432

 
$
1,483

 
$
1,190

 
 
 
 
 
 
 
 
 
Per Share Basis:
 
 
 
 
 
 
 
 
Net Income Attributable to Kimberly-Clark Corporation
 
 
 
 
 
 
 
 
Basic
 
$
1.31

 
$
1.10

 
$
3.77

 
$
3.00

Diluted
 
$
1.30

 
$
1.09

 
$
3.73

 
$
2.98

Cash Dividends Declared
 
$
0.74

 
$
0.70

 
$
2.22

 
$
2.10

See Notes to Consolidated Financial Statements.

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Millions of dollars)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Net Income
 
$
537

 
$
458

 
$
1,542

 
$
1,262

Other Comprehensive Income, Net of Tax:
 
 
 
 
 
 
 
 
Unrealized currency translation adjustments
 
141

 
(664
)
 
133

 
(224
)
Employee postretirement benefits
 
(54
)
 
45

 
(46
)
 
45

Other
 
(10
)
 
(8
)
 
(10
)
 
(36
)
Total Other Comprehensive Income, Net of Tax
 
77

 
(627
)
 
77

 
(215
)
Comprehensive Income
 
614

 
(169
)
 
1,619

 
1,047

Comprehensive income attributable to noncontrolling interests
 
(27
)
 
(2
)
 
(70
)
 
(58
)
Comprehensive Income Attributable to Kimberly-Clark Corporation
 
$
587

 
$
(171
)
 
$
1,549

 
$
989

See Notes to Consolidated Financial Statements.

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
 
(Millions of dollars)
 
September 30
2012
 
December 31
2011
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
1,249

 
$
764

Accounts receivable, net
 
2,734

 
2,602

Inventories
 
2,373

 
2,356

Other current assets
 
570

 
561

Total Current Assets
 
6,926

 
6,283

 
 
 
 
 
Property, Plant and Equipment
 
18,081

 
18,240

Less accumulated depreciation
 
9,982

 
10,191

Property, Plant and Equipment, net
 
8,099

 
8,049

Investments in Equity Companies
 
398

 
338

Goodwill
 
3,331

 
3,340

Other Intangible Assets
 
247

 
265

Long-Term Notes Receivable
 
395

 
394

Other Assets
 
641

 
704

 
 
$
20,037

 
$
19,373

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Debt payable within one year
 
$
1,274

 
$
706

Trade accounts payable
 
2,343

 
2,388

Accrued expenses
 
2,117

 
2,026

Other current liabilities
 
291

 
277

Total Current Liabilities
 
6,025

 
5,397

Long-Term Debt
 
5,130

 
5,426

Noncurrent Employee Benefits
 
1,410

 
1,460

Other Liabilities
 
1,086

 
1,014

Redeemable Preferred and Common Securities of Subsidiaries
 
547

 
547

Stockholders' Equity
 
 
 
 
Kimberly-Clark Corporation
 
5,535

 
5,249

Noncontrolling interests
 
304

 
280

Total Stockholders' Equity
 
5,839

 
5,529

 
 
$
20,037

 
$
19,373

See Notes to Consolidated Financial Statements.

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Table of Contents



KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(Unaudited)
 
 
 
Nine Months Ended
September 30
(Millions of dollars)
 
2012
 
2011
 
 
 
 
 
Operating Activities
 
 
 
 
Net income
 
$
1,542

 
$
1,262

Depreciation and amortization
 
642

 
821

Stock-based compensation
 
57

 
37

Increase in operating working capital
 
(335
)
 
(155
)
Deferred income taxes
 
320

 
200

Net losses on asset dispositions
 
15

 
1

Equity companies' earnings in excess of dividends paid
 
(53
)
 
(46
)
Postretirement benefits
 
(11
)
 
(331
)
Other
 
(8
)
 
(18
)
Cash Provided by Operations
 
2,169

 
1,771

Investing Activities
 
 
 
 
Capital spending
 
(763
)
 
(656
)
Proceeds from maturity of note receivable
 

 
220

Proceeds from sales of investments
 
14

 
21

Proceeds from dispositions of property
 
6

 
23

Investments in time deposits
 
(61
)
 
(122
)
Maturities of time deposits
 
78

 
115

Other
 
(3
)
 
4

Cash Used for Investing
 
(729
)
 
(395
)
Financing Activities
 
 
 
 
Cash dividends paid
 
(859
)
 
(824
)
Net increase in short-term debt
 
464

 
14

Proceeds from issuance of long-term debt
 
315

 
799

Repayments of long-term debt
 
(471
)
 
(20
)
Cash paid on redeemable preferred securities of subsidiary
 
(21
)
 
(40
)
Proceeds from exercise of stock options
 
523

 
294

Acquisitions of common stock for the treasury
 
(962
)
 
(1,246
)
Other
 
25

 
(8
)
Cash Used for Financing
 
(986
)
 
(1,031
)
Effect of exchange rate changes on Cash and Cash Equivalents
 
31

 
11

Increase in Cash and Cash Equivalents
 
485

 
356

Cash and Cash Equivalents, beginning of year
 
764

 
876

Cash and Cash Equivalents, end of period
 
$
1,249

 
$
1,232

See Notes to Consolidated Financial Statements.

