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, 1999 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.) 29 East Stephenson Street Freeport, Illinois 61032-0943 (Address of principal executive offices) (Zip Code) (815) 235-4171 (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 / / Number of shares of Common Stock outstanding as of July 27, 1999: 281,916,330 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------- 1999 1998* 1999 1998* Net sales $1,597,314 $1,559,537 $3,113,507 $2,961,630 Cost of products sold 1,176,508 1,082,609 2,269,393 2,088,479 --------- --------- --------- --------- GROSS INCOME 420,806 476,928 844,114 873,151 Selling, general and administrative expenses 322,528 229,052 582,493 463,110 Restructuring costs 8,697 8,546 186,721 51,928 Trade names and goodwill amortization and other 12,625 10,576 24,663 32,384 --------- --------- --------- --------- OPERATING INCOME (LOSS) 76,956 228,754 50,237 325,729 --------- --------- --------- --------- Nonoperating expenses (income): Interest expense 24,440 21,344 49,701 43,677 Other, net 3,246 (21,557) 6,288 (208,260) --------- --------- --------- --------- Net nonoperating expenses (income) 27,686 (213) 55,989 (164,583) --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 49,270 228,967 (5,752) 490,312 Income taxes 19,216 86,952 43,193 189,804 --------- --------- --------- --------- NET INCOME (LOSS) $30,054 $142,015 $(48,945) $300,508 ========= ========= ========== ========== Earnings (loss) per share: Basic $ 0.11 $ 0.51 $ (0.17) $ 1.07 Diluted 0.11 0.50 (0.17) 1.06 Dividends per share $ 0.20 $0.19 $ 0.40 $ 0.38 Weighted average shares outstanding: Basic 281,830 280,652 281,639 280,547 Diluted 293,251 292,100 292,647 291,685 See notes to consolidated financial statements. *Restated for the merger with Rubbermaid Incorporated on March 24, 1999, and the merger with Calphalon on May 7, 1998, both of which were accounted for as poolings of interests. 2 NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands) June 30, % of December 31, % of 1999 Total 1998 Total -------- ----- ------------ ----- ASSETS CURRENT ASSETS Cash and cash equivalents $ 48,996 0.8% $ 86,554 1.3% Accounts receivable, net 1,166,204 18.5% 1,078,530 17.1% Inventories, net 1,078,431 17.1% 1,033,488 16.4% Deferred income taxes 86,624 1.4% 108,192 1.7% Prepaid expenses and other 151,338 2.4% 143,885 2.3% --------- ---- --------- ---- TOTAL CURRENT ASSETS 2,531,593 40.1% 2,450,649 38.0% MARKETABLE EQUITY SECURITIES 26,935 0.4% 19,317 0.3% OTHER LONG-TERM INVESTMENTS 61,933 1.0% 57,967 0.9% OTHER ASSETS 301,244 4.8% 267,073 4.2% PROPERTY, PLANT AND EQUIPMENT, NET 1,514,561 24.0% 1,627,090 25.8% TRADE NAMES AND GOODWILL 1,871,987 29.7% 1,867,059 29.7% ---------- ----- ---------- ----- TOTAL ASSETS $6,308,253 100.0% $6,289,155 100.0% ========== ===== ========== ===== See notes to consolidated financial statements. 3 NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONT.) (Unaudited, in thousands) June 30, % of December 31, % of 1999 Total 1998 Total -------- ----- ------------ ----- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 51,442 0.8% $ 94,634 1.5% Accounts payable 323,458 5.1% 322,080 5.1% Accrued compensation 111,891 1.8% 110,471 1.8% Other accrued liabilities 744,190 11.8% 610,618 9.7% Income taxes 9,737 0.2% 26,744 0.4% Current portion of long-term debt 7,244 0.1% 7,334 0.1% --------- ---- --------- ---- TOTAL CURRENT LIABILITIES 1,247,962 19.8% 1,171,881 18.6% LONG-TERM DEBT 1,550,023 24.6% 1,393,865 22.2% OTHER NONCURRENT LIABILITIES 326,457 5.2% 374,293 6.0% DEFERRED INCOME TAXES - - 4,527 - MINORITY INTEREST 1,306 0.0% 857 0.0% COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST 500,000 7.9% 500,000 8.0% STOCKHOLDERS' EQUITY Common stock - authorized shares, 400.0 million at $1 par value; 281,898 4.5% 281,747 4.5% Outstanding shares: 1999 281.8 million 1998 281.7 million Additional paid-in capital 208,914 3.3% 183,102 3.3% Retained earnings 2,303,129 36.5% 2,465,064 38.2% Accumulated other comprehensive income (111,436) (1.8%) (86,181) (1.4%) --------- ---- --------- ---- TOTAL STOCKHOLDERS' EQUITY 2,682,505 42.5% 2,843,732 45.2% --------- ---- --------- ---- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,308,253 100.0% $6,289,155 100.0% --------- ---- --------- ---- See notes to consolidated financial statements. 