SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended March 31,September 30, 2004
Commission File Number 1-9608
NEWELL RUBBERMAID INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 36-3514169 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
10B Glenlake Parkway, Suite 600
Atlanta, Georgia 30328
(Address of principal executive offices)
(Zip Code)
(770) 407-3800
(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/ | No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes /x/ | No |
Number of shares of common stock outstanding (net of treasury shares) as of April 30,October 29, 2004: 274.8 millionmillion.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Unaudited,Amounts in millions, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
Quarter Ended March 31, | September 30, | September 30, | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Net sales | $ | 1,541.0 | $ | 1,557.9 | $ | 1,671.8 | $ | 1,729.1 | $ | 4,939.9 | $ | 5,072.0 | ||||||||||||
Cost of products sold | 1,129.5 | 1,125.2 | 1,198.5 | 1,237.3 | 3,571.0 | 3,625.0 | ||||||||||||||||||
GROSS MARGIN | 411.5 | 432.7 | 473.2 | 491.8 | 1,368.9 | 1,447.0 | ||||||||||||||||||
Selling, general and administrative expenses | 313.8 | 292.0 | 307.1 | 298.8 | 945.5 | 905.5 | ||||||||||||||||||
Impairment charges | 348.9 | — | 374.0 | — | ||||||||||||||||||||
Restructuring costs | 22.8 | 24.4 | — | 32.3 | 47.9 | 109.5 | ||||||||||||||||||
OPERATING INCOME | 74.9 | 116.3 | ||||||||||||||||||||||
OPERATING (LOSS) INCOME | (182.7 | ) | 160.7 | 1.5 | 432.0 | |||||||||||||||||||
Nonoperating expenses: | ||||||||||||||||||||||||
Interest expense, net | 30.9 | 37.0 | 29.5 | 33.1 | 90.0 | 104.5 | ||||||||||||||||||
Other, net | (4.3 | ) | 20.3 | |||||||||||||||||||||
Other (income) expense, net | (0.8 | ) | 1.4 | (3.9 | ) | 18.6 | ||||||||||||||||||
Net nonoperating expenses | 26.6 | 57.3 | 28.7 | 34.5 | 86.1 | 123.1 | ||||||||||||||||||
INCOME BEFORE INCOME TAXES | 48.3 | 59.0 | ||||||||||||||||||||||
(LOSS) INCOME BEFORE INCOME TAXES | (211.4 | ) | 126.2 | (84.6 | ) | 308.9 | ||||||||||||||||||
Income taxes | 15.2 | 19.1 | 23.6 | 40.7 | 58.7 | 100.0 | ||||||||||||||||||
NET INCOME FROM CONTINUING OPERATIONS | 33.1 | 39.9 | ||||||||||||||||||||||
Loss from discontinued operations, net of tax | (108.0 | ) | (23.9 | ) | ||||||||||||||||||||
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 | ($74.9 | ) | $ | 16.0 | ($ | 226.4 | ) | $ | 75.2 | ($ | 240.3 | ) | $ | 165.0 | ||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||
Basic | 274.4 | 273.6 | 274.4 | 274.4 | 274.4 | 274.0 | ||||||||||||||||||
Diluted | 274.5 | 274.0 | 274.4 | 274.4 | 274.4 | 274.3 | ||||||||||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||
Basic - | ||||||||||||||||||||||||
Income from continuing operations | $ | 0.12 | $ | 0.15 | ||||||||||||||||||||
Loss from discontinued operations | (0.39 | ) | (0.09 | ) | ||||||||||||||||||||
(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 | ($0.27 | ) | $ | 0.06 | ($ | 0.83 | ) | $ | 0.27 | ($ | 0.88 | ) | $ | 0.60 | ||||||||||
Diluted - | ||||||||||||||||||||||||
Income from continuing operations | $ | 0.12 | $ | 0.15 | ||||||||||||||||||||
Loss from discontinued operations | (0.39 | ) | (0.09 | ) | ||||||||||||||||||||
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 | ($0.27 | ) | $ | 0.06 | ($ | 0.83 | ) | $ | 0.27 | ($ | 0.88 | ) | $ | 0.60 | ||||||||||
Dividends per share | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.63 | $ | 0.63 |
See Notes to Consolidated Financial Statements (Unaudited).
2
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(InAmounts in millions)
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 51.9 | $ | 144.4 | $ | 354.5 | $ | 144.4 | ||||||||
Accounts receivable, net | 1,253.2 | 1,410.1 | 1,184.3 | 1,397.1 | ||||||||||||
Inventories, net | 991.7 | 886.8 | 1,060.0 | 884.8 | ||||||||||||
Deferred income taxes | 153.7 | 152.7 | 115.3 | 152.7 | ||||||||||||
Prepaid expenses and other | 191.4 | 183.4 | 163.2 | 183.1 | ||||||||||||
Current assets of discontinued operations | 175.2 | 222.8 | — | 238.1 | ||||||||||||
TOTAL CURRENT ASSETS | 2,817.1 | 3,000.2 | 2,877.3 | 3,000.2 | ||||||||||||
OTHER LONG-TERM INVESTMENTS | 15.5 | 15.5 | 15.5 | 15.5 | ||||||||||||
OTHER ASSETS | 203.8 | 180.8 | 256.7 | 197.2 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 1,558.3 | 1,625.7 | 1,341.3 | 1,608.8 | ||||||||||||
DEFERRED INCOME TAXES | 56.7 | 68.1 | 9.3 | 68.1 | ||||||||||||
GOODWILL | 1,991.1 | 1,989.0 | 1,798.0 | 1,989.0 | ||||||||||||
OTHER INTANGIBLE ASSETS, NET | 445.8 | 450.6 | 307.1 | 447.9 | ||||||||||||
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS | 121.1 | 150.8 | — | 154.0 | ||||||||||||
TOTAL ASSETS | $ | 7,209.4 | $ | 7,480.7 | $ | 6,605.2 | $ | 7,480.7 | ||||||||
See Notes to Consolidated Financial Statements (Unaudited).
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(InAmounts in millions, except per share data)
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Notes payable | $ | 12.7 | $ | 21.9 | $ | 14.0 | $ | 21.9 | ||||||||
Accounts payable | 663.5 | 701.6 | 633.1 | 694.7 | ||||||||||||
Accrued compensation | 84.8 | 123.5 | 115.4 | 122.1 | ||||||||||||
Other accrued liabilities | 891.8 | 961.5 | 842.4 | 960.4 | ||||||||||||
Income taxes | 85.1 | 80.8 | 134.0 | 80.8 | ||||||||||||
Current portion of long-term debt | 14.1 | 13.5 | 215.0 | 13.5 | ||||||||||||
Current liabilities of discontinued operations | 97.5 | 119.2 | — | 128.6 | ||||||||||||
TOTAL CURRENT LIABILITIES | 1,849.5 | 2,022.0 | 1,953.9 | 2,022.0 | ||||||||||||
LONG-TERM DEBT | 2,871.3 | 2,868.6 | 2,439.6 | 2,868.6 | ||||||||||||
OTHER NONCURRENT LIABILITIES | 574.9 | 570.6 | 585.0 | 572.3 | ||||||||||||
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS | — | 1.5 | — | 1.5 | ||||||||||||
MINORITY INTEREST | 1.9 | 1.7 | ||||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Common stock, authorized shares, 800.0 million at $1.00 par value; | 290.1 | 290.1 | ||||||||||||||
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 | ) | (411.6 | ) | (411.6 | ) | ||||||||
Shares held: | ||||||||||||||||
2004 - 15.7 million | ||||||||||||||||
2003 - 15.7 million | ||||||||||||||||
Additional paid-in capital | 432.2 | 439.9 | 437.4 | 439.9 | ||||||||||||
Retained earnings | 1,733.2 | 1,865.7 | 1,452.2 | 1,865.7 | ||||||||||||
Accumulated other comprehensive loss | (132.1 | ) | (167.8 | ) | (141.4 | ) | (167.8 | ) | ||||||||
TOTAL STOCKHOLDERS’ EQUITY | 1,911.8 | 2,016.3 | 1,626.7 | 2,016.3 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 7,209.4 | $ | 7,480.7 | $ | 6,605.2 | $ | 7,480.7 | ||||||||
See Notes to Consolidated Financial Statements (Unaudited).
