SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2003
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 (I.R.S. Employer
incorporation or organization) Identification No.)
Deerfield Corporate Centre One
13010 Morris Road, Suite 100
Alpharetta, Georgia 30004
(Address of principal executive offices)
(Zip Code)
(770) 670-2232
(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 July 31, 2003: 274.4 million
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net sales $1,976.1 $1,895.0 $3,712.5 $3,492.0
Cost of products sold 1,426.1 1,374.4 2,699.1 2,552.3
--------- --------- --------- ---------
GROSS MARGIN 550.0 520.6 1,013.4 939.7
Selling, general and administrative expenses 351.6 330.0 674.2 629.2
Restructuring costs 57.9 8.9 117.6 18.6
--------- --------- --------- ---------
OPERATING INCOME 140.5 181.7 221.6 291.9
Nonoperating expenses:
Interest expense 28.6 29.3 60.6 54.4
Other, net 2.7 18.1 28.0 26.0
--------- --------- --------- ---------
Net nonoperating expenses 31.3 47.4 88.6 80.4
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 109.2 134.3 133.0 211.5
Income taxes 35.4 45.7 43.2 72.0
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 73.8 88.6 89.8 139.5
Cumulative effect of accounting change - - - (514.9)
--------- --------- --------- ---------
NET INCOME (LOSS) $73.8 $88.6 $89.8 ($375.4)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 274.2 267.0 273.8 266.9
Diluted 274.7 268.0 274.2 267.8
2
Earnings (loss) per share:
Basic -
Before cumulative effect of accounting change $0.27 $0.33 $0.33 $0.52
Cumulative effect of accounting change - - - (1.93)
--------- --------- --------- ---------
Net income (loss) per common share: $0.27 $0.33 $0.33 ($1.41)
========= ========= ========= =========
Diluted -
Before cumulative effect of accounting change $0.27 $0.33 $0.33 $0.52
Cumulative effect of accounting change - - - (1.92)
--------- -------- --------- ---------
Net income (loss) per common share $0.27 $0.33 $0.33 ($1.40)
========= ======== ========= =========
Dividends per share $0.21 $0.21 $0.42 $0.42
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
June 30, December 31,
2003 2002
-------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $35.4 $55.1
Accounts receivable, net 1,455.1 1,377.7
Inventories, net 1,365.1 1,196.2
Deferred income taxes 202.3 213.5
Prepaid expenses and other 221.7 237.5
------- -------
TOTAL CURRENT ASSETS 3,279.6 3,080.0
OTHER ASSETS 313.3 286.7
PROPERTY, PLANT AND EQUIPMENT, NET 1,847.2 1,812.8
DEFERRED INCOME TAXES 10.9 -
GOODWILL, NET 2,308.4 1,847.3
OTHER INTANGIBLE ASSETS, NET 368.2 362.1
------- -------
TOTAL ASSETS $8,127.6 $7,388.9
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(IN MILLIONS, EXCEPT PER SHARE DATA)
June 30, December 31,
2003 2002
---- ----
(UNAUDITED)
<s> <c> <c>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $37.4 $25.2
Accounts payable 863.0 686.6
Accrued compensation 107.9 153.5
Other accrued liabilities 1,085.3 1,165.4
Income taxes 134.3 159.7
Current portion of long-term debt 129.8 424.0
------- -------
TOTAL CURRENT LIABILITIES 2,357.7 2,614.4
LONG TERM DEBT 2,547.0 1,856.6
OTHER NONCURRENT LIABILITIES 398.6 348.4
DEFERRED INCOME TAXES _ 4.7
MINORITY INTEREST 1.5 1.3
COMPANY OBLIGATED MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF A SUBSIDIARY TRUST 500.0 500.0
STOCKHOLDERS' EQUITY:
Common stock, authorized shares,
800.0 million at $1.00 par value 290.0 283.1
Outstanding shares:
2003 - 290.0 million
2002 - 283.1 million
Treasury stock, at cost: (410.9) (409.9)
Shares held:
2003 - 15.7 million
2002 - 15.7 million
Additional paid-in capital 436.2 237.3
Retained earnings 2,117.8 2,143.2
Accumulated other comprehensive loss (110.3) (190.2)
------- -------
TOTAL STOCKHOLDERS' EQUITY 2,322.8 2,063.5
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,127.6 $7,388.9
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(IN MILLIONS)
Six Months Ended June 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income (loss) $89.8 ($375.4)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change - 514.9
Depreciation and amortization 137.6 146.4
Deferred income taxes 0.1 38.1
Noncash restructuring and restructuring related charges 62.9 6.1
Loss on sale of business 20.5 -
Other 22.3 13.3
Changes in current accounts excluding the
effects of acquisitions:
Accounts receivable (14.3) (53.2)
Inventories (141.3) (87.3)
Other current assets 8.5 (13.8)
Accounts payable 161.2 132.8
Accrued liabilities and other (205.9) (23.2)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 141.4 298.7
------ ------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (458.7) (228.8)
Expenditures for property, plant and equipment (188.4) (101.2)
Disposals of noncurrent assets and other 10.2 6.9
------ ------
NET CASH USED IN INVESTING ACTIVITIES (636.9) (323.1)
------ ------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 1,036.1 520.8
Proceeds from issuance of stock 200.1 -
Payments on notes payable and long-term debt (651.4) (391.0)
Cash dividends (115.2) (112.1)
Proceeds from exercised stock options and other 4.7 9.4
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 474.3 27.1
------ ------
Exchange rate effect on cash 1.5 0.6
------ ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (19.7) 3.3
Cash and cash equivalents at beginning of year 55.1 6.8
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $35.4 $10.1
======= ======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
6
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 Rubbermaid and Calphalon Home
business segments typically have higher sales in the second half of
the year due to retail stocking related to the holiday season; the
Irwin business segment typically has 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 Sharpie 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.
RECENT ACCOUNTING PRONOUNCEMENTS: In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 (the Interpretation). The
Interpretation introduces a new consolidation model - the variable
interests model - which determines control and consolidation based on
potential variability in gains and losses of the entity being
evaluated for consolidation. Under the Interpretation, variable
interest entities (VIE's) are to be evaluated for consolidation based
on their variable interests. Variable interests are contractual,
ownership, or other interests in an entity that expose their holders
to the risks and rewards of the VIE. Variable interests include
equity investments, loans, leases, derivatives, guarantees, and other
instruments whose values change with changes in the VIE's assets. The
provisions of the Interpretation apply to interests in VIE's acquired
before February 1, 2003 and are effective as of the beginning of the
first annual or interim period beginning after June 15, 2003.
Adoption of this standard will not have a material effect on the
Company's financial statements.
