SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended September 30,20032004Commission File Number 1-9608
NEWELL RUBBERMAID INC.
(Exact(Exact name of registrant as specified in its charter)
DELAWARE 36-3514169 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Deerfield Corporate Centre One 13010 Morris Road,
DELAWARE 36-3514169 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)10B Glenlake Parkway, Suite
100 Alpharetta,600
Atlanta, Georgia30004 (Address30328
(Address of principal executive offices)(Zip
(Zip Code)(770)
670-2232 (Registrant's407-3800
(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, and (2) has been subject to such filing requirements for the past 90 days.
Yes /x/
Yes /x/ No // /Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes /x/
Yes /x/ No // /Number of shares of common stock outstanding (net of treasury shares) as of October
24, 2003: 274.429, 2004: 274.8 million.
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------- 2003 2002 2003 2002 ---- ---- ---- ----Net sales $1,944.7 $1,948.3 $5,657.2 $5,440.3 Cost of products sold 1,422.5 1,398.0 4,121.6 3,950.3 -------- -------- -------- -------- GROSS MARGIN 522.2 550.3 1,535.6 1,490.0 Selling, general and administrative expenses 328.3 341.7 1,002.5 970.9 Restructuring costs 48.4 51.2 166.0 69.8 -------- -------- -------- -------- OPERATING INCOME 145.5 157.4 367.1 449.3 Nonoperating expenses: Interest expense 27.4 29.7 88.0 84.1 Other, net 7.2 13.7 35.2 39.7 -------- -------- -------- -------- Net nonoperating expenses 34.6 43.4 123.2 123.8 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 110.9 114.0 243.9 325.5 Income taxes 35.7 37.8 78.9 109.8 -------- -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 75.2 76.2 165.0 215.7 Cumulative effect of accounting change, net of tax - - - 514.9 -------- -------- -------- -------- NET INCOME (LOSS) 75.2 76.2 165.0 (299.2) ======== ======== ======== ======== Weighted average shares outstanding: Basic 274.4 267.2 274.0 267.0 Diluted 274.4 277.7 274.3 267.7 Earnings (loss) per share: Basic - Before cumulative effect of accounting change $0.27 $0.29 $0.60 $0.81 Cumulative effect of accounting change - - - (1.93) -------- -------- -------- ------- Net income (loss) per common share $0.27 $0.29 $0.60 ($1.12) ======== ======== ======== ======== Diluted - Before cumulative effect of accounting change $0.27 $0.29 $0.60 $0.81 Cumulative effect of accounting change - - - (1.93) -------- -------- -------- ------- Net income (loss) per common share $0.27 $0.29 $0.60 ($1.12) ======== ======== ======== ======== Dividends per share $0.21 $0.21 $0.63 $0.63 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).2PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Net sales $ 1,671.8 $ 1,729.1 $ 4,939.9 $ 5,072.0 Cost of products sold 1,198.5 1,237.3 3,571.0 3,625.0
GROSS MARGIN 473.2 491.8 1,368.9 1,447.0 Selling, general and administrative expenses 307.1 298.8 945.5 905.5 Impairment charges 348.9 — 374.0 — Restructuring costs — 32.3 47.9 109.5
OPERATING (LOSS) INCOME (182.7 ) 160.7 1.5 432.0 Nonoperating expenses: Interest expense, net 29.5 33.1 90.0 104.5 Other (income) expense, net (0.8 ) 1.4 (3.9 ) 18.6
Net nonoperating expenses 28.7 34.5 86.1 123.1
(LOSS) INCOME BEFORE INCOME TAXES (211.4 ) 126.2 (84.6 ) 308.9 Income taxes 23.6 40.7 58.7 100.0
NET (LOSS) INCOME FROM CONTINUING OPERATIONS (235.0 ) 85.5 (143.3 ) 208.9 Gain/(loss) from discontinued operations, net of tax 8.6 (10.3 ) (97.0 ) (43.9 )
NET (LOSS) INCOME ($ 226.4 ) $ 75.2 ($ 240.3 ) $ 165.0
Weighted average shares outstanding: Basic 274.4 274.4 274.4 274.0 Diluted 274.4 274.4 274.4 274.3 (Loss) Earnings per share: Basic – (Loss) income from continuing operations ($ 0.86 ) $ 0.31 ($ 0.52 ) $ 0.76 Income (loss) from discontinued operations 0.03 (0.04 ) (0.35 ) (0.16 )
Net (loss) income per common share ($ 0.83 ) $ 0.27 ($ 0.88 ) $ 0.60
Diluted – (Loss) income from continuing operations ($ 0.86 ) $ 0.31 ($ 0.52 ) $ 0.76 Income (loss) from discontinued operations 0.03 (0.04 ) (0.35 ) (0.16 )
Net (loss) income per common share ($ 0.83 ) $ 0.27 ($ 0.88 ) $ 0.60
Dividends per share $ 0.21 $ 0.21 $ 0.63 $ 0.63 See Notes to Consolidated Financial Statements (Unaudited).
2
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
September 30, December 31, 2004 2003 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 354.5 $ 144.4 Accounts receivable, net 1,184.3 1,397.1 Inventories, net 1,060.0 884.8 Deferred income taxes 115.3 152.7 Prepaid expenses and other 163.2 183.1 Current assets of discontinued operations — 238.1
TOTAL CURRENT ASSETS 2,877.3 3,000.2 OTHER LONG-TERM INVESTMENTS 15.5 15.5 OTHER ASSETS 256.7 197.2 PROPERTY, PLANT AND EQUIPMENT, NET 1,341.3 1,608.8 DEFERRED INCOME TAXES 9.3 68.1 GOODWILL 1,798.0 1,989.0 OTHER INTANGIBLE ASSETS, NET 307.1 447.9 NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS — 154.0
TOTAL ASSETS $ 6,605.2 $ 7,480.7
See Notes to Consolidated Financial Statements (Unaudited).
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(DOLLARS IN MILLIONS) September 30, December 31, 2003 2002 ---- ---- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $77.1 $55.1 Accounts receivable, net 1,392.6 1,377.7 Inventories, net 1,271.2 1,196.2 Deferred income taxes 200.4 213.5 Prepaid expenses and other 221.2 237.5 -------- -------- TOTAL CURRENT ASSETS 3,162.5 3,080.0 OTHER ASSETS 316.3 286.7 PROPERTY, PLANT(CONT.)
(Amounts in millions, except per share data)
September 30, December 31, 2004 2003 (Unaudited) LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Notes payable $ 14.0 $ 21.9 Accounts payable 633.1 694.7 Accrued compensation 115.4 122.1 Other accrued liabilities 842.4 960.4 Income taxes 134.0 80.8 Current portion of long-term debt 215.0 13.5 Current liabilities of discontinued operations — 128.6
TOTAL CURRENT LIABILITIES 1,953.9 2,022.0 LONG-TERM DEBT 2,439.6 2,868.6 OTHER NONCURRENT LIABILITIES 585.0 572.3 LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS — 1.5 STOCKHOLDERS’ EQUITY: Common stock, authorized shares, 800.0 million at $1.00 par value 290.1 290.1 Outstanding shares: 2004 - 290.1 million 2003 - 290.1 million Treasury stock, at cost; (411.6 ) (411.6 ) Shares held: 2004 - 15.7 million 2003 - 15.7 million Additional paid-in capital 437.4 439.9 Retained earnings 1,452.2 1,865.7 Accumulated other comprehensive loss (141.4 ) (167.8 )
TOTAL STOCKHOLDERS’ EQUITY 1,626.7 2,016.3
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 6,605.2 $ 7,480.7
See Notes to Consolidated Financial Statements (Unaudited).
4
NEWELL RUBBERMAID INC. AND
EQUIPMENT, NET 1,816.7 1,812.8 GOODWILL, NET 2,298.1 1,847.3 OTHER INTANGIBLE ASSETS, NET 373.5 362.1 -------- -------- TOTAL ASSETS $7,967.1 $7,388.9 ======== ======== SEESUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)
Nine Months Ended September 30, 2004 2003 OPERATING ACTIVITIES: Net (loss) income ($ 240.3 ) $ 165.0 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 185.4 186.5 Deferred income taxes 85.1 9.6 Impairment charges 374.0 — Noncash restructuring charges 25.3 73.0 (Gain)/loss on sale of assets/business (6.5 ) 20.5 Loss on discontinued businesses 90.5 — Other (4.8 ) 30.7 Changes in current accounts excluding the
Effects of acquisitions:Accounts receivable 211.0 47.0 Inventories (176.8 ) (1.4 ) Other current assets 17.9 2.6 Accounts payable (60.2 ) 121.9 Discontinued operations (29.8 ) 9.9 Accrued liabilities and other (49.0 ) (244.8 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 421.8 420.5
INVESTING ACTIVITIES: Acquisitions, net of cash acquired (3.0 ) (460.0 ) Expenditures for property, plant and equipment (95.2 ) (247.1 ) Sale of businesses and noncurrent assets 289.2 10.2
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 191.0 (696.9 )
FINANCING ACTIVITIES: Proceeds from issuance of debt 21.3 1,040.5 Proceeds from issuance of stock — 200.1 Payments on notes payable and long-term debt (251.9 ) (776.7 ) Cash dividends (173.2 ) (173.1 ) Proceeds from exercised stock options and other 1.4 6.0
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (402.4 ) 296.8
Exchange rate effect on cash (0.3 ) 1.6
INCREASE IN CASH AND CASH EQUIVALENTS 210.1 22.0 Cash and cash equivalents at beginning of year 144.4 55.1
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 354.5 $ 77.1
See Notes to Consolidated Financial Statements (Unaudited).
5
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED). 3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONT.) (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA) September 30, December 31, 2003 2002 ---- ---- (UNAUDITED)LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $31.6 $25.2 Accounts payable 815.9 686.6 Accrued compensation 117.5 153.5 Other accrued liabilities 1,062.5 1,165.4 Income taxes 139.0 159.7 Current portion of long-term debt 30.8 424.0 -------- -------- TOTAL CURRENT LIABILITIES 2,197.3 2,614.4 LONG-TERM DEBT 2,538.8 1,856.6 OTHER NONCURRENT LIABILITIES 402.4 349.7 DEFERRED INCOME TAXES 2.3 4.7 COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST 500.0 500.0 STOCKHOLDERS' EQUITY: Common stock, authorized shares, 800.0 million at $1.00 par value 290.1 283.1 Outstanding shares: 2003 - 290.1 million 2002 - 283.1 million Treasury stock, at cost; (411.6) (409.9) Shares held: 2003 - 15.7 million 2002 - 15.7 million Additional paid-in capital 438.2 237.3 Retained earnings 2,135.1 2,143.2 Accumulated other comprehensive loss (125.5) (190.2) -------- -------- TOTAL STOCKHOLDERS' EQUITY 2,326.3 2,063.5 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,967.1 $7,388.9 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).4
NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN MILLIONS) Nine Months Ended September 30, 2003 2002 ---- ----OPERATING ACTIVITIES: Net income (loss) $165.0 ($299.2) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change - 514.9 Depreciation and amortization 208.6 218.4 Deferred income taxes 9.6 31.9 Noncash restructuring and restructuring related charges 73.0 44.7 Loss on sale of business 20.5 - Other 30.7 35.2 Changes in current accounts excluding the effects of acquisitions: Accounts receivable 51.7 12.0 Inventories (44.8) (65.2) Other current assets 7.1 (21.8) Accounts payable 112.3 106.1 Accrued liabilities and other (213.2) (7.8) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 420.5 569.2 ------- ------- INVESTING ACTIVITIES: Acquisitions, net of cash acquired (460.0) (228.5) Expenditures for property, plant and equipment (247.1) (185.2) Sale of business 10.2 - Disposals of noncurrent assets and other - 7.8 ------- ------- NET CASH USED IN INVESTING ACTIVITIES (696.9) (405.9) ------- ------- FINANCING ACTIVITIES: Proceeds from issuance of debt 1,040.5 523.1 Proceeds from issuance of stock 200.1 - Payments on notes payable and long-term debt (776.7) (535.8) Cash dividends (173.1) (168.2) Proceeds from exercised stock options and other 6.0 16.3 ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 296.8 (164.6) ------- ------- Exchange rate effect on cash 1.6 1.2 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22.0 (0.1) Cash and cash equivalents at beginning of year 55.1 6.8 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $77.1 $6.7 ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).5 NEWELL RUBBERMAID INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE(Unaudited)Note 1
- BASIS OF PRESENTATION– Basis of PresentationThe accompanying unaudited consolidated financial statements of Newell Rubbermaid Inc. (collectively with its subsidiaries, the
"Company"“Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation of the financial position and the results of operations. It is suggested that these unaudited consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in theCompany'sCompany’s latest Annual Report on Form 10-K.SEASONAL VARIATIONS:Seasonal Variations:The
Company'sCompany’s product groups are only moderately affected by seasonal trends. TheRubbermaidCleaning & Organization andCalphalon HomeOther business segments typically have higher sales in the second half of the year due to retail stocking related to the holiday season; theIrwinTools & Hardware and Home Fashions businesssegmentsegments typicallyhashave higher sales in the second and third quarters due to an increased level of do-it-yourself projects completed in the summer months; and theSharpieOffice Products business segment typically has higher sales in the second and third quarters due to the back-to-school season. Because these seasonal trends are moderate, theCompany'sCompany’s consolidated quarterly sales generally do not fluctuatesignificantly. FAIR VALUE OF STOCK OPTIONS: On May 7, 2003, the Company's stockholders approved the Newell Rubbermaid Inc. 2003significantly, unless a significant acquisition is made.Fair Value of Stock
Plan (the "2003 Plan").Options:The2003 Plan provides for grants of up to an aggregate of 15.0 million stock options, stock awards and performance shares (except that no more than 3.0 million of those grants may be stock awards and performance shares). Under the 2003 Plan, the option exercise price will equal the common stock's closing price on the date of grant. Options will vest over five years (which may be shortened to no less than three years) and expire ten years from the date of grant. Also, under the 2003 Plan, none of the restrictions on stock awards will lapse earlier than the third anniversary of the date of grant. The Company'sCompany’s stock option plans are accounted for under Accounting Principles Board Opinion No. 25. As a result, the Company grants fixed stock options under which no compensation cost is recognized. Had compensation cost for the plans been determined consistent with Statement of Financial Accounting Standard No. 123 (FAS 123),"Accounting“Accounting for Stock Based Compensation,"” theCompany'sCompany’s net income and earnings per share would have been reduced to the following pro forma amounts for the three and nine months ended September 30,(IN MILLIONS, EXCEPT PER SHARE DATA): 6
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ----Net income (loss): As reported $75.2 $76.2 $165.0 ($299.2) Fair value option expense (4.7) (4.2) (14.1) (12.6) ----- ----- ------ ------ Pro forma $70.5 $72.0 $150.9 ($311.8) Basic earnings (loss) per share: As reported $0.27 $0.29 $0.60 ($1.12) Pro forma 0.26 0.27 0.55 (1.17) Diluted earnings (loss) per share: As reported $0.27 $0.29 $0.60 ($1.12) Pro forma 0.26 0.27 0.55 (1.16)RECENT ACCOUNTING PRONOUNCEMENTS: In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (the Interpretation). The Interpretation introduces a new consolidation model - the variable interests model - which determines control and consolidation based on potential variability(ingains and losses of the entity being evaluated for consolidation. Under the Interpretation, variable interest entities (VIEs) are to be evaluated for consolidation based on their variable interests. Variable interests are contractual, ownership, or other interestsmillions, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Net (loss) income: As reported ($ 226.4 ) $ 75.2 ($ 240.3 ) $ 165.0 Fair value option expense (4.6 ) (4.7 ) (13.7 ) (14.1 )