4
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Unaudited,Amounts in millions)
Quarter Ended March 31, | Nine Months Ended September 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net (loss)/income | ($74.9 | ) | $ | 16.0 | ||||||||||||
Adjustments to reconcile net (loss)/income to net cash provided by 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 | 64.5 | 59.5 | 185.4 | 186.5 | ||||||||||||
Deferred income taxes | 85.1 | 9.6 | ||||||||||||||
Impairment charges | 374.0 | — | ||||||||||||||
Noncash restructuring charges | 8.9 | 44.6 | 25.3 | 73.0 | ||||||||||||
Deferred income taxes | 7.3 | (10.6 | ) | |||||||||||||
(Gain)/loss on sale of assets/business | (4.1 | ) | 21.2 | (6.5 | ) | 20.5 | ||||||||||
Loss on discontinued businesses | 104.6 | — | 90.5 | — | ||||||||||||
Other | 2.2 | 17.0 | (4.8 | ) | 30.7 | |||||||||||
Changes in accounts excluding the effects of acquisitions: | ||||||||||||||||
Changes in current accounts excluding the Effects of acquisitions: | ||||||||||||||||
Accounts receivable | 152.9 | 123.4 | 211.0 | 47.0 | ||||||||||||
Inventories | (107.9 | ) | (45.1 | ) | (176.8 | ) | (1.4 | ) | ||||||||
Other current assets | (4.8 | ) | 5.3 | 17.9 | 2.6 | |||||||||||
Accounts payable | (36.1 | ) | 44.3 | (60.2 | ) | 121.9 | ||||||||||
Discontinued operations | (8.6 | ) | (54.7 | ) | (29.8 | ) | 9.9 | |||||||||
Accrued liabilities and other | (110.7 | ) | (180.4 | ) | (49.0 | ) | (244.8 | ) | ||||||||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (6.7 | ) | 40.5 | |||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 421.8 | 420.5 | ||||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Acquisitions, net of cash acquired | — | (452.3 | ) | (3.0 | ) | (460.0 | ) | |||||||||
Expenditures for property, plant and equipment | (36.6 | ) | (93.2 | ) | (95.2 | ) | (247.1 | ) | ||||||||
Sale of businesses and non-current assets | 16.5 | 7.5 | ||||||||||||||
Sale of businesses and noncurrent assets | 289.2 | 10.2 | ||||||||||||||
NET CASH USED IN INVESTING ACTIVITIES | (20.1 | ) | (538.0 | ) | ||||||||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 191.0 | (696.9 | ) | |||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from issuance of debt | 9.7 | 619.3 | 21.3 | 1,040.5 | ||||||||||||
Proceeds from issuance of stock | — | 200.1 | — | 200.1 | ||||||||||||
Payments on notes payable and long-term debt | (17.7 | ) | (312.0 | ) | (251.9 | ) | (776.7 | ) | ||||||||
Cash dividends | (57.7 | ) | (57.7 | ) | (173.2 | ) | (173.1 | ) | ||||||||
Proceeds from exercised stock options and other | 0.9 | 2.0 | 1.4 | 6.0 | ||||||||||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (64.8 | ) | 451.7 | (402.4 | ) | 296.8 | ||||||||||
Exchange rate effect on cash | (0.9 | ) | 0.9 | (0.3 | ) | 1.6 | ||||||||||
DECREASE IN CASH AND CASH EQUIVALENTS | (92.5 | ) | (44.9 | ) | ||||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | 210.1 | 22.0 | ||||||||||||||
Cash and cash equivalents at beginning of year | 144.4 | 55.1 | 144.4 | 55.1 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 51.9 | $ | 10.2 | $ | 354.5 | $ | 77.1 | ||||||||
See Notes to Consolidated Financial Statements (Unaudited).
5
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Unaudited)
Note 1 —– Basis of Presentation
The accompanying unaudited consolidated financial statements of Newell Rubbermaid Inc. (collectively with its subsidiaries, the “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 the Company’s latest Annual Report on Form 10-K.
Seasonal Variations:The Company’s product groups are only moderately affected by seasonal trends. The Cleaning & Organization and Other business segmentsegments typically hashave higher sales in the second half of the year due to retail stocking related to the holiday season; the Tools & Hardware and Home Fashions business segments typically have higher sales in the second and third quarters due to an increased level of do-it-yourself projects completed in the summer months; and the Office 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, the Company’s consolidated quarterly sales generally do not fluctuate significantly, unless a significant acquisition is made.
Fair Value of Stock Options:The Company’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 for Stock Based Compensation,” the Company’s net income and earnings per share would have been reduced to the following pro forma amounts for the quarterthree and nine months ended March 31,September 30,(in millions, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Net (loss) income: | ||||||||||||||||||||||||
As reported | ($74.9 | ) | $ | 16.0 | ($ | 226.4 | ) | $ | 75.2 | ($ | 240.3 | ) | $ | 165.0 | ||||||||||
Fair value option expense | (4.5 | ) | (3.7 | ) | (4.6 | ) | (4.7 | ) | (13.7 | ) | (14.1 | ) | ||||||||||||
Pro forma | ($79.4 | ) | $ | 12.3 | ($ | 231.0 | ) | $ | 70.5 | ($ | 254.0 | ) | $ | 150.9 | ||||||||||
Basic earnings (loss) per share: | ||||||||||||||||||||||||
Basic (loss) earnings per share: | ||||||||||||||||||||||||
As reported | ($0.27 | ) | $ | 0.06 | ($ | 0.83 | ) | $ | 0.27 | ($ | 0.88 | ) | $ | 0.60 | ||||||||||
Pro forma | (0.29 | ) | 0.04 | ($ | 0.84 | ) | $ | 0.26 | ($ | 0.93 | ) | $ | 0.55 | |||||||||||
Diluted earnings (loss) per share: | ||||||||||||||||||||||||
Diluted (loss) earnings per share: | ||||||||||||||||||||||||
As reported | ($0.27 | ) | $ | 0.06 | ($ | 0.83 | ) | $ | 0.27 | ($ | 0.88 | ) | $ | 0.60 | ||||||||||
Pro forma | (0.29 | ) | 0.04 | ($ | 0.84 | ) | $ | 0.26 | ($ | 0.93 | ) | $ | 0.55 |
Reclassifications:Certain amounts in prior years have been reclassified to conform to the current year presentation. See Note 24 for a discussion of discontinued operations.
Note 2 — Discontinued Operations
On January 31, 2004, the Company completed the sale of its Panex Brazilian low-end cookware division (previously reported in the Other operating segment) and European picture frames businesses (previously reported in the Home Fashions operating segment) in France, Spain and the United Kingdom.
6
On March 14, 2004, the Company entered into a definitive agreement to sell substantially all of its U.S. picture frame business (Burnes), its Anchor Hocking glassware business and its Mirro cookware business. Under the terms of the agreement, the Company will retain the accounts receivable of the businesses and expects total proceeds, including the retained receivables, as a result of the transaction to be approximately $310 million, subject to final negotiation. The effective date of sale is April 13, 2004. The Burnes picture frames business was previously reported in the Home Fashions operating segment, while the Anchor Hocking and Mirro businesses were previously reported in the in the Other operating segment.Note 2 – Impairment Charges
The 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 conducts its annual test of impairment for goodwill and other indefinite-lived intangible assets in the third quarter. The Company also tests for impairment if events or circumstances occur subsequent to the Company’s annual impairment tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performs the annual impairment testing 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 business. 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 discontinued operationsimpairment 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 impairment test requires that a company estimate the fair 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 three months ended March 31,:
2004 | 2003 | |||||||
Net sales | $ | 133.5 | $ | 178.5 | ||||
Loss from discontinued operations, net of income taxes of ($1.5) and ($11.5) million, respectively | ($3.4 | ) | ($23.9 | ) | ||||
Loss on disposal of discontinued operations | ($104.6 | ) | — |
7
No tax benefit
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, 2004, 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 loss on disposal of discontinued operations. In addition, no amounts relatedTools & Hardware and Other segments primarily relates to interest expensepatents that the Company will allow to expire and fixed assets that are currently held for sale, and accordingly, have been allocatedwritten down to discontinued operations.fair value.
In the second quarter of 2004, the Company recorded an impairment charge of $25.1 million as follows:
• | 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 following table presents summarized balance sheet informationCompany cannot predict whether certain events might occur that would adversely affect the reported value of the discontinued operations (remaining goodwill and other identifiable intangible assets. Such events may include, but are not limited to, strategic decisions made in millions):
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
Accounts receivable, net | $ | 0.8 | $ | 32.6 | ||||
Inventories, net | 168.2 | 179.4 | ||||||
Prepaid expenses and other current Assets | 6.2 | 10.8 | ||||||
Total Current Assets | 175.2 | 222.8 | ||||||
Property, plant and equipment, net | 120.8 | 135.5 | ||||||
Other assets | 0.3 | 15.3 | ||||||
Total Assets | $ | 296.3 | $ | 373.6 | ||||
Accounts payable | $ | 66.7 | $ | 75.9 | ||||
Other accrued liabilities | 30.8 | 43.3 | ||||||
Total Current Liabilities | 97.5 | 119.2 | ||||||
Long-Term Liabilities | — | 1.5 | ||||||
Total Liabilities | $ | 97.5 | $ | 120.7 | ||||
Note 3 — Restructuring Costs
TheIn the second quarter of 2004, the Company continues to incur restructuringcompleted its accounting charges associated with the Company’sits strategic restructuring plan (the “plan”“Plan”) announced on May 3, 2001. The specific objectives of the plan arePlan were to streamline the Company’s supply chain to become the best-cost global provider throughout the Company’s portfolio by reducing worldwide headcount and consolidating duplicative manufacturing facilities. The Company expects to incur between $470 and $480recorded $462 million in restructuring charges under the plan,Plan, including previously recognized charges$84.2 million on discontinued operations of $83.6 million.operations. The following analysis excludes the restructuring amounts related to discontinued operations.