4 NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1999 1998* ---- ---- OPERATING ACTIVITIES: Net income $ (48,946) $ 300,508 Adjustments to reconcile net income to net cash provided by Operating activities: Depreciation and amortization 141,265 140,022 Deferred income taxes 18,808 22,670 Net gain on sale of marketable equity securities - (115,674) Sale of Businesses - (24,141) Write-off of intangible assets and other - 4,288 Other 111,354 38,253 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (107,623) (107,383) Inventories (93,204) (33,413) Other current assets (33,532) (27,429) Accounts payable (2,306) (23,305) Accrued liabilities and other 38,280 (127,022) -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 24,096 47,374 -------- -------- INVESTING ACTIVITIES: Acquisitions, net (35,334) (370,509) Expenditures for property, plant and equipment (89,031) (117,463) Proceeds on sale of businesses, Net of taxes paid - 51,262 Sale of marketable Equity securities - 378,321 Disposals of non-current assets and other 11,250 (13,027) -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (113,115) $ (71,416) ========= =========== See notes to consolidated financial statements. *Restated for the merger with Rubbermaid Incorporated on March 24, 1999, and the merger with Calphalon on May 7, 1998, both of which were accounted for as poolings of interests. 5 NEWELL RUBBERMAID INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) (Unaudited, in thousands) FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1999 1998* ---- ---- FINANCING ACTIVITIES: Proceeds from issuance of debt $ 719,424 $ 203,792 Payments on notes payable and long-term debt (577,889) (107,243) Proceeds from exercised stock options and other 25,963 (1,560) Cash dividends (112,989) (105,823) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 54,509 (10,834) -------- -------- Exchange rate effect on cash (3,048) (156) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37,558) (35,032) Cash and cash equivalents at beginning of year 86,554 150,131 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,996 $ 115,099 ========== ========= Supplemental cash flow disclosures - Cash paid during the period for: Income taxes $ 87,327 $ 137,677 Interest $ 60,903 $ 50,909 See notes to consolidated financial statements. *Restated for the merger with Rubbermaid Incorporated on March 24, 1999, and the merger with Calphalon on May 7, 1998, both of which were accounted for as poolings of interests. 6 NEWELL RUBBERMAID INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL INFORMATION The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments necessary to present a fair statement of the results for the periods reported, subject to normal recurring year-end adjustments, none of which is expected to be material. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed 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. On March 24, 1999, Newell Co. ("Newell") completed a merger with Rubbermaid Incorporated ("Rubbermaid") in which Rubbermaid became a wholly-owned subsidiary of Newell. Simultaneously with the consummation of the merger, Newell changed its name to Newell Rubbermaid Inc. (the "Company"). The merger was accounted for as a pooling of interests and the financial statements have been restated to retroactively combine Rubbermaid's financial statements with those of Newell as if the merger had occurred at the beginning of the earliest period presented. Certain 1998 amounts have been reclassified to conform with 1999 presentation. NOTE 2 - ACQUISITIONS, MERGERS AND DIVESTITURES Acquisitions ------------ During January 1998, the Company acquired Curver Consumer Products ("Curver"). Curver is a manufacturer and marketer of plastic housewares in Europe. Curver operates as part of Rubbermaid Europe. On March 27, 1998, the Company acquired Swish Track and Pole ("Swish") from Newmond Group PLC. Swish is a manufacturer and marketer of decorative and functional window furnishings in Europe and operates as part of Newell Window Fashions Europe. On May 19, 1998, the Company acquired certain assets of Century Products ("Century"). Century is a manufacturer and marketer of infant products such as car seats, strollers and infant carriers