Pro forma ($ 231.0 ) $ 70.5 ($ 254.0 ) $ 150.9 Basic (loss) earnings per share: As reported ($ 0.83 ) $ 0.27 ($ 0.88 ) $ 0.60 Pro forma ($ 0.84 ) $ 0.26 ($ 0.93 ) $ 0.55 Diluted (loss) earnings per share: As reported ($ 0.83 ) $ 0.27 ($ 0.88 ) $ 0.60 Pro forma ($ 0.84 ) $ 0.26 ($ 0.93 ) $ 0.55 Reclassifications:Certain amounts in
an entity that expose their holders to the risks and rewards of the VIE. Variable interests include equity investments, loans, leases, derivatives, guarantees, and other instruments whose values change with changes in the VIE's assets. The provisions of the Interpretation apply to interest in VIE's acquired before February 1, 2003. A FASB Staff Position issued in October 2003 deferred the effective date of the Interpretation to the first interim or annual period ending after December 15, 2003 for entities created before February 1, 2003. The Company is currently evaluating the impact FIN 46 will have on its financial statements for any VIE created before February 1, 2003 in which the Company has an interest. In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 (FAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly, which will result in more consistent reporting of contracts as either derivatives or hybrid instruments. The Company adopted the provisions of FAS 149, effective June 30, 2003. Adoption of this standard did not have a material effect on the Company's financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 (FAS 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." FAS 150 establishes standards for how an issuer classifies and measures 7 certain financial instruments with characteristics of both liabilities and equity. On October 29, 2003 the FASB deferred, indefinitely, the application of paragraphs 9 and 10 of FAS 150 as it relates to mandatorily redeemable non-controlling interests in consolidated subsidiaries that would not be recorded as liabilities under FAS 150 by such subsidiaries. The adoption of the remainder of FAS 150 on July 1, 2003, had no impact on the Company's consolidated financial statements. RECLASSIFICATIONS: Certain 2002 amountsprior years have been reclassified to conform to the2003current year presentation.NOTESee Note 4 for a discussion of discontinued operations.6
Note 2
- CHANGES IN ACCOUNTING PRINCIPLE Effective January 1, 2002,– Impairment ChargesThe following table summarizes the recorded noncash pretax impairment charges(in millions):
Three Months Ended Nine Months Ended September 30, 2004 September 30, 2004 Goodwill $ 181.2 $ 182.7 Other indefinite-lived intangible assets 107.1 116.0 Long-lived assets 60.6 75.3
$ 348.9 $ 374.0
The Company
adopted Statementconducts its annual test ofFinancial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets." Pursuant to the adoption of FAS 142, the Company performed the requiredimpairmenttests offor goodwill and other indefinite-lived intangible assetsand recorded a pre-tax goodwill impairment charge of $538.0 million, $514.9 million net of tax, in the first quarter of 2002. In determining the goodwill impairment, the Company measured the impairment loss as the excess of the carrying amount of goodwill (which included the carrying amount of trademarks) over the implied fair value of goodwill (which excluded the fair value of identifiable trademarks). The Company conducts annual impairment testsin the thirdquarter andquarter. The Company also tests for impairment if events or circumstances occur subsequent to theCompany'sCompany’s annual impairment tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount.ForThe Company performs thenine months ended September 30, 2003, no suchannual impairmentcharges have been recorded. A summarytesting in the third quarter because it coincides with its annual strategic planning process for all of its businesses.The annual strategic planning meeting provides a forum for executive management to review changes recommended by division and group management in the long-term strategy of the individual businesses and approve specific initiatives. At the planning session, division management teams present their long-term vision for the business and recommend changes in response to internal and external factors, which may impact the valuation of long-lived assets, including goodwill, other intangible assets, and fixed assets. Additionally, these meetings are used to discuss the current business environment and outlook, as well as overall brand strategy.
Subsequent to the recent planning meetings, the Company performed its impairment testing of indefinite-lived intangible assets, giving consideration to underlying strategic and economic changes in the
Company'sbusiness. Additionally, the Company tested its other long-lived assets for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”The results of the impairment testing were reviewed and discussed with the Audit Committee of the Board of Directors, which agreed with management’s recommendations and concluded on October 22, 2004, that the impairment charges described below are required under generally accepted accounting principles.
Testing Approach
Goodwill
The goodwill
duringimpairment test requires that a company estimate thenine months endedfair value of the business enterprise at the reporting unit level, that is, the operating segment or one reporting level below the operating segment. The fair value of a reporting unit was calculated with the assistance of an independent third party valuation specialist using discounted cash flows. The discounted cash flows were estimated utilizing various assumptions regarding future revenue and expenses, working capital, terminal value, and discount rates. The underlying assumptions used were consistent with those used in the strategic plan. If the fair value of the reporting unit was less than its carrying amount at the valuation date, an impairment loss was recognized to the extent that the implied fair value of the goodwill within the reporting unit was less than the recorded amount of goodwill.Other Indefinite-Lived Intangible Assets, primarily Trademarks and Tradenames
The impairment test for other indefinite-lived intangible assets, primarily trademarks and tradenames (intangible assets), requires that a company determine the fair value of the intangible asset. Generally, the fair value of the intangible assets was calculated with the assistance of an independent third party valuation specialist using discounted cash flows associated with the underlying intangible asset. The discounted cash flows were estimated utilizing various assumptions regarding future revenue and expenses, working capital, terminal value, and discount rates. The underlying assumptions used were consistent with those used in the strategic plan. The fair value of the intangible asset was then compared to the carrying value. If the fair value of the intangible asset was less than its carrying amount, an impairment charge was recorded.
7
Other Long-Lived Assets, primarily Fixed Assets and Patents
In accordance with SFAS No. 144, the Company evaluated if there were impairment indicators present related to its fixed assets and other long-term assets. If impairment indicators were present, future cash flows related to the asset group was estimated. The sum of the undiscounted future cash flows attributable to the asset group was then compared to the carrying amount of the asset group. The cash flows were estimated utilizing various assumptions regarding future revenue and expenses, working capital, and proceeds from asset disposals on a basis consistent with the strategic plan. If the carrying amount exceeded the sum of the future undiscounted future cash flows, the Company discounted the future cash flows using a risk-free discount rate and recorded an impairment charge as the difference between the discounted cash flows and the carrying value of the asset group. Generally, the Company performed its testing of the asset group at the product-line level, as this is the lowest level for which identifiable cash flows are available.
As a result of the impairment testing described above, the Company recorded a noncash $348.9 million ($332.8 million, net of tax) impairment charge in the third quarter as follows:
Other Indefinite- Other Long-Lived Lived Intangible Assets (Fixed Segment Goodwill Assets Assets / Patents) Total Cleaning & Organization $ 34.0 $ — $ 45.7 $ 79.7 Office Products 138.8 93.8 8.5 241.1 Home Fashions 8.4 13.3 3.9 25.6 Tools & Hardware — — 1.0 1.0 Other — — 1.5 1.5
Total $ 181.2 $ 107.1 $ 60.6 $ 348.9
Cleaning & Organization
The European Cleaning & Organization business was previously classified in the fix portfolio of the Company’s business, as management believed that the restructuring and other investments made in the business would produce favorable returns in the future. These expected returns have not materialized and the Company is currently exploring alternatives for this business. Accordingly, an impairment charge was recorded to write the long-lived assets down to fair value (disposal value). The write-down of fixed assets is expected to decrease depreciation expense in 2005 by approximately $5 million.
Office Products
The impairment charge recorded in the Office Products segment is primarily a result of three factors:
• Prior year restructuring activity related to a product line in the European business has not resulted in the expected returns, and management is currently exploring alternatives for this product line. Accordingly, an impairment charge was recorded to write the long-lived assets down to fair value (disposal value). The impairment charge recognized on this product line was $80.8 million, of which $8.5 million related to the write-down of fixed assets. The write-down of fixed assets is expected to decrease depreciation expense in 2005 by approximately $1 million. • In the European business, the Company has historically promoted and supported several different brands in the everyday writing category. In the third quarter management developed a plan to consolidate certain brands in Europe in this category. This new plan results from several factors:
• The Company believes that rationalizing its brands will enable the Company to more effectively allocate capital and other resources. In this regard, the Company is focused on promoting its brands globally and reducing the reliance on local or regional brands. • The brand that is targeted for rationalization has experienced sales declines, especially in the current year, and management believes it has more effective investment opportunities outside of this brand.
As a result of this plan, the Company recognized an impairment charge of $123.1 million related to this product line. • In the third quarter, management decided to rationalize several trademarks and trade names (brands), primarily in the Latin America businesses. The current plan is to reduce the number of brands from 76 to 12 over the next three years. 8
As a result of this decision, the Company determined that certain brands that were previously considered to have indefinite lives were impaired. Accordingly, the Company wrote these trademarks and tradenames down to their fair value and will begin amortizing these brands over their remaining useful lives (generally three years). As a result of this reclassification, amortization expense is expected to increase by approximately $3 million in 2005. The total impairment charge recognized as a result of the decision to rationalize brands was $37.2 million. Home Fashions
Management decided to rationalize certain trademarks and tradenames (brands), primarily in the United Kingdom home fashions business, in order to focus on promoting more effective brands. As a result of this decision the Company determined that these brands became impaired and accordingly, these trademarks and tradenames, as well as certain associated patents, have been written off. The impairment charge associated with this decision was $17.2 million. Additionally, primarily as a result of an increase from the prior year in the discount rate (risk adjusted rate) used in calculating the enterprises’ fair value, an impairment charge of $8.4 million was recorded on goodwill. As of September 30,
2003 is2004, there was $23.9 million of goodwill and other indefinite-lived intangible assets relating to this business.Tools & Hardware / Other
The impairment charge recorded in the Tools & Hardware and Other segments primarily relates to patents that the Company will allow to expire and fixed assets that are currently held for sale, and accordingly, have been written down to fair value.
In the second quarter of 2004, the Company recorded an impairment charge of $25.1 million as
follows (IN MILLIONS): Balance at December 31, 2002 $1,847.3 Acquisitions 432.8 Other (primarily foreign exchange) 18.0 -------- Balance at September 30, 2003 $2,298.1 ======== NOTEfollows:
• In the first quarter of 2004, the Company began exploring various options for certain businesses and product lines in the Home Fashions and Tools & Hardware reportable segments, including evaluating those businesses for potential sale. As this process progressed, the Company determined that the businesses had a net book value in excess of their fair value. Due to the apparent decline in value, the Company conducted an impairment test in the second quarter and recorded an impairment loss to write the net assets of these businesses and product lines to fair value. • In 2004, the Company made the decision to exit certain product lines, which resulted in the impairment of fixed assets, primarily in the Cleaning & Organization segment. The Company determined the fair value of the fixed assets by estimating the future cash flows attributable to these fixed assets, including an estimate of the ultimate sale proceeds. Accordingly, the Company recorded a charge to write the assets to their estimated fair value. The Company cannot predict whether certain events might occur that would adversely affect the reported value of the remaining goodwill and other identifiable intangible assets. Such events may include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s customer base, or a material adverse change in its relationship with significant customers. Additionally, increases in the risk adjusted rate could result in additional impairment charges.