7
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149 (FAS 149), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." FAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement improves financial reporting
by requiring that contracts with comparable characteristics be
accounted for similarly, which will result in more consistent
reporting of contracts as either derivatives or hybrid instruments.
The Company adopted the provisions of FAS 149, effective June 30,
2003. Adoption of this standard did not have a material effect on the
Company's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standard No. 150 (FAS 150), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." FAS
150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. Had this statement been adopted on January 1, 2003,
the Company would have reclassified its Company Obligated Mandatorily
Redeemable Convertible Preferred Securities of a Subsidiary Trust into
Long Term Debt in the Company's Consolidated Balance Sheet and reclassi-
fied approximately $6.7 million and $13.4 million of interest expense
from Other, net to Interest Expense in the Company's Consolidated
Statement of Operations for the three and six months ended June 30, 2003,
respectively.
8
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible
Assets." Pursuant to the adoption of FAS 142, the Company performed
the required impairment tests of goodwill and indefinite-lived
intangible assets and recorded a pre-tax goodwill impairment charge of
$538.0 million, $514.9 million net of tax, in the first quarter of
2002. In determining the goodwill impairment, the Company measured
the impairment loss as the excess of the carrying amount of goodwill
(which included the carrying amount of trademarks) over the implied
fair value of goodwill (which excluded the fair value of identifiable
trademarks). The Company conducts annual impairment tests in the
third quarter and will also test 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.
A summary of changes in the Company's goodwill during the six months
ended June 30, 2003 is as follows (IN MILLIONS):
Balance at December 31, 2002 $1,847.3
Acquisitions 431.5
Other (primarily foreign exchange) 29.6
--------
Balance at June 30, 2003 $2,308.4
========
NOTE 3 - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
Effective January 1, 2003, the Company completed its acquisition of
American Saw & Mfg. Co. (Lenox), a leading manufacturer of power tool
accessories and hand tools marketed under the Lenox brand. The
purchase price was approximately $450 million. This purchase marks
the continued expansion and enhancement of the Company's product lines
and customer base in the global power tool accessories and hand tools
market and strengthens the Company's platform in the professional and
fast growing "do-it-yourself" channels. Lenox had 2002 net sales of
$185.4 million and is included in the Irwin operating segment. The
Company is in the process of completing third party valuations of
certain financial positions; thus, the allocation of the purchase
price is preliminary.
On April 30, 2002, the Company completed the purchase of American Tool
Companies, Inc. (American Tool), a leading manufacturer of hand tools
and power tool accessories. The Company had previously held a 49.5%
stake in American Tool, which had been accounted for under the equity
method prior to acquisition. The purchase price was $467 million,
which included $197 million for the majority 50.5% ownership stake,
9
the repayment of $243 million in American Tool debt and $27 million of
transaction costs.
The 2003 and 2002 transactions were accounted for as purchases;
therefore, results of operations are included in the accompanying
Consolidated Financial Statements since their respective acquisition
dates. The acquisition costs for the 2003 and 2002 acquisitions,
other than American Tool, were allocated on a preliminary basis to the
fair market value of the assets acquired and liabilities assumed. The
Company's final integration plans may include exit costs for certain
plants and product lines and employee termination costs. The final
adjustments to the purchase price allocations are not expected to be
material to the Consolidated Financial Statements.
The Company continues to formulate integration plans for Lenox and
other acquisitions. In 2003, integration plans for acquired
businesses resulted in integration plan liabilities of $14.1 million
for facility and other exit costs, $10.3 million for employee
severance and termination benefits and $6.2 million for other pre-
acquisition contingencies.
The unaudited consolidated results of operations on a pro forma basis,
as though the 2003 and 2002 acquisitions of Lenox and American Tool,
respectively, had been completed on January 1, 2002, are as follows
for the six months ended June 30, (IN MILLIONS, EXCEPT PER SHARE
AMOUNTS):
2003 2002
---- ----
Net sales $3,712.5 $3,725.2
Income before accounting change $89.8 $146.6
Basic earnings per share before
accounting change $0.33 $0.55
Net income (loss) $89.8 ($368.4)
Basic earnings (loss) per share $0.33 ($1.38)
DIVESTITURES
On March 27, 2003, the Company completed the sale of its Cosmolab
business, a division of the Sharpie segment, for approximately $13.0
million. The Cosmolab business had annual net sales of approximately
$50 million. The Company used the proceeds from the sale to reduce
its commercial paper borrowings. The Company recorded a pre-tax loss
on the sale of $21.2 million in the first quarter of 2003 as a
component of Other, net in the Consolidated Statement of Operations.
NOTE 4 - RESTRUCTURING COSTS
The Company continues to record restructuring charges associated with
the Company's strategic restructuring plan announced on May 3, 2001.
Through this strategic restructuring plan, management intends to
10
streamline the Company's supply chain to enable it to be the low cost
global provider throughout the Company's product portfolio. The
plan's terms include reducing worldwide headcount and consolidating
duplicative manufacturing facilities, over a three-year period
beginning in 2001. In the first six months of 2003, the Company
incurred facility exit costs and employee severance and termination
benefit costs for approximately 3,600 employees, as described in the
table below. Under the restructuring plan, 69 facilities have been
exited and headcount has been reduced by 8,400 employees.
Pre-tax restructuring costs consisted of the following (IN MILLIONS):
Three Months Ended Six Months Ended June 30,
June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Facility and other exit costs $24.3 $1.8 $56.6 $4.7
Employee severance and termination benefits 30.7 7.0 57.4 13.3
Exited contractual commitments 2.9 0.1 3.6 0.6
------ ------ ------ ------
Total Restructuring Costs $57.9 $8.9 $117.6 $18.6
====== ====== ====== ======
Restructuring provisions were determined based on estimates prepared
at the time the restructuring actions were approved by management, and
also include amounts recognized as incurred. Cash paid for
restructuring activities was $54.1 million and $21.7 million in the
first six months of 2003 and 2002, respectively. A summary of the
Company's restructuring plan reserves is as follows (IN MILLIONS):
12/31/01 Costs 06/30/02
Balance Provision Incurred Balance
-------- --------- -------- -------
<s> <c> <c> <c> <c>
Facility and other exit costs $20.1 $4.7 ($7.5) $17.3
Employee severance and termination benefits 6.2 13.3 (15.3) 4.2
Exited contractual commitments 1.9 0.6 (0.7) 1.8
------ ------ ------ ------
$28.2 $18.6 ($23.5) $23.3
====== ====== ====== ======
12/31/02 Costs 06/30/03
Balance Provision Incurred Balance
-------- --------- -------- -------
Facility and other exit costs $36.1 $56.6 ($50.3) $42.4
Employee severance and termination benefits 41.1 57.4 (53.1) 45.4
Exited contractual commitments 2.1 3.6 (4.3) 1.4
------ ------ ------ ------
$79.3 $117.6 ($107.7) $89.2
====== ====== ====== ======
11
The facility and other exit cost reserves of $42.4 million at June 30,
2003 are primarily related to future minimum lease payments on vacated
facilities and other closure costs related to 45 facilities and
administrative offices.
