CHAPTER TWO

Introduction to the Financial Statements

Stephen H. Penman
The web page for Chapter Two runs under the following headings:
What this Chapter is Doing
Linking to Financial Statements: the SEC EDGAR Database
Linking to the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB)
SEC Reporting Requirements
XBRL
Regulation FD
Introduction to International Reporting Standards
Nike’s Full Financial Statements and Other Information on Nike
Financial Reports in Countries other than the U.S.
Accounting Relations: How They Help in Building Analysis Tools
A Balance Sheet Presentation that Emphasizes the Shareholder’s View of the
Firm: Dell Computer
Book Values and Earnings: the Starting Points for P/B and P/E Valuation
Historical P/B and P/E Ratios
More P/E and P/B Graphs
Multiple screeners
Financial Reporting During the Stock Market Bubble of the 1990s
Kimberly-Clark 10-K
Readers’ Corner

What this Chapter is Doing
Chapter 2 does two things.
First, it familiarizes you with the financial statements, both the form in which the statements are prepared and the measurement rules behind the numbers. Much of the material should be familiar from earlier accounting courses, but it is presented with valuation in mind. When you come to analyze financial statements (in Part Two) and prepare financial statement spreadsheets (using the BYOAP feature on the web site), you must have this chapter as background. The material on cash accounting and accrual accounting (and cash flow valuation versus accrual valuation) in Chapter 4 builds from this chapter.

Second, the chapter gives you an introduction to intrinsic price-to-book ratios (P/B) and price-earnings ratios (P/E). You see here how these ratios are determined by how book values and earnings are measured. Your understanding of these ratios – and how they are estimated – will be completed in Chapters 5 and 6.
If you have had an accounting course, the material on financial statements serves as a review. But make sure you understand the accounting relations that dictate the form of the statements, for these will be used in constructing analysis tools later. Spend some time on learning how to access financial information through the links on the book’s web page (see below).
Linking to Financial Statements: the SEC EDGAR Database

All firms traded on U.S. stock exchanges must file reports with the Securities and Exchange Commission, and EDGAR is the database houses all electronic filings since 1993. EDGAR stands for Electronic Data Gathering, Analysis and Retrieval. Access EDGAR at
http://www.sec.gov/edgar.shtml
First go to the Quick EDGAR Tutorial on the SEC’s site. Note the search features. Also read About EDGAR. Then look at the list of types of filings by clicking on Description of SEC Forms. You will be most concerned with quarterly financial reports filed on form 10-Q and annual reports filed on form 10-K. To go directly to a specific company filings, go to
http://www.sec.gov/edgar/searchedgar/companysearch.html

You can access any firm’s filings through the Search EDGAR feature on the SEC’s site. Commercial services have engines that allow you to load selected features of a report – a balance sheet, for example – and also download parts of reports into excel spreadsheets for further analysis. It has become increasing difficult to use these services (as a free service), due to demand. You can often get the filings through the firm’s own web site (look for the investor relations page), but sometimes they are in pdf format. Annual reports of companies are also available at:
http://www.annualreports.com/
10K Wizard is a good search engine if you want to find some particular item in 10-K reports. So, for example you can search for all references to “interest expense” in IBM’s 10-K reports for the last five years. See
http://www.10kwizard.com/
You will get a significant amount of summary financial information through finance portals:
http://www.google.com/finance
http://finance.yahoo.com/
Linking to the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)
The web site for the FASB is
http://www.fasb.org
This site will give you considerable detail on FASB Statements and other professional announcements. For the IASB, go to
http://www.ifrs.org/Home.htm
For more coverage of international accounting standards, see IAS Plus:
http://www.iasplus.com/index.htm
See also Wikipedia:
http://en.wikipedia.org/wiki/International_Accounting_Standards_Board
http://en.wikipedia.org/wiki/Financial_Accounting_Standards_Board

SEC Reporting Requirements
The SEC web site gives you a full list of the forms that firms file with the Commission. Filings are required for all firms that wish to offer their securities to the public in the United States. The main forms are as follows:
For an initial offering of securities:
Registration statement (S-1 and higher S- numbers).
For communication with shareholders, the main forms are:
Solicitation of proxies (the proxy statement) (14A)
Annual report to shareholders (10K)
Quarterly report to shareholders (10Q)
Report of securities offered to employees (11K)
Notification of significant events (8K)
Notification of tender offers by others (Schedule 14D-1)
Notification of tender offers by issuer (repurchases) (Schedule 13E-4)
Notification of five percent equity holding or change in beneficial
ownership (Schedule 13D)
For foreign firms:
Registration and annual filing for foreign registrant and reconciliation to US
GAAP accounting (F20-F)
For firms with a market capitalization of over $700 million, 10-K reports must be filed within 60 days of fiscal-year end, and 10-Q reports within 40 days of quarter’s end. Smaller firms have a longer filing period, ranging from 75 days to 90 days for 10-K reports, and 45 days for 10-Qs.
XBRL
eXtensible Business Reporting Language works like bar coding. Each item in a 10-K,
10-Q, or other filing is coded with a computer-readable tag. Knowing the tag, an analyst (with the appropriate software) can pull out a specific line item and enter it into his or her analysis. So, rather than being limited to the format in the original document, the analyst can pull down information in the form desired by providing the appropriate tag identification. There are over 10,000 tags, covering everything from line items in the financial statements themselves to details in the footnotes. If, for example, an analyst used a diagnostic for earnings quality, he or she could calculate the diagnostic directly from the 10-K by supplying the relevant tags. The analysis in this book could be set up a particular set of tags. Get the analysis by the press on a button.
The dictionary that sullies the tags is called the XBRL taxonomy. Look at www.xbrl.us for the U.S. GAAP taxonomy.