Note 3
- ACQUISITIONS AND DIVESTITURES ACQUISITIONS Effective January 1, 2003,— Restructuring CostsIn the second quarter of 2004, the Company completed its
acquisition of American Saw & Mfg. Co. (Lenox), a leading manufacturer of power tool accessories and hand tools marketed under the Lenox brand. The purchase price was approximately $450 million. This purchase marks the continued expansion and enhancement of the Company's product lines and customer base in the global power tool accessories and hand tools market and strengthens the Company's platform in the professional and fast growing "do-it-yourself" channels. Lenox had 2002 net sales of $185.4 million and is included in the Irwin operating segment. On April 30, 2002, the Company completed the purchase of American Tool Companies, Inc. ("American Tool"), a leading manufacturer of hand tools and power tool accessories. The Company had previously held a 49.5% stake in American Tool, which had been accounted for under the equity method prior to acquisition. The purchase price was $467 8 million, which included $197 million for the majority 50.5% ownership stake, the repayment of $243 million in American Tool debt and $27 million of transaction costs. The 2003 and 2002 transactions were accounted for as purchases; therefore, results of operations are included in the accompanying Consolidated Financial Statements since their respective acquisition dates. The acquisition costs for 2003 were allocated on a preliminary basis to the fair market value of the assets acquired and liabilities assumed. The Company's final integration plans may include exit costs for certain plants and product lines and employee termination costs. The final adjustments to the purchase price allocations are not expected to be material to the Consolidated Financial Statements. The Company continues to formulate integration plans for Lenox and other acquisitions. In 2003, integration plans for acquired businesses resulted in integration plan liabilities of $14.1 million for facility and other exit costs, $10.4 million for employee severance and termination benefits and $6.2 million for other pre- acquisition contingencies. The unaudited consolidated results of operations on a pro forma basis, as though the 2003 and 2002 acquisitions of Lenox and American Tool, respectively, had been completed on January 1, 2002, are as follows for the three months and nine months ended September 30, (IN MILLIONS, EXCEPT PER SHARE AMOUNTS):
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ----Net sales $1,944.7 $1,996.9 $5,657.2 $5,722.1 Income beforeaccountingchange $75.2 $83.7 $165.0 $230.3 Basic earnings per share before accounting change $0.27 $0.31 $0.60 $0.86 Net income (loss) $75.2 $83.7 $165.0 ($284.7) Basic earnings (loss) per share $0.27 $0.31 $0.60 ($1.07)DIVESTITURES On March 27, 2003, the Company completed the sale of its Cosmolab business, a division of the Sharpie segment, for approximately $13.0 million. The Cosmolab business had annual net sales of approximately $50 million. The Company used the proceeds from the sale to reduce its commercial paper borrowings. The Company recorded a pre-tax loss on the sale of $21.2 million in the first quarter of 2003 as a component of Other, net in the Consolidated Statement of Operations. NOTE 4 - RESTRUCTURING COSTS The Company continues to record restructuringcharges associated withthe Company'sits strategic restructuring plan (the “Plan”) announced on May 3, 2001. The specific objectives of theplan arePlan were to streamline theCompany'sCompany’s supply chain tobebecome thelow costbest-cost global provider throughout theCompany'sCompany’s portfolio by reducing worldwide headcount and consolidating duplicative manufacturingfacilities, over a three-year period beginning in 2001. In the third quarter of 2003, thefacilities. The Companyexpanded the scope and estimated cost of its original restructuring plan. 9 The original plan estimated approximately $350recorded $462 million intotalrestructuringcharges.charges under the Plan, including $84.2 million on discontinued operations. Therevisedfollowing analysis excludes the restructuringplan (the "revised plan") estimates total charges ranging from $460 million to $480 million. The increase in total charges from the original restructuring plan isamounts related tothe currency translation impact for future European projects (as the Euro and British Pound have significantly strengthened against the US dollar) and the addition of high return projects primarily in the Company's American Tool business.discontinued operations.9
Pre-tax restructuring costs consisted of the following
(IN MILLIONS)(in millions):
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ----Facility and other exit costs $10.7 $13.7 $67.3 $18.4 Employee severance and termination benefits 31.1 30.5 88.5 43.8 Exited contractual commitments and other 6.6 7.0 10.2 7.6 ----- ----- ------ ----- Recorded as Restructuring Costs $48.4 $51.2 $166.0 $69.8 ===== ===== ====== ===== Restructuring provisions were determined based on estimates prepared at the time the restructuring actions were approved by management, and also include amounts recognized as incurred. Cash paid for restructuring activities was $77.7 million and $41.7 million in the first nine months of 2003 and 2002, respectively. A summary of the Company's restructuring plan reserves is as follows (IN MILLIONS): 12/31/01 Costs 09/30/02 Balance Provision Incurred Balance -------- --------- -------- -------- Facility and other exit costs $20.1 $18.4 ($11.5) $27.0 Employee severance and termination benefits 6.2 43.8 (28.1) 21.9 Exited contractual commitments and other 1.9 7.6 (5.6) 3.9 ------ ------ ----- ------ $28.2 $69.8 ($45.2) $52.8 ====== ====== ===== ====== 12/31/02 Costs 09/30/03 Balance Provision Incurred Balance -------- --------- -------- ------- Facility and other exit costs $36.1 $67.3 ($58.6) $44.8 Employee severance and termination benefits 41.1 88.5 (69.7) 59.9 Exited contractual commitments and other 2.1 10.2 (11.8) 0.5 ----- ------ ------ ------ $79.3 $166.0 ($140.1) $105.2 ===== ====== ====== ======
Three Months Ended
September 30,Nine Months Ended September 30, 2003 2004 2003 Facility and other exit costs $ 28.6 $ 32.8 $ 56.2 Employee severance and termination benefits 3.7 9.9 53.3 Exited contractual commitments and other — 5.2 —
Recorded as Restructuring Costs $ 32.3 $ 47.9 $ 109.5
Restructuring provisions were determined based on estimates prepared at the time the restructuring actions were approved by management, and also include amounts recognized as incurred. In the second quarter, the Company reduced its restructuring reserve by approximately $10.0 million, primarily as a result of higher proceeds received from fixed asset disposals. Cash paid for restructuring activities was $28.1 million and $16.3 million for the third quarters of 2004 and 2003, respectively. Cash paid for restructuring activities was $68.6 million and $63.4 million in the first nine months of 2004 and 2003, respectively.
A summary of the Company’s restructuring plan reserves is as follows(in millions):
12/31/02 Costs 09/30/03 Balance Provision Incurred Balance Facility and other exit costs $ 31.4 $ 56.2 ($ 45.6 ) $ 42.0 Employee severance and termination benefits 36.4 53.3 (36.9 ) 52.8
$ 67.8 $ 109.5 ($ 82.5 ) $ 94.8
12/31/03 Costs 09/30/04 Balance Provision Incurred Balance Facility and other exit costs $ 77.5 $ 32.8 ($ 90.4 ) $ 19.9 Employee severance and termination benefits 61.8 9.9 (56.8 ) 14.9 Exited contractual commitments and other 6.5 5.2 (7.5 ) 4.2
$ 145.8 $ 47.9 ($ 154.7 ) $ 39.0
The facility and other exit cost reserves are primarily related to future minimum lease payments on vacated facilities and other closure costs. The remaining restructuring reserve will require cash payments to settle the liabilities.
Under the
revised plan,Plan, the Companyexpects to exitexited 84 facilities andreducereduced headcount by approximately12,000 people. At the plan's completion, the12,000. The Company expects total annual savings of between$150$125 and$175$150 million ($125105 to$135$115 million related to the reduced10headcount, $10 to $20 million related to reduced depreciation, and $10 to $15 million related toreduced depreciation, and $15 to $25 million related toother cash savings).As of September 30, 2003, restructuring reserves held on the Company's books were representative of approximately 100 individual restructuring plans.The following table depicts thematerialchanges inthese plansaccrued restructuring reserves for the nine months ended September 30, aggregated by reportable businesssegment:
12/31/01 Costs 09/30/02 Segment Balance Provision Incurred Balance ------- -------- --------- -------- --------Rubbermaid $3.1 $7.6 ($7.0) $3.7 Sharpie 2.0 4.9 (3.8) 3.1 Irwin 14.1 33.2 (14.9) 32.4 Calphalon Home 2.5 14.0 (10.8) 5.7 Corporate 6.5 10.1 (8.7) 7.9 ----- ----- ----- ------ $28.2 $69.8 ($45.2) $52.8 ===== ===== ===== ====== 12/31/02 Costs 09/30/03 Segment Balance Provision Incurred Balance ------- -------- --------- -------- -------- Rubbermaid $11.9 $33.0 ($28.0) $16.9 Sharpie 22.5 24.9 (24.7) 22.7 Irwin 12.8 44.0 (24.8) 32.0 Calphalon Home 11.6 61.2 (52.7) 20.1 Corporate 20.5 2.9 (9.9) 13.5 ----- ------ ------ ------ $79.3 $166.0 ($140.1) $105.2 ===== ====== ====== ======In the first nine months of 2003,segment(in millions):10
12/31/02 Costs 09/30/03 Segment Balance Provision Incurred Balance Cleaning & Organization $ 3.8 $ 29.4 ($ 19.2 ) $ 14.0 Office Products 27.2 24.9 (28.3 ) 23.8 Home Fashions 12.4 35.2 (22.7 ) 24.9 Tools & Hardware 0.5 8.9 (2.2 ) 7.2 Other 3.6 8.2 (0.5 ) 11.3 Corporate 20.3 2.9 (9.6 ) 13.6
$ 67.8 $ 109.5 ($ 82.5 ) $ 94.8
12/31/03 Costs 09/30/04 Segment Balance Provision Incurred Balance Cleaning & Organization $ 56.2 $ 21.5 ($ 69.8 ) $ 7.9 Office Products 29.9 7.4 (20.9 ) 16.4 Home Fashions 17.7 7.3 (23.3 ) 1.7 Tools & Hardware 17.9 4.5 (19.1 ) 3.3 Other 9.6 7.0 (12.9 ) 3.7 Corporate 14.5 0.2 (8.7 ) 6.0
$ 145.8 $ 47.9 ($ 154.7 ) $ 39.0
Note 4 – Discontinued Operations
On January 31, 2004, the Company
incurred facility exit costscompleted the sale of its Panex Brazilian low-end cookware division (previously reported in the Other operating segment) andemployee severanceEuropean picture frames businesses (previously reported in the Home Fashions operating segment).On April 13, 2004, the Company sold substantially all of its U.S. picture frame business (Burnes), its Anchor Hocking glassware business and
termination benefit costs for approximately 4,400 employees.its Mirro cookware business. Under therestructuring plan, 73 facilities have been exitedterms of the agreement andheadcount has been reduced by 9,200 employees. In 2003,final adjustments relating to the transaction, the Companyannounced its intention to close oneretained the accounts receivable ofits manufacturing facilities intheCalphalon Home operating segment bybusinesses, and total proceeds, including theend of 2003. Asretained receivables, as a result ofthis decision,theCompany evaluated its long-lived assets, primarily property, plant and equipment, for impairment and recorded a non-cash restructuring charge of $30.5transaction were $304 million. TheamountBurnes picture frame business was previously reported in the Home Fashions operating segment, while the Anchor Hocking and Mirro businesses were previously reported in the Other operating segment. In September 2004, as part of theimpairment was determined using a discounted cash flow analysis. In 2003,final adjustments relating to the transaction, the Company recorded an additional loss of approximately $1.0 million on this sale.On July 1, 2004, the Company completed the sale of Little Tikes Commercial Playground Systems Inc. (“LTCPS”) to PlayPower, Inc. for approximately $41 million. LTCPS was previously reported in the Other operating segment, as a
non-cashunit of the Company’s Little Tikes division. LTCPS is a manufacturer of commercial playground systems and contained playground environments. The Company will retain the consumer portion of its Little Tikes division. The Company recognized a gain on the sale of LTCPS of $14.3 million ($9.6 million, net of tax) in the third quarter of 2004. For the year ended December 31, 2003, LTCPS contributed approximately $60 million of sales to the Company.The following table summarizes the results of the discontinued operations for the three and nine months ended September 30, 2004(in millions):
11
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Net sales $ — $ 215.7 $ 171.2 $ 585.2 Loss from discontinued operations, net of income taxes of ($4.7) million for the three months ended September 30, 2003, and ($3.0) and ($20.9) million for the nine months ended September 30, 2004 and 2003, respectively — ($ 10.3 ) ($ 6.5 ) ($ 43.9 ) Gain/(Loss) on disposal of discontinued operations, net of income taxes of $4.7 million for the three months ended September 30, 2004 $ 8.6 — ($ 90.5 ) — No amounts related to interest expense have been allocated to discontinued operations.
The following table presents summarized balance sheet information of the discontinued operations as of December 31, 2003 (in millions):
December 31, 2003 Accounts receivable, net $ 45.5 Inventories, net 181.4 Prepaid expenses and other current assets 11.2
Total Current Assets 238.1 Property, plant and equipment, net 152.3 Other assets 1.7
Total Assets $ 392.1
Accounts payable $ 82.8 Other accrued liabilities 45.8
Total Current Liabilities 128.6
Long-term liabilities 1.5
Total Liabilities $ 130.1
There were no assets or liabilities attributable to discontinued operations as of September 30, 2004.
Note 5 – Income Taxes
During the nine months ended September 30, 2004, the statute of limitations on certain transactions for which the Company had provided tax reserves, in whole or in part, expired resulting in the reversal of the provisions and interest accrued thereon in the amount of $37.4 million. Accordingly, the impact was recorded in income taxes for the nine months ended September 30, 2004.