In 2003, the Company announced its intention to close one of its
manufacturing facilities in the Calphalon Home operating segment by
the end of 2003. As a result of this decision, the Company evaluated
its long-lived assets, primarily property, plant and equipment, for
impairment and recorded a non-cash restructuring charge of $30.5
million. The amount of the impairment was determined using a
discounted cash flow analysis.
In 2003, the Company recorded a non-cash restructuring charge of $11.0
million relating to the curtailment of a pension plan associated with
the closure of one of the Company's exited facilities. The non-cash
restructuring charge has been included in employee severance and
termination benefits as disclosed in the table above.
Severance reserves of $45.4 million at June 30, 2003 are primarily
related to the employees of the exited facilities.
NOTE 5 - 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):
June 30, December 31,
2003 2002
---- ----
Materials and supplies $342.0 $308.8
Work in process 210.2 174.9
Finished products 812.9 712.5
-------- --------
$1,365.1 $1,196.2
======== ========
12
NOTE 6 - LONG-TERM DEBT
The following is a summary of long-term debt (IN MILLIONS):
June 30, December 31,
2003 2002
---- ----
Medium-term notes $1,804.5 $1,680.9
Commercial paper 414.0 140.0
Preferred debt
securities 450.0 450.0
Other long-term debt 8.3 9.7
------- -------
Total debt 2,676.8 2,280.6
Current portion of
long-term debt (129.8) (424.0)
-------- --------
Long-term Debt $2,547.0 $1,856.6
======== ========
On June 16, 2003, the Company terminated certain interest rate swap
agreements prior to their scheduled maturities and received cash of
$11.4 million. Of this amount, $10.8 million represents the fair
value of the swaps that were terminated and the remainder represents
interest received on the swaps. The cash received relating to the
fair value of the swaps is included in Other as an operating activity
in the Consolidated Statement of Cash Flows. As of June 30, 2003, the
unamortized gain of $10.7 million on the terminated interest rate
swaps is accounted for as long-term debt (of which $3.3 million is
classified as current). The unamortized gain will be amortized as a
reduction to interest expense over the remaining term of the
underlying debt.
On June 13, 2003, Newell Rubbermaid rolled over the $650.0 million 364
day Revolving Credit Facility that was scheduled to terminate on June
14, 2003. The new agreement consists of 19 participating banks and
will mature on June 11, 2004. The revolver requires, among other things,
that the Company maintain certain interest coverage and total indebted-
ness to total capital ratio, as defined in the agreement. The agreement
also limits subsidiary indebtedness. As of June 30, 2003, the Company
was in compliance with this agreement. No amounts are outstanding under
the Revolving Credit Facility as of June 30, 2003.
On May 6, 2003, the Company issued $400.0 million of medium term notes
with seven-year and two-year maturities. The $400.0 million of medium
term notes consist of $250.0 million in 4.00% notes due 2010 and
$150.0 million in 2.00% notes due 2005. The seven-year notes pay
interest semi-annually on May 1 and November 1 until final maturity on
May 1, 2010. The two-year notes pay interest semi-annually on May 1
and November 1 until final maturity on May 1, 2005. The proceeds of
these issuances were used to pay down commercial paper. These
13
issuances are reflected in the outstanding amount of medium-term notes
noted above and the entire amount is considered to be long-term debt.
On February 24, 2003, the Company terminated certain interest rate
swap agreements prior to their scheduled maturities and received cash
of $21.0 million. Of this amount, $17.3 million represents the fair
value of the swaps that were terminated and the remainder represents
interest received on the swaps. The cash received relating to the
fair value of the swaps is included in Other as an operating activity
in the Consolidated Statement of Cash Flows. As of June 30, 2003, the
unamortized gain of $15.8 million on the terminated interest rate
swaps is accounted for as long-term debt (of which $4.4 million is
classified as current). The unamortized gain will be amortized as a
reduction to interest expense over the remaining term of the
underlying debt.
On January 10, 2003, the Company completed the sale of 6.67 million
shares of its common stock at a public offering price of $30.10 per
share pursuant to a shelf registration statement filed with the
Securities and Exchange Commission. Total proceeds from the sale were
approximately $200.8 million, resulting in net proceeds to the
Company, before expenses, of $200.1 million. The proceeds were used
to reduce the Company's commercial paper borrowings.
NOTE 7 - FAIR VALUE OF STOCK OPTIONS
On May 7, 2003, the Company's stockholders approved a 2003 Stock Plan.
The 2003 Plan provides for grants of up to an aggregate of 15.0
million stock options, stock awards and performance shares (except
that no more than 3.0 million of those grants may be stock awards and
performance shares). Under the 2003 Plan, the option exercise price
will equal the common stock's closing price on the date of grant.
Options will vest over five years (which may be shortened to no less
than three years) and expire ten years from the date of grant. Also,
under the 2003 Plan, none of the restrictions on stock awards will
lapse earlier than the third anniversary of the date of grant.
The Company'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 six months ended June 30, (IN MILLIONS, EXCEPT
PER SHARE DATA):
14
2003 2002
---- ----
Net income (loss):
As reported $89.8 ($375.4)
Fair value option expense (9.0) (8.3)
----- --------
Pro forma $80.8 ($383.7)
Basic earnings (loss) per share:
As reported $0.33 ($1.41)
Pro forma 0.30 (1.44)
Diluted earnings (loss) per share:
As reported $0.33 ($1.40)
Pro forma 0.29 (1.43)
Because the FAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
15
NOTE 8 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the three
and six months ended June 30, is shown below (IN MILLIONS, EXCEPT PER
SHARE DATA):
"In the Convertible
Basic Money" Preferred Diluted
Method Options(1) Securities(2) Method
------ ---------- ------------- ------
<s> <c> <c> <c> <c>
Three Months Ended June 30, 2003
--------------------------------
Net income $73.8 - - $73.8
Weighted average shares outstanding 274.2 0.5 - 274.7
Earnings per share $0.27 $0.27
Three Months Ended June 30, 2002
--------------------------------
Net income $88.6 - - $88.6
Weighted average shares outstanding 267.0 1.0 - 268.0
Earnings per share $0.33 $0.33
Six Months Ended June 30, 2003
------------------------------
Net income $89.8 - - $89.8
Weighted average shares outstanding 273.8 0.4 - 274.2
Earnings per share $0.33 $0.33
Six Months Ended June 30, 2002
------------------------------
Income before cumulative effect of
accounting change $139.5 - - $139.5
Weighted average shares outstanding 266.9 0.9 - 267.8
Earnings per share $0.52 $0.52
Net loss ($375.4) - - ($375.4)
Weighted average shares outstanding 266.9 0.9 - 267.8
Loss per share ($1.41) ($1.40)
(1) The weighted average shares outstanding for the three months ended June 30, 2003 and 2002 exclude
approximately 7.6 million and 3.0 million stock options, respectively, and by approximately
7.7 million and 3.7 million stock options for the six months ended June 30, 2003 and 2002,
respectively, because such options had an exercise price in excess of the average market value
of the Company's common stock during the respective periods and would, therefore, be anti-dilutive.
