| Description of Business and Significant Accounting Policies | Footnote 1 — Description of Business and Significant
Accounting Policies
Description of Business
Newell Brands is a leading global consumer goods company with a
strong portfolio of well-known brands, including Paper
Mate ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
Additionally, the Company has revised the classification of certain
items, principally related to customer supply chain related
payments, in its consolidated statement of operations for 2017. The
impact on the Consolidated Statements of Operations for the three
months ended March 31, 2017, June 30, 2017,
September 30, 2017, and the year ended December 31, 2017,
was a decrease to net sales and a corresponding decrease to cost of
products sold of $1.8 million, $15.9 million,
$12.9 million and $40.1 million, respectively. The impact
on discontinued operations for the three months ended
March 31, 2017, June 30, 2017, September 30, 2017,
and the year ended December 31, 2017, was a decrease to net
sales and a corresponding decrease to cost of products sold of
$1.3 million, $1.6 million, $1.7 million and
$7.3 million, respectively. The impact of this revision was
not material to the Consolidated Statements of Operations for any
period and there was no impact to the Company’s Consolidated
Balance Sheet at December 31, 2017, or Consolidated Statements
of Cash Flows and Statements of Stockholders’ Equity for any
periods in the year ended December 31, 2017.
Discontinued Operations
During 2018, the Company implemented the Accelerated Transformation
Plan, which was designed in part, to rationalize the organization
and its portfolio of products. Pursuant to the Accelerated
Transformation Plan, a number of the Company’s businesses
were designated for disposal. At December 31, 2018, these
businesses have been classified as discontinued operations as these
businesses together represent a strategic shift that has a major
effect on the Company’s operations and financial results (see
Footnote 4). Prior periods have been reclassified to conform
with the current presentation. As of December 31, 2018, the
expected form of sale for certain businesses designated for
disposal has changed since the Company’s original
assumptions, which has resulted in the reclassification of certain
items, primarily related to income taxes.
Principles of Consolidation
The consolidated financial statements include the consolidated
accounts of the Company and have been prepared in accordance with
generally accepted accounting principles in the United States of
America (“GAAP”).
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries after elimination of
intercompany transactions and balances.
Use of Estimates
The preparation of these consolidated financial statements requires
the use of certain estimates by management in determining the
Company’s assets, liabilities, sales and expenses, and
related disclosures. Actual results could differ from those
estimates.
Other Items
The Company holds a 23.4% investment in Sprue Aegis
(“Sprue”). During the year ended December 31,
2018, 2017 and 2016, the Company’s related party sales to
Sprue were $8.4 million, $33.5 million and
$23.2 million, respectively. On March 31, 2018, the
Company terminated its distribution agreement with Sprue.
During the year ended December 31, 2018, 2017 and 2016, the
income attributable to non-controlling
Concentration of Credit Risk
The Company sells products to customers in diversified industries
and geographic regions and, therefore, has no significant
concentrations of credit risk. The Company continuously evaluates
the creditworthiness of its customers and generally does not
require collateral.
The Company evaluates the collectability of accounts receivable
based on a combination of factors. When aware of a specific
customer’s inability to meet its financial obligations, such
as in the case of bankruptcy filings or deterioration in the
customer’s operating results or financial position, the
Company records a specific reserve for bad debt to reduce the
related receivable to the amount the Company reasonably believes is
collectible. The Company also records reserves for bad debt for all
other customers based on a variety of factors, including the length
of time the receivables are past due and historical collection
experience. Accounts are also reviewed for potential write-off case-by-case
The Company’s forward exchange contracts do not subject the
Company to risk due to foreign exchange rate movement, because
gains and losses on these instruments generally offset gains and
losses on the assets, liabilities and other transactions being
hedged. The Company is exposed to credit-related losses in the
event of non-performance
Sales Recognition, Customer Programs and Variable
Consideration
The Company recognizes revenue when performance obligations under
the terms of a contract with the customer are satisfied and are
recognized at a point in time, which generally occurs either on
shipment or on delivery based on contractual terms, which is also
when control is transferred. The Company’s primary
performance obligation is the distribution and sales of its
consumer and commercial products to its customers. Prior to the
adoption of Accounting Standards Codification Topic 606,
“Revenue from Contracts with Customers”
The Company measures revenue as the amount of consideration for
which it expects to be entitled in exchange for transferring goods
or providing services. Certain customers may receive cash and/or
non-cash
In addition, the Company participates in various programs and
arrangements with customers designed to increase the sale of
products by these customers. Among the programs negotiated are
arrangements under which allowances are earned by customers for
attaining agreed-upon sales levels or for participating in specific
marketing programs. Coupon programs are also developed on a
customer- and territory-specific basis with the intent of
increasing sales by all customers.