and operates as part of the Graco/Century division. On June 30, 1998, the Company purchased Panex S.A. Industria e Comercio ("Panex"), a manufacturer and marketer of aluminum cookware products in Brazil. Panex operates as part of the Mirro division. On August 31, 1998, the Company purchased the Gardinia Group ("Gardinia"), a manufacturer and supplier of window treatments in Germany. Gardinia operates as part of Newell Window 7 Fashions Europe. On September 30, 1998, the Company purchased the rotring Group ("Rotring"), a manufacturer and supplier of writing instruments, drawing instruments, art materials and color cosmetic products in Germany. The writing and drawing instruments piece of Rotring operates as part of the Company's Sanford International division. The art materials piece of Rotring operates as part of the Company's Sanford North America division. The color cosmetic products piece of Rotring operates as a separate U.S. division, Cosmolab. On March 30, 1999, the Company purchased Ateliers 28 ("Ateliers"), a manufacturer and marketer of decorative and functional drapery hardware in Europe. Ateliers operates as part of Newell Window Fashions Europe. For these and other minor acquisitions, the Company paid $693.9 million in cash and assumed $102.9 million of debt. The transactions were accounted for as purchases; therefore, results of operations are included in the accompanying consolidated financial statements since their respective dates of acquisition. The acquisition costs were allocated on a preliminary basis to the fair market value of the assets acquired and liabilities assumed and resulted in trade names and goodwill of approximately $513.3 million. The Company began to formulate an integration plan for these acquisitions as of their respective acquisition dates. The integration plan for Curver was finalized during the first quarter of 1999 and resulted in no integration liabilities included in the purchase price. The Company's integration plans combined Curver into Rubbermaid Europe. The integration plans for Century and Panex were finalized during the second quarter of 1999 and resulted in integration liabilities of $3.2 million for exit costs and employee terminations. The Company's integration plans combined Century into Graco and Panex into Mirro. No integration liabilities have been included in the allocation of purchase price for Gardinia, Rotring and Ateliers as of June 30, 1999. Such costs will be accrued upon finalization of each acquisition's integration plan. The Company's finalized integration plans will include exit costs for certain plants and product lines and employee terminations associated with the integration of Gardinia into Newell Window Fashions Europe and Rotring into Sanford International and Sanford North America. The final adjustments to the purchase price allocations are not expected to be material to the consolidated financial statements. 8 The unaudited consolidated results of operations for the six months ended June 30, 1999 and 1998 on a pro forma basis, as though the Curver, Swish, Century, Panex, Gardinia, Rotring and Ateliers businesses had been acquired on January 1, 1998, are as follows (in millions, except per share amounts): Six Months Ended June 30, ----------------- 1999 1998 ---- ---- Net sales $ 3,122.7 $ 3,293.2 Net income (loss) $ (49.0) $ 295.4 Basic earnings (loss) per share $ (0.17) $ 1.05 Mergers ------- On May 7, 1998, a subsidiary of the Company merged with Calphalon Corporation ("Calphalon"), a manufacturer and marketer of gourmet cookware. The Company issued approximately 3.1 million shares of common stock for all of the common stock of Calphalon. This transaction was accounted for as a pooling of interests; therefore prior financial statements were restated to reflect this merger. Calphalon now operates as a separate division of the company. On March 24, 1999, the Company completed the Rubbermaid merger. The merger qualified as a tax-free exchange and was accounted for as a pooling of interests. Newell issued .7883 Newell Rubbermaid shares for each outstanding share of Rubbermaid common stock. A total of 119.0 million shares (after adjustment for fractional and dissenting shares) of the Company's common stock were issued as a result of the merger, and Rubbermaid's