Note the ABRL will not change the content on reports; it will just add tags
Watch for a CEASA report of XBRL, to be posted sometime in 2012 to:
www.gsb.columbia.edu/ceasa
Regulation FD
In early 2001, the SEC issued regulation FD (Full Disclosure). This regulation forbids the practice of selective disclosure by managements to analysts. If management releases information it must do so publicly, not to individual analysts.
The SEC saw the regime of selective disclosure as detrimental to a “level playing field.” They also saw selective disclosure as being used as a threat against management: if management did not like what analysts were saying about their firms, they might cut them off from selected information; or, they could reward analysts with private information if they wrote positively about the firm. Regulation FD is designed to end these practices. Critics maintain, however, the regulation will result in less disclosure rather than more: rather than sharing information, firms will disclose less.
Introduction to International Reporting Standards
As in other countries, the U.S is moving towards adopting international accounting standards. See Box 2.6 of this chapter. For U.S. students unfamiliar with IFRS, the following web sites give you an introduction:
http://www.ifrs.com/
http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1847
http://www.pcfr.org/downloads/06_08_Meeting_Materials/IFRS_Backgrounder_AICPA.pdf
On U.S. convergence, go to
http://www.pwc.com/us/en/issues/ifrs-reporting/index.jhtml
Nike’s Full Financial Statements and Other Information on Nike

Chapter 2 presents the 2010 financial statements for Nike, Inc.. You should go to the EDGAR files and view the complete 10-K report for 2010 and later years. Browse the statement footnotes. Look at the discussion of the business that precedes the financial statements. Compare the 10-K to the quarterly 10-Q. Browse Nike’s other SEC filings. Tour Nike’s investor relation’s site at
http://investors.nikeinc.com/Investors/OVERVIEW/default.aspx
Now see how much information you can get on Nike through a finance portal like Yahoo! Finance or Google Finance.Look at analysts’ forecasts and analysts’ research reports on those sites (does your institution subscribe to IBES or Zacks forecast services, or to First Call research reports?) Search news reports. Browse with the aid of the finance browsers. Use the company comparison tools. Look for additional information through your library.
Financial Reports in Countries other than the U.S.
Financial reports firms in other countries can be found on their corporate web sites. Since 2005, all listed firms must conform to International Financial Reporting Standards (IFRS). Private companies are regulated by local accounting standard boards, owever.
For a German company, see
http://www.siemens.com/investor/en/index.htm
For an Italian company, see
http://www.eni.com/en_IT/investor-relation/investor_relations.shtml?home_2010_it_tab=navigation_menu
For a French company, see
http://www.total.com/en/home-investors-940702.html
Accounting Relations: How They Help in Building Analysis Tools
Chapter 2 introduces you to a number of accounting relations that govern the financial statements. The balance sheet equation (2.1), for example, says that the balance sheet must balance: Shareholders’ Equity = Assets – Liabilities. The income statement equations (2.2 and 2.2a) give the calculation of net income from components of the statement. The cash flow statement equation (2.3) lays outs how the change in cash is

explained in that statement. These equations give the structure of each statement. That is, they explain how the components within the statements are tied together.
Why is an understanding of these accounting relations important for financial analysis? Well, Chapter 1 explained that fundamental analysis involves forecasting. Future earnings and book values (of equity) will be particularly important. These two numbers are the “bottom line” numbers of the income statement and balance sheet. To forecast them, we forecast the line items – the components of the two statements – that sum to the two bottom line numbers. The accounting relations tell us how they sum. Accounting relations give us the structure for forecasting. So, if we wish to forecast future book values, for example, we forecast assets and liabilities that, by the balance sheet equation, give us shareholders’ equity. Or, the accounting relation for the statement of shareholders’ equity (2.4) tells us that we can forecast the book value of shareholders’ equity by forecasting comprehensive income minus net payout to shareholders added to the current book value.
Indeed, to build a forecasting program in a spreadsheet, we structure the spreadsheet so that the operations within the spreadsheet obey these accounting relations. Take a peek at Build Your Own Analysis Product (BYOAP) under Course-wide Content in the Student Edition on the book’s web site. This is a guide for developing an analysis and valuation tool. Once you get into it (after covering more chapters in the book), you will see how the output from using this tool is generated by manipulating input according to rules dictated by accounting relations.
The accounting relations in Chapter 2 are elementary ones. Box 2.2 summarizes them. Chapter 8 completes the set that you will need to build your spreadsheet tool.
A Balance Sheet Presentation that Emphasizes the Shareholders’ View of the Firm
The standard balance sheet in the US presents asset of the left-hand and claims against those assets – liabilities and shareholders’ equity – on the right. A presentation of Dell’s 2002 balance sheet that highlights the shareholders – the owners – is as follows (in millions):
Dell Computer Corporation
Shareholders’ Equity $4,694
The shareholders’ interested is determined as follows:
Assets $13,535
Liabilities 8,841 $4,694