(2) The convertible preferred securities are anti-dilutive for the three and six months ended June 30, 2003
and 2002, and therefore have been excluded from diluted earnings per share. Had the convertible
preferred shares been included in the diluted earnings per share calculation, net income would be
increased by $4.2 million and $4.4 million for the three months ended June 30, 2003 and 2002,
respectively, and by $8.4 million and $8.8 million for the six months ended June 30, 2003 and 2002,
respectively, and weighted average shares outstanding would have increased by 9.9 million shares
in all periods.
16
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (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
Currency Derivatives Minimum Other
Translation Hedging Pension Comprehensive
Gain (Loss) Gain Liability Loss
----------- ---- --------- ----
<s> <c> <c> <c> <c>
Balance at December 31, 2002 ($115.1) $0.4 ($75.5) ($190.2)
Current year change 69.5 3.5 6.9 79.9
------- ------- ------- -------
Balance at June 30, 2003 ($45.6) $3.9 ($68.6) ($110.3)
======= ======= ======= =======
Total comprehensive income (loss) amounted to the following (IN MILLIONS):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income (loss) $73.8 $88.6 $89.8 ($375.4)
Foreign currency translation gain 78.1 96.3 69.5 62.7
After-tax derivatives hedging gain (loss) (2.9) 6.0 3.5 7.7
After-tax minimum pension liability 6.9 - 6.9 -
------ ------ ------ ------
Comprehensive income (loss) $155.9 $190.9 $169.7 ($305.0)
====== ====== ====== ======
17
NOTE 10 - INDUSTRY SEGMENTS
The Company manages its business in four operating segments that have
been named for leading worldwide brands in the Company's product
portfolio. In the first quarter of 2003, the Company realigned its
Eldon and Panex divisions out of its Sharpie and Calphalon Home
operating segments, respectively, and into its Rubbermaid operating
segment (prior years' segment data has been reclassified to conform to
the current segment structure). This realignment reflects the
Company's focus on building large consumer brands, promoting
organizational integration and operating efficiencies and aligning the
businesses with the Company's strategic account management strategy.
The Company's segment results are as follows (IN MILLIONS):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net Sales (1)
---------
Rubbermaid $751.2 $738.2 $1,469.2 $1,448.3
Sharpie 485.2 464.0 779.6 765.9
Irwin 520.5 447.3 1,002.6 778.4
Calphalon Home 219.2 245.5 461.1 499.4
-------- -------- -------- --------
$1,976.1 $1,895.0 $3,712.5 $3,492.0
======== ======== ======== ========
Operating Income (2)
----------------
Rubbermaid $39.9 $51.8 $107.3 $112.9
Sharpie 107.6 96.5 137.4 122.3
Irwin 55.6 41.2 95.2 61.1
Calphalon Home 1.6 8.8 12.8 29.4
Corporate (3) (6.3) (7.7) (13.5) (15.2)
Restructuring Costs (57.9) (8.9) (117.6) (18.6)
-------- -------- ------- -------
$140.5 $181.7 $221.6 $291.9
======== ======== ======= =======
Identifiable Assets
-------------------
Rubbermaid $1,908.6 $1,847.2
Sharpie 1,098.1 991.5
Irwin 1,380.4 1,226.4
Calphalon Home 726.5 709.8
Corporate (4) 3,014.0 2,614.0
-------- --------
$8,127.6 $7,388.9
======== ========
18
GEOGRAPHIC AREA INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net Sales
---------
United States $1,391.2 $1,380.0 $2,626.4 $2,554.2
Canada 96.2 81.7 170.6 145.4
-------- -------- -------- --------
North America 1,487.4 1,461.7 2,797.0 2,699.6
Europe 384.5 328.4 731.4 620.6
Central and South America 72.1 76.0 121.5 123.9
All other 32.1 28.9 62.6 47.9
-------- -------- -------- --------
$1,976.1 $1,895.0 $3,712.5 $3,492.0
======== ======== ======== ========
Operating Income
----------------
United States $139.6 $139.2 $211.6 $231.7
Canada 14.5 10.3 24.5 14.6
-------- -------- -------- --------
North America 154.1 149.5 236.1 246.3
Europe (24.4) 15.7 (30.6) 22.6
Central and South America 6.5 10.7 8.6 13.5
All other 4.3 5.8 7.5 9.5
-------- -------- -------- --------
$140.5 $181.7 $221.6 $291.9
======== ======== ======== ========
Identifiable Assets (5)
-----------------------
United States $5,752.3 $5,151.0
Canada 137.0 115.7
-------- --------
North America 5,889.3 5,266.7
Europe 1,876.8 1,802.0
Central and South America 255.6 224.4
All other 105.9 95.8
-------- --------
$8,127.6 $7,388.9
======== ========
1) All intercompany transactions have been eliminated. Sales to Wal*Mart Stores, Inc. and subsidiaries
amounted to approximately 16% of consolidated net sales in the first six months of 2003 and 2002.
Sales to no other customer exceeded 10% of consolidated net sales for either period.
2) Operating income is net sales less cost of products sold, selling, general and administrative
expenses, and restructuring costs. Certain headquarters expenses of an operational nature are
allocated to business segments and geographic areas primarily on a net sales basis. Trade names
amortization is considered a corporate expense and not allocated to business segments.
3) Corporate operating expenses consist primarily of administrative costs that cannot be allocated to a
particular segment.
4) Corporate assets primarily include trade names, goodwill, equity investments and deferred tax assets.
5) Transfers of finished goods between geographic areas are not significant.
19
NOTE 11 - 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 representations
and indemnifications related to legal, environmental, product
liability, tax or other types of issues. Based on the nature of these
representations and indemnifications, it is not possible to predict
the maximum potential payments under all of these agreements due to
the conditional nature of the Company'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.