In addition, due to significant restructuring
chargeactivity and certain changes in the Company’s business model affecting the utilization of$14.0net operating loss carryovers, particularly in certain European countries, the valuation allowance on certain net operating losses previously tax-benefited has been increased by $31.0 million. This amount was recorded in income taxes for the nine months ended September 30, 2004.12
In the three months ended September 30, 2004, the Company received notification from the Internal Revenue Service that it would receive a refund of $2.9 million relating to
the curtailment of a pension plan associated with the closure of one of the Company's exited facilities. The non-cash restructuring chargeamounts previously paid. Accordingly, this amount has beenincludedrecorded inemployee severanceincome taxes for the three andtermination benefits as disclosed in the table above. NOTE 5 - INVENTORIESnine months ended September 30, 2004.Note 6 – Inventories
Inventories are stated at the lower of cost or market value. The components of inventories, net of LIFO reserve, were as follows
(IN MILLIONS): 11 September 30, December 31, 2003 2002 ---- ---- Materials and supplies $313.9 $308.8 Work(inprocess 185.4 174.9 Finished products 771.9 712.5 -------- -------- $1,271.2 $1,196.2 ======== ======== NOTE 6 - LONG-TERM DEBTmillions):
September 30, December 31, 2004 2003 Materials and supplies $ 251.1 $ 240.4 Work in process 170.1 115.4 Finished products 638.8 529.0
$ 1,060.0 $ 884.8
Note 7 – Long-term Debt
The following is a summary of long-term debt
(IN MILLIONS)(in millions):September 30, December 31, 2003 2002 ---- ---- Medium-term notes $1,712.6 $1,680.9 Commercial paper 398.2 140.0 Preferred debt securities 450.0 450.0 Other long-term debt 8.8 9.7 -------- -------- Total debt 2,569.6 2,280.6 Current portion of long-term debt (30.8) (424.0) -------- -------- Long-term Debt $2,538.8 $1,856.6 ======== ======== On June 13, 2003, Newell Rubbermaid rolled over the $650.0 million 364 day Revolving Credit Facility that was terminating on June 14, 2003. The new agreement consists of 19 participating banks and will mature on June 11, 2004. The revolver requires, among other things, that
September 30, December 31, 2004 2003 Medium-term notes $ 1,647.0 $ 1,647.0 Commercial paper — 217.1 Preferred debt securities 450.0 450.0 Junior convertible subordinated debentures 515.5 515.5 Terminated interest rate swaps 41.8 46.7 Other long-term debt 0.3 5.8
Total debt 2,654.6 2,882.1 Current portion of long-term debt (215.0 ) (13.5 )
Long-term Debt $ 2,439.6 $ 2,868.6
Effective March 9, 2004, the Company
maintain certain interest coverage and total indebtedness to total capital ratios, as defined in the agreement. The agreement also limits subsidiary indebtedness. As of September 30, 2003, the Company was in compliance with this agreement. No amounts are outstanding under the Revolving Credit Facility as of September 30, 2003. On May 6, 2003, the Company issued $400.0 million of medium term notes with seven-year and two-year maturities. The $400.0 million of medium term notes consist of $250.0 million in 4.00% notes due 2010 and $150.0 million in 2.00% notes due 2005. The seven-year notes pay interest semi-annually on May 1 and November 1 until final maturity on May 1, 2010. The two-year notes pay interest semi-annually on May 1 and November 1 until final maturity on May 1, 2005. The proceeds of these issuances were used to pay down commercial paper. These issuances are reflected in the outstanding amount of medium-term notes noted above and the entire amount is considered to be long-term debt. On January 10, 2003, the Company completed the sale of 6.67 million shares of its common stock at a public offering price of $30.10 per share pursuant to a shelf registration statement filed with the Securities and Exchange Commission. Total proceeds from the sale were approximately $200.8 million, resulting in net proceeds to the Company, before expenses, of $200.1 million. The proceeds were used to reduce the Company's commercial paper borrowings. 12 Through the first nine months of 2003, the Company hasterminatedcertainan interest rate swapagreementsagreement prior totheirthe scheduledmaturities. The following table summarizesmaturity date and received cash of $9.2 million. Of this amount $5.5 million represents thearrangementsfair value ofeachthe swap that was terminated and the remainder represents net interestrate swap termination that occurred throughreceivable on thenine months ended September 30, 2003: Fair Value of Unamortized Date of Interest Rate Total Cash the Terminated Gain as of Swap Termination Received Swaps 9/30/03 ---------------- --------- ----- ------- September 30, 2003 $6.4 $6.0 $6.0 September 15, 2003 5.7 5.4 5.3 June 16, 2003 11.4 10.8 9.8 February 24, 2003 21.0 17.3 14.7 ----- ----- ----- Total $44.5 $39.5 $35.8 ===== ===== =====swap. The cash received relating to the fair value of theswapsswap has been included in Other as an operating activity in the Consolidated Statement of Cash Flows. The unamortized gain on the terminated interest rateswapsswap is accounted for as long-term debt (of which$9.0$0.7 million is classified as current). On March 9, 2004, the Company entered into a fixed to floating rate swap that effectively replaced the terminated swap.Note 8 – Employee Benefit and Retirement Plans
The
unamortized gain will be amortized as a reduction to interest expense overfollowing table presents theremaining termcomponents of theunderlying debt. NOTE 7 - EARNINGS PER SHARECompany’s pension expense for the three months ended September 30, (in millions):
United States International 2004 2003 2004 2003 Service cost-benefits earned during the year $ 10.2 $ 8.8 $ 1.8 $ 2.2 Interest cost on projected benefit obligation 16.0 12.1 4.9 4.5 Expected return on plan assets (19.5 ) (17.1 ) (4.5 ) (4.3 ) Actuarial loss 1.3 0.1 0.4 0.4
Net pension expense $ 8.0 $ 3.9 $ 2.6 $ 2.8
13
The following table presents the components of the Company’s pension expense for the nine months ended September 30, (in millions):
United States International 2004 2003 2004 2003 Service cost-benefits earned during the year $ 31.2 $ 26.3 $ 5.3 $ 6.6 Interest cost on projected benefit obligation 40.4 36.3 14.8 13.5 Expected return on plan assets (49.2 ) (51.3 ) (13.6 ) (13.0 ) Curtailment, settlement cost (1.8 ) — 0.2 — Actuarial loss 3.4 0.4 1.3 1.2
Net pension expense $ 24.0 $ 11.7 $ 8.0 $ 8.3
The following table presents the components of the Company’s other postretirement benefits expense for the three and nine months ended September 30, (in millions):
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Service cost-benefits earned during the year $ 1.0 $ 1.2 $ 3.5 $ 3.7 Interest cost on projected benefit obligation 3.4 4.0 11.1 12.1 Amortization of prior service cost (0.2 ) 0.1 (0.5 ) 0.2 Actuarial loss — — 0.5 —
Net pension expense $ 4.2 $ 5.3 $ 14.6 $ 16.0
In the third quarter of 2004, the Company made a voluntary $50.0 million cash contribution to fund the Company’s pension plan.
Note 9 — Earnings per Share
The calculation of basic and diluted earnings per share for the three and nine months ended September 30, is shown below
(IN MILLIONS, EXCEPT PER SHARE DATA)(in millions, except per share data):
“In the Convertible Basic Money” Preferred Diluted Method Options(1) Securities(2) Method Three Months Ended September 30, 2004Loss from continuing operations ($ 235.0 ) — — ($ 235.0 ) Loss per share ($ 0.86 ) — — ($ 0.86 ) Income from discontinued operations $ 8.6 — — $ 8.6 Income per share $ 0.03 — — $ 0.03 Net loss ($ 226.4 ) — — ($ 226.4 ) Loss per share ($ 0.83 ) — — ($ 0.83 ) Weighted average shares outstanding 274.4 — — 274.4 Three Months Ended September 30, 2003Income from continuing operations $ 85.5 — — $ 85.5 Earnings per share $ 0.31 — — $ 0.31 Loss from discontinued operations ($ 10.3 ) — — ($ 10.3 ) Loss per share ($ 0.04 ) — — ($ 0.04 ) 14
“In the Convertible Basic Money” Preferred Diluted Method Options(1) Securities(2) Method Net income $ 75.2 — — $ 75.2 Earnings per share $ 0.27 — — $ 0.27 Weighted average shares outstanding 274.4 — — 274.4 Nine Months Ended September 30, 2004Loss from continuing operations ($ 143.3 ) — — ($ 143.3 ) Loss per share ($ 0.52 ) — — ($ 0.52 ) Loss from discontinued operations ($ 97.0 ) — — ($ 97.0 ) Loss per share ($ 0.35 ) — — ($ 0.35 ) Net loss ($ 240.3 ) — — ($ 240.3 ) Loss per share ($ 0.88 ) — — ($ 0.88 ) Weighted average shares outstanding 274.4 — — 274.4 Nine Months Ended September 30, 2003Income from continuing operations $ 208.9 — — $ 208.9 Earnings per share $ 0.76 — — $ 0.76 Loss from discontinued operations ($ 43.9 ) — — ($ 43.9 ) Loss per share ($ 0.16 ) — — ($ 0.16 ) Net income $ 165.0 — — $ 165.0 Earnings per share $ 0.60 — — $ 0.60 Weighted average shares outstanding 274.0 0.3 — 274.3
"In the Convertible Basic Money" Preferred Diluted Method Options(1) Securities(2) Method ------ ---------- ------------- ------QUARTER ENDED SEPTEMBER 30, 2003 Net income $75.2 - - $75.2 Weighted average shares outstanding 274.4 - - 274.4 Earnings per share $0.27 $0.27 QUARTER ENDED SEPTEMBER 30, 2002 Net income $76.2 - 4.4 $80.6 Weighted average shares outstanding 267.2 0.6 9.9 277.7 Earnings per share $0.29 $0.29 NINE MONTHS ENDED SEPTEMBER 30, 2003 Net income $165.0 - - $165.0 Weighted average shares outstanding 274.0 0.3 - 274.3 Earnings per share $0.60 $0.60 NINE MONTHS ENDED SEPTEMBER 30, 2002 Income before cumulative effect of accounting change $215.7 - - $215.7 Weighted average shares outstanding 267.0 0.7 - 267.7 Earnings per share $0.81 $0.81 13 Net loss ($299.2) - - ($299.2) Weighted average shares outstanding 267.0 0.7 - 267.7 Loss per share ($1.12) ($1.12)(1) The weighted average shares outstanding for the three months ended September 30, 20032004 and20022003 exclude approximately10.011.2 million and4.410.0 million stock options, respectively, and approximately8.08.8 million and4.48.0 million stock options for the nine months ended September 30,20032004 and2002,2003, respectively, because such options had an exercise price in excess of the average market value of theCompany'sCompany’s common stock during the respective periods and would, therefore, be anti-dilutive.(2) The convertible preferred securities are anti-dilutive for the three months ended September 30, 2003andfor thenine months ended September 30,20032004 and2002,2003, and therefore have been excluded from diluted earnings per share. Had the convertible preferredsharessecurities been included in the diluted earnings per share calculation, net income would be increased by $4.2 million for the three months ended September 30, 2004 and 2003, respectively, and by $12.6million and $13.2million for the nine months ended September 30,20032004 and2002,2003, respectively, and weighted average shares outstanding would have increased by 9.9 million shares in all periods.NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)Note 10 – Accumulated Other Comprehensive Loss
Accumulated other comprehensive
income (loss)loss encompassesnet after- tax unrealized gains or losses on securities available for sale,foreign currency translation adjustments, net losses on derivative instruments and net minimum pension liability adjustments and is recorded withinstockholders'stockholders’ equity.The following table displays the components of accumulated other comprehensive loss(in millions):
Foreign After-tax After-tax Accumulated Currency Derivatives Minimum Other Translation Hedging Pension Comprehensive Gain Gain/(Loss) Liability Loss Balance at December 31, 2003 $ 15.6 $ 6.6 ($ 190.0 ) ($ 167.8 ) Current year change 38.2 (11.8 ) — 26.4
Balance at September 30, 2004 $ 53.8 ($ 5.2 ) ($ 190.0 ) ($ 141.4 )
15
Total comprehensive (loss) income
or loss (IN MILLIONS):
Foreign After-tax After-tax Accumulated Currency Derivatives Minimum Other Translation Hedging Pension Comprehensive Loss Gain Liability Loss ---- ---- --------- ----Balance at December 31, 2002 ($115.1) $0.4 ($75.5) ($190.2) Current year change 54.0 4.0 6.7 64.7 ------ ---- ----- ------ Balance at September 30, 2003 ($61.1) $4.4 ($68.8) ($125.5) ===== ==== ===== ====== Total comprehensive income (loss)amountedto the following (IN MILLIONS): Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) $75.2 $76.2 $165.0 ($299.2) Foreign currency translation (loss) gain (15.5) 5.1 54.0 56.0 After-tax derivatives hedging gain (loss) 0.5 (6.7) 4.0 12.9 After-tax minimum pension liability (0.2) - 6.7 - ----- ----- ------ ------ Comprehensive income (loss) $60.0 $74.6 $229.7 ($230.3) ===== ===== ====== ======14 NOTE 9 - INDUSTRY SEGMENTS In accordance with paragraph 26(a) of Statement of Financial Accounting Standards No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," the Company has aggregated certain of its operations segments into four reportable segments. The Company manages its business in these four operating segments that have been named for leading worldwide brands in the Company's product portfolio. In the first quarter of 2003, the Company realigned its Eldon and Panex divisions out of its Sharpie and Calphalon Home operating segments, respectively, and into its Rubbermaid operating segment (prior years' segment data has been reclassified to conformto thecurrent segment structure). This realignment reflectsfollowing(in millions):