This presentation shows that the owners’ interest is a residual interest in the assets after deducting the claims of the liabilities.
Book Values and Earnings: the Starting Points for P/B and P/E Valuation
In the web page for Chapter 1 we showed that a savings account can be valued in two ways:
The book value method
The capitalized earnings method
With the book value method, value is set equal to book value. With the earnings capitalization method, earnings are capitalized at a rate equal to the required return (earnings divided by the required return).
Book value and earnings (income or profit) are prominent numbers for a firm, book value being the bottom line number in the balance sheet, earnings the bottom line number in the income statement. The accountant is saying of the book value: here is my calculation of the value of shareholders’ equity. Indeed, the book value is sometimes called “net worth.” He or she is also saying that the value is given by a set of assets and liabilities (accounting relation 2.1 tells you that). Earnings are the amount by which book value increases each period before paying net dividends (accounting relation 2.4 tells you that). So the accountant is also saying of the earnings: here is my calculation of how the value of shareholders’ equity increased from the business operations during the period. The book value is a stock of value, the earnings are a flow (change) of value, as the Chapter 2 explains. Just as with a saving account, we can value a firm using its stock of value in the balance sheet. Or we can value it by capitalizing the flow: flows are converted to stocks of value by capitalization.
The problem with equities is that book value is typically not a good measure of value and earnings is typically not a good measure of change in value. If there were any doubt, look at the graphs of median P/B and P/E ratios in Figures 2.2 and 2.3. Median P/B ratios are typically not 1. If the required return for equities were 10 percent, the P/E ratio for capitalizing a dollar of forward earnings is 1/0.10 = 10.0, or 8.3 if the required return were 12 percent (compared to 1/0.05 = 20 for a savings account with a 5 percent required return). Median P/E ratios (in Figure 2.3) are considerably higher than these numbers. So firms typically trade at multiples of book value greater than 1 and at P/E ratios greater than earnings capitalized at the required return.

One reaction to this might be to throw out the financial statements: they report imperfect measures of value and changes in value. That would be a mistake. The imperfect measures are a staring point; they provide part of the valuation. Indeed, as you proceed through the book, you will see that there are two complementary approaches to valuation based on financial statements:
P/B Approach: Value = Book Value + Extra Value Not in Book Value
P/E Approach: Value = Capitalized Earnings + Extra Value Not Indicated by
Earnings
The P/B approach starts with the value in the balance sheet and calculates extra value. The extra value is called the premium over book value, as explained in the chapter. The P/E approach starts with capitalizing earnings and calculates extra value. For the savings account, it so happens that there is no extra value to be calculated: the book value and earnings suffice. For a firm, this is usually not the case. We have to develop methods of calculating the extra value, as we will surely do in this book.
Historical P/B and P/E Ratios
Figures 2.2 and 2.3 give median P/B and P/E ratios for NYSE and AMEX stocks since 1963. Always refer to history to get an idea of what in normal. Compare the P/B ratios in the 1970s to those in the 1990s. Quite a difference! The market in the 1970s saw less value in companies than was on their balance sheets, but considerably more value than their balance sheet values in the 1990s. What would explain this? Well, one of two things: either accountants were excluding more value from the balance sheet in the 1990s or the market was mispricing balance sheets. Certainly stock prices rose significantly after the 1970s (as if stocks were undervalued) and declined in 2000 (as if stocks were overvalued). But, with more value coming from intangible assets in the 1990s – knowledge assets in the information economy – one would expect P/B values to be higher because knowledge assets are not on the balance sheet. That tells us that analysts in the 1990s had a bigger premium to calculate to get the intrinsic P/B ratio.
Your will notice that the S&P P/E ratios tend to be higher than the median P/E ratios for all NYSE and AMEX firms in Figures 2.2 and 2.3. They are for different sets of firms, but also the S&P ratios are weighted averages whilst those in the figures are medians. Indeed, typical multiples that are quoted vary considerably, depending on the set of stocks to which they refer and whether the number is an arithmetic average, a weighed average or the median of the set. So, in June 2001, for example, the (weighted average) P/E for the S&P500 stood at 26, but the median P/E for the 3,000 largest stocks by market capitalization was only 16.
Here are the P/B ratios and P/E ratios for the S&P 500 from 1977 – 2010 (calculated from the Standard and Poor’s website):