As of June 30, 2003, the Company has identified and quantified
exposures under these representations and indemnifications of
approximately $44.0 million, which expire in 2006. As of June 30,
2003, no amounts have been recorded on the balance sheet related to
these indemnifications, as the risk of loss is considered remote.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
---------------------
The following table sets forth for the periods indicated items from
the Consolidated Statements of Operations as a percentage of net
sales:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.2 72.5 72.7 73.1
------ ------ ------ ------
GROSS MARGIN 27.8 27.5 27.3 26.9
Selling, general and administrative expenses 17.8 17.4 18.2 18.0
Restructuring costs 2.9 0.5 3.2 0.5
------ ------ ------ ------
OPERATING INCOME 7.1 9.6 6.0 8.4
Nonoperating expenses:
Interest expense 1.4 1.5 1.6 1.6
Other, net 0.1 1.0 0.8 0.7
------ ------ ------ -------
Net nonoperating expenses 1.6 2.5 2.4 2.3
------ ------ ------ ------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 5.5 7.1 3.6 6.1
Income taxes 1.8 2.4 1.2 2.1
------ ------ ------ ------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 3.7 4.7 2.4 4.0
------ ------ ------ ------
Cumulative effect of accounting change - - - (14.7)
------ ------ ------ ------
NET INCOME (LOSS) 3.7% 4.7% 2.4% (10.8)%
====== ====== ====== ======
21
THREE MONTHS ENDED JUNE 30, 2003 VS. THREE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS:
Net sales for the three months ended June 30, 2003 (second quarter)
were $1,976.1 million, an increase of $81.1 million, or 4.3%, from
$1,895.0 million in the comparable quarter of 2002. The increase
resulted from sales contributions from the American Tool Companies,
Inc. (American Tool) (acquired April 2002) and American Saw & Mfg. Co.
(Lenox) (acquired January 2003) acquisitions.
Gross margin as a percentage of net sales in the second quarter of
2003 was 27.8%, or $550.0 million, versus 27.5%, or $520.6 million, in
the comparable quarter of 2002. The improvement in gross margin is
primarily related to the Company's productivity initiative, higher
margins from the Company's new products and the acquisition of Lenox,
partially offset by increased prices for certain raw materials and
unfavorable product mix at certain businesses.
Selling, general and administrative expenses ("SG&A") in the second
quarter of 2003 were 17.8% of net sales, or $351.6 million, versus
17.4%, or $330.0 million, in the comparable quarter of 2002. The
increase in SG&A is primarily the result of the American Tool and
Lenox acquisitions and planned investments in marketing initiatives,
including the Company's Strategic Account Management Program and
Phoenix Program, supporting the Company's brand portfolio and
strategic account strategy.
The Company recorded pre-tax strategic restructuring charges of $57.9
million ($39.1 million after taxes) and $8.9 million ($5.9 million
after tax) in the second quarter of 2003 and 2002, respectively. The
2003 second quarter pre-tax charge included $24.3 million of facility
and other exit costs, $30.7 million of employee severance and
termination benefits, and $2.9 million in other restructuring costs.
The 2002 second quarter pre-tax charge included $1.8 million of
facility and other exit costs, $7.0 million of employee severance and
termination benefits, and $0.1 million in other restructuring costs.
See Note 4 to the Consolidated Financial Statements (Unaudited) for
further information on the strategic restructuring plan.
Operating income in the second quarter of 2003 was 7.1% of net sales,
or $140.5 million, versus operating income of 9.6%, or $181.7 million,
in the comparable quarter of 2002. Operating income includes
restructuring charges of $57.9 million ($39.1 million after taxes) and
$8.9 million ($5.9 million after taxes) in the second quarter of 2003
and 2002, respectively. The decrease in operating margins is
primarily the result of restructuring charges to streamline the
Company's supply chain.
22
Net nonoperating expenses in the second quarter of 2003 were 1.6% of
net sales, or $31.3 million, versus 2.5%, or $47.4 million, in the
comparable quarter of 2002. The decrease in expenses is primarily
related to $13.6 million ($9.0 million after tax) of Anchor Hocking
transaction related costs incurred in 2002 associated with the
Company's withdrawn divestiture.
The effective tax rate was 32.5% in the second quarter of 2003 versus
34.0% in the second quarter of 2002. This lower rate reflects the
benefit of the full year impact of 2002 tax rate initiatives.
Net income for the second quarter of 2003 was $73.8 million, compared
to $88.6 million in the second quarter of 2002. Diluted earnings per
share were $0.27 in the second quarter of 2003 compared to $0.33 in
the second quarter of 2002. The decrease in net income and earnings
per share was primarily due to increased restructuring charges to
streamline the Company's supply chain.
BUSINESS GROUP OPERATING RESULTS:
Net sales in the four segments in which the Company operates were as
follows for the three months ended June 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $751.2 $738.2 1.8%
Sharpie 485.2 464.0 4.6
Irwin 520.5 447.3 16.4
Calphalon Home 219.2 245.5 (10.7)
-------- -------- -----
Total Net Sales(1) $1,976.1 $1,895.0 4.3%
======== ======== =====
Operating income by segment was as follows for the three months ended
June 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $39.9 $51.8 (23.0)%
Sharpie 107.6 96.5 11.5
Irwin 55.6 41.2 35.0
Calphalon Home 1.6 8.8 (81.8)
Corporate Costs (2) (6.3) (7.7)
Restructuring Costs (57.9) (8.9)
------ ------
Total Operating Income(3) $140.5 $181.7
====== ======
23
(1) All intercompany transactions have been eliminated. Sales
to Wal*Mart Stores, Inc. and subsidiaries amounted to
approximately 16% of consolidated net sales in the three
months ended June 30, 2003 and 2002. Sales to no other
customer exceeded 10% of consolidated net sales for either
period.
(2) Corporate operating expenses consist primarily of
administrative costs that cannot be allocated to a
particular segment.
(3) Operating income is net sales less cost of products sold,
selling, general and administrative expenses, and
restructuring costs. Certain headquarters expenses of an
operational nature are allocated to business segments and
geographic areas primarily on a net sales basis. Trade names
amortization is considered a corporate expense and not
allocated to business segments.
RUBBERMAID
Net sales for the second quarter of 2003 were $751.2 million, an
increase of $13.0 million, or 1.8%, from $738.2 million in the second
quarter of 2002. A high single digit increase at Little Tikes and a
double-digit increase at Rubbermaid Europe (primarily currency
driven) were partially offset by a mid-single digit decline in the
Graco business.