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Net (loss) income ($ 226.4 ) $ 75.2 ($ 240.3 ) $ 165.0 Foreign currency translation (loss) gain 12.6 (15.5 ) 38.2 54.0 After-tax derivatives hedging gain (loss) (3.2 ) 0.5 (11.8 ) 4.0 After-tax minimum pension liability — (0.2 ) — 6.7
Comprehensive (loss) income ($ 217.0 ) $ 60.0 ($ 213.9 ) $ 229.7
Note 11 — Industry Segments
The Company’s reporting segments reflect the
Company'sCompany’s focus on building large consumer brands, promoting organizational integration,andachieving operating efficiencies and aligning the businesses with theCompany'sCompany’s strategic account management strategy.In addition, the realignment reflects the revised management and selling structure of the Company.TheCompany'sCompany reports its results in five reportable segments as follows:
Segment Description of Products Cleaning & Organization Indoor/outdoor organization, storage, food storage, cleaning, refuse Office Products Ballpoint/roller ball pens, markers, highlighters, pencils, office
products, art suppliesTools & Hardware Hand tools, power tool accessories, manual paint applicators,
cabinet hardware, propane torchesHome Fashions Drapery houseware, window treatments Other Operating segments that do not meet aggregation criteria, including aluminum and stainless steel cookware, hair care accessory products, infant and juvenile products, including toys, high chairs, car seats, and strollers The Company’s segment results are as follows
(IN MILLIONS)(in millions):
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Net Sales (1)Cleaning & Organization $ 455.9 $ 514.4 $ 1,372.0 $ 1,504.3 Office Products 424.3 428.7 1,246.3 1,258.8 Tools & Hardware 300.6 299.3 875.2 859.5 Home Fashions 228.1 223.5 679.1 670.9 Other 262.9 263.2 767.3 778.5
$ 1,671.8 $ 1,729.1 $ 4,939.9 $ 5,072.0
Operating (Loss) Income (2)Cleaning & Organization $ 29.2 $ 31.9 $ 49.9 $ 93.0 Office Products 61.5 69.9 188.7 231.8 Tools & Hardware 45.1 53.4 131.6 136.6 Home Fashions 15.9 17.5 25.0 30.1 Other 24.7 31.2 55.6 74.5 Corporate (3) (10.2 ) (10.9 ) (27.4 ) (24.5 ) Impairment Charges (4) (348.9 ) — (374.0 ) — Restructuring Costs (5) — (32.3 ) (47.9 ) (109.5 )
($ 182.7 ) $ 160.7 $ 1.5 $ 432.0
16
September 30, December 31, Identifiable Assets 2004 2003 Cleaning & Organization $ 1,088.4 $ 1,256.5 Office Products 1,063.0 997.5 Tools & Hardware 818.5 812.1 Home Fashions 575.6 630.2 Other 528.1 577.8 Corporate (6) 2,531.6 2,814.5 Discontinued Operations — 392.1
$ 6,605.2 $ 7,480.7
Geographic Area Information
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Net SalesUnited States $ 1,169.6 $ 1,199.9 $ 3,379.2 $ 3,511.3 Canada 87.0 91.5 250.6 253.5
North America 1,256.6 1,291.4 3,629.8 3,764.8 Europe 331.2 344.2 1,050.2 1,045.3 Central and South America 48.2 54.4 149.0 156.5 All other 35.8 39.1 110.9 105.4
$ 1,671.8 $ 1,729.1 $ 4,939.9 $ 5,072.0
Operating (Loss) Income (7)United States $ 119.8 $ 145.5 $ 308.1 $ 401.1 Canada 19.7 17.7 52.3 48.9
North America 139.5 163.2 360.4 450.0 Europe (290.8 ) (8.1 ) (330.8 ) (41.0 ) Central and South America (38.9 ) (3.9 ) (36.4 ) 9.4 All other 7.5 9.5 8.3 13.6
($ 182.7 ) $ 160.7 $ 1.5 $ 432.0
September 30, December 31, Identifiable Assets (8) 2004 2003 United States $ 4,646.0 $ 5,012.1 Canada 101.0 136.2
North America 4,747.0 5,148.3 Europe 1,545.0 1,628.3 Central and South America 192.7 195.4 All other 120.5 116.6 Discontinued Operations — 392.1
$ 6,605.2 $ 7,480.7
Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------- 2003 2002 2003 2002 ---- ---- ---- ----NET SALES (1) Rubbermaid $767.8 $759.3 $2,237.1 $2,207.7 Sharpie 389.1 412.1 1,168.6 1,178.0 Irwin 521.2 479.3 1,523.8 1,257.6 Calphalon Home 266.6 297.6 727.7 797.0 -------- -------- -------- -------- $1,944.7 $1,948.3 $5,657.2 $5,440.3 ======== ======== ======== ======== OPERATING INCOME (2) Rubbermaid $58.8 $77.6 $166.1 $190.4 Sharpie 62.8 74.4 200.2 196.7 Irwin 71.0 32.8 166.2 94.0 Calphalon Home 12.2 31.3 25.0 60.7 Corporate (3) (10.9) (7.5) (24.4) (22.7) Restructuring Costs (48.4) (51.2) (166.0) (69.8) -------- -------- -------- -------- $145.5 $157.4 $367.1 $449.3 ======== ======== ======== ======== September 30, December 31, 2003 2002 ---- ---- IDENTIFIABLE ASSETS Rubbermaid $1,873.5 $1,847.2 Sharpie 940.6 991.5 Irwin 1,372.1 1,226.4 Calphalon Home 710.3 709.8 Corporate (4) 3,070.6 2,614.0 -------- -------- $7,967.1 $7,388.9 ======== ======== 15 GEOGRAPHIC AREA INFORMATION Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------- 2003 2002 2003 2002 ---- ---- ---- ---- NET SALES United States $1,382.2 $1,427.5 $4,003.6 $3,981.8 Canada 97.9 83.1 268.5 228.5 -------- -------- -------- -------- North America 1,480.1 1,510.6 4,272.1 4,210.3 Europe 358.8 347.0 1,090.2 967.6 Central and South America 65.7 66.2 187.2 190.1 All other 40.1 24.5 107.7 72.3 -------- -------- -------- -------- $1,944.7 $1,948.3 $5,657.2 $5,440.3 ======== ======== ======== ======== OPERATING INCOME United States $130.2 $150.3 $341.8 $382.0 Canada 21.6 12.8 46.1 27.4 -------- -------- -------- -------- North America 151.8 163.1 387.9 409.4 Europe (13.8) (15.5) (44.4) 7.1 Central and South America (1.7) 7.6 6.9 21.1 All other 9.2 2.2 16.7 11.7 -------- -------- -------- -------- $145.5 $157.4 $367.1 $449.3 ======== ======== ======== ======== September 30, December 31, 2003 2002 ---- ---- IDENTIFIABLE ASSETS (5) United States $5,650.1 $5,151.0 Canada 138.5 115.7 -------- -------- North America 5,788.6 5,266.7 Europe 1,832.6 1,802.0 Central and South America 236.4 224.4 All other 109.5 95.8 -------- -------- $7,967.1 $7,388.9 ======== ========1) All intercompany transactions have been eliminated. Sales to Wal*Mart Stores, Inc. and subsidiariesone customer amounted to approximately16% and 15%14.3% of consolidated net sales, excluding discontinued operations, in the first nine months of20032004 and2002,2003, respectively. Sales to no other customer exceeded 10% of consolidated net sales for either period.2) Operating income is net sales less cost of products sold, selling, general and administrative expenses, impairment charges, and restructuring costs. Certain headquarters expenses of an operational nature are allocated to business segments and geographic areas primarily on a net sales basis. Trade names amortization is considered a corporate expense and not allocated to business segments.3) Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a particular segment. 4) Impairment charges have been presented separately in this table; refer to Note 2 to the Consolidated Financial Statements (Unaudited) for a breakout of the charge by reportable segment. 5) Restructuring costs have been presented separately in this table; refer to Note 3 to the Consolidated Financial Statements (Unaudited) for a breakout of the charge by reportable segment 6) Corporate assets primarily include trade names, goodwill, equity investments and deferred tax assets. 5) TransfersAccordingly, the write-down offinished goods betweengoodwill and other intangible assets associated with the impairment charge (see Note 2 to the Consolidated Financial Statements (Unaudited)) have been reflected as reductions in Corporate assets.7) The restructuring and impairment charges recorded in the nine months ended September 30, 2004 have been reflected in the appropriate geographic regions. 8) Transfers of finished goods between geographic areas are not significant. Corporate assets are not significant.primarily reflected in the United States.16 NOTE 10 - CONTINGENCIESNote 12 – Contingencies
The Company is involved in legal proceedings in the ordinary course of its business. These proceedings include claims for damages arising out of use of the
Company'sCompany’s products, allegations of infringement of intellectual property, commercial disputes and employment related matters, as well as environmental matters. Some of the legal proceedings include claims for punitive as well as compensatory damages, and a few proceedings purport to be class actions.Although management of the Company cannot predict the ultimate outcome of these legal proceedings with certainty, it believes that the ultimate resolution of the
Company'sCompany’s legal proceedings, including any amounts it may be required to pay in excess of amounts reserved, will not have a material effect on theCompany'sCompany’s financial statements.In the normal course of business and as part of its acquisition and divestiture strategy, the Company may provide certain representations and indemnifications related to legal, environmental, product liability, tax or other types of issues. Based on the nature of these representations and indemnifications, it is not possible to predict the maximum potential payments under all of these agreements due to the conditional nature of the
Company'sCompany’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements did not have a material effect on theCompany'sCompany’s business, financial condition or results of operation.As of September 30, 2003,Note 13 – Subsequent Event
On October 12, 2004, the Company
has identified and quantified exposures under these representations and indemnificationspurchased 825,000 shares ofapproximately $46.0 million, which expire in 2006. Asits Preferred Securities from a holder for $43.6875 per share. The Company paid a total ofSeptember 30, 2003, no amounts have been recorded$36 million.On November 4, 2004, the Company declared a quarterly cash dividend of $0.21 per share on the
balance sheet relatedCompany’s common stock. The dividend is payable December 3, 2004 tothese indemnifications, as the riskcommon stockholders ofloss is considered remote.record on November 16, 2004.17
ITEMItem 2.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSAND FINANCIAL CONDITION RESULTS OF OPERATIONSOverview
The Company made significant progress in the first nine months of 2004 toward achieving its previously announced 2004 key objectives. The Company’s key objectives for 2004, and the progress made in the first nine months of 2004 toward achieving such priorities, are highlighted below:
1. Continue to divest non-strategic businesses:The Company has completed its previously announced plan to divest certain under-performing, non-strategic businesses in order to concentrate on leveraging brand strength and product innovation in its core portfolio of businesses. In January 2004, the Company completed the sale of its Panex Brazilian low-end cookware division and European picture frames businesses. In April 2004, the Company sold substantially all of its U.S. picture frames business (Burnes), its Anchor Hocking glassware business and its Mirro cookware business for total proceeds of approximately $304 million (after final negotiations). On July 1, 2004, the Company completed the sale of Little Tikes Commercial Playground Systems Inc. (“LTCPS”) to PlayPower, Inc. for approximately $41 million. LTCPS is a manufacturer of commercial playground systems and contained playground environments. The Company will retain the consumer portion of its Little Tikes division.
In connection with these divestitures, the Company recorded an after-tax loss on the sale of these businesses of approximately $91 million in the nine months ending September 30, 2004. Total 2003 sales of the divested businesses were $851.0 million. The divestitures of these businesses are expected to reduce 2004 earnings per share by approximately $0.11 to $0.13, exclusive of the loss to be recognized in 2004. In addition, the divestitures are expected to reduce operating cash flow by $40 to $45 million, annually.
2. Complete the 2001 restructuring plan:In the second quarter of 2004, the Company completed the accounting charges associated with its 2001 restructuring plan. The 2001 restructuring plan resulted in total charges of $462 million, including previously recognized charges on discontinued operations of $84.2 million. In total, the Company exited 84 facilities and reduced headcount by approximately 12,000. The Company expects total annual savings to be approximately $125 to $150 million as a result of this restructuring program.
3. Continue to rationalize low-margin product lines:In the first nine months of 2004, the Company exited approximately $200 million in sales of low-margin product lines. The Company will continue to rationalize low-margin product lines throughout 2004. The completion of this program is expected to reduce annual sales by $275 million.
4. Deploy Newell Operational Excellence (NWL OPEX):The Company is committed to reducing costs by at least 5% annually. In connection with this goal, the Company is committed to deploying and implementing NWL OPEX, which is a methodical process focused on lean manufacturing. It includes installing the right manufacturing and distribution metrics and driving improvement quarter after quarter. In addition to cost reduction, other key components of NWL OPEX are improved quality and service levels and the reduction of inventory and lead times. The Company’s program for driving productivity throughout its manufacturing network gained traction in the first nine months of 2004. The Company delivered approximately $86 million of gross productivity savings during the first nine months of 2004.