Year Index Return % Trailing P/E Forward P/E P/B

2010 1257.64 15.06 16.26 13.33 2.17
2009 1115.10 26.46 21.88 2.17
2008 903.25 -37.00 60.84 2.00
2007 1468.36 5.49 22.19 16.7 2.77
2006 1418.30 15.79 17.40 17.6 2.81
2005 1248.29 4.91 17.85 18.2 2.76
2004 1211.92 10.88 20.70 19.9 2.92
2003 1111.92 28.69 22.81 24.2 3.03
2002 879.82 -22.10 31.89 28.6 2.73
2001 1148.08 -11.89 46.50 40.6 3.39
2000 1320.28 -9.10 26.41 23.6 4.05
1999 1469.25 21.04 30.50 32.1 5.05
1998 1229.23 28.58 32.60 30.6 4.61
1997 970.43 33.36 24.43 23.1 3.89
1996 740.74 22.96 19.19 19.5 3.12
1995 615.93 37.58 18.14 17.3 2.84
1994 459.27 1.32 15.01 16.1 2.38
1993 466.45 10.08 21.31 19.0 2.53
1992 435.71 7.62 22.82 19.9 2.40
1991 417.09 30.47 26.12 21.0 2.63
1990 330.22 -3.10 15.47 14.5 2.16
1989 353.40 31.69 15.45 14.0 2.40
1988 277.72 16.61 11.69 11.9 1.97
1987 247.08 14.12 1.70
1986 242.17 16.72 1.73
1985 211.28 14.46 1.61
1984 167.24 10.05 1.35
1983 164.93 11.76 1.43
1982 140.64 11.13 1.24
1981 122.55 7.98 1.12
1980 135.76 9.16 1.35
1979 107.94 7.26 1.16
1978 96.11 7.79 1.14
1977 95.10 8.73 1.23

More data on S&P indices are available from the Standard & Poor’s web site at:
http://www.standardandpoors.com/home/en/us
More P/E and P/B Graphs
Here are graphs that break the P/E and P/B graphs for all US listed firms in Figures 2.2 and 2.3 into NYSE and AMEX listed firms and NASDAQ firms. Note the big run up in the ratios for NASDAQ firms (including many technology and internet firms) in the late 1990s.
NYSE and AMEX firms

NASDAQ firms


Multiple Screeners
A multiple screening engine identifies firms with a particular level of a certain multiple. One might, for example, be interested in firms with P/E rations below 10. A multiple screener will identify those firms within a universe that you specify. For example, go to
http://screen.yahoo.com/stocks.html)
Financial Reporting During the Stock Market Bubble of the 1990s
Chapter 1, along with the web page for that chapter, discusses the stock market bubble and analysts’ role in perpetuating the bubble. Bubbles can be promoted by speculative analysis but also by poor accounting. Chapter 2 makes the point that, from the fundamentalist’s point of view, accounting should not contaminate reliable information with speculation: Don’t mix what you know with what you don’t know. Unfortunately, some of the accounting during the bubble helped to reinforce speculation. The accounting scandals that followed the bursting of the bubble brought this point home. The WorldCom case in Box 2.4 of the text was but one example. Read Box 2.5 again, then go to
The Quality of Financial Statements: Perspectives from the Recent Stock Market Bubble

This paper can be downloaded at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=319262
This paper is also available in Accounting Horizons, Vol. 17 (Supplement 2003), pp. 77-96. A number of issues in this paper arise in later chapters of the book.

The Kimberly-Clark 10-K
KMB’s complete 10-K can be downloaded at:
http://www.sec.gov/Archives/edgar/data/55785/000119312511043300/d10k.htm
Refer to this report if working the Continuing Case in the book or working Minicase M2.1.
If you have trouble downloading the 10-K, it is provided at the end of this web supplement.

Readers’ Corner
At this point you should review a financial accounting text. Keep it by your side and refer to it when accounting issues arise as you proceed with financial statement analysis. Standard texts that cover U.S. accounting standards include
Donald Keiso, Jerry Weygandt, and Terry Warfield. Intermediate Accounting, 13th ed.
(New York: Wiley & Sons, 2010)
Lawrence Revsine, Daniel Collins, W. Bruce Johnson, and F. Mittelstaedt, Financial
Reporting & Analysis, 4th ed. (McGraw-Hill 2009)
For coverage of accounting standards internationally, see
Frederick Choi, International Accounting and Finance Handbook, 2nd ed., 2001
Cumulative Supplement (New York: Wiley & Sons, 2001)
For other books on financial statement analysis, see
Wahlen J., Baginski, S. and Bradshaw, M. Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective, South-western Publishing, 7th Edition, 2010.
White G, Sondhi A and Fried D, The Analysis and Use of Financial Statements, Wiley, 3rd Edition, 2004.
Palepu K. and Healy P., Business Analysis and Valuation Using Financial Statements, South-Western, 4th Edition, 2007.
Subramanyam, K., and Wild, J., Financial Statement Analysis, 10th ed. (McGraw-Hill,
2009)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

________________________________________

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

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 or organization) (I.R.S. Employer
Identification No.)