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected.
For further information, refer to the Consolidated Financial Statements and footnotes included in our Annual Report on Form  10-K for the year ended December 31, 2011. The terms "Corporation," "Kimberly-Clark," "K-C," "we," "our" and "us" refer to Kimberly-Clark Corporation and its consolidated subsidiaries.
Highly Inflationary Accounting for Venezuelan Operations
Our Venezuelan subsidiary ("K-C Venezuela") accounts for its operations as highly inflationary, as required by GAAP.  Under highly inflationary accounting, K-C Venezuela's functional currency became the U.S. dollar, and its income statement and balance sheet are measured into U.S. dollars using both current and historical rates of exchange.  The effect of changes in exchange rates on bolivar-denominated monetary assets and liabilities is reflected in earnings in Other (income) and expense, net.  We determined that the Central Bank of Venezuela regulated currency exchange system rate of 5.4 bolivars per U.S. dollar was the appropriate exchange rate to measure K-C Venezuela's bolivar-denominated transactions into U.S. dollars during 2011 and through September 30, 2012.


Note 2. Fair Value Information
Fair Value Measurements
The following fair value information is based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:
Level 1 – Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require inputs that are significant to the valuation and are unobservable.
During the nine months ended September 30, 2012 and for full year 2011, there were no significant transfers among level 1, 2, or 3 fair value determinations.
Set forth below are the assets and liabilities that are measured on a recurring basis at fair value and the inputs used to develop those fair value measurements.
 
September 30
2012
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
(Millions of dollars)
Assets
 
 
 
 
 
 
 
Company-owned life insurance ("COLI")
$
49

 
$

 
$
49

 
$

Available-for-sale securities
17

 
17

 

 

Derivatives
67

 

 
67

 

Total
$
133

 
$
17

 
$
116

 
$

Liabilities
 
 
 
 
 
 
 
Derivatives
$
68

 
$

 
$
68

 
$


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Table of Contents

 
December 31
2011
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
 
 
(Millions of dollars)
 
 
Assets
 
 
 
 
 
 
 
COLI
$
45

 
$

 
$
45

 
$

Available-for-sale securities
15

 
15

 

 

Derivatives
61

 

 
61

 

Total
$
121

 
$
15

 
$
106

 
$

Liabilities
 
 
 
 
 
 
 
Derivatives
$
120

 
$

 
$
120

 
$

The COLI policies are a source of funding primarily for our nonqualified employee benefits and are included in other assets. Available-for-sale securities are included in other assets. See Note 8 for information on the classification of derivatives in the Condensed Consolidated Balance Sheet.
Level 1 Fair Values - The fair values of certain available-for-sale securities are based on quoted market prices in active markets for identical assets. Unrealized losses on these securities were not significant at September 30, 2012 and December 31, 2011 and have been recorded in other comprehensive income until realized. The unrealized losses have not been recognized in earnings because we have both the intent and ability to hold the securities for a period of time sufficient to allow for an anticipated recovery of fair value to the cost of these securities.
Level 2 Fair Values - The fair value of the COLI policies is derived from investments in a mix of money market, fixed income and equity funds managed by unrelated fund managers. The fair values of derivatives used to manage interest rate risk and commodity price risk are based on LIBOR rates and interest rate swap curves and NYMEX price quotations, respectively. The fair value of hedging instruments used to manage foreign currency risk is based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. Additional information on our use of derivative instruments is contained in Note 8.

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Fair Value Disclosures
The following table includes the fair value of our financial instruments for which disclosure of fair value is required:
 
Fair Value
Hierarchy Level
 
Carrying
Amount
 
Estimated
Fair  Value
 
Carrying
Amount
 
Estimated
Fair  Value
 
 
September 30, 2012
 
December 31, 2011
 
 
 
(Millions of dollars)
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(a)
1
 
$
1,249

 
$
1,249

 
$
764

 
$
764

Time deposits(b)
1
 
81

 
81

 
95

 
95

Note receivable(c)
3
 
395

 
386

 
394

 
373

Liabilities and redeemable preferred and common securities of subsidiaries
 
 
 
 
 
 
 
 
 