18
Results of Operations
The following table sets forth for the periods indicated items from the Consolidated Statements of Operations as a percentage of net
sales:
sales(in millions, except percentages):
Three Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 Net sales $ 1,671.8 100.0 % $ 1,729.1 100.0 % $ 4,939.9 100.0 % $ 5,072.0 100.0 % Cost of products sold 1,198.5 71.7 1,237.3 71.6 3,571.0 72.3 3,625.0 71.5
Gross margin 473.3 28.3 491.8 28.4 1,368.9 27.7 1,447.0 28.5 Selling, general and administrative expenses 307.1 18.4 298.8 17.3 945.5 19.1 905.5 17.9 Impairment charges 348.9 20.9 — — 374.0 7.6 — — Restructuring costs — — 32.3 1.9 47.9 1.0 109.5 2.2
Operating (loss) income (182.7 ) (10.9 ) 160.7 9.3 1.5 — 432.0 8.5 Nonoperating expenses: Interest expense, net 29.5 1.8 33.1 1.9 90.0 1.8 104.5 2.1 Other (income) expense, net (0.8 ) — 1.4 0.1 (3.9 ) (0.1 ) 18.6 0.4
Net nonoperating expenses 28.7 1.7 34.5 2.0 86.1 1.7 123.1 2.4
(Loss) Income before income taxes (211.4 ) (12.6 ) 126.2 7.3 (84.6 ) (1.7 ) 308.9 6.1 Income taxes 23.6 1.4 40.7 2.4 58.7 1.2 100.0 2.0
Net (loss) income from continuing operations (235.0 ) (14.1 ) 85.5 4.9 (143.3 ) (2.9 ) 208.9 4.1
Gain/(Loss) from discontinued operations, net of tax 8.6 0.5 (10.3 ) (0.6 ) (97.0 ) (2.0 ) (43.9 ) (0.9 )
Net (loss) income ($ 226.4 ) (13.5 )% $ 75.2 4.3 % ($ 240.3 ) (4.9 )% $ 165.0 3.3 %
Three
Months Ended NineMonths Ended September30, September 30, ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ----Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 73.1% 71.8% 72.9% 72.6% ------ ------ ------ ------ GROSS MARGIN 26.9% 28.2% 27.1% 27.4% Selling, general and administrative expenses 16.9% 17.5% 17.7% 17.8% Restructuring costs 2.5% 2.6% 2.9% 1.3% ------ ------ ------ ------ OPERATING INCOME 7.5% 8.1% 6.5% 8.3% Nonoperating expenses: Interest expense 1.4% 1.5% 1.6% 1.6% Other, net 0.4% 0.7% 0.6% 0.7% ------ ------ ------ ------ Net nonoperating expenses 1.8% 2.2% 2.2% 2.3% ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5.7% 5.9% 4.3% 6.0% Income taxes 1.8% 2.0% 1.4% 2.0% ------ ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3.9% 3.9% 2.9% 4.0% ------ ------ ------ ------ Cumulative effect of accounting change --% --% --% 9.5% ------ ------ ------ ------ NET INCOME (LOSS) 3.9% 3.9% 2.9% (5.5)% ====== ====== ====== ======THREE MONTHS ENDED SEPTEMBER30,2003 VS. THREE MONTHS ENDED SEPTEMBER2004 vs. Three Months Ended September 30,2002 CONSOLIDATED OPERATING RESULTS:2003Consolidated Operating Results:
Net sales for the three months ended September 30,
20032004 (third quarter) were$1,944.7$1,671.8 million, representing a decrease of$3.6$57.3 million, or0.2%3.3%, from$1,948.3$1,729.1 million in the comparable quarter of2002.2003. The decrease resulted fromthe continued planned exitproduct line rationalization ofhigh-risk customers$75 million, or 4.3%, andpricing declines,a decline in core sales of $15 million, or 0.9%. These were partially offset bya benefit fromfavorable foreign currency translation of $30 million, or 1.7%, and favorable pricing of $3 million, or 0.2%, for theimpact of the Lenox acquisition.quarter.Gross margin as a percentage of net sales in the third quarter of
20032004 was26.9%28.3%, or$522.2$473.3 million, versus28.2%28.4%, or$550.3$491.8 million, in the comparable quarter of2002.2003. Thereductiondecline in gross margin is18primarily related tounfavorableraw material inflation of $31 million. This was partially offset by favorable pricing of2.1%$3 million, or 0.2%, andlower manufacturing volumes as inventories were reduceda favorable mix driven by$94 millionthe rationalization of unprofitable product lines, primarily in thethirdRubbermaid Home Products and Eldon Office Products businesses. Gross productivity in the quarterand sales volumes were lower than prior year.of $29 million was partially offset by restructuring related costs of $15 million.Selling, general and administrative expenses
("SG&A")(SG&A) in the third quarter of20032004 were16.9%18.4% of net sales, or$328.3$307.1 million, versus17.5%17.3%, or$341.7$298.8 million, in the comparable quarter of2002.2003. Thedecreaseincrease in SG&Ais primarilyreflects a foreign19
currency impact of $7 million and pension cost increases of $4 million. All other SG&A was essentially flat with streamlining initiatives offsetting continued investments in the
resultbusiness.The Company recorded a non-cash pretax impairment charge of $348.9 million (332.8 million, net of tax) in the
Company's streamlining initiatives.third quarter of 2004. These charges were required to write-down certain assets to fair value. See Note 2 to the Consolidated Financial Statements (Unaudited) for additional information.The Company recorded pre-tax strategic restructuring charges of
$48.4$32.3 million($32.8 million after taxes) and $51.2 million ($34.2 million after tax)in the third quarter of2003 and 2002, respectively.2003. The2003 third quarterpre-tax charge included$10.7$28.6 million of facility and other exit costs$31.1and $3.7 million of employee severance and terminationbenefits, and $6.6 million in other restructuring costs. The 2002 third quarter pre-tax charge included $13.7 million of facility and other exit costs, $30.5 million of employee severance and termination benefits, and $7.0 million in other restructuring costs.benefits. See Note43 to the Consolidated Financial Statements (Unaudited) for further information on the strategic restructuring plan.Operating (loss) income in the third quarter of
20032004 was7.5%($182.7) million, or (10.9%) of net sales,or $145.5 million,versus operating income of8.1%,$160.7 million, or$157.4 million,9.3%, in the comparable quarter of2002. Operating income includes restructuring charges of $48.4 million ($32.8 million after taxes) and $51.2 million ($34.2 million after taxes) in the third quarter of 2003 and 2002, respectively.2003. The decrease in operating margins isprimarilythe result ofpricing pressures, increased prices for certain raw materials, lower manufacturing volumes and unfavorable mix, partially offset by a decrease in selling, general and administrative expense related totheCompany's streamlining initiatives.factors described above.Net nonoperating expenses in the third quarter of
20032004 were1.8%1.7% of net sales, or$34.6$28.7 million, versus2.2%2.0%, or$43.4$34.5 million, in the comparable quarter of2002.2003. Net interest expense decreased $3.6 million for the third quarter of 2004 compared to the third quarter of 2003 as a result of lower average debt outstanding, partially offset by increased interest rates.The
decrease in expenses is primarily due to acquisition related charges of $8.7 million ($5.8 million after tax) incurredeffective tax rate was (11.2)% in the third quarter of2002 relating to the Company's acquisition of American Tool Companies, Inc. The effective tax rate was 32.2%2004 versus 32.3% in the third quarter of2003 versus 33.2%2003. The change in the effective tax rate is primarily related to the non-deductibility associated with a portion of the Company’s $348.9 million impairment charge. See Notes 2 and 5 to the Consolidated Financial Statements (Unaudited) for further information.Net (loss) income from continuing operations for the third quarter of 2004 was ($235.0) million, compared to $85.5 million in the third quarter of
2002. This lower rate reflects, among other things,2003. Diluted (loss) earnings per share from continuing operations were ($0.86) in theincreasethird quarter of 2004 compared to $0.31 in the third quarter of 2003.The net gain recognized from discontinued operations for the third quarter of 2004 was $8.6 million, net of tax, compared to a net loss of $10.3 million, net of tax, in the third quarter of 2003. Diluted earnings (loss) per share from discontinued operations was $0.03 in
low-tax jurisdictions and,the third quarter of 2004 compared to ($0.04) incertain jurisdictions,theyear over year reduction in current year losses andthird quarter of 2003. See Note 4 to theuse of net operating loss carryforwards.Consolidated Financial Statements (Unaudited) for further information.Net (loss) income for the third quarter of
20032004 was$75.2($226.4) million, compared to$76.2$75.2 million in the third quarter of2002.2003. Diluted (loss) earnings per sharewerewas ($0.83) in the third quarter of 2004 compared to $0.27 in the third quarter of2003 compared to $0.29 in the third quarter of 2002. The decrease in net income and earnings per share was primarily due to pricing pressures, increased prices for certain raw materials, lower manufacturing volumes and unfavorable mix, partially offset by a decrease in selling, general and administrative expense related to the Company's streamlining initiatives. 19 BUSINESS GROUP OPERATING RESULTS:2003.Business Group Operating Results:
Net sales
in the four segments in which the Company operatesby reportable segment were as follows for the three months ended September 30,(IN MILLIONS)(in millions):2003 2002 % Change ---- ---- -------- Rubbermaid $767.8 $759.3 1.1% Sharpie 389.1 412.1 (5.6) Irwin 521.2 479.3 8.7 Calphalon Home 266.6 297.6 (10.4) -------- -------- ---- Total Net Sales (1) $1,944.7 $1,948.3 (0.2)% ======== ======== ====
2004 2003 % Change Cleaning & Organization $ 455.9 $ 514.4 (11.4 )% Office Products 424.3 428.7 (1.0 ) Tools & Hardware 300.6 299.3 0.4 Home Fashions 228.1 223.5 2.1 Other 262.9 263.2 (0.1 )
Total Net Sales (1) $ 1,671.8 $ 1,729.1 (3.3 )%
Operating income by segment was as follows for the three months ended September 30,
(IN MILLIONS): 2003 2002 % Change ---- ---- -------- Rubbermaid $58.8 $77.6 (24.2)% Sharpie 62.8 74.4 (15.6) Irwin 71.0 32.8 116.5 Calphalon Home 12.2 31.3 (61.0) Corporate Costs (2) (10.9) (7.5) Restructuring Costs (48.4) (51.2) ------ ------ Total Operating Income (3) $145.5 $157.4 ====== ====== (1) All intercompany transactions have been eliminated. Sales to Wal*Mart Stores, Inc. and subsidiaries amounted to approximately 16% and 14% of consolidated net sales(inthe three months ended September 30, 2003 and 2002, respectively. Sales to no other customer exceeded 10% of consolidated net sales for either period. (2) Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a particular segment. (3) Operating income is net sales less cost of products sold, selling, general and administrative expenses, and restructuring costs. Certain headquarters expenses of an operational nature are allocated to business segments and geographic areas primarily on a net sales basis. Trade names amortization is considered a corporate expense and not allocated to business segments. RUBBERMAIDmillions):
2004 2003 % Change Cleaning & Organization $ 29.2 $ 31.9 (8.5 )% Office Products 61.5 69.9 (12.0 ) Tools & Hardware 45.1 53.4 (15.5 ) Home Fashions 15.9 17.5 (9.1 ) Other 24.7 31.2 (20.8 ) Corporate Costs (2) (10.2 ) (10.9 ) Impairment Charges (3) (348.9 ) — Restructuring Costs (4) — (32.3 )
Total Operating Income (5) ($ 182.7 ) $ 160.7 (213.7 )%
20
(1) All intercompany transactions have been eliminated. Sales to one customer amounted to approximately 14.8% and 14.6% of consolidated net sales, excluding discontinued operations, in the three months ended September 30, 2004 and 2003, respectively. Sales to no other customer exceeded 10% of consolidated net sales for either period. (2) Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a particular segment. (3) Impairment charges have been presented separately in this table; refer to Note 2 to the Consolidated Financial Statements (Unaudited) for a breakout of the charge by reportable segment. (4) Restructuring costs have been presented separately in this table; refer to Note 3 to the Consolidated Financial Statements (Unaudited) for a breakout of the charge by reportable segment. (5) Operating income is net sales less cost of products sold, selling, general and administrative expenses, impairment charges and restructuring costs. Certain headquarters expenses of an operational nature are allocated to business segments and geographic areas primarily on a net sales basis. Cleaning & Organization
Net sales for the third quarter of
20032004 were$767.8$455.9 million,an increasea decrease of$8.5$58.5 million, or1.1%11.4%, from$759.3$514.4 million in the third quarter of2002. A high single digit increase at2003, driven primarily by a decline in the Rubbermaid Home Productsand a double-digit increase at Rubbermaid Europe (primarily currency driven) were partially offset by declinesbusiness due to planned product line rationalization inthe Little Tikes and Graco businesses, as orders originally scheduled in September slipped to October.certain low margin product lines.Operating income for the third quarter of
20032004 was$58.8$29.2 million, a decrease of$18.8$2.7 million, or24.2%8.5%, from$77.6$31.9 million in the third quarter of2002.2003. The decrease in operating income isprimarilythe result of higher raw material costs and lost absorption in manufacturing facilities, partially offset by favorable pricing,pressure on non-differentiated items in the Rubbermaid Homeproductivity and mix.Office Products
business and an increase in prices for certain raw materials. 20 SHARPIENet sales for the third quarter of
20032004 were$389.1$424.3 million, a decrease of$23.0$4.4 million, or5.6%1.0%, from$412.1$428.7 million in the third quarter of2002. The decrease in sales is caused2003, driven primarily bysoftnessthe exit of certain low margin resin based products in thecommercial sector, lower back-to-school replenishment orders andEldon office products business, partially offset by a mid single digit sales increase in thedisposition of Cosmolab in March 2003.writing instruments business.Operating income for the third quarter of
20032004 was$62.8$61.5 million, a decrease of$11.6$8.4 million, or15.6%12.0%, from$74.4$69.9 million in the third quarter of2002. The2003, driven by raw material inflation, the sales decrease at Eldon and an increase inoperating income is primarilySG&A spending. These were partially offset by a mid single digit sales increase in theresult of lower sales, inventory reductions and increased investment in strategic marketing initiatives. IRWINwriting instruments business.Tools & Hardware
Net sales for the third quarter of
20032004 were$521.2$300.6 million, an increase of$41.9$1.3 million, or8.7%0.4%, from$479.3$299.3 million in the third quarter of2002. The2003, driven by the impact of positive currency translation and a sales increase innet sales for the third quarter of 2003 was primarily due to sales fromthe Lenoxacquisition, a high single digit increase at Home Decor (primarily currency driven), and double digit increases in the tools and accessories businesses, partially offset by double-digit declines at Levolor/Kirsch resulting from the planned exit of low margin product lines.business.Operating income for the third quarter of
20032004 was$71.0$45.1 million,an increasea decrease of$38.2$8.3 million, or116.5%15.5%, from$32.8$53.4 million in the third quarter of2002. The improvement in operating income was2003, driven byproductivity, double-digit salesincreases inthe toolsraw material costs, particularly steel, andaccessories businesses and the Lenox acquisition, partially offset by the planned product line exits at Levolor/Kirsch. CALPHALON HOMErestructuring related costs.Home Fashions
Net sales for the third quarter of
20032004 were$266.6$228.1 million,a decreasean increase of$31.0$4.6 million, or10.4%2.1%, from$297.6$223.5 million in the third quarter of2002. The sales decrease was primarily the result of a double-digit decline at the US picture frame business and a high single digit decline in the low-end cookware and bakeware business.2003, driven by favorable currency translation.Operating income for the third quarter of
20032004 was$12.2$15.9 million, a decrease of$19.1$1.6 million, or61.0%9.1%, from$31.3$17.5 million in the third quarter of2002.2003. The decrease in operating incomeiswas due primarily to an increase in raw materials costs, partially offset by productivity.21
Other
Net sales for the third quarter of 2004 were $262.9 million, a decrease of $0.3 million, or 0.1%, from $263.2 million in the third quarter of 2003. Sales increases at Little Tikes due to new product introductions were offset by declines in the
declineGraco and European Cookware businesses.Operating income for the third quarter of 2004 was $24.7 million, a decrease of $6.5 million, or 20.8%, from $31.2 million in
sales attheUS picture frame business, unfavorable product mixthird quarter of 2003, driven primarily by raw material inflation andpricing pressure on opening price point products. NINE MONTHS ENDED SEPTEMBERincreased SG&A spending in the Little Tikes business.Nine Months Ended September 30, 2004 vs. Nine Months Ended September 30, 2003