outstanding stock options were converted into options to purchase approximately 2.5 million Newell Rubbermaid common shares. In connection with the merger, the Company incurred $36.8 million ($.13 per common share) of merger costs which were expensed during the six months ended June 30, 1999 as restructuring costs. See Note 3 for further detail of restructuring costs. No adjustments were made to the net assets of the combining companies to adopt conforming accounting practices or fiscal years other than adjustments to eliminate the accounting effects related to Newell's purchase of a former Rubbermaid operating division (Eldon) in 1997. Because the Newell Rubbermaid merger was accounted for as a pooling of interests, the accounting effects of Newell's purchase of Eldon have been eliminated as if Newell had always owned Eldon. The following table presents a reconciliation of net sales and net income for Newell, Rubbermaid and Calphalon individually to those presented in the accompanying consolidated financial statements: 9 Six months ended June 30, 1999 1998 ---------- ---------- Net sales: Newell $ 1,832.3 $ 1,654.3 Rubbermaid 1,228.5 1,268.4 Calphalon 52.7 38.9 -------- -------- Combined $ 3,113.5 $ 2,961.6 ======== ======== Net income: Newell $ 98.9 $ 239.6 Rubbermaid (149.5) 61.6 Calphalon 1.7 (0.7) -------- -------- Combined $ (48.9) $ 300.5 ======== ======= Divestitures ------------ On April 29, 1998, the Company sold the assets of its decorative covering product line (Decora). On August 21, 1998, the Company sold its school supplies and stationery business (Stuart Hall). On September 9, 1998, the Company sold its plastic storage and serveware business (Newell Plastics). The pre-tax net gain on the sales of these businesses was $59.8 million, most of which was offset by non-deductible goodwill, resulting in a net after-tax gain of $15.1 million. Sales for these businesses prior to their divestitures were approximately $131 million in 1998 and $229 million in 1997. NOTE 3 - RESTRUCTURING COSTS 1998 ---- During January 1998, Rubbermaid announced a series of restructuring initiatives to establish a central global procurement organization and to consolidate, automate, or relocate its worldwide manufacturing and distribution operations. During the first six months of 1998, Rubbermaid recorded pre-tax charges of $51.9 million. The 1998 restructuring charge included: (1) $4.5 million relating to employee severance and termination benefits for sales and administrative employees, (2) $15.2 million for costs to exit business activities at five facilities and (3) $32.2 million to write down impaired long-lived assets to their fair value. The charge for costs to exit business activities related to exit plans for the closure of a plastic housewares molding and warehouse operation in the state of New York, the closure of a commercial play systems warehouse and manufacturing facility in Australia, the closure of a cleaning products manufacturing operation in North Carolina, the elimination of Rubbermaid's Asia Pacific regional headquarters and the related joint venture in Japan and the closure of a distribution facility in France. 10 The closure of the operations described above necessitated a revaluation of the cash flows related to those operations, resulting in a $32.2 million charge to write down $12.4 million of fixed assets and $19.8 million of goodwill to fair value. Rubbermaid determined that the future cash flows on an undiscounted basis (before taxes and interest) were not sufficient to cover the carrying value of these long-lived assets affected by these decisions. Management determined the fair value of these assets using discounted cash flows. 