Short-term debt(d)
2
 
553

 
553

 
87

 
87

Monetization loan(c)
3
 
397

 
398

 
397

 
386

Long-term debt(e)
2
 
5,454

 
6,596

 
5,648

 
6,671

Redeemable preferred securities of subsidiary(c)
3
 
506

 
553

 
506

 
568

Redeemable common securities of subsidiary(f)
3
 
41

 
41

 
41

 
41

(a) 
Cash equivalents are comprised of certificates of deposit, time deposits and other interest-bearing investments with original maturity dates of 90 days or less. Cash equivalents are recorded at cost, which approximates fair value.
(b) 
Time deposits, included in Other current assets on the Condensed Consolidated Balance Sheet, are comprised of deposits with original maturities of more than 90 days but less than one year. Time deposits are recorded at cost, which approximates fair value.
(c) 
The note, monetization loan and redeemable preferred securities of subsidiary are not traded in active markets. Accordingly, their fair values were calculated using a floating rate pricing model that compared the stated spread to the fair value spread to determine the price at which each of the financial instruments should trade. The model used the following inputs to calculate fair values: face value, current LIBOR rate, unobservable fair value credit spread, stated spread, maturity date and interest payment dates. The difference between the carrying amount of the note and its fair value represents an unrealized loss position for which an other-than-temporary impairment has not been recognized in earnings because we have both the intent and ability to hold the note for a period of time sufficient to allow for an anticipated recovery of fair value to the carrying amount of the note.
(d) 
Short-term debt is comprised of U.S. commercial paper and other similar short-term debt issued by non-U.S. subsidiaries, all of which are recorded at cost, which approximates fair value.
(e) 
Long-term debt excludes the monetization loan and includes the current portion ($721 million and $619 million at September 30, 2012 and December 31, 2011, respectively) of these debt instruments. Fair values were estimated based on quoted prices for financial instruments for which all significant inputs were observable, either directly or indirectly.
(f) 
The fair value of the redeemable common securities of subsidiary was based on various inputs, including an independent third-party appraisal, adjusted for current market conditions.


Note 3. Pulp and Tissue Restructuring Actions
On January 21, 2011, we initiated a pulp and tissue restructuring plan ("The Restructuring") in order to exit our remaining integrated pulp manufacturing operations and improve the underlying profitability and return on invested capital of our consumer tissue and K-C Professional ("KCP") businesses. The Restructuring involves the streamlining, sale or closure of six of our manufacturing facilities around the world. In conjunction with these actions, we exited certain non-strategic products, primarily non-branded offerings, and transferred some production to lower-cost facilities in order to improve overall profitability and returns.
In addition, on January 24, 2012, we announced our decision to streamline an additional manufacturing facility in North America ("Additional Streamlining") to further enhance the profitability of our consumer tissue business.
Both restructuring actions are anticipated to be substantially completed by the end of 2012. The restructuring actions are expected to result in cumulative pre-tax charges of approximately $550 to $600 million ($385 to $420 million after tax) over 2011 and 2012.

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Cash costs related to the streamlining of operations, sale or closure, relocation of equipment, severance and other expenses are expected to account for approximately 30 to 40 percent of the charges. Noncash charges consist primarily of incremental depreciation.
Through September 30, 2012, cumulative pre-tax charges for the restructuring actions were $500 million ($345 million after tax), including cumulative pre-tax cash charges of $135 million.  On a geographic basis, these cumulative pre-tax charges were incurred as follows: North America - $262 million; Australia - $160 million and Other - $78 million.  On a business segment basis, these cumulative pre-tax charges were incurred as follows: Consumer Tissue - $437 million; K-C Professional & other - $61 million and Other (income) and expense, net - $2 million.
The following charges were incurred in connection with the restructuring actions:
 
Three Months Ended September 30
 
2012
 
2011
 
The
Restructuring
 
Additional
Streamlining
 
Total
 
The
Restructuring
 
(Millions of dollars)
Incremental depreciation
$

 
$
6

 
$
6

 
$
76

Charges for workforce reductions

 

 

 
11

Asset write-offs

 

 

 
5

Other exit costs
22

 
2

 
24

 
3

Cost of products sold
22

 
8

 
30

 
95

Charges for workforce reductions included in Marketing, research and general expenses
1

 

 
1

 

Provision for income taxes
(12
)
 
(3
)
 
(15
)
 
(29
)
Net charges
$
11

 
$
5

 
$
16

 
$
66

 
Nine Months Ended September 30
 
2012
 
2011
 
The
Restructuring
 
Additional
Streamlining
 
Total
 
The
Restructuring
 
(Millions of dollars)
Incremental depreciation
$
7

 
$
18

 
$
25

 
$
192

Charges for workforce reductions

 
3

 
3

 
54

Asset write-offs
11

 

 
11

 
13

Other exit costs
42

 
2

 
44

 
3

Cost of products sold
60

 
23

 
83

 
262

Charges for workforce reductions included in Marketing, research and general expenses
2

 

 
2

 
5

Provision for income taxes
(20
)
 
(9
)
 
(29
)
 
(85
)
Net charges
$
42

 
$
14

 
$
56

 
$
182

See Note 10 for additional information on the pulp and tissue restructuring charges by segment.
Pre-tax charges for the restructuring actions relate to activities in the following geographic areas:
 
Three Months Ended September 30, 2012
 
North
America
 
Australia
 
Other
 
Total
 
(Millions of dollars)
Incremental depreciation
$
6

 
$

 
$

 
$
6

Charges for workforce reductions
1

 

 

 
1

Other exit costs
3

 
22

 
(1
)
 
24

Total charges
$
10

 
$
22

 
$
(1
)
 
$
31



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Table of Contents

 
Nine Months Ended September 30, 2012
 
North
America
 
Australia
 
Other
 
Total
 
(Millions of dollars)
Incremental depreciation
$
24

 
$
1

 
$

 
$
25

Charges for workforce reductions
5

 

 

 
5

Asset write-offs
11

 

 

 
11

Other exit costs
18

 
26

 

 
44

Total charges
$
58

 
$
27

 
$

 
$
85


 
Three Months Ended September 30, 2011
 
North
America
 
Australia
 
Other
 
Total
 
(Millions of dollars)
Incremental depreciation
$
53

 
$
19

 
$
4

 
$
76

Charges for workforce reductions
10

 