Under customer programs and arrangements that require sales
incentives to be paid in advance, the Company amortizes the amount
paid over the period of benefit or contractual sales volume. When
incentives are paid in arrears, the Company accrues the estimated
amount to be paid based on the program’s contractual terms,
expected customer performance and/or estimated sales volume.
The Company sells gift cards to customers in its retail stores,
third-party retail stores and through consumer direct operations.
Gift cards do not have an expiration date. At the point of sale of
a gift card, the Company records deferred revenue. Gift card
revenue is recognized when the gift card is redeemed by the
customer or the likelihood of the gift card being redeemed by the
customer is remote (“gift card breakage”). Gift card
breakage income is recognized in proportion to the actual
redemption of gift cards based on the Company’s historical
redemption pattern and is included in net sales in the
Company’s Consolidated Statements of Operations.
For further information regarding revenue recognition see Footnote
2.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments that have a maturity of three months or less when
purchased.
Inventories
Inventories are stated at the lower of cost or market value using
the last-in, first-out first-in, first-out
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are expensed as incurred. Depreciation
expense is calculated principally on the straight-line basis.
Useful lives determined by the Company are as follows: buildings
and improvements (20 — 40 years) and machinery and equipment
(3 — 15 years).
Goodwill and Other Indefinite-Lived Intangible Assets
The Company conducts its annual test for impairment of goodwill and
indefinite-lived intangible assets as of July 1.
The Company evaluates goodwill for impairment annually at the
reporting unit level. The Company also tests for impairment if
events and circumstances indicate that it is more likely than not
that the fair value of a reporting unit is below its carrying
amount. If the carrying amount of the reporting unit is greater
than the fair value, impairment will be present. The Company
assesses the fair value of each reporting unit for its goodwill
impairment test based on a discounted cash flow model. Estimates
critical to the Company’s fair value estimates under the
discounted cash flow model include projected financial performance
and cash flows of the reporting unit, the discount rate, long-term
sales growth rate, product and overhead costs and the working
capital investment required.
The Company measures the amount of any goodwill impairment by
comparing the fair value to the carrying value of the reporting
unit. An impairment charge is recognized to the extent the carrying
value of the reporting unit exceeds the fair value.
The Company evaluates indefinite-lived intangible assets (primarily
trademarks and trade names) for impairment annually. The Company
also tests for impairment if events and circumstances indicate that
it is more likely than not that the fair value of an
indefinite-lived intangible asset is below its carrying amount.
Estimates critical to the Company’s evaluation of
indefinite-lived intangible assets for impairment include the
discount rate, royalty rates and assumptions on excess earnings,
where applicable, used in its evaluation of trade names, projected
average revenue growth and projected long-term growth rates in the
determination of terminal values. An impairment charge is recorded
if the carrying amount of an indefinite-lived intangible asset
exceeds the estimated fair value on the measurement date.
See Footnote 9 for additional detail on goodwill and other
intangible assets.
Valuation of Assets held for Sale
As of December 31, 2018, the Company had five disposal groups
classified as held for sale. Current assets held for sale, net of
current liabilities held for sale were $2.9 billion at
December 31, 2018. Upon designation as held for sale, the
Company’s disposal groups are assessed for impairment by
comparing the fair value of the disposal groups to their carrying
values. The fair value of the disposal groups is estimated using a
market multiple approach. For the year ended December 31,
2018, the Company recorded impairment charges of $697 million
related to the Process Solutions disposal group, $131 million
related to its Rexair disposal group, and $80 million related to
its U.S. Playing Cards disposal group, which were held for sale as
of December 31, 2018. The Company uses various assumptions to
estimate fair value under the market multiple approach, including
estimating the market multiples expected from the eventual sale of
the disposal groups based on information obtained as a result of
its marketing process.
Other Long-Lived Assets
The Company tests its other long-lived assets for impairment in
accordance with relevant authoritative guidance. The Company
evaluates if impairment indicators related to its property, plant
and equipment and other long-lived assets are present. These
impairment indicators may include a significant decrease in the
market price of a long-lived asset or asset group, a significant
adverse change in the extent or manner in which a long-lived asset
or asset group is being used or in its physical condition, or a
current period operating or cash flow loss combined with a history
of operating or cash flow losses or a forecast that demonstrates
continuing losses associated with the use of a long-lived asset or
asset group. If impairment indicators are present, the Company
estimates the future cash flows for the asset or group of assets.