VS. NINE MONTHS ENDED SEPTEMBER 30, 2002 CONSOLIDATED OPERATING RESULTS:Consolidated Operating Results:
Net sales for the nine months ended September 30,
20032004 were$5,657.2$4,939.9 million,an increaserepresenting a decrease of$216.9$132.1 million, or4.0%2.6%, from$5,440.3$5,072.0 million in2002.the comparable period of 2003. Theincreasedecrease resulted fromsales contributions from the American Tool Companies, Inc. (American Tool) (acquired April 2002)product line rationalization of approximately $200 million, or 3.9%, andAmerican Saw & Mfg. Co. (Lenox) (acquired January 2003) acquisitions and favorable currency translation, offset byunfavorable pricing of2%. 21$24 million, or 0.5%, partially offset by favorable foreign currency translation of $115 million, or 2.3%, for the period.Gross margin as a percentage of net sales for the nine months ended September 30,
20032004 was27.1%27.7%, or$1,535.6$1,368.9 million, versus27.4%28.5%, or$1,490.0$1,447.0 million, in the comparable period of2002.2003. Thereductiondecline in gross margin is primarily related to unfavorable pricingpressures, increased prices for certainof $24 million, or 0.4 points, and rawmaterials and unfavorable product mix at certain businesses,material inflation of $70 million, partially offset by favorable mix driven by the rationalization of unprofitable product lines, primarily in the Rubbermaid Home Products business. Gross productivityinitiatives.of $86 million was largely offset by restructuring related costs of $66 million.Selling, general and administrative expenses
("SG&A")(SG&A) for the nine months ended September 30,20032004 were17.7%19.1% of net sales, or$1,002.5$945.5 million, versus17.8%17.9%, or$970.9$905.5 million, in the comparable period of2002.2003. The increase in SG&Ais primarily the resultreflects a foreign currency impact ofthe American Tool$31 million andLenox acquisitions and plannedpension cost increases of $12 million. All other SG&A was essentially flat with streamlining initiatives offsetting continued investments inmarketing initiatives, includingtheCompany's Strategic Account Management Program and Phoenix Program, supportingbusiness.The Company recorded total non-cash pretax impairment charges of $374.0 million for the
Company's brand portfolio and strategic account strategy, partially offset bynine months ended September 30, 2004. These charges were required to write certain assets to fair value. See Note 2 to theCompany's streamlining initiatives.Consolidated Financial Statements (Unaudited) for additional information.The Company recorded pre-tax strategic restructuring charges of
$166.0$47.9 million($112.4and $109.5 millionafter taxes) and $69.8 million ($46.3 million after tax)for the nine months ended September 30,20032004 and2002,2003, respectively. The20032004 pre-tax charge included$67.3$32.8 million of facility and other exit costs,$88.5$9.9 million of employee severance and termination benefits, and$10.2$5.2 million in other restructuring costs. The20022003 pre-tax charge included$18.4$56.2 million of facility and other exit costs$43.8and $53.3 million of employee severance and terminationbenefits, and $7.6 million in other restructuring costs.benefits. See Note43 to the Consolidated Financial Statements (Unaudited) for further information on the strategic restructuring plan.Operating income for the nine months ended September 30,
20032004 was6.5%$1.5 million, versus $432.0 million, or 8.5% of net salesor $367.1 million, versus operating income of 8.3%, or $449.3 million,in the comparable period of2002.2003. The decrease in operating margins isprimarilythe result ofincreased restructuring charges to streamlinetheCompany's supply chain and the decrease in gross margins.factors described above.Net nonoperating expenses for the nine months ended September 30,
20032004 were2.2%1.7% of net sales, or$123.2$86.1 million, versus2.3%2.4%, or$123.8$123.1 million, in the comparable period of2002. The reduction in expenses is primarily due to acquisition related charges of $8.7 million ($5.8 million after tax) incurred in 2002 relating to2003. In March 2003, theCompany's acquisition of American Tool Companies, Inc. and $13.6 million ($9.0 million after tax) of Anchor Hocking transaction related costs incurred in 2002 associated with the Company's withdrawn divestiture, partially offset by theCompany recognized a $21.2 million non-cash pre-tax lossrecognizedon the sale of the Cosmolabbusiness in March 2003. The effective tax rate was 32.3%business. Net interest expense decreased $14.5 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003versus 33.7% in the comparable periodas a result of2002. Thislower average debt outstanding, partially offset by increased interest rates.The effective tax rate
reflects, among other things, the increase in earnings in low-tax jurisdictions and, in certain jurisdictions, the year over year reduction in current year losses and the use of net operating loss carryforwards. Income before cumulative effect of accounting changewas (69.4)% for the nine months ended September 30,2003 was $165.0 million, compared to $215.7 million in the comparable period of 2002. Diluted earnings per share before cumulative effect of accounting change were $0.60 for the nine 22 months ended September 30, 2003 compared to $0.81 in the comparable period of 2002. The decrease in income and earnings per share before cumulative effect of accounting change was primarily due to increased restructuring charges to streamline the Company's supply chain and the decrease in gross margins. Net income (loss)2004 versus 32.4% for the nine months ended September 30,20032003. The change in the effective tax rate is primarily related to the non-deductibility associated with a portion of the Company’s $374.0 million impairment charge. See Notes 2 and 5 to the Consolidated Financial Statements (Unaudited) for further information.Net (loss) income from continuing operations for the nine months ended September 30, 2004 was
$165.0($143.3) million, compared to($299.2)$208.9 millioninfor thecomparable period of 2002.nine months ended September 30, 2003. Diluted (loss) earnings(loss)per sharewerefrom continuing operations was ($0.52) for the nine months ended September 30, 2004 compared to $0.76 for the nine months ended September 30, 2003.22
The net loss recognized from discontinued operations for the nine months ended September 30, 2004 was $97.0 million, net of tax, compared to $43.9 million, net of tax, for the nine months ended September 30, 2003. Diluted loss per share from discontinued operations was ($0.35) for the nine months ended September 30, 2004 compared to ($0.16) for the nine months ended September 30, 2003. See Note 4 to the Consolidated Financial Statements (Unaudited) for further information.
Net (loss) income for the nine months ended September 30, 2004 was ($240.3) million, compared to $165.0 million for the nine months ended September 30, 2003. Diluted (loss) earnings per share was ($0.88) for the nine months ended September 30, 2004 compared to $0.60 for the nine months ended September 30,
2003 compared to ($1.12) in the comparable period of 2002. The difference in net income and diluted earnings per share is primarily the result of the $538.0 million, $514.9 million net of tax, cumulative effect of an accounting change adjustment related to the Company's adoption of FAS 142 as discussed in Note 2 to the Consolidated Financial Statements (Unaudited), and the decrease in income before cumulative effect of accounting change discussed above. BUSINESS SEGMENT OPERATING RESULTS:2003.Business Segment Operating Results:
Net sales
in the four segments in which the Company operatesby reportable segment were as follows for the nine months ended September 30,(IN MILLIONS)(in millions):2003 2002 % Change ---- ---- -------- Rubbermaid $2,237.1 $2,207.7 1.3% Sharpie 1,168.6 1,178.0 (0.8) Irwin 1,523.8 1,257.6 21.2 Calphalon Home 727.7 797.0 (8.7) -------- -------- ---- Total Net Sales (1) $5,657.2 $5,440.3 4.0% ======== ======== ====
2004 2003 % Change Cleaning & Organization $ 1,372.0 $ 1,504.3 (8.8 )% Office Products 1,246.3 1,258.8 (1.0 ) Tools & Hardware 875.2 859.5 1.8 Home Fashions 679.1 670.9 1.2 Other 767.3 778.5 (1.4 )
Total Net Sales (1) $ 4,939.9 $ 5,072.0 (2.6 )%
Operating income by segment was as follows for the nine months ended September 30,
(IN MILLIONS): 2003 2002 % Change ---- ---- -------- Rubbermaid $166.1 $190.4 (12.8)% Sharpie 200.2 196.7 1.8 Irwin 166.2 94.0 77.0 Calphalon Home 25.0 60.7 (58.8) Corporate Costs (2) (24.4) (22.7) Restructuring Costs (166.0) (69.8) ------ ------ Total Operating Income (3) $367.1 $449.3 ====== ====== (1) All intercompany transactions have been eliminated. Sales to Wal*Mart Stores, Inc. and subsidiaries amounted to approximately 16% and 15% of consolidated net sales(inthe first nine months of 2003 and 2002. Sales to no other customer exceeded 10% of consolidated net sales for either period. (2) Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a particular segment. (3) Operating income is net sales less cost of products sold, selling, general and administrative expenses, and restructuring costs. Certain headquarters expenses of an operational nature are allocated to business segments and geographic areas primarily on a net sales basis. Trade names amortization is considered a corporate expense and not allocated to business segments. 23 RUBBERMAIDmillions):
2004 2003 % Change Cleaning & Organization $ 49.9 $ 93.0 (46.3 )% Office Products 188.7 231.8 (18.6 ) Tools & Hardware 131.6 136.6 (3.7 ) Home Fashions 25.0 30.1 (16.9 ) Other 55.6 74.5 (25.4 ) Corporate Costs (2) (27.4 ) (24.5 ) Impairment Charges (3) (374.0 ) — Restructuring Costs (4) (47.9 ) (109.5 )
Total Operating Income (5) $ 1.5 $ 432.0 (99.7 )%
(1) All intercompany transactions have been eliminated. Sales to one customer amounted to approximately 14.3% of consolidated net sales, excluding discontinued operations, in the first nine months of 2004 and 2003. Sales to no other customer exceeded 10% of consolidated net sales for either period. (2) Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a particular segment. (3) Impairment charges have been presented separately in this table; refer to Note 2 to the Consolidated Financial Statements (Unaudited) for a breakout of the charge by reportable segment. (4) Restructuring costs have been presented separately in this table; refer to Note 3 to the Consolidated Financial Statements (Unaudited) for a breakout of the charge by reportable segment. (5) Operating income is net sales less cost of products sold, selling, general and administrative expenses, impairment charges and restructuring costs. Certain headquarters expenses of an operational nature are allocated to business segments and geographic areas primarily on a net sales basis. Cleaning & Organization
Net sales for the nine months ended September 30,
20032004 were$2,237.1$1,372.0 million,an increasea decrease of$29.4$132.3 million, or1.3%8.8%, from$2,207.7$1,504.3 million in the comparable period of2002. A double-digit increase at Rubbermaid Europe (primarily currency driven) and mid-single digit increase at2003, driven primarily by a decline in the Rubbermaid Home Productswas partially offset by a high- single digit decreasebusiness due to planned product line rationalizations inthe Graco business and mid-single digit decrease in the Little Tikes business.low-margin products.Operating income for the nine months ended September 30,
20032004 was$166.1$49.9 million, a decrease of$24.3$43.1 million, or12.8%46.3%, from$190.4$93.0 million in the comparable period of2002.2003. The decrease in operating income isprimarilythe result ofpricing pressurehigher raw material costs, lost absorption inopening price point itemsmanufacturing facilities andincreased costs of certain raw materials. SHARPIErestructuring related charges.23
Office Products
Net sales for the nine months ended September 30,
20032004 were$1,168.6$1,246.3 million, a decrease of$9.4$12.5 million, or0.8%1.0%, from$1,178.0$1,258.8 million in the comparable period of2002. The decrease2003, driven primarily by the exit of low margin resin based products insales is primarilytheresult of the disposition of Cosmolab in March 2003. Excluding sales from the divested Cosmolab business, net sales were up by $14.1 million, or 1.2%.Eldon office products business.Operating income for the nine months ended September 30,
20032004 was$200.2$188.7 million,an increasea decrease of$3.5$43.1 million, or1.8%18.6%, from$196.7$231.8 million in the comparable period of2002. Operating income was positively impacted2003, driven by lower sales,growth (excluding Cosmolab), productivityrestructuring related costs in the European writing instruments business, raw material inflation, primarily in resin costs in the Eldon office products division, andfavorable mix management, partially offset by investments in marketing initiatives. IRWINother cost inflation.Tools & Hardware
Net sales for the nine months ended September 30,
20032004 were$1,523.8$875.2 million, an increase of$266.2$15.7 million, or21.2%1.8%, from$1,257.6$859.5 million in the comparable period of2002.2003. The increase in net salesthrough the first nine months of 2003wasprimarily due to incremental sales from the American Tool and Lenox acquisitions, a double digit sales increase at Home Decor (primarily currency driven) and double- digitdriven by increases in thetoolsLenox andaccessories businesses, partially offset by double-digit sales declines at Levolor/Kirsch resulting from the planned exit of low margin product lines.BernzOmatic businesses.Operating income for the nine months ended September 30,
20032004 was$166.2$131.6 million,an increasea decrease of$72.2$5.0 million, or77.0%3.7%, from$94.0$136.6 million in the comparable period of2002.2003. Theimprovementdecrease in operating income wasdriven by productivity, the Lenox and American Tool acquisitions and double-digit salesrelated to increases inthe toolsraw material costs, particularly steel, restructuring related costs andaccessories businesses,increased SG&A spending, partially offset by theplanned product line exits at Levolor/Kirsch. CALPHALON HOMEsales increases described above and strong productivity.Home Fashions
Net sales for the nine months ended September 30,
20032004 were$727.7$679.1 million,a decreasean increase of$69.3$8.2 million, or8.7%1.2%, from$797.0$670.9 million in the comparable period of2002.2003. The increase in net salesdecreasewas driven primarilydue to the decline in sales at the US picture frame business, the result 24 of the Company's planned exit from certain high risk customers and pricing pressure on opening price point items.by favorable foreign currency fluctuation.Operating income for the nine months ended September 30,
20032004 was $25.0 million, a decrease of$35.7$5.1 million, or58.8%16.9%, from$60.7$30.1 million in the comparable period of2002.2003. The decrease in operating incomeis primarilywas due to increases in raw material costs and lower pricing, partially offset by productivity.Other
Net sales for the
declinenine months ended September 30, 2004 were $767.3 million, a decrease of $11.2 million, or 1.4%, from $778.5 million in the comparable period of 2003. The decrease in net sales was primarily attributable to the sale of Cosmolab in March 2003, which contributed $10 million in salesatin theUS picture frame businessfirst quarter of 2003.Operating income for the nine months ended September 30, 2004 was $55.6 million, a decrease of $18.9 million, or 25.4%, from $74.5 million in the comparable period of 2003. The decrease in operating income was due primarily to raw material inflation and
pricing pressure on opening price point products. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- SOURCES:increased SG&A spending in the Little Tikes business.Liquidity and Capital Resources
Cash and cash equivalents increased by $210.1 million for the nine months ended September 30, 2004. The
Company'schange in cash and cash equivalents is as follows for the nine months ended September 30, (in millions):
2004 2003 Cash provided by operating activities $ 421.8 $ 420.5 Cash provided by/(used in) investing activities 191.0 (696.9 ) Cash (used in)/provided by financing activities (402.4 ) 296.8 Exchange effect on cash and cash equivalents (0.3 ) 1.6
Increase in cash and cash equivalents $ 210.1 $ 22.0
24
Sources:
The Company’s primary sources of liquidity and capital resources include cash provided from operations and use of available borrowing facilities.