 
1

 
11

Asset write-offs
2

 
3

 

 
5

Other exit costs
1

 
2

 

 
3

Total charges
$
66

 
$
24

 
$
5

 
$
95


 
Nine Months Ended September 30, 2011
 
North
America
 
Australia
 
Other
 
Total
 
(Millions of dollars)
Incremental depreciation
$
123

 
$
59

 
$
10

 
$
192

Charges for workforce reductions
10

 
46

 
3

 
59

Asset write-offs
8

 
5

 

 
13

Other exit costs
1

 
2

 

 
3

Total charges
$
142

 
$
112

 
$
13

 
$
267

The following summarizes the cash charges recorded and reconciles these charges to accrued expenses for the restructuring actions at September 30:
(Millions of dollars)
 
2012
 
2011
 
 
 
 
 
Accrued expenses - beginning of year
 
$
37

 
$

Charges for workforce reductions and other exit costs
 
49

 
62

Cash payments
 
(65
)
 
(34
)
Currency and other
 
2

 
15

Accrued expenses - September 30
 
$
23

 
$
43




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Table of Contents

Note 4. Inventories
The following schedule presents a summary of inventories by major class:
 
 
September 30, 2012
 
December 31, 2011
(Millions of dollars)
 
LIFO
 
Non-
LIFO
 
Total
 
LIFO
 
Non-
LIFO
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
At the lower of cost, determined on the FIFO or weighted-average cost methods, or market:
 
 
 
 
 
 
 
 
 
 
 

Raw materials
 
$
153

 
$
334

 
$
487

 
$
163

 
$
334

 
$
497

Work in process
 
204

 
140

 
344

 
245

 
126

 
371

Finished goods
 
667

 
803

 
1,470

 
708

 
760

 
1,468

Supplies and other
 

 
321

 
321

 

 
300

 
300

 
 
1,024

 
1,598


2,622


1,116


1,520

 
2,636

Excess of FIFO or weighted-average cost over LIFO cost
 
(249
)
 

 
(249
)
 
(280
)
 

 
(280
)
Total
 
$
775

 
$
1,598

 
$
2,373

 
$
836

 
$
1,520

 
$
2,356

We use the LIFO method of valuing inventory for financial reporting purposes for most U.S. inventories. Interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time.


Note 5. Employee Postretirement Benefits
The table below presents net periodic benefit cost information for defined benefit plans and other postretirement benefit plans:
 
 
Defined
Benefit Plans
 
Other Postretirement
Benefit Plans
 
 
Three Months Ended September 30
(Millions of dollars)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Service cost
 
$
10

 
$
14

 
$
3

 
$
3

Interest cost
 
69

 
77

 
9

 
10

Expected return on plan assets
 
(82
)
 
(87
)
 

 

Recognized net actuarial loss
 
27

 
23

 

 

Other
 
3

 
4

 
1

 

Net periodic benefit cost
 
$
27

 
$
31

 
$
13

 
$
13

 
 
Defined
Benefit Plans
 
Other Postretirement
Benefit Plans
 
 
Nine Months Ended September 30
(Millions of dollars)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Service cost
 
$
34

 
$
42

 
$
11

 
$
10

Interest cost
 
209

 
231

 
28

 
32

Expected return on plan assets
 
(247
)
 
(260
)
 

 

Recognized net actuarial loss
 
82

 
70

 

 

Other
 
20

 
6

 

 
2

Net periodic benefit cost
 
$
98

 
$
89

 
$
39

 
$
44

For the nine months ended September 30, 2012 and 2011, we made cash contributions of $95 million and $416 million, respectively, to our pension trusts. We currently anticipate contributing approximately $100 million for the full year 2012 to our pension trusts.


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Note 6. Earnings Per Share ("EPS")
There are no adjustments required to be made to net income for purposes of computing basic and diluted EPS. The average number of common shares outstanding is reconciled to those used in the basic and diluted EPS computations as follows:
 
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Millions of shares)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Average shares outstanding
 
393.9

 
392.1

 
393.8

 
395.7

Participating securities
 

 
0.1

 

 
0.4

Basic
 
393.9

 
392.2

 
393.8

 
396.1

Dilutive effect of stock options
 
1.7

 
1.6

 
1.9

 
1.5

Dilutive effect of restricted share and restricted share unit awards
 
1.1

 
1.4

 
1.4

 
1.2

Diluted
 
396.7

 
395.2

 
397.1

 
398.8

There were no significant outstanding options excluded from the computation of diluted EPS during the three and nine month periods ended September 30, 2012. Outstanding options during the three and nine month periods ended September 30, 2011 of 3.2 million and 4.8 million, respectively, were not included in the computation of diluted EPS mainly because the exercise prices of the options were greater than the average market price of the common shares during the periods.
The number of common shares outstanding as of September 30, 2012 and 2011 was 392.3 million and 393.3 million, respectively.


Note 7. Stockholders' Equity
Set forth below are reconciliations for the nine months ended September 30, 2012 and 2011 of the carrying amount of total stockholders' equity from the beginning of the period to the end of the period. In addition, each of the reconciliations displays the amount of net income allocable to redeemable securities of subsidiaries.
 
