Non-GAAP Financial Measures Used in Kimberly-Clark Corporation's Investor Day Presentations (March 2010)
Non-GAAP Financial Measures Used in Kimberly-Clark Corporation's Investor Day Presentations (March 2010)
In materials posted on this internet website, the following financial measures have not been calculated in accordance with generally accepted accounting principles in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures:
- adjusted earnings and earnings per share
- adjusted operating margin
- adjusted return on invested capital
- organic sales growth
These non-GAAP financial measures exclude certain items that are included in the company’s earnings and earnings per share, operating margin, return on invested capital (“ROIC”), and sales growth calculated in accordance with GAAP. A detailed explanation of each of the adjustments to the comparable GAAP financial measures is given below.
Kimberly-Clark provides these non-GAAP financial measures as supplemental information to our GAAP financial measures. Management and the company’s Board of Directors use adjusted earnings and earnings per share, adjusted operating margin, adjusted ROIC and organic sales growth to (a) evaluate the company’s historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources and (c) measure the operational performance of the company’s business units and their managers. Additionally, the Management Development and Compensation Committee of the company’s Board of Directors uses certain of these non-GAAP financial measures when setting and assessing achievement of incentive compensation goals. These goals are based, in part, on the company’s adjusted earnings per share and improvement in the company’s adjusted return on invested capital determined by excluding the charges and credits that are used in calculating these non-GAAP financial measures.
In addition, Kimberly-Clark management believes that investors’ understanding of the company’s performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing the company’s ongoing results of operations. We believe that many investors are interested in understanding the performance of our businesses by comparing our results from ongoing operations from one period to the next. By providing the non-GAAP financial measures, together with the reconciliations, we believe we are enhancing investors’ understanding of our businesses and our results of operations. Also, many financial analysts who follow our company focus on and publish both historical results and future projections based on non-GAAP financial measures. We believe that it is in the best interests of our investors for us to provide this information to analysts so that those analysts accurately report the non-GAAP financial information.
We calculate adjusted earnings and earnings per share, adjusted operating margin, and adjusted ROIC by excluding from the comparable GAAP measure some or all of the following: (i) charges related to our strategic cost reduction plan for streamlining the company’s operations; (ii) an after-tax extraordinary loss related to the restructuring of certain contractual arrangements; (iii) a gain of a litigation settlement; (iv) our share of an equity affiliate’s gain on the sale of a business; (v) incremental tax charges arising out of repatriation of earnings of foreign subsidiaries under the American Jobs Creation Act of 2004, or AJCA; (vi) the cumulative effect of an accounting change; (vii) a European legal judgment; (viii) a charge for bond recalls; (ix) sales from disposed of operations; and (x) expected impact of the devaluation of the Venezuelan bolivar. Each of these adjustments and the basis for such adjustments are described below:
- Strategic cost reduction plan. In July 2005, the company authorized a strategic cost reduction plan aimed at streamlining manufacturing and administrative operations, primarily in North America and Europe. The strategic cost reduction plan commenced in the third quarter of 2005 and was completed by December 31, 2008. At the time we announced the plan, we advised investors that we would report our earnings per share and operating profit and margin excluding the strategic cost reduction plan charges so that investors could compare our operating results without the plan charges from period to period and could assess our progress in implementing the plan.
- Extraordinary loss. In June 2008, the company restructured contractual arrangements of two financing entities, which resulted in the consolidation of these two entities. As a result of the consolidation, notes receivable and loan obligations held by these entities were included in long-term notes receivable and long-term debt on the company’s consolidated balance sheet. Because the fair value of the loans exceeded the fair value of the notes receivable, the company recorded an aftertax extraordinary loss, which is excluded from our adjusted measures.
- Gain on litigation settlement. In 2007, the company received proceeds from settlement of litigation related to prior years’ operations in Latin America. This gain is excluded from our adjusted measures.
- Gain on sale of business. In the fourth quarter of 2006, the company’s equity affiliate, Kimberly-Clark de Mexico, S.A. de C.V. sold its pulp and paper business and recorded an after-tax gain. We excluded the company’s portion of this gain from our adjusted earnings per share so that investors can compare our operating results without the non-recurring gain.
- AJCA charges. During 2005, the company recorded non-recurring charges associated with repatriation of earnings from its non-U.S. subsidiaries under the provisions of the AJCA. These charges are excluded from our adjusted measures.
- Cumulative effect of an accounting change. In the fourth quarter of 2005, the company implemented a new accounting standard for asset retirement obligations. The charge associated with the adoption of this accounting standard is excluded from our adjusted measures.
- European Legal Judgment. In the first quarter of 2003, we recorded a charge as a result of a legal judgment related to a 1987 European government grant to a facility that was sold in 1998. This charge is excluded from our adjusted measures.
- Callable Bonds. We redeemed debentures in 2003, enabling us to substantially lower our financing costs. We exclude the cost of calling the debentures from our adjusted measures.
- Disposed of Operations. In November 2004, the company spun-off its Neenah pulp and paper operations (“NPI”). Accordingly, the impact of 2004 net sales from NPI’s pulp operations are excluded from our adjusted measures.
- Devaluation of Venezuelan bolivar. The company began accounting for Venezuela as hyperinflationary effective January 1, 2010 and anticipates recording a loss in the first quarter 2010 for the expected remeasurement of the local currency balance sheet in Venezuela as a result of the recent currency devaluation. Management will exclude this loss when reporting non-GAAP measures in 2010.
We calculate organic sales growth by excluding from growth in net sales determined on a GAAP basis the effect of changes in currency values and the impact of the NPI spin-off described above.
These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measures. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and they may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation and items being excluded. The company compensates for these limitations by using these non-GAAP financial measures as supplements to the GAAP measures and by providing the reconciliations of the non-GAAP and comparable GAAP financial measures. The non-GAAP financial measures should be read only in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP.
