Kimberly-Clark 2008 Annual Report Download - page 57

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PART II
(Continued)
As of December 31, 2008, a 10 percent unfavorable change in the exchange rate of the U.S. dollar against
the prevailing market rates of foreign currencies involving balance sheet transactional exposures would have
resulted in a net pretax loss of approximately $43 million. These hypothetical losses on transactional exposures
are based on the difference between the December 31, 2008 rates and the assumed rates. In the view of
management, the above hypothetical losses resulting from these assumed changes in foreign currency exchange
rates are not material to the Corporation’s consolidated financial position, results of operations or cash flows.
The translation of the balance sheets of non-U.S. operations from local currencies into U.S. dollars is also
sensitive to changes in foreign currency exchange rates. Consequently, an annual test is performed to determine
if changes in currency exchange rates would have a significant effect on the translation of the balance sheets of
non-U.S. operations into U.S. dollars. These translation gains or losses are recorded as unrealized translation
adjustments (“UTA”) within stockholders’ equity. The hypothetical change in UTA is calculated by multiplying
the net assets of these non-U.S. operations by a 10 percent change in the currency exchange rates. The results of
this sensitivity test are presented in the following paragraph.
As of December 31, 2008, a 10 percent unfavorable change in the exchange rate of the U.S. dollar against
the prevailing market rates of the Corporation’s foreign currency translation exposures would have reduced
stockholders’ equity by approximately $462 million. These hypothetical adjustments in UTA are based on the
difference between the December 31, 2008 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 because they would not affect the Corporation’s
cash flow.
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, 2008, the debt portfolio was composed of approximately 20 percent
variable-rate debt and 80 percent fixed-rate debt.
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, 2008, a 10 percent decrease in interest rates would have increased the fair
value of fixed-rate debt by about $200 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.
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