9
Pre-tax restructuring costs consisted of the following for the quarter ended March 31,(in millions):
Three Months Ended September 30, | Nine Months Ended | |||||||||||||||||||
September 30, | ||||||||||||||||||||
2004 | 2003 | 2003 | 2004 | 2003 | ||||||||||||||||
Facility and other exit costs | $ | 15.1 | $ | 3.1 | $ | 28.6 | $ | 32.8 | $ | 56.2 | ||||||||||
Employee severance and termination benefits | 5.4 | 21.3 | 3.7 | 9.9 | 53.3 | |||||||||||||||
Exited contractual commitments | 2.3 | — | ||||||||||||||||||
Exited contractual commitments and other | — | 5.2 | — | |||||||||||||||||
Total Restructuring Costs | $ | 22.8 | $ | 24.4 | ||||||||||||||||
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 $13.7$28.1 million and $17.4$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 threenine months of 2004 and 2003, respectively.
A summary of the Company’s restructuring plan reserves is as follows(in millions):
12/31/02 | Costs | 3/31/03 | 12/31/02 | Costs | 09/30/03 | |||||||||||||||||||||||||||
Balance | Provision | Incurred | Balance | Balance | Provision | Incurred | Balance | |||||||||||||||||||||||||
Facility and other exit costs | $ | 31.4 | $ | 3.1 | ($7.3 | ) | $ | 27.2 | $ | 31.4 | $ | 56.2 | ($ | 45.6 | ) | $ | 42.0 | |||||||||||||||
Employee severance and termination benefits | 36.4 | 21.3 | (13.0 | ) | 44.7 | 36.4 | 53.3 | (36.9 | ) | 52.8 | ||||||||||||||||||||||
Total Restructuring Costs | $ | 67.8 | $ | 24.4 | ($20.3 | ) | $ | 71.9 | ||||||||||||||||||||||||
$ | 67.8 | $ | 109.5 | ($ | 82.5 | ) | $ | 94.8 | ||||||||||||||||||||||||
12/31/03 | Costs | 03/31/04 | 12/31/03 | Costs | 09/30/04 | |||||||||||||||||||||||||||
Balance | Provision | Incurred | Balance | Balance | Provision | Incurred | Balance | |||||||||||||||||||||||||
Facility and other exit costs | $ | 77.5 | $ | 15.1 | ($20.3 | ) | $ | 72.3 | $ | 77.5 | $ | 32.8 | ($ | 90.4 | ) | $ | 19.9 | |||||||||||||||
Employee severance and termination benefits | 61.8 | 5.4 | (10.0 | ) | 57.2 | 61.8 | 9.9 | (56.8 | ) | 14.9 | ||||||||||||||||||||||
Exited contractual commitments | 6.5 | 2.3 | (1.1 | ) | 7.7 | |||||||||||||||||||||||||||
Exited contractual commitments and other | 6.5 | 5.2 | (7.5 | ) | 4.2 | |||||||||||||||||||||||||||
Total Restructuring Costs | $ | 145.8 | $ | 22.8 | ($31.4 | ) | $ | 137.2 | ||||||||||||||||||||||||
$ | 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 plan,Plan, the Company expects to exit 76exited 84 facilities and reducereduced headcount by approximately 10,300 people. At the plan’s completion, the12,000. The Company expects total annual savings of between $125 and $150 million ($105 to $115 million related to the reduced headcount, $10 to $20 million related to reduced depreciation, and $10 to $15 million related to other cash savings). As of March 31, 2004, restructuring reserves consisted of approximately 100 individual restructuring plans. The following table depicts the material changes in these plansaccrued restructuring reserves for the threenine months ended March 31,September 30, aggregated by reportable business segment:
12/31/02 | Costs | 3/31/03 | ||||||||||||||
Segment | Balance | Provision | Incurred | Balance | ||||||||||||
Cleaning & Organization | $ | 3.8 | $ | 4.2 | ($3.0 | ) | $ | 5.0 | ||||||||
Office Products | 27.2 | 0.5 | (1.6 | ) | 26.1 | |||||||||||
Home Fashions | 12.4 | 10.6 | (6.6 | ) | 16.4 | |||||||||||
Tools & Hardware | 0.5 | 2.3 | (0.6 | ) | 2.2 | |||||||||||
Other | 3.6 | 6.4 | (4.9 | ) | 5.1 | |||||||||||
Corporate | 20.3 | 0.4 | (3.6 | ) | 17.1 | |||||||||||
$ | 67.8 | $ | 24.4 | ($20.3 | ) | $ | 71.9 | |||||||||
12/31/03 | Costs | 3/31/04 | ||||||||||||||
Segment | Balance | Provision | Incurred | Balance | ||||||||||||
Cleaning & Organization | $ | 56.2 | $ | 6.3 | ($12.9 | ) | $ | 49.6 | ||||||||
Office Products | 29.9 | (0.6 | ) | (3.7 | ) | 25.6 | ||||||||||
Home Fashions | 17.7 | 5.7 | (2.0 | ) | 21.4 | |||||||||||
Tools & Hardware | 17.9 | 1.5 | (9.7 | ) | 9.7 | |||||||||||
Other | 9.6 | 9.7 | (0.7 | ) | 18.6 | |||||||||||
Corporate | 14.5 | 0.2 | (2.4 | ) | 12.3 | |||||||||||
$ | 145.8 | $ | 22.8 | ($31.4 | ) | $ | 137.2 | |||||||||
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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 completed the sale of its Panex Brazilian low-end cookware division (previously reported in the Other operating segment) and European 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 its Mirro cookware business. Under the terms of the agreement and final adjustments relating to the transaction, the Company retained the accounts receivable of the businesses, and total proceeds, including the retained receivables, as a result of the transaction were $304 million. The Burnes 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 the 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 unit 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 activity and certain changes in the Company’s business model affecting the utilization of net 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 first three months ofended September 30, 2004, the Company incurred facility exit costs and employee severance and termination benefit costs for approximately 600 employees. Underreceived notification from the restructuring plan, 73 facilities have been exited and headcountInternal Revenue Service that it would receive a refund of $2.9 million relating to amounts previously paid. Accordingly, this amount has been reduced by approximately 9,300 employees.recorded in income taxes for the three and nine months ended September 30, 2004.
Note 4 —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):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Materials and supplies | $ | 259.8 | $ | 241.4 | $ | 251.1 | $ | 240.4 | ||||||||
Work in process | 149.8 | 115.8 | 170.1 | 115.4 | ||||||||||||
Finished products | 582.1 | 529.6 | 638.8 | 529.0 | ||||||||||||
$ | 991.7 | $ | 886.8 | $ | 1,060.0 | $ | 884.8 | |||||||||
Note 57 – Long-term Debt
The following is a summary of long-term debt(in millions):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Medium-term notes | $ | 1,647.0 | $ | 1,647.0 | $ | 1,647.0 | $ | 1,647.0 | ||||||||
Commercial paper | 218.0 | 217.1 | — | 217.1 | ||||||||||||
Preferred debt securities | 450.0 | 450.0 | 450.0 | 450.0 | ||||||||||||
Junior convertible subordinated debentures | 515.5 | 515.5 | 515.5 | 515.5 | ||||||||||||
Terminated interest rate swaps | 48.8 | 46.7 | 41.8 | 46.7 | ||||||||||||
Other long-term debt | 6.1 | 5.8 | 0.3 | 5.8 | ||||||||||||
Total debt | 2,885.4 | 2,882.1 | 2,654.6 | 2,882.1 | ||||||||||||
Current portion of long-term debt | (14.1 | ) | (13.5 | ) | (215.0 | ) | (13.5 | ) | ||||||||
Long-term Debt | $ | 2,871.3 | $ | 2,868.6 | $ | 2,439.6 | $ | 2,868.6 | ||||||||
Effective March 9, 2004, the Company terminated an interest rate swap agreement prior to the scheduled maturity date and received cash of $9.2 million. Of this amount $5.5 million represents the fair value of the swap that was terminated and the remainder represents net interest receivable on the swap. The cash received relating to the fair value of the swap has been included in Other as an operating activity in the Consolidated Statement of Cash Flows. The unamortized gain on the terminated interest rate swap is accounted for as long-term debt (of which $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 68 – Employee Benefit and Retirement Plans
The following table presents the components of the Company’s pension expense for the three months ended March 31September 30, (in millions):
United States | International | United States | International | |||||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
Service cost-benefits earned during the year | $ | 11.0 | $ | 8.8 | $ | 1.8 | $ | 2.2 | $ | 10.2 | $ | 8.8 | $ | 1.8 | $ | 2.2 | ||||||||||||||||
Interest cost on projected benefit Obligation | 13.5 | 12.1 | 4.9 | 4.5 | ||||||||||||||||||||||||||||
Interest cost on projected benefit obligation | 16.0 | 12.1 | 4.9 | 4.5 | ||||||||||||||||||||||||||||
Expected return on plan assets | (16.3 | ) | (17.1 | ) | (4.5 | ) | (4.3 | ) | (19.5 | ) | (17.1 | ) | (4.5 | ) | (4.3 | ) | ||||||||||||||||
Curtailment, settlement cost | — | — | 0.2 | — | ||||||||||||||||||||||||||||
Actuarial loss | 1.2 | 0.1 | 0.4 | 0.4 | 1.3 | 0.1 | 0.4 | 0.4 | ||||||||||||||||||||||||
Net pension expense | $ | 9.4 | $ | 3.9 | $ | 2.8 | $ | 2.8 | $ | 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 March 31September 30, (in millions):
Other Postretirement | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
Benefits | September 30, | September 30, | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Service cost-benefits earned during the year | $ | 1.3 | $ | 1.2 | $ | 1.0 | $ | 1.2 | $ | 3.5 | $ | 3.7 | ||||||||||||
Interest cost on projected benefit Obligation | 4.1 | 4.0 | ||||||||||||||||||||||
Interest cost on projected benefit obligation | 3.4 | 4.0 | 11.1 | 12.1 | ||||||||||||||||||||
Amortization of prior service cost | — | 0.1 | (0.2 | ) | 0.1 | (0.5 | ) | 0.2 | ||||||||||||||||
Actuarial loss | 0.3 | — | — | — | 0.5 | — | ||||||||||||||||||
Net pension expense | $ | 5.7 | $ | 5.3 | $ | 4.2 | $ | 5.3 | $ | 14.6 | $ | 16.0 | ||||||||||||
On December 8, 2003, Congress enactedIn the Medicare Prescription Drug, Improvement and Modernization Act (the “Drug Act”) into law. The Drug Act introducesthird quarter of 2004, the Company made a prescription drug benefit under Medicare Part D as well as a federal subsidyvoluntary $50.0 million cash contribution to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company is currently reviewingfund the impact of the Drug Act and has elected to defer recognition of the benefit to its postretirement healthcare plans; as a result, the reported benefit obligation and net periodic postretirement cost as of and for the quarter ended March 31, 2004 do not reflect the effects of the Drug Act. Once final guidance is issued, previously reported information is subject to change.Company’s pension plan.