Operating income for the second quarter of 2003 was $39.9 million, a
decrease of $11.9 million, or 23.0%, from $51.8 million in the second
quarter of 2002. The decrease in operating income is primarily the
result of higher raw material costs and pricing pressure on opening
price point items.
SHARPIE
Net sales for the second quarter of 2003 were $485.2 million, an
increase of $21.2 million, or 4.6%, from $464.0 million in the second
quarter of 2002. The increase in sales is primarily the result of
high single digit increases in the North American and European writing
instrument businesses driven by strong back-to-school sell-in,
partially offset by the disposition of Cosmolab in March 2003.
Operating income for the second quarter of 2003 was $107.6 million, an
increase of $11.1 million, or 11.5%, from $96.5 million in the second
quarter of 2002. Operating income was positively impacted by core
sales growth, productivity and favorable mix management, partially
offset by investments in marketing initiatives.
24
IRWIN
Net sales for the second quarter of 2003 were $520.5 million, an
increase of $73.2 million, or 16.4%, from $447.3 million in the second
quarter of 2002. The increase in net sales for the second quarter of
2003 was primarily due to sales from the American Tool and Lenox
acquisitions.
Operating income for the second quarter of 2003 was $55.6 million, an
increase of $14.4 million, or 35.0%, from $41.2 million in the second
quarter of 2002. The improvement in operating income was driven by
productivity, new products and the Lenox acquisition, partially offset
by the planned product line exits at Levolor/Kirsch and incremental
investments in marketing initiatives.
CALPHALON HOME
Net sales for the second quarter of 2003 were $219.2 million, a
decrease of $26.3 million, or 10.7%, from $245.5 million in the second
quarter of 2002. The sales decrease was primarily the result of a
double-digit decline at the US picture frame business, partially
offset by a double-digit increase in the European Housewares business.
Operating income for the second quarter of 2003 was $1.6 million, a
decrease of $7.2 million, or 81.8%, from $8.8 million in the second
quarter of 2002. The decrease in operating income is primarily due to
the decline in sales at the US picture frame business, unfavorable
product mix and pricing pressure on opening price point items.
SIX MONTHS ENDED JUNE 30, 2003 VS. SIX MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS:
Net sales for the six months ended June 30, 2003 were $3,712.5
million, an increase of $220.5 million, or 6.3%, from $3,492.0 million
in the comparable period of 2002. The increase resulted from sales
contributions from the American Tool Companies, Inc. (American Tool)
(acquired April 2002) and American Saw & Mfg. Co. (Lenox) (acquired
January 2003) acquisitions.
Gross margin as a percentage of net sales for the six months ended
June 30, 2003 was 27.3%, or $1,013.4 million, versus 26.9%, or $939.7
million, in the comparable period of 2002. The improvement in gross
margin is primarily related to the Company's productivity initiative,
higher margins from the Company's new products and the acquisition of
Lenox which generates higher gross margin than the Company's average,
partially offset by increased prices for certain raw materials and
unfavorable product mix at certain businesses.
25
Selling, general and administrative expenses ("SG&A") for the six
months ended June 30, 2003 were 18.2% of net sales, or $674.2 million,
versus 18.0%, or $629.2 million, in the comparable period of 2002.
The increase in SG&A is primarily the result of the American Tool and
Lenox acquisitions and planned investments in marketing initiatives,
including the Company's Strategic Account Management Program and
Phoenix Program, supporting the Company's brand portfolio and
strategic account strategy.
The Company recorded pre-tax strategic restructuring charges of $117.6
million ($79.4 million after taxes) and $18.6 million ($12.3 million
after tax) for the six months ended June 30, 2003 and 2002,
respectively. The 2003 pre-tax charge included $56.6 million of
facility and other exit costs, $57.4 million of employee severance and
termination benefits, and $3.6 million in other restructuring costs.
The 2002 pre-tax charge included $4.7 million of facility and other
exit costs, $13.3 million of employee severance and termination
benefits, and $0.6 million in other restructuring costs. See Note 4
to the Consolidated Financial Statements (Unaudited) for further
information on the strategic restructuring plan.
Operating income for the six months ended June 30, 2003 was 6.0% of
net sales, or $221.6 million, versus operating income of 8.4%, or
$291.9 million, in the comparable period of 2002. The decrease in
operating margins is primarily the result of restructuring charges to
streamline the Company's supply chain.
Net nonoperating expenses for the six months ended June 30, 2003 were
2.4% of net sales, or $88.6 million, versus 2.3%, or $80.4 million, in
the comparable period of 2002. The increase in expenses is primarily
related to the $21.2 million non-cash pre-tax loss recognized on the
sale of the Cosmolab business in March 2003, partially offset by $13.6
million ($9.0 million after tax) of Anchor Hocking transaction related
costs incurred in 2002 associated with the Company's withdrawn
divestiture. See Note 3 to the Consolidated Financial Statements
(Unaudited) for additional details.
The effective tax rate was 32.5% for the six months ended June 30,
2003 versus 34.0% in the comparable period of 2002. This lower rate
reflects the benefit of the full year impact of 2002 tax rate
initiatives.
Income before cumulative effect of accounting change for the six
months ended June 30, 2003 was $89.8 million, compared to $139.5
million in the comparable period of 2002. Diluted earnings per share
before cumulative effect of accounting change were $0.33 for the six
months ended June 30, 2003 compared to $0.52 in the comparable period
of 2002. The decrease in income and earnings per share before
cumulative effect of accounting change was primarily due to increased
26
restructuring charges to streamline the Company's supply chain and the
loss recognized on the sale of the Cosmolab business.
Net income for the six months ended June 30, 2003 was $89.8 million,
compared to a net loss of $375.4 million in the comparable period of
2002. Diluted earnings (loss) per share were $0.33 for the six months
ended June 30, 2003 compared to ($1.40) in the comparable period of
2002. The difference in net income and diluted earnings per share is
primarily the result of the $538.0 million, $514.9 million net of tax,
cumulative effect of an accounting change adjustment related to the
Company's adoption of FAS 142 as discussed in Note 2 to the
Consolidated Financial Statements (Unaudited).
BUSINESS SEGMENT OPERATING RESULTS:
Net sales in the four segments in which the Company operates were as
follows for the six months ended June 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $1,469.2 $1,448.3 1.4%
Sharpie 779.6 765.9 1.8
Irwin 1,002.6 778.4 28.8
Calphalon Home 461.1 499.4 (7.7)
-------- -------- ----
Total Net Sales(1) $3,712.5 $3,492.0 6.3%
======== ======== ====
Operating income by segment was as follows for the six months ended
June 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $107.3 $112.9 (5.0)%
Sharpie 137.4 122.3 12.3
Irwin 95.2 61.1 55.8
Calphalon Home 12.8 29.4 (56.5)
Corporate Costs (2) (13.5) (15.2)
Restructuring Costs (117.6) (18.6)
------ ------
Total Operating Income(3) $221.6 $291.9
====== ======
27
(1) All intercompany transactions have been eliminated. Sales
to Wal*Mart Stores, Inc. and subsidiaries amounted to
approximately 16% of consolidated net sales in the first six
months of 2003 and 2002, respectively. Sales to no other
customer exceeded 10% of consolidated net sales for either
period.