P. O. Box 619100, Dallas, Texas 75261-9100
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (972) 281-1200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class
________________________________________ Name of each exchange on which registered
________________________________________
Common Stock—$1.25 Par Value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes . No •.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes •. No .


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 . No •.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes . No •.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. •

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  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 Act). Yes •. No .

The aggregate market value of the registrant’s common stock held by non-affiliates on June 30, 2010 (based on the closing stock price on the New York Stock Exchange) on such date was approximately $24.8 billion.

As of February 11, 2011, there were 404,377,352 shares of Kimberly-Clark common stock outstanding.


Documents Incorporated By Reference

Certain information contained in the definitive Proxy Statement for Kimberly-Clark’s Annual Meeting of Stockholders to be held on April 21, 2011 is incorporated by reference into Part III.

________________________________________
________________________________________
Table of Contents
KIMBERLY-CLARK CORPORATION

TABLE OF CONTENTS


Page
________________________________________
Part I
Item 1. Business
1
Item 1A. Risk Factors
4
Item 1B. Unresolved Staff Comments
9
Item 2. Properties
9
Item 3. Legal Proceedings
9

Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
13
Item 6. Selected Financial Data
14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
33
Item 8. Financial Statements and Supplementary Data
35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
84
Item 9A. Controls and Procedures
84
Item 9B. Other Information
87

Part III
Item 10. Directors, Executive Officers and Corporate Governance
88
Item 11. Executive Compensation
88
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
88
Item 13. Certain Relationships and Related Transactions, and Director Independence
88
Item 14. Principal Accountant Fees and Services
88

Part IV
Item 15. Exhibits, Financial Statement Schedules
89

Signatures
92
________________________________________
Table of Contents
PART I


ITEM 1. BUSINESS

Kimberly-Clark Corporation was incorporated in Delaware in 1928. We are a global company focused on leading the world in essentials for a better life through product innovation and building our personal care, consumer tissue, K-C Professional & Other and health care brands. We are principally engaged in the manufacturing and marketing of a wide range of essential products to improve people’s lives around the world. Most of these products are made from natural or synthetic fibers using advanced technologies in fibers, nonwovens and absorbency. Unless the context indicates otherwise, the terms “Corporation,” “Kimberly-Clark,” “K-C,” “we,” “our” and “us” refer to Kimberly-Clark Corporation and its consolidated subsidiaries.

For financial information by business segment and geographic area, and information about our principal products and markets, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) and Item 8, Note 20 to the Consolidated Financial Statements.

Recent Developments

Effective January 1, 2010, our Venezuelan subsidiary (“K-C Venezuela”) began accounting for its operations as highly inflationary. As a result, we remeasured K-C Venezuela’s bolivar-denominated net monetary asset position using a parallel exchange rate of approximately 6 bolivars per U.S. dollar and recorded an after-tax charge of $96 million in the first quarter of 2010. For additional information, see MD&A and Item 8, Note 4 to the Consolidated Financial Statements.

On January 21, 2011, we initiated a pulp and tissue restructuring plan 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 businesses. The restructuring is expected to be completed by the end of 2012 and will involve the streamlining, sale or closure of 5 to 6 of our manufacturing facilities around the world. In conjunction with these actions, we will be exiting certain non-strategic products, primarily non-branded offerings, and transferring some production to lower-cost facilities in order to improve overall profitability and returns. For additional information, see MD&A and Item 8, Note 19 to the Consolidated Financial Statements.

During 2010, we repurchased approximately 12.8 million shares of our common stock at a cost of about $800 million. We expect to repurchase $1.5 billion of our common stock in 2011, subject to market conditions. For additional information see Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and MD&A.


Description of Kimberly-Clark

We are organized into operating segments based on product groupings. These operating segments have been aggregated into four reportable global business segments. Information on these four segments, as well as their principal sources of revenue, is included below.

• Personal Care, which manufactures and markets disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and related products. Products in this segment are primarily for household use and are sold under a variety of brand names, including Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names.

• Consumer Tissue, which manufactures and markets facial and bathroom tissue, paper towels, napkins and related products for household use. Products in this segment are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page and other brand names.

• K-C Professional & Other, which manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products for the away-from-home marketplace. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, WypAll, Kimtech, KleenGuard, Kimcare and Jackson brand names.

1
________________________________________
Table of Contents
PART I
(Continued)


• Health Care, which manufactures and markets health care products such as surgical drapes and gowns, infection control products, face masks, exam gloves, respiratory products, pain management products and other disposable medical products. Products in this segment are sold under the Kimberly-Clark, Ballard, ON-Q and other brand names.