Note 79 — Earnings per Share
The calculation of basic and diluted earnings per share for the quarterthree and nine months ended March 31, 2004 and 2003, respectively,September 30, is shown below(in millions, except per share data):
“In the | Convertible | “In the | Convertible | |||||||||||||||||||||||||||||
Basic | Money” | Preferred | Diluted | Basic | Money” | Preferred | Diluted | |||||||||||||||||||||||||
Method | Options(1) | Securities(2) | Method | Method | Options(1) | Securities(2) | Method | |||||||||||||||||||||||||
2004 | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2004 | ||||||||||||||||||||||||||||||||
Loss from continuing operations | ($ | 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, 2003 | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 33.1 | — | — | $ | 33.1 | $ | 85.5 | — | — | $ | 85.5 | ||||||||||||||||||||
Income per share | $ | 0.12 | $ | 0.12 | ||||||||||||||||||||||||||||
Earnings per share | $ | 0.31 | — | — | $ | 0.31 | ||||||||||||||||||||||||||
Loss from discontinued operations | ($108.0) | — | — | ($108.0) | ($ | 10.3 | ) | — | — | ($ | 10.3 | ) | ||||||||||||||||||||
Loss per share | ($0.39 | ) | ($0.39 | ) | ($ | 0.04 | ) | — | — | ($ | 0.04 | ) | ||||||||||||||||||||
Net loss | ($74.9) | — | — | ($74.9) | ||||||||||||||||||||||||||||
Loss per share | ($0.27 | ) | ($0.27 | ) | ||||||||||||||||||||||||||||
Weighted average shares outstanding | 274.4 | 0.1 | — | 274.5 | ||||||||||||||||||||||||||||
2003 | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 39.9 | — | — | $ | 39.9 | ||||||||||||||||||||||||||
Income per share | $ | 0.15 | $ | 0.15 | ||||||||||||||||||||||||||||
Loss from discontinued operations | ($23.9) | — | — | ($23.9) | ||||||||||||||||||||||||||||
Loss per share | ($0.09 | ) | ($0.09 | ) | ||||||||||||||||||||||||||||
Net income | $ | 16.0 | — | — | $ | 16.0 | ||||||||||||||||||||||||||
Income per share | $ | 0.06 | $ | 0.06 | ||||||||||||||||||||||||||||
Weighted average shares outstanding | 273.6 | 0.4 | — | 274.0 |
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, 2004 | ||||||||||||||||
Loss 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, 2003 | ||||||||||||||||
Income 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 |
(1) | The weighted average shares outstanding for the three months ended September 30, 2004 and 2003 exclude | |
(2) | The |
Note 810 – Accumulated Other Comprehensive Income (Loss)Loss
Accumulated other comprehensive income (loss)loss encompasses net 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 within stockholders’ equity.
The following table displays the components of accumulated other comprehensive income or loss(in millions):
Foreign | After-tax | After-tax | Accumulated | Foreign | After-tax | After-tax | Accumulated | |||||||||||||||||||||||||
Currency | Derivatives | Minimum | Other | Currency | Derivatives | Minimum | Other | |||||||||||||||||||||||||
Translation | Hedging | Pension | Comprehensive | Translation | Hedging | Pension | Comprehensive | |||||||||||||||||||||||||
Gain | Gain/(Loss) | Liability | Loss | Gain | Gain/(Loss) | Liability | Loss | |||||||||||||||||||||||||
Balance at December 31, 2003 | $ | 15.6 | $ | 6.6 | ($190.0 | ) | ($167.8 | ) | $ | 15.6 | $ | 6.6 | ($ | 190.0 | ) | ($ | 167.8 | ) | ||||||||||||||
Current year change | 46.6 | (10.9 | ) | — | 35.7 | 38.2 | (11.8 | ) | — | 26.4 | ||||||||||||||||||||||
Balance at March 31, 2004 | $ | 62.2 | ($4.3 | ) | ($190.0 | ) | ($132.1 | ) | ||||||||||||||||||||||||
Balance at September 30, 2004 | $ | 53.8 | ($ | 5.2 | ) | ($ | 190.0 | ) | ($ | 141.4 | ) | |||||||||||||||||||||
15
Total comprehensive (loss) income amounted to the following(in millions):
March 31, | March 31, | |||||||
2004 | 2003 | |||||||
Net (loss) income | ($74.9 | ) | $ | 16.0 | ||||
Foreign currency translation gain/(loss) | 46.6 | (8.6 | ) | |||||
After-tax derivatives hedging (loss)/gain | (10.9 | ) | 6.4 | |||||
($39.2 | ) | $ | 13.8 | |||||
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 911 — Industry Segment InformationSegments
In 2003, the Company made several organizational changes, divided the company into two major groups, and named two chief operating officers. As of December 31, 2003, the Company realigned itsThe Company’s reporting segments to reflect the changes in the Company’s structure and to more appropriately reflect the Company’s focus on building large consumer brands, promoting organizational integration, achieving operating efficiencies and aligning the businesses with the Company’s strategic account management strategy. The realignment streamlines what had previously been four operating segments (prior years’ segment data has been reclassified to conform to the current segment structure). The Company 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 supplies | |
Tools & Hardware | Hand tools, power tool accessories, manual paint applicators, cabinet hardware, propane torches | |
Home 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):
2004 | 2003 | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
Net Sales (1) — Quarter Ended March 31, | ||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Net Sales (1) | ||||||||||||||||||||||||
Cleaning & Organization | $ | 447.4 | $ | 477.5 | $ | 455.9 | $ | 514.4 | $ | 1,372.0 | $ | 1,504.3 | ||||||||||||
Office Products | 332.8 | 322.3 | 424.3 | 428.7 | 1,246.3 | 1,258.8 | ||||||||||||||||||
Tools & Hardware | 274.3 | 265.6 | 300.6 | 299.3 | 875.2 | 859.5 | ||||||||||||||||||
Home Fashions | 226.8 | 219.6 | 228.1 | 223.5 | 679.1 | 670.9 | ||||||||||||||||||
Other | 259.7 | 272.9 | 262.9 | 263.2 | 767.3 | 778.5 | ||||||||||||||||||
$ | 1,541.0 | $ | 1,557.9 | $ | 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
2004 | 2003 | September 30, | December 31, | |||||||||||||
Operating Income (2) – Quarter Ended March 31, | ||||||||||||||||
Identifiable Assets | 2004 | 2003 | ||||||||||||||
Cleaning & Organization | $ | 12.2 | $ | 40.0 | $ | 1,088.4 | $ | 1,256.5 | ||||||||
Office Products | 31.8 | 47.1 | 1,063.0 | 997.5 | ||||||||||||
Tools & Hardware | 43.0 | 35.4 | 818.5 | 812.1 | ||||||||||||
Home Fashions | 3.9 | 4.7 | 575.6 | 630.2 | ||||||||||||
Other | 14.2 | 20.7 | 528.1 | 577.8 | ||||||||||||
Corporate | (7.4 | ) | (7.2 | ) | 2,531.6 | 2,814.5 | ||||||||||
Restructuring Costs | (22.8 | ) | (24.4 | ) | ||||||||||||
$ | 74.9 | $ | 116.3 | |||||||||||||
Identifiable Assets – At March 31 and December 31, | ||||||||||||||||
Cleaning & Organization | $ | 1,190.3 | $ | 1,256.5 | ||||||||||||
Office Products | 983.2 | 997.5 | ||||||||||||||
Tools & Hardware | 804.5 | 812.1 | ||||||||||||||
Home Fashions | 634.0 | 630.2 | ||||||||||||||
Other | 579.9 | 612.8 | ||||||||||||||