The sum of the undiscounted future cash flows attributable to the
asset or group of assets is compared to their carrying amount. The
cash flows are estimated utilizing various projections of sales and
expenses, working capital and proceeds from asset disposals on a
basis consistent with the strategic plan. If the carrying amount
exceeds the sum of the undiscounted future cash flows, the Company
determines the assets’ fair value by discounting the future
cash flows using a discount rate required for a similar investment
of like risk and records an impairment charge as the difference
between the fair value and the carrying value of the asset group.
Generally, the Company performs its testing of the asset group at
the reporting unit level, as this is the lowest level for which
identifiable cash flows are available.
Shipping and Handling Costs
The Company records shipping and handling costs as a component of
cost of products sold.
Product Liability Reserves
The Company has a self-insurance program for product liability that
includes reserves for self-retained losses and certain excess and
aggregate risk transfer insurance. The Company uses historical loss
experience combined with actuarial evaluation methods, review of
significant individual files and the application of risk transfer
programs in determining required product liability reserves. The
Company’s actuarial evaluation methods take into account
claims incurred but not reported when determining the
Company’s product liability reserve. While the Company
believes that it has adequately reserved for these claims, the
ultimate outcome of these matters may exceed the amounts recorded
by the Company, and such additional losses may be material to the
Company’s Consolidated Financial Statements.
Product Warranties
In the normal course of business, the Company offers warranties for
a variety of its products. The specific terms and conditions of the
warranties vary depending upon the specific product and markets in
which the products were sold. The Company accrues for the estimated
cost of product warranty at the time of sale based on historical
experience.
Advertising Costs
The Company expenses production costs of print, radio, television
and other advertisements as of the first date the advertisements
take place, and the Company expenses all other advertising and
marketing costs when incurred. Advertising and promotion costs are
recorded in selling, general and administrative expenses and
totaled $374 million, $447 million and $364 million
in 2018, 2017 and 2016, respectively.
Research and Development Costs
Research and development costs relating to both future and current
products are charged to selling, general and administrative
expenses as incurred. These costs totaled $135 million,
$158 million and $147 million in 2018, 2017 and 2016,
respectively.
Derivative Financial Instruments
Derivative financial instruments are generally used to manage
certain commodity, interest rate and foreign currency risks. These
instruments primarily include interest rate swaps, forward starting
interest rate swaps, forward exchange contracts and options. The
Company’s forward exchange contracts and options do not
subject the Company to exchange rate risk because gains and losses
on these instruments generally offset gains and losses on the
assets, liabilities and other transactions being hedged. However,
these instruments, when settled, impact the Company’s cash
flows from operations to the extent the underlying transaction
being hedged is not simultaneously settled due to an extension, a
renewal or otherwise.
On the date when the Company enters into a derivative, the
derivative is designated as a hedge of the identified exposure. The
Company measures effectiveness of its hedging relationships both at
hedge inception and on an ongoing basis.
Foreign Currency Operations
Assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at the rates of exchange in effect at year-end.
The Company designates certain foreign currency denominated,
long-term intercompany financing transactions as being of a
long-term investment nature and records gains and losses on the
transactions arising from changes in exchange rates as translation
adjustments.
Income Taxes
The Company accounts for deferred income taxes using the asset and
liability approach. Under this approach, deferred income taxes are
recognized based on the tax effects of temporary differences
between the financial statement and tax bases of assets and
liabilities, as measured by current enacted tax rates. Valuation
allowances are recorded to reduce the deferred tax assets to an
amount that will more likely than not be realized.
The Company’s income tax provisions are based on calculations
and assumptions that are subject to examination by various
worldwide tax authorities. Although the Company believes that the
positions taken on previously filed tax returns are reasonable, it
has established tax, interest and penalty reserves in recognition
that various taxing authorities may challenge the positions taken,
which could result in additional liabilities for taxes, interest
and penalties. The Company regularly reviews its deferred tax
assets for recoverability considering historical profitability,
projected future taxable income, the expected timing of the
reversals of existing temporary differences and tax planning
strategies.
The authoritative guidance requires application of a “more
likely than not” threshold to the recognition and
derecognition of tax positions. The Company’s ongoing
assessments of the more likely than not outcomes of tax authority
examinations and related tax positions require significant judgment
and can increase or decrease the Company’s effective tax
rate, as well as impact operating results.
Stock-Based Compensation
Stock-based compensation expense is adjusted for estimated
forfeitures and is recognized on a straight-line basis over the
requisite service period of the award, which is generally three
years for stock options and one to three years for restricted stock
units and performance-based restricted stock units. The Company
estimates future forfeiture rates based on its historical
experience (see Footnote 16 for additional information).