These reportable segments were determined in accordance with how our chief operating decision maker and our executive managers develop and execute our global strategies to drive growth and profitability of our worldwide Personal Care, Consumer Tissue, K-C Professional & Other and Health Care operations. 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.

Revenue, profit and total assets of each reportable segment are shown in Item 8, Note 20 to the Consolidated Financial Statements.

Products for household use are sold directly, and through wholesalers, to supermarkets, mass merchandisers, drugstores, warehouse clubs, variety and department stores and other retail outlets. Products for away-from-home use are sold through distributors and directly to manufacturing, lodging, office building, food service, health care establishments and high volume public facilities. In addition, certain products are sold to converters.

Net sales to Wal-Mart Stores, Inc. were approximately 13 percent in both 2010 and 2009, and 14 percent in 2008.


Patents and Trademarks

We own various patents and trademarks registered domestically and in many foreign countries. We consider the patents and trademarks which we own and the trademarks under which we sell certain of our products to be material to our business. Consequently, we seek patent and trademark protection by all available means, including registration.

Raw Materials

Cellulose fiber, in the form of kraft pulp or fiber recycled from recovered waste paper, is the primary raw material for our tissue products and is a component of disposable diapers, training pants, feminine pads and incontinence care products.

Superabsorbent materials are important components of disposable diapers, training and youth pants and incontinence care products. Polypropylene and other synthetics and chemicals are the primary raw materials for manufacturing nonwoven fabrics, which are used in disposable diapers, training and youth pants, wet wipes, feminine pads, incontinence and health care products, and away-from-home wipers.

Most recovered paper, synthetics, pulp and recycled fiber are purchased from third parties. We consider the supply of these raw materials to be adequate to meet the needs of our businesses. See Item 1A, “Risk Factors.”

Competition

We have several major competitors in most of our markets, some of which are larger and more diversified than us. The principal methods and elements of competition include brand recognition and loyalty, product innovation, quality and performance, price, and marketing and distribution capabilities. For additional discussion of the competitive environment in which we conduct our business, see Item 1A, “Risk Factors.”

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Research and Development

Research and development expenditures are directed toward new or improved personal care, tissue, wiping, safety and health care products and nonwoven materials. Consolidated research and development expense was $317 million in 2010, $301 million in 2009 and $297 million in 2008.

Foreign Market Risks

We operate and market our products globally, and our business strategy includes targeted growth in Asia, Latin America, the Middle East and Eastern Europe. See Item 1A, “Risk Factors” for a discussion of foreign market risks that may affect our financial results.

Environmental Matters

Total worldwide capital expenditures for voluntary environmental controls or controls necessary to comply with legal requirements relating to the protection of the environment at our facilities are expected to be as follows:


2011 2012
(Millions of dollars)
Facilities in U.S. $ 14 $ 8
Facilities outside U.S. 30 14

Total $ 44 $ 22


Total worldwide operating expenses for environmental compliance, including pollution control equipment operation and maintenance costs, governmental payments, and research and engineering costs are expected to be as follows:


2011 2012
(Millions of dollars)
Facilities in U.S. $ 87 $ 88
Facilities outside U.S. 78 73

Total $ 165 $ 161


Total environmental capital expenditures and operating expenses are not expected to have a material effect on our total capital and operating expenditures, consolidated earnings or competitive position. These expected amounts do not include potential remediation costs associated with our pulp and tissue restructuring plan (see “Recent Developments”) as the outcome related to the streamlining, sale or closure of the 5 to 6 facilities is not known. Current environmental spending estimates could be modified as a result of changes in our plans, changes in legal requirements, including any requirements related to global climate change, or other factors.

Employees

In our worldwide consolidated operations, we had approximately 57,000 employees as of December 31, 2010.

Available Information

We make financial information, news releases and other information available on our corporate website at www.kimberly-clark.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on

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Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on this website as soon as reasonably practicable after we file these reports and amendments with, or furnish them to, the Securities and Exchange Commission (“SEC”). Stockholders may also contact Stockholder Services, P.O. Box 612606, Dallas, Texas 75261-2606 or call 972-281-1522 to obtain a hard copy of these reports without charge.


ITEM 1A. RISK FACTORS

Our business faces many risks and uncertainties that we cannot control. Any of the risks discussed below, as well as factors described in other places in this Form 10-K, or in our other filings with the SEC, could adversely affect our business, consolidated financial position, results of operations or cash flows. In addition, these items could cause our future results to differ from those in any of our forward-looking statements. These risks are not the only ones we face. Other risks that we do not presently know about or that we presently believe are not material could also adversely affect us.

Significant increases in prices for raw materials, energy, transportation and other necessary supplies and services, without corresponding increases in our selling prices, could adversely affect our financial results.