Corporate (4) | 2,721.2 | 2,798.0 | ||||||||||||||
Discontinued Operations | 296.3 | 373.6 | — | 392.1 | ||||||||||||
$ | 7,209.4 | $ | 7,480.7 | $ | 6,605.2 | $ | 7,480.7 | |||||||||
Geographic Area Information
2004 | 2003 | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
Net Sales — Quarter Ended March 31, | ||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Net Sales | ||||||||||||||||||||||||
United States | $ | 1,040.0 | $ | 1,083.6 | $ | 1,169.6 | $ | 1,199.9 | $ | 3,379.2 | $ | 3,511.3 | ||||||||||||
Canada | 74.0 | 69.8 | 87.0 | 91.5 | 250.6 | 253.5 | ||||||||||||||||||
North America | 1,114.0 | 1,153.4 | 1,256.6 | 1,291.4 | 3,629.8 | 3,764.8 | ||||||||||||||||||
Europe | 348.0 | 330.9 | 331.2 | 344.2 | 1,050.2 | 1,045.3 | ||||||||||||||||||
Central and South America | 42.2 | 41.5 | 48.2 | 54.4 | 149.0 | 156.5 | ||||||||||||||||||
All other | 36.8 | 32.1 | 35.8 | 39.1 | 110.9 | 105.4 | ||||||||||||||||||
$ | 1,541.0 | $ | 1,557.9 | $ | 1,671.8 | $ | 1,729.1 | $ | 4,939.9 | $ | 5,072.0 | |||||||||||||
Operating Income – Quarter Ended March 31, | ||||||||||||||||||||||||
Operating (Loss) Income (7) | ||||||||||||||||||||||||
United States | $ | 77.4 | $ | 101.7 | $ | 119.8 | $ | 145.5 | $ | 308.1 | $ | 401.1 | ||||||||||||
Canada | 12.7 | 10.4 | 19.7 | 17.7 | 52.3 | 48.9 | ||||||||||||||||||
North America | 90.1 | 112.1 | 139.5 | 163.2 | 360.4 | 450.0 | ||||||||||||||||||
Europe | (11.4 | ) | (1.9 | ) | (290.8 | ) | (8.1 | ) | (330.8 | ) | (41.0 | ) | ||||||||||||
Central and South America | 2.1 | 2.3 | (38.9 | ) | (3.9 | ) | (36.4 | ) | 9.4 | |||||||||||||||
All other | (5.9 | ) | 3.8 | 7.5 | 9.5 | 8.3 | 13.6 | |||||||||||||||||
$ | 74.9 | $ | 116.3 | ($ | 182.7 | ) | $ | 160.7 | $ | 1.5 | $ | 432.0 | ||||||||||||
Identifiable Assets (5) – At March 31 and December 31, | ||||||||||||||||||||||||
United States | $ | 4,515.6 | $ | 4,652.6 | ||||||||||||||||||||
Canada | 97.2 | 139.0 | ||||||||||||||||||||||
North America | 4,612.8 | 4,791.6 | ||||||||||||||||||||||
Europe | 1,689.1 | 1,628.3 | ||||||||||||||||||||||
Central and South America | 175.9 | 195.4 | ||||||||||||||||||||||
All other | 435.3 | 491.8 | ||||||||||||||||||||||
Discontinued Operations | 296.3 | 373.6 | ||||||||||||||||||||||
$ | 7,209.4 | $ | 7,480.7 | |||||||||||||||||||||
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 | |||||
All intercompany transactions have been eliminated. Sales to | ||
Operating income is net sales less cost of products sold, | ||
Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a particular segment. | ||
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, | |
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 primarily reflected in the United States. |
Note 1012 – 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’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’s legal proceedings, including any amounts it may be required to pay in excess of amounts reserved, will not have a material effect on the Company’s financial statements.
In the normal course of business and as part of its acquisition and divestiture strategy, the Company may provide certain representationrepresentations 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’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 the Company’s business, financial condition or results of operation.
Note 13 – Subsequent Event
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.
17
PART I. FINANCIAL INFORMATION
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview
The Company has made significant progress in the first quarternine months of 2004 toward achieving its previously announced 2004 key objectives. The Company’s 2004 priorities remain unchanged as it continues to work to reconfigure its portfolio through divestitures, rationalization of low-margin product lines and restructuring. The Company’s key objectives for 2004, and the progress made in the first quarternine months of 2004 toward achieving such priorities, are highlighted below:
1. Continue to divest non-strategic businesses:The Company has substantially 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 MarchApril 2004, the Company entered into a definitive agreement to sellsold substantially all of its U.S. picture frames business (Burnes), its Anchor Hocking glassware business and its Mirro cookware business. Underbusiness for total proceeds of approximately $304 million (after final negotiations). On July 1, 2004, the termsCompany completed the sale of the agreement, theLittle 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 accounts receivableconsumer portion of the businesses and expects total proceeds, including the retained receivables, as a result of the transaction to be approximately $310 million. The effective date of sale is April 13, 2004. its Little Tikes division.
In connection with these divestitures, the Company recorded aan after-tax loss on the sale of these businesses of approximately $105$91 million in the first quarternine months ending September 30, 2004. Total 2003 sales of 2004.the divested businesses were $851.0 million. The divestitures of these businesses and others currently being evaluated for potential divestiture 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 is expected to be reduced by $40 to $45 million, annually.
2. Complete the 2001 restructuring plan:In the first quarter of 2004, the Company recorded a restructuring charge of $22.8 million, bringing plan-to-date charges to approximately $437 million. In total, the Company has exited or has begun exiting 73 facilities and has reduced headcount by approximately 9,300 employees. In the second quarter of 2004, the Company expects to incur between $33 and $43 million incompleted the accounting charges associated with its 2001 restructuring charges.plan. The 2001 restructuring plan will resultresulted in total charges of $470 to $480$462 million, including previously recognized charges on discontinued operations of $83.6$84.2 million. In total, the Company exited 84 facilities and reduced headcount by approximately 12,000. The Company will complete the accounting charges associated withexpects total annual savings to be approximately $125 to $150 million as a result of this plan in the second quarter of 2004.restructuring program.
3. Continue to rationalize low-margin product lines:In the first quarternine months of 2004, the Company exited approximately $60$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 $225 to $250$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 quarternine months of 2004. The Company delivered approximately $25$86 million of gross productivity savings during the quarter.first nine months of 2004.