Recent Accounting Pronouncements
Changes to U.S. Generally Accepted Accounting Principles
(“GAAP”) are established by the Financial Accounting
Standards Board (“FASB”) in the form of accounting
standards updates (“ASUs”) to the FASB’s
Accounting Standards Codification. The Company considers the
applicability and impact of all ASUs.
In February 2016, the FASB issued ASU 2016-02, right-of-use 2016-02 non-lease 2016-02
In August 2017, the FASB issued ASU 2017-12, Derivatives and
Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities.” 2017-12 2017-12 2017-12 2017-12
In August 2018, the FASB issued ASU 2018-15, “Intangibles –
Goodwill and Other – Internal-Use 350-40): 2018-15 2018-15 2018-15 2018-15
Other recently issued ASUs were assessed and determined to be
either not applicable or are expected to have a minimal impact on
the Company’s consolidated financial position and results of
operations.
Adoption of New Accounting Guidance
In May 2014, the FASB issued ASU 2014-09, 2014-09
The cumulative effect of the changes made to the Consolidated
Balance Sheet at January 1, 2018 from the adoption of
Topic 606 were as follows (in millions):
Balance at Adjustments Balance at
Accounts receivable, net $ 1,879.3 $ 100.3 $ 1,979.6
Prepaid expenses and other 327.9 14.6 342.5
Current assets held for sale 6,370.4 21.3 6,391.7
Noncurrent assets held for sale 3,842.2 33.8 3,876.0
Other accrued liabilities 1,271.9 114.9 1,386.8
Current liabilities held for sale 1,661.3 21.3 1,682.6
Noncurrent liabilities held for sale 242.5 33.8 276.3
Retained earnings 4,611.2
— 4,611.2
As part of Topic 606, the Company reclassified items such as cash
discounts, allowances for returns, and credits or incentives
provided to customers from accounts receivable, net to other
accrued liabilities as of the adoption date. These items are
accounted for as variable consideration when estimating the amount
of revenue to recognize. Also as part of the new standard, the
Company recognizes right to recover assets associated with its
estimated allowances for returns in prepaid expenses and other,
which were previously netted against the allowance for returns
included in accounts receivable, net.
The impact of adoption of Topic 606 on the Consolidated Balance
Sheet and Consolidated Statement of Operations as of and for the
period indicated was as follows (in millions):
December 31, 2018
As Excluding As
Accounts receivable, net $ 1,850.7 $ (109.2 ) $ 1,741.5
Inventory, net 1,583.1 0.3 1,583.4
Prepaid expenses and other 278.0 (14.7 ) 263.3
Current assets held for sale 3,541.3 (36.7 ) 3,504.6
Other accrued liabilities 1,182.3 (123.1 ) 1,059.2
Current liabilities held for sale 650.4 (36.7 ) 613.7
Retained deficit (2,486.7 ) (0.5 ) (2,487.2 )
Year Ended December 31,
2018
As Excluding As
Net sales $ 8,630.9 $ 192.0 $ 8,822.9
Cost of products sold 5,622.1 184.3 5,806.4
Selling, general and administrative expenses 2,434.8 8.4 2,443.2
Operating loss (7,828.5 ) (0.7 ) (7,829.2 )
Income tax benefit (1,478.1 ) (0.2 ) (1,478.3 )
Loss from continuing operations (6,789.6 ) (0.5 ) (6,790.1 )
Loss from discontinued operations, net of tax (128.3 )
— (128.3 )
Net loss (6,917.9 ) (0.5 ) (6,918.4 )
Certain costs and cash payments made to customers previously
recorded in costs of products sold and selling, general and
administrative expenses have been reclassified against net sales as
they do not meet the specific criteria to qualify as a distinct
good or service under the new guidance, primarily related to
payments to customers for defective products under warranty.
Refer to Footnote 2 for additional information regarding the
Company’s adoption of Topic 606.
In August 2016, the FASB issued ASU 2016-15, “ Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments.” 2016-15 2016-15 2016-15 2016-15,
In October 2016, the FASB issued ASU 2016-16, 2016-16 2016-16 2016-16,
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash
Flows (Topic 230): Restricted Cash.” 2016-18 required 2016-18 2016-18
In March 2017, the FASB issued ASU 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost.” 2017-07 2017-07 2017-07 2017-07
In February 2018, the FASB issued ASU No. 2018-02, Income
Statement — Reporting Comprehensive Income (Topic
220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.” No. 2018-02 No. 2018-02 No. 2018-02 2018-02
Other recently issued ASUs were assessed and determined to be
either not applicable or are expected to have a minimal impact on
the Company’s consolidated financial position and results of
operations. |