Cash provided
fromby operating activities for the nine months ended September 30,20032004 was$420.5$421.8 million compared to$569.2$420.5 million for the comparable period of2002.2003. Thedecreaseincrease in cash provided from operating activities was due toa decreasean increase in earnings before non-cash charges of$57.2$58.9 millionand(as shown in the following table), mostly offset by anet increasereduction in the year over year improvement in working capital and other assets in 2004 compared to 2003, which used an additional$110.2$22.1 million,partially offset by deferred gains of $18.7 million relating toand a reduction in cash received from theearlytermination of certain interest rate swap arrangements.ThroughThe following table reconciles earnings before non-cash charges to net (loss) income as of September 30, (in millions):
2004 2003 Change Net (loss)/income ($ 240.3 ) $ 165.0 Depreciation and amortization 185.4 186.5 Impairment charges 374.0 — Non-cash restructuring charges 25.3 73.0 Deferred income taxes 85.1 9.6 (Gain)/loss on sale of assets/business (6.5 ) 20.5 Loss on discontinued businesses 90.5 —
Earnings before non-cash charges $ 513.5 $ 454.6 $ 58.9
The Company did not renew its $650.0 million 364-day Syndicated Revolving Credit Agreement, which expired on its scheduled maturity date of June 11, 2004. The Company’s $650.0 million five-year Syndicated Revolving Credit Agreement (the “Revolver”) that is scheduled to expire in June 2007 remains in place. At September 30, 2004, there were no borrowings under the Revolver.
In lieu of borrowings under the Revolver, the Company may issue up to $650.0 million of commercial paper. The Revolver provides the committed backup liquidity required to issue commercial paper. Accordingly, commercial paper may only be issued up to the amount available for borrowing under the Revolver. At September 30, 2004, no commercial paper was outstanding.
The Revolver permits the Company to borrow funds on a variety of interest rate terms. The Revolver requires, among other things, that the Company maintain certain Interest Coverage and Total Indebtedness to Total Capital Ratio, as defined in the agreement. The agreement also limits Subsidiary Indebtedness. As of September 30, 2004, the Company was in compliance with this agreement.
In the first nine months of
2003,2004, the Company received proceeds from the issuance of debt of$1,040.5$21.3 million compared to$523.1$1,040.5 million in the year ago period.On January 10, 2003, the Company completed the sale of 6.67 million shares of its common stock at a public offering price of $30.10 per share pursuant to a shelf registration statement filed with the Securities and Exchange Commission. Total proceeds from the sale were approximately $200.8 million, resulting in net proceeds to the Company, before expenses, of $200.1 million. The proceeds were used to reduce the Company's commercial paper borrowings. The Company has a $1.0 billion universal shelf registration statement that became effective in April 2003 under which debt and equity securities may be issued. ThroughIn the first nine months of
2003, $400.02004, the Company received cash proceeds of $289.2 million related to the sale ofmedium term notes were issued under this shelf registration statement,businesses and other non-current assets, compared to $10.2 million in the year ago period. The Company used the proceeds from the sale ofwhich were usedthese businesses topay downreduce its commercialpaper. USES:paper borrowings.Uses:
The
Company'sCompany’s primary uses of liquidity and capital resources include acquisitions, payments on notes payable and long-term debt, dividend payments and capital expenditures.Cash usedIn the first nine months of 2004, the Company made payments for acquisitions
wasof $3.0 million, compared to $460.0 millionforused in the first nine months of 2003compared to $228.5 million in the year ago period, and is related primarilyrelating to the acquisition ofLenox, which was funded through the issuance of commercial paper. On March 27, 2003, the Company completed the sale of its Cosmolab business, a division of the Sharpie segment. The Company received 25 cash proceeds of $7.5 million related to the Cosmolab transaction. The Company used the proceeds from the sale to reduce its commercial paper borrowings.Lenox.In the first nine months of
2003,2004, the Company made payments onlong- termnotes payable and long-term debt of$776.7$251.9 million compared to$535.8$776.7 million in the year ago period.On January 10, 2003, the Company received proceeds from the issuance of stock of $200.1 million. The proceeds received were used to reduce the Company's commercial paper borrowings. Refer to Note 6 in the Consolidated Financial Statements (Unaudited) for further information.25
Cash used for restructuring activities was
$77.7$68.6 million and$41.7$63.4 million in the first nine months of 2004 and 2003, respectively. Such cash payments represent primarily employee termination benefits.Capital expenditures were $95.2 million and $247.1 million in the first nine months of 2004 and 2003, respectively. The reduction in capital expenditures is largely due to the Company’s decision to reduce capital investment in the Rubbermaid Home Products business, where capital expenditures decreased from $69.6 million in the first nine months of 2003
and 2002, respectively. Such cash payments represent primarily employee termination benefits. Capital expenditures were $247.1 million and $185.2to $7.8 million in the first nine months of2003 and 2002, respectively. The increase in capital expenditures is primarily due to the acquisitions of American Tool and Lenox and the Company's increased investment in new product development and productivity initiatives.2004.Aggregate dividends paid were $173.2 million and $173.1 million
and $168.2 million duringin the first nine months of 2004 and 2003,and 2002,respectively.In the third quarter of 2004, the Company made a voluntary $50.0 million cash contribution to fund the Company’s pension plan.
Retained earnings decreased in the first nine months of
20032004 by$8.1$413.5 million. The reduction in retained earnings is due to cash dividends paid on common stockpartially offset byand the current yearearnings.net loss.Working capital at September 30,
20032004 was$965.2$923.4 million compared to$465.6$978.2 million at December 31,2002.2003. The current ratio at September 30,20032004 was1.44:1.47:1 compared to1.18:1.48:1 at December 31,2002.2003. Theincreasereduction in working capitaland the current ratiois due to theAmerican Tooluse of cash to pay down commercial paper andLenox acquisitions, and a reduction inthecurrent portioncollection oflong-term debt.accounts receivable, partially offset by seasonal inventory build.Total debt to total capitalization (total debt is net of cash and cash equivalents, and total capitalization includes total debt and
stockholders'stockholders’ equity) was.47:.59:1 at September 30,20032004 and.47:.58:1 at December 31,2002.2003.On October 12, 2004, the Company purchased 825,000 shares of its Preferred Securities from a holder for $43.6875 per share. The Company paid a total of $36 million.
On November 4, 2004, the Company declared a quarterly cash dividend of $0.21 per share on the Company’s common stock. The dividend is payable December 3, 2004 to common stockholders of record on November 16, 2004.
The Company believes that cash provided from operations and available borrowing facilities will continue to provide adequate support for the cash needs of existing
businesses;businesses on a short-term basis; however, certain events, such as significant acquisitions, could require additional externalfinancing. MINIMUM PENSION LIABILITY ------------------------- The decline in U.S. and European interest rates since November 2002 has caused the Company to change the discount rate used to calculate the present value of its pension liabilities from 6.75% at December 31, 2002 to an estimated 6.25% at December 31, 2003, increasing the Company's pension plan liability. Asfinancing on aresult, the Company's pension plan, which historically has had an over-funded position, currently is under-funded.long-term basis.Minimum Pension Liability
In accordance with
theFinancial Accounting Standards Board (FASB) Statement No. 87,Employers'Employers’ Accounting for Pensions, the26Company expects to record an additional minimum pension liability adjustment at December 31,2003.2004. Based on September 30,2003 plan asset2004 pension values, the approximate effect of this non-cash adjustment would be to increase the pension liability by approximately$175$0 to$210$30 million, with a corresponding charge to equity, net of taxes of approximately$110$0 to$130$20 million. The direct charge tostockholders'stockholders’ equity would not affect net income, but would be included in other comprehensive income. The Companyremains confidentbelieves that its pension plan has the appropriate long-term investment strategy and theCompany'sCompany’s liquidity position is expected to remain strong.MARKET RISK -----------Market Risk
The
Company'sCompany’s market risk is impacted by changes in interest rates, foreign currency exchange rates and certain commodity prices. Pursuant to theCompany'sCompany’s policies, natural hedging techniques and derivative financial instruments may be utilized to reduce the impact of adverse changes in market prices. The Company does not hold or issue derivative instruments for trading purposes.The
Company'sCompany’s primary market risk is foreign exchange and interest rate exposure.The Company manages interest rate exposure through its conservative debt ratio target and its mix of fixed and floating rate debt. Interest rate swaps may be used to adjust interest rate exposures when appropriate based on market conditions, and, for qualifying hedges, the interest differential of swaps is included in interest expense.
26
The
Company'sCompany’s foreign exchange risk management policy emphasizes hedging anticipated intercompany and third party commercial transaction exposures of one-year duration or less. The Company focuses on natural hedging techniques of the following form: 1) offsetting or netting of like foreign currency flows, 2) structuring foreign subsidiary balance sheets with appropriate levels of debt to reduce subsidiary net investments and subsidiary cash flows subject to conversion risk, 3) converting excess foreign currency deposits into U.S. dollars or the relevant functional currency and 4) avoidance of risk by denominating contracts in the appropriate functional currency. In addition, the Company utilizes forward contracts and purchased options to hedge commercial and intercompany transactions. Gains and losses related to qualifying hedges of commercial and intercompany transactions are deferred and included in the basis of the underlying transactions. Derivatives used to hedge intercompany loans are marked to market with the corresponding gains or losses included in theCompany'sCompany’s Consolidated Statements of Operations.DueThe Company purchases certain raw materials that are subject to price volatility caused by unpredictable factors. While future movements of raw material costs are uncertain, a variety of programs, including periodic raw material purchases, purchases of raw materials for future delivery and customer price adjustments help the
diversity of its product lines,Company address this risk. Generally, the Company does nothave material sensitivityuse derivatives toany one commodity. The Company manages commodity price exposures primarily throughmanage theduration and terms of its vendor contracts.volatility related to this risk.The amounts shown below represent the estimated potential economic loss that the Company could incur from adverse changes in either interest rates or foreign exchange rates using the value-at-risk estimation model. The value-at-risk model uses historical foreign
27exchange rates and interest rates to estimate the volatility and correlation of these rates in future periods. This model estimates a loss in fair market value using statistical modeling techniques that are based on a variance/covariance approach and includes substantially all market risk exposures (specifically excluding equity-method investments). The fair value losses shown in the table below have no impact on results of operations or financial condition at September 30,20032004 as they represent hypothetical, not realized losses. The following table indicates the calculated amounts for the nine months ended September 30,(IN MILLIONS)(in millions):
2003 2002 Nine Nine Month September 30, Month September 30, Confidence Average 2003 Average 2002 Level ------- ---- ------- ---- -----Interest rates $22.4 $21.1 $17.4 $21.2 95% Foreign exchange $1.2 $1.1 $0.3 $0.4 95%
2004 2003 Nine Nine Month September 30, Month September 30, Confidence Average 2004 Average 2003 Level Interest rates $ 12.3 $ 11.3 $ 22.4 $ 21.1 95 % Foreign exchange $ 2.3 $ 1.6 $ 1.2 $ 1.1 95 % The 95% confidence interval signifies the
Company'sCompany’s degree of confidence that actual losses would not exceed the estimated losses shown above. The amounts shown here disregard the possibility that interest rates and foreign currency exchange rates could move in theCompany'sCompany’s favor. The value-at-risk model assumes that all movements in these rates will be adverse. Actual experience has shown that gains and losses tend to offset each other over time, and it is highly unlikely that the Company could experience losses such as these over an extended period of time. These amounts should not be considered projections of future losses, because actual results may differ significantly depending upon activity in the global financial markets.FORWARD LOOKING STATEMENTS --------------------------Forward Looking Statements
Forward-looking statements in this Report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, but are not limited to, such matters as sales, income, earnings per share, return on equity, return on invested capital, capital expenditures, working capital, dividends, capital structure, debt to capitalization ratios, interest rates, internal growth rates, impacts of changes in accounting standards, pending legal proceedings and claims (including environmental matters), future economic performance, operating income improvements, synergies,
management'smanagement’s plans, goals and objectives for future operations and growth or the assumptions relating to any of the forward-looking statements. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results. Actual results could differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, those matters set forth in this Report and Exhibit 99.1 to this Report.ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market RiskThe information required by this item is incorporated herein by reference to the section entitled
"Market Risk"“Market Risk” in theCompany's 28 Management'sCompany’s Management’s Discussion and Analysis of Results of Operations and Financial Condition (Part I, Item 2).ITEM27
Item 4.
CONTROLS AND PROCEDURES a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.Controls and ProceduresAs of September 30,
2003,2004, an evaluation was performed by theCompany'sCompany’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer,have evaluatedof the effectiveness of theCompany'sCompany’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and the chief financial officer concluded that theCompany'sCompany’s disclosure controls and procedures were effective.b) CHANGES IN INTERNAL CONTROLS.There
have beenwere nosignificantchanges in theCompany'sCompany’s internalcontrolscontrol over financial reporting that occurred during the quarter ended September 30, 2004 that have materially affected, orin other facts that could significantlyare reasonably likely to materially affect, the Company’s internalcontrols subsequent to the date of their evaluation. 29control over financial reporting.28
PART II. OTHER INFORMATION
ITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsInformation required under this Item is contained above in Part I. Financial Information, Item 1 and is incorporated herein by reference.
ITEMItem 6.
EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.3 Rights Agreement, dated as of August 6, 1998, between the Company and First Chicago Trust Company of New York, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated August 6, 1998), as amended by a First Amendment to Rights Agreement effective as of September 29, 2003, between the Company and The Bank of New York, as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form 8-A/A, filed October 27, 2003). 4.7 Specimen Common Stock. 12. Statement of Computation of Ratio of Earnings to Fixed Charges. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) , As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Safe Harbor Statement. (b) Reports on Form 8-K: Report on Form 8-K, dated July 31, 2003, that included a press release announcing the Company's results for the second fiscal quarter ended June 30, 2003. Report on Form 8-K, dated September 2, 2003, that included a press release announcing the Company's appointment of three key executives to expanded roles. Report on Form 8-K, dated September 10, 2003, that included a press release announcing the appointment of The Bank of New York as the Company's new stock transfer agent, registrar and dividend disbursement and reinvestment agent, effective September 29, 2003. 30Exhibits
11 Statement of Computation of Earnings per Share of Common Stock. 12 Statement of Computation of Ratio of Earnings to Fixed Charges. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Safe Harbor Statement. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEWELL RUBBERMAID INC. Registrant Date: November 10, 2003 /s/ J. Patrick Robinson ------------------------------------- J. Patrick Robinson Vice President - Corporate Controller and Chief Financial Officer 31
NEWELL RUBBERMAID INC.
RegistrantDate: November 9, 2004 /s/ J. Patrick Robinson J. Patrick Robinson Vice President – Chief Financial Officer