18
Consolidated Results of Operations
The following table sets forth for the periods indicated items from the Consolidated Statements of Operations as reported and as a percentage of net sales for the three months ended March 31, ($ (in millions)millions, except percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 1,541.0 | 100.0 | % | $ | 1,557.9 | 100.0 | % | $ | 1,671.8 | 100.0 | % | $ | 1,729.1 | 100.0 | % | $ | 4,939.9 | 100.0 | % | $ | 5,072.0 | 100.0 | % | ||||||||||||||||||||||||
Cost of products sold | 1,129.5 | 73.3 | 1,125.2 | 72.2 | 1,198.5 | 71.7 | 1,237.3 | 71.6 | 3,571.0 | 72.3 | 3,625.0 | 71.5 | ||||||||||||||||||||||||||||||||||||
Gross margin | 411.5 | 26.7 | 432.7 | 27.8 | 473.3 | 28.3 | 491.8 | 28.4 | 1,368.9 | 27.7 | 1,447.0 | 28.5 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 313.8 | 20.4 | 292.0 | 18.7 | 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 | 22.8 | 1.5 | 24.4 | 1.6 | — | — | 32.3 | 1.9 | 47.9 | 1.0 | 109.5 | 2.2 | ||||||||||||||||||||||||||||||||||||
Operating income | 74.9 | 4.9 | 116.3 | 7.5 | ||||||||||||||||||||||||||||||||||||||||||||
Operating (loss) income | (182.7 | ) | (10.9 | ) | 160.7 | 9.3 | 1.5 | — | 432.0 | 8.5 | ||||||||||||||||||||||||||||||||||||||
Nonoperating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net | 30.9 | 2.0 | 37.0 | 2.4 | 29.5 | 1.8 | 33.1 | 1.9 | 90.0 | 1.8 | 104.5 | 2.1 | ||||||||||||||||||||||||||||||||||||
Other, net | (4.3 | ) | (0.3 | ) | 20.3 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||
Other (income) expense, net | (0.8 | ) | — | 1.4 | 0.1 | (3.9 | ) | (0.1 | ) | 18.6 | 0.4 | |||||||||||||||||||||||||||||||||||||
Net nonoperating expenses | 26.6 | 1.7 | 57.3 | 3.7 | 28.7 | 1.7 | 34.5 | 2.0 | 86.1 | 1.7 | 123.1 | 2.4 | ||||||||||||||||||||||||||||||||||||
Income before income taxes | 48.3 | 3.1 | 59.0 | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||
(Loss) Income before income taxes | (211.4 | ) | (12.6 | ) | 126.2 | 7.3 | (84.6 | ) | (1.7 | ) | 308.9 | 6.1 | ||||||||||||||||||||||||||||||||||||
Income taxes | 15.2 | 1.0 | 19.1 | 1.2 | 23.6 | 1.4 | 40.7 | 2.4 | 58.7 | 1.2 | 100.0 | 2.0 | ||||||||||||||||||||||||||||||||||||
Net income from continuing operations | 33.1 | 2.1 | 39.9 | 2.6 | ||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income from continuing operations | (235.0 | ) | (14.1 | ) | 85.5 | 4.9 | (143.3 | ) | (2.9 | ) | 208.9 | 4.1 | ||||||||||||||||||||||||||||||||||||
Loss from discontinued operations, net of tax | (108.0 | ) | (7.0 | ) | (23.9 | ) | (1.5 | ) | ||||||||||||||||||||||||||||||||||||||||
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 | ($74.9 | ) | (4.9 | %) | $ | 16.0 | 1.0 | % | ($ | 226.4 | ) | (13.5 | )% | $ | 75.2 | 4.3 | % | ($ | 240.3 | ) | (4.9 | )% | $ | 165.0 | 3.3 | % | ||||||||||||||||||||||
Three Months Ended March 31,September 30, 2004 Vs.vs. Three Months Ended March 31,September 30, 2003
Consolidated Operating Results:
Net sales for the three months ended March 31,September 30, 2004 (first(third quarter) were $1,541.0$1,671.8 million, representing a decrease of $16.9$57.3 million, or 1.1%3.3%, from $1,557.9$1,729.1 million in the comparable quarter of 2003. The decrease resulted from product line rationalization of $60$75 million, or 3.8%4.3%, and unfavorable pricinga decline in core sales of $13$15 million, or 0.8%,0.9%. These were partially offset by favorable foreign currency translation of $57$30 million, or 3.6%1.7%, and favorable pricing of $3 million, or 0.2%, for the quarter.
Gross margin as a percentage of net sales in the firstthird quarter of 2004 was 26.7%28.3%, or $411.5$473.3 million, versus 27.8%28.4%, or $432.7$491.8 million, in the comparable quarter of 2003. The decline in gross margin is primarily related to unfavorable pricing of $13 million, or 0.8%, and raw material inflation of $21 million,$31 million. This was partially offset by favorable pricing of $3 million, or 0.2%, and a favorable mix driven by the rationalization of unprofitable product lines, primarily in the Rubbermaid Home Products business.and Eldon Office Products businesses. Gross productivity in the quarter of $25$29 million or 2.5%, was partially offset by restructuring related costs of $26 million, primarily in the Sanford Europe and Rubbermaid Home Products business.$15 million.
Selling, general and administrative expenses (SG&A) in the firstthird quarter of 2004 were 20.4%18.4% of net sales, or $313.8$307.1 million, versus 18.7%17.3%, or $292.0$298.8 million, in the comparable quarter of 2003. The increase in SG&A reflects a foreign
19
currency impact of $16$7 million and pension cost increases of $4 million. All other SG&A was essentially flat due towith streamlining initiatives offsetting continued investments in the business.
The Company recorded a non-cash pretax impairment charge of $348.9 million (332.8 million, net of tax) in the 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 $22.8 million and $24.4$32.3 million in the firstthird quarter of 2004 and 2003, respectively.2003. The 2004 first quarter pre-tax charge included $15.1 million of facility and other exit costs, $5.4 million of employee severance and termination benefits, and $2.3 million in other restructuring costs. The 2003 first quarter pre-tax charge included $3.1$28.6 million of facility and other exit costs and $21.3$3.7 million of employee severance and termination benefits. See Note 3 to the Consolidated Financial Statements (Unaudited) for further information on the strategic restructuring plan.
Operating (loss) income in the firstthird quarter of 2004 was 4.9%($182.7) million, or (10.9%) of net sales, or $74.9 million, versus operating income of 7.5%$160.7 million, or $116.3 million,9.3%, in the comparable quarter of 2003. The decrease in operating margins is primarily the result of the factors described above.
Net nonoperating expenses in the firstthird quarter of 2004 were 1.7% of net sales, or $26.6$28.7 million, versus 3.7%2.0%, or $57.3$34.5 million, in the comparable quarter of 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 effective tax rate was (11.2)% in the third quarter of 2004 versus 32.3% in the third quarter of 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 2003. Diluted (loss) earnings per share from continuing operations were ($0.86) in the third 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 the third quarter of 2004 compared to ($0.04) in the third quarter of 2003. See Note 4 to the Consolidated Financial Statements (Unaudited) for further information.
Net (loss) income for the third quarter of 2004 was ($226.4) million, compared to $75.2 million in the third quarter of 2003. Diluted (loss) earnings per share was ($0.83) in the third quarter of 2004 compared to $0.27 in the third quarter of 2003.
Business Group Operating Results:
Net sales by reportable segment were as follows for the three months ended September 30, (in millions):
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):
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 | )% | |||||
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(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 2004 were $455.9 million, a decrease of $58.5 million, or 11.4%, from $514.4 million in the third quarter of 2003, driven primarily by a decline in the Rubbermaid Home Products business due to planned product line rationalization in certain low margin product lines.
Operating income for the third quarter of 2004 was $29.2 million, a decrease of $2.7 million, or 8.5%, from $31.9 million in the third quarter of 2003. The decrease in operating income is the result of higher raw material costs and lost absorption in manufacturing facilities, partially offset by favorable pricing, productivity and mix.
Office Products
Net sales for the third quarter of 2004 were $424.3 million, a decrease of $4.4 million, or 1.0%, from $428.7 million in the third quarter of 2003, driven primarily by the exit of certain low margin resin based products in the Eldon office products business, partially offset by a mid single digit sales increase in the writing instruments business.
Operating income for the third quarter of 2004 was $61.5 million, a decrease of $8.4 million, or 12.0%, from $69.9 million in the third quarter of 2003, driven by raw material inflation, the sales decrease at Eldon and an increase in SG&A spending. These were partially offset by a mid single digit sales increase in the writing instruments business.
Tools & Hardware
Net sales for the third quarter of 2004 were $300.6 million, an increase of $1.3 million, or 0.4%, from $299.3 million in the third quarter of 2003, driven by the impact of positive currency translation and a sales increase in the Lenox business.
Operating income for the third quarter of 2004 was $45.1 million, a decrease of $8.3 million, or 15.5%, from $53.4 million in the third quarter of 2003, driven by increases in raw material costs, particularly steel, and restructuring related costs.
Home Fashions
Net sales for the third quarter of 2004 were $228.1 million, an increase of $4.6 million, or 2.1%, from $223.5 million in the third quarter of 2003, driven by favorable currency translation.
Operating income for the third quarter of 2004 was $15.9 million, a decrease of $1.6 million, or 9.1%, from $17.5 million in the third quarter of 2003. The decrease in operating income was due primarily to an increase in raw materials costs, partially offset by productivity.
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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 Graco 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 the third quarter of 2003, driven primarily by raw material inflation and increased SG&A spending in the Little Tikes business.
Nine Months Ended September 30, 2004 vs. Nine Months Ended September 30, 2003
Consolidated Operating Results:
Net sales for the nine months ended September 30, 2004 were $4,939.9 million, representing a decrease of $132.1 million, or 2.6%, from $5,072.0 million in the comparable period of 2003. The decrease resulted from product line rationalization of approximately $200 million, or 3.9%, and unfavorable pricing of $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, 2004 was 27.7%, or $1,368.9 million, versus 28.5%, or $1,447.0 million, in the comparable period of 2003. The decline in gross margin is primarily related to unfavorable pricing of $24 million, or 0.4 points, and raw 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 productivity of $86 million was largely offset by restructuring related costs of $66 million.
Selling, general and administrative expenses (SG&A) for the nine months ended September 30, 2004 were 19.1% of net sales, or $945.5 million, versus 17.9%, or $905.5 million, in the comparable period of 2003. The increase in SG&A reflects a foreign currency impact of $31 million and pension cost increases of $12 million. All other SG&A was essentially flat with streamlining initiatives offsetting continued investments in the business.
