Kimberly-Clark 2007 Annual Report Download - page 59

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PART II
(Continued)
stockholders’ equity by approximately $563 million. These hypothetical adjustments in UTA are based on the
difference between the December 31, 2007 exchange rates and the assumed rates. In the view of management,
the above UTA adjustments resulting from these assumed changes in foreign currency exchange rates are not
material to the Corporation’s consolidated financial position.
Interest Rate Risk
Interest rate risk is managed through the maintenance of a portfolio of variable- and fixed-rate debt
composed of short- and long-term instruments. The objective is to maintain a cost-effective mix that management
deems appropriate. At December 31, 2007, the debt portfolio was composed of approximately 40 percent
variable-rate debt and 60 percent fixed-rate debt. The strategy employed to manage exposure to interest rate
fluctuations consists primarily of a mix of fixed and floating rate debt and is designed to balance the
Corporation’s cost of financing with its interest rate risk.
Two separate tests are performed to determine whether changes in interest rates would have a significant
effect on the Corporation’s financial position or future results of operations. Both tests are based on consolidated
debt levels at the time of the test. The first test estimates the effect of interest rate changes on fixed-rate debt.
Interest rate changes would result in gains or losses in the market value of fixed-rate debt due to differences
between the current market interest rates and the rates governing these instruments. With respect to fixed-rate
debt outstanding at December 31, 2007, a 10 percent decrease in interest rates would have increased the fair
value of fixed-rate debt by about $190 million. The second test estimates the potential effect on future pretax
income that would result from increased interest rates applied to the Corporation’s current level of variable-rate
debt. With respect to commercial paper and other variable-rate debt, a 10 percent increase in interest rates would
not have a material effect on the future results of operations or cash flows.
Commodity Price Risk
The Corporation is subject to commodity price risk, the most significant of which relates to the price of
pulp. Selling prices of tissue products are influenced, in part, by the market price for pulp, which is determined
by industry supply and demand. On a worldwide basis, the Corporation supplies approximately 8 percent of its
virgin fiber needs from internal pulp manufacturing operations. As previously discussed under Item 1A, “Risk
Factors,” increases in pulp prices could adversely affect earnings if selling prices are not adjusted or if such
adjustments significantly trail the increases in pulp prices. Derivative instruments have not been used to manage
these risks.
The Corporation’s energy, manufacturing and transportation costs are affected by various market factors
including the availability of supplies of particular forms of energy, energy prices and local and national
regulatory decisions. As previously discussed under Item 1A, “Risk Factors,” there can be no assurance that the
Corporation will be fully protected against substantial changes in the price or availability of energy sources. In
addition, the Corporation is subject to price risk for utilities, primarily natural gas, which are used in its
manufacturing operations. Derivative instruments are used to hedge a substantial portion of natural gas risk in
accordance with the Corporation’s risk management policy.
Management does not believe that these risks are material to the Corporation’s business or its consolidated
financial position, results of operations or cash flows.
39