1999 ---- The 1998 restructuring program was terminated in the first quarter of 1999 after the Newell merger with Rubbermaid. Management is currently formulating a new restructuring plan for the combined company and will be recording a restructuring reserve in 1999 to reflect costs associated with redundant facility closures and related employee termination benefits. In the first six months of 1999, the Company recorded a pre-tax restructuring charge of $186.7 million ($159.3 million after taxes). The pre-tax charge related to the Rubbermaid acquisition, and included $36.8 million of merger costs (investment banking, legal and accounting fees), executive severance costs of $85.1 million and $64.8 million of exit costs primarily related to impaired Rubbermaid capitalized computer software costs and facility exit costs (concurrent with the merger with Rubbermaid, the Company decided that all Rubbermaid businesses will be integrated into Newell's existing information systems, resulting in an impairment of Rubbermaid's capitalized software asset which will no longer be used). NOTE 4 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, 1999 1998 -------- ------------ Materials and supplies $ 239.9 $ 223.8 Work in process 151.5 137.2 Finished products 687.0 672.5 --------- --------- $ 1,078.4 $ 1,033.5 ========= ========= NOTE 5 LONG-TERM MARKETABLE EQUITY SECURITIES Long-Term Marketable Equity Securities classified as available for sale are carried at fair value with adjustments to fair value 11 reported separately, net of tax, as a component of stockholders' equity (and excluded from earnings). Gains and losses on the sales of Long-Term Marketable Equity Securities are based upon the average cost of the securities sold. On March 3, 1998, the Company sold 7,862,300 shares it held in The Black & Decker Corporation. The Black & Decker transaction resulted in net proceeds of approximately $378.3 million and a net pre-tax gain, after fees and expenses, of approximately $191.5 million. Long-Term Marketable Equity Securities are summarized as follows (in millions): June 30, December 31, 1999 1998 -------- ------------ Aggregate market value $ 26.9 $ 19.3 Aggregate cost 26.3 26.0 -------- -------- Unrealized pre-tax gain (loss) $ 0.6 $ (6.7) ========= ========= NOTE 6 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in millions): June 30, December 31, 1999 1998 -------- ------------ Land $ 56.7 $ 78.4 Buildings and improvements 700.1 705.6 Machinery and equipment 2,149.8 2,166.9 -------- -------- 2,906.6 2,950.9 Allowance for depreciation (1,392.0) (1,323.8) -------- -------- $1,514.6 $ 1,627.1 ======== ========= Replacements and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense. The components of depreciation are provided by annual charges to income calculated to amortize, principally on the straight-line basis, the cost of the depreciable assets over their depreciable lives. Estimated useful lives determined by the company are: buildings and improvements (5-40 years) and machinery and equipment (2-15 years). 12 NOTE 7 - LONG-TERM DEBT Long-term debt consisted of the following (in millions): June 30, December 31, 1999 1998 -------- ------------ Medium-term notes $ 877.5 $ 883.5 Commercial paper 644.5 500.2 Other long-term debt 35.2 17.5 --------- --------- 1,557.2 1,401.2 Current portion (7.2) (7.3) --------- --------- $ 1,550.0 $ 1,393.9 ========= ========= Commercial paper in the amount of $644.5 million at June 30, 1999 was classified as long-term since it is supported by the 5-year $1.3 billion revolving credit agreement. NOTE 8 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST OF THE COMPANY In December 1997, a wholly owned subsidiary trust of the Company issued 10,000,000 of its 5.25% convertible quarterly income preferred securities (the "Convertible Preferred Securities"), with a liquidation preference of $50 per security, to certain institutional buyers. The Convertible Preferred Securities represent an undivided beneficial interest in the assets of the trust. Each of the Convertible Preferred Securities is convertible at the option of the holder into shares of the Company's Common Stock at the rate of 0.9865 shares of Common Stock for each preferred security (equivalent to $50.685 per share of Common Stock), subject to adjustment in certain circumstances. Holders of the Convertible Preferred Securities are entitled to a quarterly cash distribution at the annual rate of 5.25% of the $50 liquidation preference commencing March 1, 1998. The Convertible Preferred Securities are subject to a Company guarantee and are callable by the Company initially at 103.15% of the liquidation preference beginning in December 2001 and decreasing over time to 100% of the liquidation preference beginning in December 2007. The trust invested the proceeds of this issuance of the Convertible Preferred Securities in $500 million of the Company's 