 
 
 
Stockholders'  Equity
Attributable to
 
 
(Millions of dollars)
 
Comprehensive
Income
 
The
Corporation
 
Noncontrolling
Interests
 
Redeemable
Securities
 of
Subsidiaries
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
 
 
$
5,249

 
$
280

 
$
547

Comprehensive Income:
 
 
 
 
 
 
 
 
Net income
 
$
1,542

 
1,483

 
36

 
23

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Unrealized translation
 
133

 
124

 
9

 

Employee postretirement benefits
 
(46
)
 
(48
)
 
2

 

Other
 
(10
)
 
(10
)
 

 

Total Comprehensive Income
 
$
1,619

 
 
 
 
 
 
Stock-based awards
 
 
 
516

 

 

Income tax benefits on stock-based compensation
 
 
 
39

 

 

Shares repurchased
 
 
 
(1,006
)
 

 

Recognition of stock-based compensation
 
 
 
57

 

 

Dividends declared
 
 
 
(874
)
 
(20
)
 

Other
 
 
 
5

 
(2
)
 
(2
)
Return on redeemable securities of subsidiaries and noncontrolling interests
 
 
 

 
(1
)
 
(21
)
Balance at September 30, 2012
 
 
 
$
5,535

 
$
304

 
$
547

The change in net unrealized currency translation adjustments for the nine months ended September 30, 2012 was due to a weakening of the U.S. dollar against most foreign currencies.

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In the nine months ended September 30, 2012, we repurchased 12.7 million shares at a total cost of $980 million.
 
 
 
 
Stockholders' Equity
Attributable to
 
 
(Millions of dollars)
 
Comprehensive
Income
 
The
Corporation
 
Noncontrolling
Interests
 
Redeemable
Securities
of
Subsidiaries
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
 
 
 
$
5,917

 
$
285

 
$
1,047

Comprehensive Income:
 
 
 
 
 
 
 
 
Net income
 
$
1,262

 
1,190

 
30

 
42

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Unrealized translation
 
(224
)
 
(209
)
 
(15
)
 

Employee postretirement benefits
 
45

 
44

 
1

 

Other
 
(36
)
 
(36
)
 

 

Total Comprehensive Income
 
$
1,047

 
 
 
 
 
 
Stock-based awards
 
 
 
306

 

 

Income tax benefits on stock-based compensation
 
 
 
7

 

 

Shares repurchased
 
 
 
(1,246
)
 

 

Recognition of stock-based compensation
 
 
 
37

 

 

Dividends declared
 
 
 
(830
)
 
(17
)
 
(1
)
Other
 
 
 
(1
)
 
1

 
(1
)
Return on redeemable securities of subsidiaries and noncontrolling interests
 
 
 

 
(1
)
 
(40
)
Balance at September 30, 2011
 
 
 
$
5,179

 
$
284

 
$
1,047

Net unrealized currency gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries, except those in highly inflationary economies, are recorded in Accumulated Other Comprehensive Income ("AOCI"). For these operations, changes in exchange rates generally do not affect cash flows; therefore, unrealized translation adjustments are recorded in AOCI rather than net income. Upon sale or substantially complete liquidation of any of these subsidiaries, the applicable unrealized translation adjustment would be removed from AOCI and reported as part of the gain or loss on the sale or liquidation.
Also included in unrealized translation amounts are the effects of foreign exchange rate changes on intercompany balances of a long-term investment nature and transactions designated as hedges of net foreign investments.


Note 8. Objectives and Strategies for Using Derivatives
As a multinational enterprise, we are exposed to financial risks, such as changes in foreign currency exchange rates, interest rates, commodity prices and the value of investments of our defined benefit pension plans. We employ a number of practices to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments. Our policies allow the use of derivatives for risk management purposes and prohibit their use for speculation. Our policies also prohibit the use of any leveraged derivative instrument. Consistent with our policies, foreign currency derivative instruments, interest rate swaps and locks and the majority of commodity hedging contracts are entered into with major financial institutions.
On the date a derivative contract is entered into, we formally designate certain derivatives as cash flow, fair value or net investment hedges and establish how the effectiveness of these hedges will be assessed and measured. This process links the derivatives to the transactions or financial balances they are hedging. Changes in the fair value of derivatives not designated as hedging instruments are recorded in earnings as they occur.

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Set forth below is a summary of the fair values of our derivative instruments classified by the risks they are used to manage:
 
Assets
 
Liabilities
 
September 30
2012
 
December 31
2011
 
September 30
2012
 
December 31
2011
 
(Millions of dollars)
Foreign currency exchange risk
$
59

 
$
45

 
$
18

 
$
33

Interest rate risk
6

 
16

 
44

 
75

Commodity price risk
2

 