The Company recorded total non-cash pretax impairment charges of $374.0 million for the nine months ended September 30, 2004. These charges were required to write 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 $47.9 million and $109.5 million for the nine months ended September 30, 2004 and 2003, respectively. The 2004 pre-tax charge included $32.8 million of facility and other exit costs, $9.9 million of employee severance and termination benefits, and $5.2 million in other restructuring costs. The 2003 pre-tax charge included $56.2 million of facility and other exit costs and $53.3 million of employee severance and termination benefits. See Note 3 to the Consolidated Financial Statements (Unaudited) for further information on the strategic restructuring plan.
Operating income for the nine months ended September 30, 2004 was $1.5 million, versus $432.0 million, or 8.5% of net sales in the comparable period of 2003. The decrease in operating margins is the result of the factors described above.
Net nonoperating expenses for the nine months ended September 30, 2004 were 1.7% of net sales, or $86.1 million, versus 2.4%, or $123.1 million, in the comparable period of 2003. In March 2003, the Company recognized a $21.2 million non-cash pre-tax loss on the sale of the Cosmolab business. Net interest expense decreased $6.1$14.5 million for the first quarter ofnine months ended September 30, 2004 compared to the first quarter ofnine months ended September 30, 2003 as a result of a reduction inlower average borrowings of $218.5 million, the maturation of $415.0 million of medium term notes with higherdebt outstanding, partially offset by increased interest rates, the maturation of $50.0 million of fixed rate interest rate swaps in 2003 and the conversion of $650.0 million of interest rate swaps from fixed to floating rates.
The effective tax rate was 31.5% in(69.4)% for the first quarter ofnine months ended September 30, 2004 versus 32.4% for the nine months ended September 30, 2003. The change in the first quartereffective tax rate is primarily related to the non-deductibility associated with a portion of 2003. This lower rate reflects, among other things, the increase in earnings in low-tax jurisdictionsCompany’s $374.0 million impairment charge. See Notes 2 and in certain jurisdictions,5 to the year over year reduction in current year losses and the use of net operating loss carryforwards.Consolidated Financial Statements (Unaudited) for further information.
Net (loss) income from continuing operations for the first quarter ofnine months ended September 30, 2004 was $33.1($143.3) million, compared to $39.9$208.9 million infor the first quarter ofnine months ended September 30, 2003. Diluted (loss) earnings per share from continuing operations were $0.12 inwas ($0.52) for the first quarter ofnine months ended September 30, 2004 compared to $0.15 in$0.76 for the first quarter ofnine months ended September 30, 2003.
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The net loss recognized from discontinued operations for the first quarter ofnine months ended September 30, 2004 was $108.0$97.0 million, net of tax, compared to $23.9$43.9 million, net of tax, infor the first quarter ofnine months ended September 30, 2003. Diluted loss per share from discontinued operations werewas ($0.39) in0.35) for the first quarter ofnine months ended September 30, 2004 compared to ($0.09) in0.16) for the first quarter ofnine months ended September 30, 2003. See Note 4 to the Consolidated Financial Statements (Unaudited) for further information.
Net loss(loss) income for the first quarter ofnine months ended September 30, 2004 was $74.9($240.3) million, compared to $16.0$165.0 million of net income infor the first quarter ofnine months ended September 30, 2003. Diluted loss(loss) earnings per share was ($0.27) in0.88) for the first quarter ofnine months ended September 30, 2004 compared to diluted earnings per share of $0.06 in$0.60 for the first quarter ofnine months ended September 30, 2003.
Business Segment Operating Results:
Net sales in the five segments in which the Company operates were as follows for the quarter ended March 31,(in millions):
2004 | 2003 | % Change | ||||||||||
Cleaning & Organization | $ | 447.4 | $ | 477.5 | (6.3 | )% | ||||||
Office Products | 332.8 | 322.3 | 3.3 | |||||||||
Tools & Hardware | 274.3 | 265.6 | 3.3 | |||||||||
Home Fashions | 226.8 | 219.6 | 3.3 | |||||||||
Other | 259.7 | 272.9 | (4.8 | ) | ||||||||
Total Net Sales (1) | $ | 1,541.0 | $ | 1,557.9 | (1.1 | )% | ||||||
Operating income by reportable segment were as follows for the quarternine months ended March 31,September 30, ((in millions)millions):
2004 | 2003 | % Change | 2004 | 2003 | % Change | |||||||||||||||||||
Cleaning & Organization | $ | 12.2 | $ | 40.0 | (69.5 | )% | $ | 1,372.0 | $ | 1,504.3 | (8.8 | )% | ||||||||||||
Office Products | 31.8 | 47.1 | (32.5 | ) | 1,246.3 | 1,258.8 | (1.0 | ) | ||||||||||||||||
Tools & Hardware | 43.0 | 35.4 | 21.5 | 875.2 | 859.5 | 1.8 | ||||||||||||||||||
Home Fashions | 3.9 | 4.7 | (17.0 | ) | 679.1 | 670.9 | 1.2 | |||||||||||||||||
Other | 14.2 | 20.7 | (31.4 | ) | 767.3 | 778.5 | (1.4 | ) | ||||||||||||||||
Corporate Costs (2) | (7.4 | ) | (7.2 | ) | ||||||||||||||||||||
Restructuring Costs | (22.8 | ) | (24.4 | ) | ||||||||||||||||||||
Total Operating Income (3) | $ | 74.9 | $ | 116.3 | ||||||||||||||||||||
Total Net Sales (1) | $ | 4,939.9 | $ | 5,072.0 | (2.6 | )% | ||||||||||||||||||
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 | |
(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, |
Cleaning & Organization
Net sales for the first quarter ofnine months ended September 30, 2004 were $447.4$1,372.0 million, a decrease of $30.1$132.3 million, or 6.3%8.8%, from $477.5$1,504.3 million in the first quartercomparable period of 2003. A double-digit2003, driven primarily by a decline in the Rubbermaid Home Products business due to planned product line rationalization was partially offset by a 4% increaserationalizations in the remainder of the segment.low-margin products.
Operating income for the first quarter ofnine months ended September 30, 2004 was $12.2$49.9 million, a decrease of $27.8$43.1 million, or 69.5%46.3%, from $40.0$93.0 million in the first quartercomparable period of 2003. The decrease in operating income is the result of higher raw material costs, and restructuring related charges, including lost absorption in manufacturing facilities.facilities and restructuring related charges.
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Office Products
Net sales for the first quarter ofnine months ended September 30, 2004 were $332.8$1,246.3 million, a decrease of $12.5 million, or 1.0%, from $1,258.8 million in the comparable period of 2003, driven primarily by the exit of low margin resin based products in the Eldon office products business.
Operating income for the nine months ended September 30, 2004 was $188.7 million, a decrease of $43.1 million, or 18.6%, from $231.8 million in the comparable period of 2003, driven by lower sales, restructuring related costs in the European writing instruments business, raw material inflation, primarily in resin costs in the Eldon office products division, and other cost inflation.
Tools & Hardware
Net sales for the nine months ended September 30, 2004 were $875.2 million, an increase of $10.5$15.7 million, or 3.3%1.8%, from $322.3$859.5 million in the first quartercomparable period of 2003. The increase in net sales was driven by improvementincreases in the commercial sector of the business.Lenox and BernzOmatic businesses.
Operating income for the first quarter ofnine months ended September 30, 2004 was $31.8$131.6 million, a decrease of $15.3$5.0 million, or 32.5%3.7%, from $47.1$136.6 million in the first quartercomparable period of 2003. Approximately half of the decrease relates to restructuring related costs in the European writing instruments business. These costs include duplicate facilities as the business consolidates manufacturing and distribution and expediting costs to maintain service levels. The remaining decrease in operating income relateswas related to the Eldon business resulting from increasedincreases in raw material costs, particularly steel, restructuring related costs and additional investment in new product development.increased SG&A spending, partially offset by the sales increases described above and strong productivity.
Tools & HardwareHome Fashions
Net sales for the first quarter ofnine months ended September 30, 2004 were $274.3$679.1 million, an increase of $8.7$8.2 million, or 3.3%1.2%, from $265.6$670.9 million in the first quartercomparable period of 2003. The increase in net sales was driven primarily by high single digit increases in the Irwin and BernzOmatic businesses.favorable foreign currency fluctuation.
Operating income for the first quarter ofnine months ended September 30, 2004 was $43.0 million, an increase of $7.6 million, or 21.5%, from $35.4 million in the first quarter of 2003. The increase in operating income was related to the sales increases described above and strong productivity at Lenox and Irwin North America, partially offset by increases in raw material costs.
Home Fashions
Net sales for the first quarter of 2004 were $226.8 million, an increase of $7.2 million, or 3.3%, from $219.6 million in the first quarter of 2003. The increase in net sales was driven by favorable foreign currency in the current year.
Operating income for the first quarter of 2004 was $3.9$25.0 million, a decrease of $0.8$5.1 million, or 17.0%16.9%, from $4.7$30.1 million in the first quartercomparable period of 2003. The decrease in operating income was due primarily to unfavorable sales mixincreases in the quarter.raw material costs and lower pricing, partially offset by productivity.