5.25% Junior Convertible Subordinated Debentures due 2027 (the "Debentures"). The Debentures are the sole assets of the trust, mature December 1, 2027, bear interest at the rate of 5.25%, payable quarterly, commencing March 1, 1998, and are redeemable by the Company beginning in December 2001. The Company may defer interest payments on the Debentures for a period not to exceed 20 consecutive quarters during which time distribution payments on the Convertible Preferred Securities are also 13 deferred. Under this circumstance, the Company may not declare or pay any cash distributions with respect to its capital stock or debt securities that rank PARI PASSU with or junior to the Debentures.The Company has no current intention to exercise its right to defer payments of interest on the Debentures. The Convertible Preferred Securities are reflected as outstanding in the Company's consolidated financial statements as Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of a Subsidiary Trust. NOTE 9 - EARNINGS PER SHARE The earnings per share amounts are computed based on the weighted average monthly number of shares outstanding during the year. "Basic" earnings per share are calculated by dividing net income by weighted average shares outstanding. "Diluted" earnings per share are calculated by dividing net income by weighted average shares outstanding, including the assumption of the exercise and/or conversion of all potentially dilutive securities ("in the money" stock options and company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust). A reconciliation of the difference between basic and diluted earnings per share for the first six months of 1999 and 1998 is shown below (in millions, except per share data): Convertible Basic "In the money" Preferred Diluted Method stock options Securities Method(1) ------ --------------- ---------- --------- Three months ended June 30, 1999 Net Income $ 30.1 $ N/A $ N/A $ 30.1 Weighted average shares outstanding 281.8 N/A N/A 281.8 Earnings per Share $ 0.11 - - $ 0.11 Three months ended June 30, 1998 Net Income $ 142.0 $ 0.0 $ 4.0 $ 146.0 Weighted average shares outstanding 280.7 1.5 9.9 292.1 Earnings per share $ 0.51 - - $ 0.50 First six months, 1999 Net loss $ (48.9) $ N/A $ N/A $ (48.9) Weighted average shares outstanding 281.6 N/A N/A 281.6 Loss per Share $ (0.17) - - $ (0.17) First six months, 1998 Net Income $ 300.5 $ 0.0 $ 8.1 $ 308.6 Weighted average shares outstanding 280.5 1.3 9.9 291.7 Earnings per share $ 1.07 - - $ 1.06 (1) Diluted earnings per share for the three and six months ended June 30, 1999 exclude the impact of "in the money" stock options and convertible preferred securities because they are antidilutive. 14 NOTE 10 - COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS No. 130), which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has chosen to report Comprehensive Income and Accumulated Other Comprehensive Income, which encompasses net income, net unrealized gains on securities available for sale and foreign currency translation adjustments, in the Consolidated Statements of Stockholders' Equity and Comprehensive Income. Prior years have been restated to conform to the SFAS No. 130 requirements. The following table displays the components of Accumulated Other Comprehensive Income: Net Accumulated Unrealized Foreign Other Gains/(Losses) Currency Comprehensive (In Millions) on Securities Translation Income (Loss) -------------- ----------- -------------- Balance at December 31, 1998 $ (4.1) $ (82.1) $ (86.2) Change during six months 4.5 (29.7) (25.2) --------- --------- ---------- Balance at June 30, 1999 $ 0.4 $ (111.8) $ (111.4) ========= ========= ========== NOTE 11 - INDUSTRY SEGMENT INFORMATION The Company reviewed the criteria for determining segments of an enterprise in accordance with SFAS No. 131 and concluded it has three reportable operating segments: Household Products, Hardware & Home Furnishings and Office Products. This segmentation is appropriate because the Company organizes its product categories into these groups when making operating decisions and assessing performance. The Company divisions included in each segment also sell primarily to the same retail channel: Household Products (discount stores and warehouse clubs), Hardware and Home Furnishings (home centers and hardware 15 stores) and Office Products (office superstores and contract stationers). Based on the recent merger with Rubbermaid, the Company added the Rubbermaid divisions to the former Housewares segment to create the Household Products segment. Three Months Net Sales Ended June 30, --------- ------------------------ 1999 1998 ---- ---- (In Millions) Household Products $ 796.4 $ 831.4 Hardware & Home Furnishings 468.2 429.7 Office Products 332.7 298.4 -------- -------- Total Net Sales $1,597.3 $1,559.5 ======== ======= Three Months Operating Income Ended June 30, ---------------- ------------------------- 1999 1998 ---- ---- (In Millions) Household Products $ (50.7) $ 101.4 Hardware & Home Furnishings 76.8 71.5 Office Products 80.5 76.3 Corporate (21.0) (12.0) -------- -------- Subtotal $ 85.6 $ 237.2 Restructuring costs (8.7) (8.5) -------- -------- Total Operating Income $ 76.9 $ 228.7 ======== ======== Six Months Net Sales Ended June 30, --------- ------------------------ 1999 1998 (In Millions) ---- ---- Household Products $ 1,638.5 $ 1,657.0 Hardware & Home Furnishings 898.8 803.3 Office Products 576.2 501.3 -------- -------- Total Net Sales $ 3,113.5 $ 2,961.6 ======== ======= Six Months Operating Income Ended June 30, ---------------- ------------------------- 1999 1998 ---- ---- (In Millions) Household Products $ 37.2 $ 193.4 Hardware & Home Furnishings 128.8 112.7 Office Products 111.6 111.6 Corporate (40.7) (40.1) -------- -------- Subtotal $ 236.9 $ 377.6 Restructuring costs (186.7) (51.9) -------- -------- Total Operating Income $ 50.2 $ 325.7 ======== ======== 16 Identifiable Assets June 30, December 31, ------------------- ----------------------------- 1999 1998 (In Millions) ---- ---- Household Products $2,279.8 $2,286.3 Hardware & Home Furnishings 1,027.9 995.8 Office Products 692.8 643.0 Corporate 2,307.8 2,364.1 -------- -------- Total Identifiable Assets $6,308.3 $6,289.2 ======== ======= Operating income is net sales less cost of products sold and SG&A expenses, but is not affected either by nonoperating (income) expenses or by income taxes. Nonoperating (income) expenses consists principally of net interest expense, and in 1998, the net gain on the sale of Black & Decker common stock. In calculating operating income for individual business segments, certain headquarters expenses of an operational nature are allocated to business segments primarily on a net sales basis. Trade names and goodwill amortization is considered a corporate expense and not allocated to business segments. All intercompany transactions have been eliminated and transfers of finished goods between areas are not significant. Corporate assets primarily include trade names and goodwill, equity investments and deferred tax assets. NOTE 12 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company will adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." Management believes that the adoption of this statement will not be material to the consolidated financial statements. 17 PART I 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 Income as a percentage of net sales. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------- 1999 1998* 1999 1998* ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 73.7% 69.4% 72.9% 70.5% ----- ----- ----- ----- GROSS INCOME 26.3% 30.6% 27.1% 29.5% Selling, general and administrative expenses 20.2% 14.7% 18.7% 15.6% Restructuring costs 0.5% 0.5% 6.0% 1.8% Trade names and goodwill amortization and other 0.8% 0.7% 0.8% 1.1% ----- ----- ----- ----- OPERATING INCOME 4.8% 14.7% 1.6% 11.0% ----- ----- ----- ----- Nonoperating expenses (income): Interest expense 1.8% 1.4% 1.7% 1.5% Other, net (0.1)% (1.4)% 0.1% (7.1)% ----- ----- ----- ----- Net nonoperating expenses (income) 1.7% 0.0% 1.8% (5.6)% ----- ----- ----- ----- INCOME (LOSS) BEFORE INCOME TAXES 3.1% 14.7% (0.2)% 16.6% Income taxes 1.2% 5.6% 1.4% 6.5% ----- ----- ----- ----- NET INCOME (LOSS) 1.9% 9.1% (1.6)% 10.1% ===== ===== ===== ===== See notes to consolidated financial statements. * Restated for the merger with Rubbermaid Incorporated on March 24, 1999, and the merger with Calphalon on May 7, 1998, both of which were accounted for as poolings of interests. 