(2) Corporate operating expenses consist primarily of
administrative costs that cannot be allocated to a
particular segment.
(3) Operating income is net sales less cost of products sold,
selling, general and administrative expenses, and
restructuring costs. Certain headquarters expenses of an
operational nature are allocated to business segments and
geographic areas primarily on a net sales basis. Trade names
amortization is considered a corporate expense and not
allocated to business segments.
RUBBERMAID
Net sales for the six months ended June 30, 2003 were $1,469.2
million, an increase of $20.9 million, or 1.4%, from $1,448.3 million
in the comparable period of 2002. A double-digit increase at
Rubbermaid Europe (primarily currency driven) was partially offset by
a mid-single digit decrease in the Graco business.
Operating income for the six months ended June 30, 2003 was $107.3
million, a decrease of $5.6 million, or 5.0%, from $112.9 million in
the comparable period of 2002. The decrease in operating income is
primarily the result of higher raw material costs and pricing pressure
in opening price point items.
SHARPIE
Net sales for the six months ended June 30, 2003 were $779.6 million,
an increase of $13.7 million, or 1.8%, from $765.9 million in the
comparable period of 2002. The increase in sales is primarily the
result of high single digit and mid-single digit increases in the
European and North American writing instruments businesses,
respectively, partially offset by the disposition of Cosmolab in March
2003.
Operating income for the six months ended June 30, 2003 was $137.4
million, an increase of $15.1 million, or 12.3%, from $122.3 million
in the comparable period of 2002. Operating income was positively
impacted by core sales growth, productivity and favorable mix
management, partially offset by investments in marketing initiatives.
28
IRWIN
Net sales for the six months ended June 30, 2003 were $1,002.6
million, an increase of $224.2 million, or 28.8%, from $778.4 million
in the comparable period of 2002. The increase in net sales through
the first six months of 2003 was primarily due to sales from the
American Tool and Lenox acquisitions.
Operating income for the six months ended June 30, 2003 was $95.2
million, an increase of $34.1 million, or 55.8%, from $61.1 million in
the comparable period of 2002. The improvement in operating income
was driven by productivity, new products and the Lenox and American
Tool acquisitions, partially offset by the planned product line exits
at Levolor/Kirsch and incremental investments in marketing
initiatives.
CALPHALON HOME
Net sales for the six months ended June 30, 2003 were $461.1 million,
a decrease of $38.3 million, or 7.7%, from $499.4 million in the
comparable period of 2002. The sales decrease was primarily the
result of the Company's planned exit from certain high risk customers
and pricing pressure on opening price point items, partially offset by
a mid single digit increase at the Company's Calphalon division.
Operating income for the six months ended June 30, 2003 was $12.8
million, a decrease of $16.6 million, or 56.5%, from $29.4 million in
the comparable period of 2002. The decrease in operating income is
primarily due to the decline in sales at the US picture frame
business, unfavorable product mix and pricing pressure on opening
price point items.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
SOURCES:
The Company's primary sources of liquidity and capital resources
include cash provided from operations and use of available borrowing
facilities.
Cash provided from operating activities for the six months ended June
30, 2003 was $141.4 million compared to $298.7 million for the
comparable period of 2002. The decrease in cash provided from
operating activities was due primarily to increased cash restructuring
charges and inventory levels. The increased inventory levels were
the result of increased safety stock related to restructuring programs
and new product launches, retail inventory reductions and lower than
expected sales at the Company's Burnes picture frame division.
29
Through the first six months of 2003, the Company received proceeds
from the issuance of debt of $1,036.1 million compared to $520.8
million in the year ago period.
On January 10, 2003, the Company completed the sale of 6.67 million
shares of its common stock at a public offering price of $30.10 per
share pursuant to a shelf registration statement filed with the
Securities and Exchange Commission. Total proceeds from the sale were
approximately $200.8 million, resulting in net proceeds to the
Company, before expenses, of $200.1 million. The proceeds were used
to reduce the Company's commercial paper borrowings.
The Company has a $1.0 billion universal shelf registration statement
that became effective in April 2003 under which debt and equity
securities may be issued. During the second quarter of 2003, $400.0
million of medium term notes were issued under this shelf registration
statement, the proceeds of which were used to pay down commercial
paper.
USES:
The Company's primary uses of liquidity and capital resources include
acquisitions, dividend payments and capital expenditures.
Cash used for acquisitions was $458.7 million for the first six months
of 2003, compared to $228.8 million in the year ago period, and is
related primarily to the acquisition of Lenox, which was funded
through the issuance of commercial paper.
On March 27, 2003, the Company completed the sale of its Cosmolab
business, a division of the Sharpie segment. The Company received
cash proceeds of $7.5 million related to the Cosmolab transaction.
The Company used the proceeds from the sale to reduce its commercial
paper borrowings.
In the first six months of 2003, the Company made payments on long-
term debt of $651.4 million compared to $391.0 million in the year ago
period.
On January 10, 2003, the Company received proceeds from the issuance
of stock of $200.1 million. The proceeds received were used to reduce
the Company's commercial paper borrowings. Refer to Note 6 in the
Consolidated Financial Statements (Unaudited) for further information.
Cash used for restructuring activities was $54.1 million and $21.7
million in the first six months of 2003 and 2002, respectively. Such
cash payments represent primarily employee termination benefits.
Capital expenditures were $188.4 million and $101.2 million in the
first six months of 2003 and 2002, respectively. The increase in
30
capital expenditures is primarily due to the Company's increased
investment in new product development and productivity initiatives.
Aggregate dividends paid were $115.2 million and $112.1 million during
the first six months of 2003 and 2002, respectively.
Retained earnings decreased in the first six months of 2003 by $25.4
million. The reduction in retained earnings is due to cash dividends
paid on common stock, partially offset by current year earnings.
Working capital at June 30, 2003 was $921.9 million compared to $465.6
million at December 31, 2002. The current ratio at June 30, 2003 was
1.39:1 compared to 1.18:1 at December 31, 2002. The increase in
working capital and the current ratio is due to the American Tool and
Lenox acquisitions, and a reduction in the current portion of long-
term debt.