 
6

 
12

Total
$
67

 
$
61

 
$
68

 
$
120

The derivative assets are presented in the Condensed Consolidated Balance Sheet in Other current assets and Other assets, as appropriate. The derivative liabilities are presented in the Condensed Consolidated Balance Sheet in Accrued expenses and Other liabilities, as appropriate.
Foreign Currency Exchange Risk Management
We have a centralized U.S. dollar functional currency international treasury operation ("In-House Bank") that manages foreign currency exchange risks by netting, on a daily basis, our exposures to recorded non-U.S. dollar assets and liabilities and entering into derivative instruments with third parties whenever our net exposure in any single currency exceeds predetermined limits. These derivative instruments are not designated as hedging instruments. Changes in the fair value of these instruments are recorded in earnings when they occur. The In-House Bank also records the gain or loss on the remeasurement of its non-U.S. dollar-denominated monetary assets and liabilities in earnings. Consequently, the net effect on earnings from the use of these non-designated derivatives is substantially neutralized by transactional gains and losses recorded on the underlying assets and liabilities. The In-House Bank's daily notional derivative positions with third parties averaged $1.4 billion in the first nine months of 2012 and its average net exposure for the same period was $1.3 billion. The In-House Bank used ten counterparties for its foreign exchange derivative contracts.
We enter into derivative instruments to hedge a portion of the net foreign currency exposures of our non-U.S. operations, principally for their forecasted purchases of pulp, which are priced in U.S. dollars, and imports of intercompany finished goods and work-in-process priced predominately in U.S. dollars and euros. The derivative instruments used to manage these exposures are designated and qualify as cash flow hedges. As of September 30, 2012, outstanding derivative contracts of $920 million notional value were designated as cash flow hedges for the forecasted purchases of pulp and intercompany finished goods and work-in-process.
The foreign currency exposure on non-functional currency denominated monetary assets and liabilities managed outside the In-House Bank, primarily intercompany loans and accounts payable, is hedged with derivative instruments with third parties. At September 30, 2012, the notional amount of these predominantly undesignated derivative instruments was $580 million.
Foreign Currency Translation Risk Management
Translation adjustments result from translating foreign entities' financial statements to U.S. dollars from their functional currencies. The risk to any particular entity's net assets is reduced to the extent that the entity is financed with local currency borrowing. Translation exposure, which results from changes in translation rates between functional currencies and the U.S. dollar, generally is not hedged. However, consistent with other years, a portion of our net investment in our Mexican affiliate has been hedged. At September 30, 2012, we had in place net investment hedges of $67 million for a portion of our investment in our Mexican affiliate. Changes in the fair value of net investment hedges are recognized in other comprehensive income to offset the change in value of the net investment being hedged. There was no significant ineffectiveness related to net investment hedges as of September 30, 2012 and 2011.
Interest Rate Risk Management
Interest rate risk is managed using a portfolio of variable- and fixed-rate debt composed of short- and long-term instruments and interest rate swaps. From time to time, interest rate swap contracts, which are derivative instruments, are entered into to facilitate the maintenance of the desired ratio of variable- and fixed-rate debt. These derivative instruments are designated and qualify as fair value hedges or, to a lesser extent, cash flow hedges.
From time to time, we hedge the anticipated issuance of fixed-rate debt, using forward-starting swaps or "treasury locks" (e.g., a 10-year "treasury lock" hedging the anticipated underlying U.S. Treasury interest rate related to issuance of 10-year debt at a future date). These contracts are designated as cash flow hedges.
At September 30, 2012, the aggregate notional values of outstanding interest rate contracts designated as fair value hedges and cash flow hedges were $300 million and $280 million, respectively.

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Table of Contents

Commodity Price Risk Management
We use derivative instruments to hedge a portion of our exposure to market risk arising from changes in the price of natural gas. Hedging of this risk is accomplished by entering into forward swap contracts, which are designated as cash flow hedges of specific quantities of natural gas expected to be purchased in future months.
As of September 30, 2012, outstanding commodity forward contracts were in place to hedge forecasted purchases of about 25 percent of our estimated natural gas requirements for the next twelve months and a lesser percentage for future periods.
Effect of Derivative Instruments on Results of Operations and Other Comprehensive Income
Fair Value Hedges
Derivative instruments that are designated and qualify as fair value hedges are predominantly used to manage interest rate risk. The fair values of these instruments are recorded as an asset or liability, as appropriate, with the offset recorded in current earnings. The offset to the change in fair values of the related hedged items also is recorded in current earnings. Any realized gain or loss on the derivatives that hedge interest rate risk is amortized to interest expense over the life of the related debt.
Fair value hedges resulted in no significant ineffectiveness in the nine months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012 and 2011, no gain or loss was recognized in earnings as a result of a hedged firm commitment no longer qualifying as a fair value hedge.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in AOCI, net of related income taxes, and recognized in earnings in the same period that the hedged exposure affects earnings.
Cash flow hedges resulted in no significant ineffectiveness in the nine months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012 and 2011, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges due to the original forecasted transaction no longer being probable of occurring. At September 30, 2012, $8 million of after-tax gains are expected to be reclassified from AOCI primarily to cost of products sold during the next twelve months, consistent with the timing of the underlying hedged transactions. The maximum maturity of cash flow hedges in place at September 30, 2012 is October 2014.
Quantitative Information about Our Use of Derivative Instruments
The following tables display the location and amount of pre-tax gains and losses reported in the Consolidated Income Statement and Consolidated Statement of Other Comprehensive Income.
For the three months ended September 30 (Millions of dollars):
 