Increases in the cost of and availability of raw materials, including pulp and petroleum-based materials, the cost of energy, transportation and other necessary services, supplier constraints, an inability to maintain favorable supplier arrangements and relations or an inability to avoid disruptions in production output caused by events such as natural disasters, power outages, labor strikes, governmental regulatory requirements or nongovernmental voluntary actions in response to global climate change concerns, and the like could have an adverse effect on our financial results.

Cellulose fiber, in the form of kraft pulp or recycled fiber from recovered waste paper, is used extensively in our tissue products and is subject to significant price fluctuations due to the cyclical nature of these fiber markets. Cellulose fiber, in the form of fluff pulp, is a key component in our personal care products. Increases in pulp prices could adversely affect our earnings if selling prices for our finished products are not adjusted or if these adjustments significantly trail the increases in pulp prices. Derivative instruments have not been used to manage these risks.

A number of our products, such as diapers, training and youth pants, incontinence care products, disposable wipes and various health care products, contain certain materials that are principally derived from petroleum. These materials are subject to price fluctuations based on changes in petroleum prices, availability and other factors. We purchase these materials from a number of suppliers. Significant increases in prices for these materials could adversely affect our earnings if selling prices for our finished products are not adjusted or if adjustments significantly trail the increases in prices for these materials. Derivative instruments have not been used to manage these risks.

Although we believe that the supplies of raw materials needed to manufacture our products are adequate, global economic conditions, supplier capacity constraints, natural disasters and other factors (including actions taken to address climate change and related market responses) could affect the availability of, or prices for, those raw materials.

Our manufacturing operations utilize electricity, natural gas and petroleum-based fuels. To ensure that we use all forms of energy cost-effectively, we maintain ongoing energy efficiency improvement programs at all of our manufacturing sites. Our contracts with energy suppliers vary as to price, payment terms, quantities and duration. Our energy costs are also affected by various market factors including the availability of supplies of

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particular forms of energy, energy prices and local and national regulatory decisions (including actions taken to address climate change and related market responses). There can be no assurance that we will be fully protected against substantial changes in the price or availability of energy sources. Derivative instruments are used to manage a portion of natural gas price risk in accordance with our risk management policy.

Increased pricing pressure, intense competition for sales of our products and the inability to innovate effectively could have an adverse effect on our financial results.

We compete in intensely competitive markets against well-known, branded products and low-cost or private label products both domestically and internationally. Inherent risks in our competitive strategy include uncertainties concerning trade and consumer acceptance, the effects of consolidation within retailer and distribution channels, and competitive reaction. Our competitors for these markets include not only our traditional competitors but also private label manufacturers, low-cost manufacturers and rapidly-expanding international manufacturers. These competitors may have greater financial resources and greater market penetration, which enable them to offer a wider variety of products and services at more competitive prices. Alternatively, some of these competitors may have significantly lower product development and manufacturing costs, allowing them to offer products at a lower cost. The actions of these competitors could adversely affect our financial results. It may be necessary for us to lower prices on our products and increase spending on advertising and promotions, each of which could adversely affect our financial results.

Our ability to develop new products is affected by whether we can successfully anticipate consumer needs and preferences, develop and fund technological innovations, and receive and maintain necessary patent and trademark protection. In addition, we incur substantial development and marketing costs in introducing new and improved products and technologies. The introduction of a new consumer product (whether improved or newly developed) usually requires substantial expenditures for advertising and marketing to gain recognition in the marketplace. If a product gains consumer acceptance, it normally requires continued advertising and promotional support to maintain its relative market position. Some of our competitors are larger and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions.

There is no guarantee that we will be successful in developing new and improved products and technologies necessary to compete successfully in the industry or that we will be successful in advertising, marketing, timely launching and selling our products.

Global economic conditions, including recessions or slow economic growth, and continuing global credit market volatility, could continue to adversely affect our business and financial results.

Unfavorable global economic conditions, including the impact of recessions, slow economic growth, economic and pricing instability and credit market volatility, may continue to negatively affect our business and financial results. These economic conditions could negatively impact:

• consumer demand for our products, including shifting consumer purchasing patterns to lower-cost options such as private-label products,

• demand by businesses for our products, including effects of increased unemployment and cost savings efforts of those customers,

• the mix of our products’ sales, and

• our ability to collect accounts receivable on a timely basis from certain customers.

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Ongoing volatility in global commodity, currency and financial markets has continued to result in uncertainty in the business environment. We rely on access to the credit markets, specifically the commercial paper and public bond markets, to provide supplemental funding for our operations. Although we have not experienced a disruption in our ability to access the credit markets, it is possible that we may have difficulty accessing the credit markets in the future, which may disrupt our businesses or further increase our cost of funding our operations.

Prolonged recessions, slow economic growth or credit market disruptions could result in decreased revenue, margins and earnings.

Changes in the policies of our retail trade customers and increasing dependence on key retailers in developed markets may adversely affect our business.