Total debt to total capitalization (total debt is net of cash and cash
equivalents, and total capitalization includes total debt, company-
obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust and stockholders' equity) was .49:1 at June 30, 2003
and .47:1 at December 31, 2002. Had Financial Accounting Standard
No. 150 been adopted on January 1, 2003, total debt to total capitali-
zation would have been .58:1 at June 30, 2003. Refer to Note 1 in
the Consolidated Financial Statements (Unaudited) for further informa-
tion.
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; however, certain events, such as
significant acquisitions, could require additional external financing.
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 risk is foreign exchange and interest
rate exposure.
The Company's 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.
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
31
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
Company's Consolidated Statements of Operations.
Due to the diversity of its product lines, the Company does not have
material sensitivity to any one commodity. The Company manages
commodity price exposures primarily through the duration and terms of
its vendor contracts.
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. This model estimates a
loss in fair market value using statistical modeling techniques that
are based on a variance/covariance approach and includes substantially
all market risk exposures (specifically excluding equity-method
investments). The fair value losses shown in the table below have no
impact on results of operations or financial condition at June 30,
2003 as they represent hypothetical, not realized losses. The
following table indicates the calculated amounts for the six months
ended June 30, (IN MILLIONS):
2003 2002
6 Month June 30, 6 Month June 30, Confidence
Average 2003 Average 2002 Level
------- -------- ------ -------- ----------
Interest rates $23.1 $24.3 $15.5 $15.7 95%
Foreign exchange $1.3 $0.9 $0.2 $0.3 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
32
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 relate to, but are not
limited to, such matters as sales, income, earnings per share, return
on equity, return on invested capital, capital expenditures, working
capital, dividends, capital structure, debt to capitalization ratios,
interest rates, internal growth rates, impacts of changes in
accounting standards, pending legal proceedings and claims (including
environmental matters), future economic performance, operating income
improvements, synergies, management's plans, goals and objectives for
future operations and growth or the assumptions relating to any of the
forward-looking statements. The Company cautions that forward-looking
statements are not guarantees because there are inherent difficulties
in predicting future results. Actual results could differ materially
from those expressed or implied in the forward-looking statements.
Factors that could cause actual results to differ include, but are not
limited to, those matters set forth in this Report and Exhibit 99.1 to
this Report.
33
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).
ITEM 4. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of
June 30, 2003, the Company's chief executive officer and
chief financial officer have evaluated 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.
b) CHANGES IN INTERNAL CONTROLS. There have been no
significant changes in the Company's internal controls or in
other facts that could significantly affect internal
controls subsequent to the date of their evaluation.
34
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 2003, the 2003 Annual Meeting of Stockholders of the Company
was held. The following is a brief description of the matters voted
upon at the meeting and tabulation of the voting therefor:
Proposal 1. Election of four directors of the Company to serve
for a term of three years.
Number of Shares
--------------------------
Nominee For Withheld
------- --- --------
Thomas E. Clarke 232,755,762 9,797,510
Joseph Galli, Jr. 232,562,670 9,990,602
Elizabeth Cuthbert Millett 232,655,037 9,898,235
William P. Sovey 158,070,902 84,480,846
Proposal 2. Approval of the Newell Rubbermaid Inc. 2003 Stock
Plan. A proposal to ratify the Newell Rubbermaid Inc. 2003 Stock
Plan was adopted, with 197,494,569 votes cast for, 15,733,613
votes cast against, 2,090,714 votes abstained and 27,234,376
broker non-votes.
Proposal 3. Approval of the Newell Rubbermaid Inc. Management
Cash Bonus Plan. A proposal to ratify the Newell Rubbermaid Inc.
Management Cash Bonus Plan was adopted, with 228,950,344 votes
cast for, 11,407,596 votes cast against, 2,195,332 votes
abstained and 0 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.2 By-Laws of Newell Rubbermaid Inc., as amended through
May 7, 2003.
4.1 Amendment No. 1 to the Five-Year Credit Agreement dated
as of June 13, 2003 between Newell Rubbermaid Inc.,
each of the lenders signatory thereto and JPMorgan
Chase Bank, as administrative agent (amending the Five-
Year Credit Agreement dated as of June 14, 2002 by and
among Newell Rubbermaid Inc., JPMorgan Chase Bank, as
35
administrative agent, J.P. Morgan Securities Inc., as
sole lead arranger and sole bookrunner, Bank of
America, N.A. and Bank One, NA, as co-syndication
agents, and Barclays Bank PLC and BNP Paribas, as co-
documentation agents, which is incorporated by
reference to Exhibit 10.1 to Amendment No. 2 to the
Company's Registration Statement on Form S-3, File No.
333-88050, filed July 10, 2002).
4.2 Amended and Restated 364-Day Credit Agreement dated as
of June 13, 2003 between Newell Rubbermaid Inc., each
of the lenders signatory thereto and JPMorgan Chase
Bank, as administrative agent (amending and restating
the 364-Day Credit Agreement dated as of June 14, 2002
by and among Newell Rubbermaid Inc., JPMorgan Chase
Bank, as administrative agent, J.P. Morgan Securities
Inc., as sole lead arranger and sole bookrunner, Bank
of America, N.A. and Bank One, NA, as co-syndication
agents, and Barclays Bank PLC and BNP Paribas, as co-
documentation agents, which is incorporated by
reference to Exhibit 10.2 to Amendment No. 2 to the
Company's Registration Statement on Form S-3, File No.
333-88050, filed July 10, 2002).
10.1 The Newell Rubbermaid Inc. 2003 Stock Plan, effective
May 7, 2003 (incorporated by reference to Exhibit B of
the Company's 2003 Proxy Statement, dated March 24,
2003, and filed with the Securities and Exchange
Commission on March 31, 2003).
12. Statement of Computation of Ratio of Earnings to Fixed
Charges.
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Safe Harbor Statement.
36
(b) Reports on Form 8-K:
Report on Form 8-K, dated April 29, 2003, that included a press
release announcing the Company's results for the first fiscal
quarter ended March 31, 2003.
Report on Form 8-K, dated May 5, 2003, stating that the Company
had entered into two separate Underwriting Agreements with
respect to the offering and sale of $250.0 million of unsecured
and unsubordinated notes and the offering and sale of $150.0
million of unsecured and unsubordinated notes.
Report on Form 8-K, dated May 6, 2003, that included the filing
of a legal opinion with respect to the Company's Registration
Statements on Form S-3 (Nos. 333-88050 and 333-103773).
37
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: July 31, 2003 /s/ J. Patrick Robinson
-------------------------------------
J. Patrick Robinson
Vice President - Corporate Controller
and Chief Financial Officer
38