Income Statement Classifications
 
(Gain) or Loss
Recognized in Income
 
 
 
2012
 
2011
Undesignated foreign exchange hedging instruments
Other (income) and expense, net(a)
 
$
(30
)
 
$
92

 
 
 
 
 
 
Fair Value Hedges
 
 
 
 
 
Interest rate swap contracts
Interest expense
 
$
3

 
$
8

Hedged debt instruments
Interest expense
 
$
(3
)
 
$
(8
)

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Table of Contents

 
Amount of (Gain) or
Loss Recognized In
AOCI
 
Income Statement
Classification of (Gain) or Loss
Reclassified from AOCI
 
(Gain) or Loss Reclassified
from AOCI into Income
 
2012
 
2011
 
 
 
2012
 
2011
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
3

 
$
61

 
Interest expense
 
$

 
$

Foreign exchange contracts
8

 
(34
)
 
Cost of products sold
 
(8
)
 
15

Foreign exchange contracts

 
(8
)
 
Other (income) and expense, net
 

 
(8
)
Commodity contracts
(1
)
 
5

 
Cost of products sold
 
4

 
1

Total
$
10

 
$
24

 
 
 
$
(4
)
 
$
8

Net Investment Hedges
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
1

 
$
(7
)
 
 
 
$

 
$

For the nine months ended September 30 (Millions of dollars):
 
Income Statement Classifications
 
(Gain) or Loss
Recognized in Income
 
 
 
2012
 
2011
Undesignated foreign exchange hedging instruments
Other (income) and expense, net(a)
 
$
(31
)
 
$
(7
)
 
 
 
 
 
 
Fair Value Hedges
 
 
 
 
 
Interest rate swap contracts
Interest expense
 
$
8

 
$
3

Hedged debt instruments
Interest expense
 
$
(8
)
 
$
(3
)
 
Amount of (Gain) or
Loss Recognized In
AOCI
 
Income Statement
Classification of (Gain) or Loss
Reclassified from AOCI
 
(Gain) or Loss Reclassified
from AOCI into Income
 
2012
 
2011
 
 
 
2012
 
2011
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
16

 
$
69

 
Interest expense
 
$
1

 
$
(2
)
Foreign exchange contracts
(7
)
 
11

 
Cost of products sold
 
(12
)
 
36

Foreign exchange contracts
(3
)
 
(3
)
 
Other (income) and expense, net
 
(3
)
 
(3
)
Commodity contracts
6

 
6

 
Cost of products sold
 
14

 
6

Total
$
12

 
$
83

 
 
 
$

 
$
37

Net Investment Hedges
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(2
)
 
$
(4
)
 
 
 
$

 
$

(a) 
(Gains) and losses on these instruments primarily relate to derivatives entered into with third parties to manage foreign currency exchange exposure on the remeasurement of non-functional currency denominated monetary assets and liabilities. Consequently, the effect on earnings from the use of these undesignated derivatives is substantially neutralized by the recorded transactional gains and losses on the underlying assets and liabilities.


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Table of Contents

Note 9. Subsequent Events
European Strategic Changes
On October 23, 2012, we approved strategic changes related to our Western and Central European consumer and professional businesses to focus our resources and investments on stronger market positions and growth opportunities. We will be exiting the diaper category in that region, with the exception of the Italian market, and divesting or exiting some lower-margin businesses, mostly in consumer tissue, in certain markets. The changes will primarily affect our consumer businesses, with a modest impact on K-C Professional.
Restructuring actions related to the strategic changes will involve the sale or closure of five of our European manufacturing facilities and a streamlining of our administrative organization. In total, these actions will result in reducing our European workforce by approximately 1,300 to 1,500 positions.
The restructuring actions will commence in the fourth quarter of 2012 and are expected to be completed by December 2014. The restructuring is expected to result in cumulative charges of approximately $250 to $350 million after tax ($300 to $400 million pre-tax) over that period. We anticipate that the pre-tax charges will fall into the following categories and approximate dollar ranges: workforce reduction costs ($140 to $175 million); asset impairment charges ($120 to $150 million); incremental depreciation ($30 to $40 million) and other associated costs ($10 to $35 million). Cash costs related to severance and other expenses are expected to account for approximately 50 to 60 percent of the charges. Noncash charges will consist primarily of asset impairment charges and incremental depreciation.
U.S. Pension Plan Lump Sum Offering
In order to reduce the size and potential future volatility of our U.S. defined benefit pension plan obligation, we have offered approximately 10,000 former employees who have deferred vested pension plan benefits a one-time option to receive a lump sum distribution of their benefits by the end of 2012. The vested benefit obligation associated with these former employees is approximately $570 million, equivalent to about 15 percent of our benefit obligation for the U.S. qualified plan.
Eligible participants have until November 21, 2012 to make their election. If the percentage of eligible participants that choose the lump sum option exceeds approximately 45 percent, we will recognize a one-time, non-cash settlement charge in the fourth quarter. The lump sum payments will be funded from existing pension plan assets and will occur by the end of 2012.