Our products are sold in a highly competitive global marketplace, which is experiencing increased concentration and the growing presence of large-format retailers and discounters. With the consolidation of retail trade, especially in developed markets such as the U.S., Europe and Australia, we are increasingly dependent on key retailers, and some of these retailers, including large-format retailers, may have greater bargaining power. They may use this leverage to demand higher trade discounts or allowances which could lead to reduced profitability. We may also be negatively affected by changes in the policies of our retail trade customers, such as inventory de-stocking, limitations on access to shelf space, delisting of our products, additional requirements related to safety, environmental, social and other sustainability issues, and other conditions. If we lose a significant customer or if sales of our products to a significant customer materially decrease, our business, financial condition and results of operations may be materially adversely affected.

If we are unable to hire, develop or retain key employees or a skilled and diverse workforce, it could have an adverse effect on our business.

Our strategy includes a focus on hiring, developing and retaining our management team and a skilled and diverse international workforce. A skilled and diverse international workforce is a significant factor in developing product innovation, as well as providing key viewpoints representative of our international consumer base. We compete to hire new employees and then seek to train them to develop their skills. Unplanned turnover or failure to develop an effective succession plan for our leadership positions, or to hire and retain a diverse, skilled workforce, could increase our operating costs and adversely affect our results of operations. There can be no assurance that we will be able to successfully recruit, develop and retain the key personnel that we need.

Our international operations are subject to foreign market risks, including foreign exchange risk, currency restrictions and political instability, which may adversely affect our financial results.

Because we and our equity companies have manufacturing facilities in 39 countries, with products sold in more than 150 countries, our results may be substantially affected by foreign market risks. We are subject to the impact of economic and political instability in developing countries.

We are subject to the movement of various currencies against each other and versus the U.S. dollar. A portion of the exposures, arising from transactions and commitments denominated in non-local currencies, is systematically managed through foreign currency forward and swap contracts. We do not generally hedge our translation exposure with respect to foreign operations.


Weaker foreign currency exchange rates increase the potential impact of forecasted increases in dollar-based input costs for operations outside the U.S. There can be no assurance that we will be protected against substantial foreign currency fluctuations.

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In addition, we face increased risks in our international operations, including currency restrictions, adverse political and economic conditions, legal and regulatory constraints, tariffs and other trade barriers, risks of expropriation, difficulties in enforcing contractual and intellectual property rights, and potentially adverse tax consequences. Each of these factors could adversely affect our financial results. See MD&A and Item 8, Note 4 to the Consolidated Financial Statements, for information about the effects of currency restrictions, currency devaluation and inflation in Venezuela on our financial results in 2010.

In addition, intense competition in European personal care and tissue markets, and the challenging economic, political and competitive environments in Latin America, Eastern Europe, Africa and Asia may slow our sales growth and earnings potential. Our success internationally also depends on our ability to acquire or form successful business alliances, and there is no guarantee that we will be able to acquire or form these alliances. In addition, there can be no assurance that our products will be accepted in any particular market.

There is no guarantee that our ongoing efforts to reduce costs will be successful.

We continue to implement plans to improve our competitive position by achieving cost reductions in our operations. In addition, we expect ongoing cost savings from our continuous improvement activities. We anticipate these continuing cost savings will result from reducing material costs and manufacturing waste and realizing productivity gains, distribution efficiencies and overhead reductions in each of our business segments. See MD&A. If we cannot successfully implement our cost savings plans, we may not realize all anticipated benefits. Any negative impact these plans have on our relationships with employees or customers or any failure to generate the anticipated efficiencies and savings could adversely affect our financial results.

Damage to the reputation of Kimberly-Clark or to one or more of our brands could adversely affect our business.

Developing and maintaining our reputation, as well as the reputation of our brands, is a critical factor in our relationship with consumers, customers, suppliers and others. Our inability to address adverse publicity or other issues, including concerns about product safety, quality, efficacy or similar matters, real or perceived, could negatively impact sentiments towards us and our products, and our business and financial results could suffer. Our business and results could also be negatively impacted by the effects of a significant product recall, product-related litigation, allegations of product tampering or contamination or the distribution and sale of counterfeit products.

Our sales may not occur as estimated.

There is no guarantee that we will be able to anticipate consumer preferences, estimate sales of new products, estimate changes in population characteristics and the acceptance of our products in new markets or anticipate changes in technology and competitive responses. As a result, we may not be able to achieve anticipated sales.


Pending litigation, administrative actions, tax matters, regulatory requirements and new legal requirements could have an adverse effect.

There is no guarantee that we will be successful in defending against legal and administrative actions or in asserting our rights under various laws, including intellectual property laws. In addition, we could incur substantial costs in defending against or in asserting our rights in these actions.

We are subject to income tax requirements in various jurisdictions in the United States and internationally. Increases in applicable tax rates, changes in applicable tax laws and actions by tax authorities in jurisdictions in which we operate could reduce our after-tax income and have an adverse effect on our results of operations.