Other
Net sales for the first quarter ofnine months ended September 30, 2004 were $259.7$767.3 million, a decrease of $13.2$11.2 million, or 4.8%1.4%, from $272.9$778.5 million in the first quartercomparable period of 2003. The decrease in net sales was primarily attributable to the sale of Cosmolab in March 2003, which contributed $10 million in sales in the first quarter of 2003.
Operating income for the first quarter ofnine months ended September 30, 2004 was $14.2$55.6 million, a decrease of $6.5$18.9 million, or 31.4%25.4%, from $20.7$74.5 million in the first quartercomparable period of 2003. The decrease in operating income was due primarily to higher raw material costsinflation and unfavorable product mix.increased SG&A spending in the Little Tikes business.
Liquidity and Capital Resources
Cash and cash equivalents decreasedincreased by $92.5$210.1 million for the threenine months ended March 31,September 30, 2004. The change in cash and cash equivalents is as follows as offor the threenine months ended March 31 (in millions)September 30, (in millions):
2004 | 2003 | |||||||
Cash (used in) provided by operating activities | ($6.7 | ) | $ | 40.5 | ||||
Cash used in investing activities | (20.1 | ) | (538.0 | ) | ||||
Cash (used in)/provided by financing activities | (64.8 | ) | 451.7 | |||||
Exchange effect on cash and cash equivalents | (0.9 | ) | 0.9 | |||||
Decrease in cash and cash equivalents | ($92.5 | ) | ($44.9 | ) | ||||
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 | ||||
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Sources:
The Company’s primary sources of liquidity and capital resources include cash provided from operations and use of available borrowing facilities.
Cash used in operating activities in the first three months ended March 31, 2004 was $6.7 million compared to cash provided by operating activities of $40.5for the nine months ended September 30, 2004 was $421.8 million compared to $420.5 million for the comparable period of 2003. The decreaseincrease in cash provided from operating activities was due to a decreasean increase in earnings before non cashnon-cash charges of $24.4$58.9 million (as shown in the following table) and, mostly offset by a reduction in the year over year improvement in working capital and other assets in 2004 compared to 2003, which used an additional $8.0$22.1 million, and a reduction in deferred gains relating tocash received from the termination of certain interest rate swap arrangements. The deferred gain from these swap agreements was $2.2 million in 2004 compared to $17.0 million in 2003 and were included in Other in the Consolidated Statement of Cash Flows.
The following table reconciles earnings before non-cash charges to net (loss) income as of March 31, (in millions)September 30, (in millions):
2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
Net (loss)/income | ($74.9 | ) | $ | 16.0 | ($ | 240.3 | ) | $ | 165.0 | |||||||||||||||
Depreciation and amortization | 64.5 | 59.5 | 185.4 | 186.5 | ||||||||||||||||||||
Impairment charges | 374.0 | — | ||||||||||||||||||||||
Non-cash restructuring charges | 8.9 | 44.6 | 25.3 | 73.0 | ||||||||||||||||||||
Deferred income taxes | 7.3 | (10.6 | ) | 85.1 | 9.6 | |||||||||||||||||||
(Gain)/loss on sale of assets/business | (4.1 | ) | 21.2 | (6.5 | ) | 20.5 | ||||||||||||||||||
Loss on discontinued businesses | 104.6 | — | 90.5 | — | ||||||||||||||||||||
Earnings before non-cash charges | $ | 106.3 | $ | 130.7 | ($24.4 | ) | $ | 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 threenine months of 2004, the Company received proceeds from the issuance of debt of $9.7$21.3 million compared to $619.3$1,040.5 million in the year ago period.
In the first nine months of 2004, the Company received cash proceeds of $289.2 million related to the sale of businesses and other non-current assets, compared to $10.2 million in the year ago period. The Company used the proceeds from the sale of these businesses to reduce its commercial paper borrowings.
Uses:
The Company’s primary uses of liquidity and capital resources include acquisitions, payments on notes payable and long-term debt, dividend payments and capital expenditures.
In the first threenine months of 2004, the Company made payments for acquisitions of $3.0 million, compared to $460.0 million used in the first nine months of 2003 relating to the acquisition of Lenox.
In the first nine months of 2004, the Company made payments on notes payable and long-term debt of $17.7$251.9 million compared to $312.0$776.7 million in the year ago period.
25
Cash used for restructuring activities was $13.7$68.6 million and $17.4$63.4 million in the first threenine months of 2004 and 2003, respectively. Such cash payments represent primarily employee termination benefits.
Capital expenditures were $36.6$95.2 million and $93.2$247.1 million in the first threenine months of 2004 and 2003, respectively. The reduction in capital expenditures is primarilylargely due to the Company’s decision to decapitalizereduce capital investment in the Rubbermaid Home Products portion of the business, where capital expenditures decreased from $48$69.6 million in the first quarternine months of 2003 to $2$7.8 million in the first quarternine months of 2004.
Aggregate dividends paid were $57.7$173.2 million duringand $173.1 million in the first threenine months of 2004 and 2003.2003, 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 threenine months of 2004 by $132.5$413.5 million. The reduction in retained earnings is due to cash dividends paid on common stock and the current year net loss, offset by a favorable cumulative translation adjustment.loss.
Working capital at March 31,September 30, 2004 was $967.6$923.4 million compared to $978.2 million at December 31, 2003. The current ratio at March 31,September 30, 2004 was 1.52:1.47:1 compared to 1.48:1 at December 31, 2003. The reduction in working capital is due to the use of cash to pay down commercial paper and the collection of 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’ equity) was .60:.59:1 at March 31,September 30, 2004 and .58:1 at December 31, 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 on a short-term basis; however, certain events, such as significant acquisitions, could require additional external financing on a long-term basis.
Minimum Pension Liability
In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers’ Accounting for Pensions, the Company expects to record an additional minimum pension liability adjustment at December 31, 2004. Based on September 30, 2004 pension values, the approximate effect of this non-cash adjustment would be to increase the pension liability by approximately $0 to $30 million, with a corresponding charge to equity, net of taxes of approximately $0 to $20 million. The direct charge to stockholders’ equity would not affect net income, but would be included in other comprehensive income. The Company believes that its pension plan has the appropriate long-term investment strategy and the Company’s liquidity position is expected to remain strong.
Market Risk
The Company’s market risk is impacted by changes in interest rates, foreign currency exchange rates and certain commodity prices. Pursuant to the Company’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’s primary market risks arerisk 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’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 the consolidated statementsCompany’s Consolidated Statements of operations.Operations.
The 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 Company address this risk. Generally, the Company does not use derivatives to manage the 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 exchange rates and interest rates to estimate the volatility and correlation of these rates in future periods. ItThis model estimates a loss in fair market value using statistical modeling techniques that are based on a variance/covariance approach and includingincludes 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 March 31,September 30, 2004 as they represent hypothetical, not realized losses. The following table indicates the calculated amounts for each of the quartersnine months ended March 31,September 30, ((in millions)millions):
Market Risk | 2004 Average | March 31, 2004 | 2003 Average | March 31, 2003 | Confidence Level | |||||||||||||||||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||||||||||||||||||||||
Nine | Nine | |||||||||||||||||||||||||||||||||||||||
Month | September 30, | Month | September 30, | Confidence | ||||||||||||||||||||||||||||||||||||
Average | 2004 | Average | 2003 | Level | ||||||||||||||||||||||||||||||||||||
Interest rates | $ | 12.4 | $ | 12.4 | $ | 21.8 | $ | 21.8 | 95 | % | $ | 12.3 | $ | 11.3 | $ | 22.4 | $ | 21.1 | 95 | % | ||||||||||||||||||||
Foreign exchange | $ | 3.4 | $ | 3.4 | $ | 1.7 | $ | 1.7 | 95 | % | $ | 2.3 | $ | 1.6 | $ | 1.2 | $ | 1.1 | 95 | % |
The 95% confidence interval signifies the Company’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 the Company’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 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 may 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, impactimpacts of changes in accounting standards, pending legal proceedings and claims (including environmental matters), future economic performance, operating income improvements, synergies, management’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 ofto this Report.
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated herein by reference to the section entitled “Market Risk” in the Company’s Management’s Discussion and Analysis of Results of Operations and Financial Condition (Part I, Item 2).
PART I. FINANCIAL INFORMATION27
Item 4. Controls and Procedures
As of March 31,September 30, 2004, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective.
There have beenwere no significant changes in the Company’s internal controlscontrol over financial reporting that occurred during the quarter ended September 30, 2004 that have materially affected, or in other facts that could significantlyare reasonably likely to materially affect, the Company’s internal controls subsequent to the date of their evaluation.control over financial reporting.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information required under this Item is contained above in the Part I. Financial Information, Item 1 and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
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), | |||
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), | |||
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: | /s/ J. Patrick Robinson | ||||
J. Patrick Robinson | |||||
Vice President – | |||||