Note 10. Description of Business Segments
We are organized into operating segments based on product groupings. These operating segments have been aggregated into four reportable global business segments: Personal Care, Consumer Tissue, K-C Professional & other, and Health Care. The reportable segments were determined in accordance with how our executive managers develop and execute global strategies to drive growth and profitability. These strategies include global plans for branding and product positioning, technology, research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. Segment management is evaluated on several factors, including operating profit. Segment operating profit excludes other (income) and expense, net and income and expense not associated with the business segments, including the charges related to the pulp and tissue restructuring actions described in Note 3.
The principal sources of revenue in each global business segment are described below:
Personal Care brands offer parents a trusted partner in caring for their families and deliver confidence, protection and discretion to adults, through a wide variety of innovative solutions and products such as disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products. Products in this segment are sold under the Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names.
Consumer Tissue offers a wide variety of innovative solutions and trusted brands that touch and improve people's lives every day. Products in this segment include facial and bathroom tissue, paper towels, napkins and related products, and are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page and other brand names.
K-C Professional & Other helps transform workplaces for employees and patrons, making them healthier, safer, and more productive, through a range of solutions and supporting products such as apparel, wipers, soaps, sanitizers, tissues, and towels. Key brands in this segment include: Kleenex, Scott, WypAll, Kimtech, and Jackson Safety.
Health Care provides the essentials that help restore patients to better health and improve the quality of patients' lives. Health Care offers a portfolio of innovative medical devices focused on pain management, respiratory and digestive health, and

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Table of Contents

surgical and infection prevention products for the operating room. This business is a global leader in education to prevent healthcare-associated infections. Products are sold primarily under the Kimberly‑Clark and ON‑Q brand names.
The following schedules present information concerning consolidated operations by business segment:
 
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2012
 
2011
 
2012
 
2011
 
 
(Millions of dollars)
NET SALES:
 
 
 
 
 
 
 
 
Personal Care
 
$
2,414

 
$
2,390

 
$
7,196

 
$
6,918

Consumer Tissue
 
1,605

 
1,711

 
4,852

 
5,054

K-C Professional & Other
 
822

 
863

 
2,458

 
2,477

Health Care
 
396

 
407

 
1,212

 
1,186

Corporate & Other
 
9

 
11

 
38

 
35

Consolidated
 
$
5,246

 
$
5,382

 
$
15,756

 
$
15,670

 
 
 
 
 
 
 
 
 
OPERATING PROFIT (reconciled to Income Before Income Taxes and Equity Interests):
 
 
 
 
 
 
 
 
Personal Care
 
$
436

 
$
396

 
$
1,241

 
$
1,185

Consumer Tissue
 
216

 
206

 
652

 
529

K-C Professional & Other
 
144

 
127

 
407

 
360

Health Care
 
59

 
56

 
168

 
159

Corporate & Other(a)
 
(77
)
 
(140
)
 
(246
)
 
(429
)
Other (income) and expense, net
 
(5
)
 
(17
)
 
(15
)
 
(27
)
Total Operating Profit
 
783

 
662

 
2,237

 
1,831

Interest income
 
4

 
5

 
13

 
13

Interest expense
 
(70
)
 
(70
)
 
(212
)
 
(205
)
Income Before Income Taxes and Equity Interests
 
$
717

 
$
597

 
$
2,038

 
$
1,639

(a) 
Corporate & Other includes pulp and tissue restructuring charges as follows:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2012
 
2011
 
2012
 
2011
 
(Millions of dollars)
Consumer Tissue
$
31

 
$
81

 
$
80

 
$
233

K-C Professional & Other

 
14

 
5

 
34

Total
$
31

 
$
95

 
$
85

 
$
267

 

See additional information in Note 3 for the pulp and tissue restructuring actions. The nine months ended September 30, 2011 also includes a non-deductible business tax charge of $32 million related to a law change in Colombia.


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Table of Contents

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This management's discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of our recent performance, financial condition and prospects.  The following will be discussed and analyzed:
Overview of Third Quarter 2012 Results
Results of Operations and Related Information
Liquidity and Capital Resources
Legal Matters
Business Outlook
Overview of Third Quarter 2012 Results
Net sales decreased 2.5 percent primarily due to unfavorable currency effects partially offset by increases in net selling prices and sales volumes.
Operating profit and net income attributable to Kimberly-Clark Corporation increased 18.3 percent and 19.7 percent, respectively.
Net income includes $16 million in after tax charges ($31 million pre-tax) in 2012 and $66 million in after tax charges ($95 million pre-tax) in 2011 for the pulp and tissue restructuring actions.
Cash provided by operations was $844 million compared to $750 million in the prior year. The improvement was driven by higher cash earnings and a smaller increase in working capital than in the year-ago quarter, partially offset by higher defined benefit pension plan contributions.

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Table of Contents

Results of Operations and Related Information
This section presents a discussion and analysis of our third quarter of 2012 net sales, operating profit and other information relevant to an understanding of the results of operations.
Third Quarter of 2012 Compared With Third Quarter of 2011
Analysis of Net Sales
By Business Segment
Net Sales
 
2012
 
2011
 
 
(Millions of dollars)
Personal Care
 
$
2,414

 
$
2,390

Consumer Tissue
 
1,605

 
1,711

K-C Professional & Other
 
822

 
863

Health Care
 
396

 
407

Corporate & Other
 
9

 
11