18 Three Months Ended June 30, 1999 Vs. Three Months Ended June 30, 1998 --------------------------------------------------------------------- Net sales for the three months ended June 30, 1999 ("second quarter") were $1,597.3 million, representing an increase of $37.8 million or 2.4% from $1,559.5 million in the comparable quarter of 1998. Results for 1998 have been restated to include the March 1999 Rubbermaid merger and the May 1998 Calphalon merger, which were accounted for as poolings of interests. The overall increase in net sales was primarily attributable to contributions from Panex (acquired in June 1998), Gardinia (acquired in August 1998), Rotring (acquired in September 1998), Ateliers 28 (acquired in March 1999) and 4% internal growth in the Newell core businesses. These increases were partially offset by a 7% decline at the Rubbermaid divisions. Net sales for each of the Company's segments (and the primary reasons for the increase or decrease) were as follows, in millions: 1999 1998 % change ---- ---- -------- Household Products: Former Housewares Group $ 201.8 $ 194.6 3.7%(1) Rubbermaid Divisions 594.6 636.8 (6.6)%(2) ------- ------- 796.4 831.4 (4.2)% Hardware & Home Furnishings 468.2 429.7 9.0%(3) Office Products 332.7 298.4 11.5%(4) ------- ------- $1,597.3 $1,559.5 2.4% ======== ======== (1) Internal growth* of 4% plus Panex acquisition less Newell Plastics divestiture. (2) Unforecasted Rubbermaid promotional commitments made prior to the merger. (3) Gardinia and Ateliers 28 acquisitions. (4) Internal growth of 9% plus Rotring acquisition less Stuart Hall divestiture. * The Company defines internal growth as growth from the core businesses, which include continuing businesses owned more than two years and minor acquisitions. Gross income as a percentage of net sales in the second quarter of 1999 was 26.3% or $420.8 million versus 30.6% or $476.9 million in the comparable quarter of 1998. Excluding charges of $38.4 million relating to the Rubbermaid merger, gross income in the second quarter of 1999 was $459.2 million or 28.7% of net sales. Excluding charges, gross margins at the Newell core businesses were maintained while the 1998 acquisitions had gross margins which were lower than the Company's average gross margins and the Rubbermaid divisions' gross margins declined in the second quarter of 1999 versus the second quarter of 1998. As the 1998 acquisitions and Rubbermaid divisions are integrated, the Company expects their gross margins to improve. 19 Selling, general and administrative expenses ("SG&A") in the second quarter of 1999 were 20.2% of net sales or $322.5 million versus 14.7% or $229.1 million in the comparable quarter of 1998. Excluding charges of $89.0 million relating to the Rubbermaid merger, SG&A in the second quarter of 1999 was $233.5 million or 14.6% of net sales. Excluding charges, SG&A as a percentage of net sales declined at Newell core businesses and at Newell Window Fashions Europe due to integration efforts. This was offset by higher than average SG&A expenditures at Rotring and Rubbermaid. As these acquisitions are integrated, the Company expects their SG&A spending as a percentage of net sales to decline. In the second quarter of 1999, the Company recorded a pre-tax restructuring charge of $8.7 million ($5.3 million after taxes). The pre-tax charge related to the Rubbermaid acquisition, and included $3.5 million of merger costs, executive severance costs of $1.8 million and a $3.4 million of exit costs primarily related to impaired Rubbermaid capitalized computer software costs and facility exit costs (concurrent with the merger with Rubbermaid, the Company decided that all Rubbermaid businesses will be integrated into Newell's existing information systems, resulting in an impairment of Rubbermaid's capitalized software asset which will no longer be used). In the second quarter of 1998, Rubbermaid recorded a pre-tax restructuring charge of $8.5 million ($5.5 million after taxes). The 1998 restructuring charge primarily included costs associated with a U.S. plant closure in the Rubbermaid Home Products division, a reduction of the Rubbermaid sales and administrative staff in Asia, an Australian plant closure in the Rubbermaid Commercial Products division and the sale of Rubbermaid's joint venture in Japan. Trade names and goodwill amortization and other in the second quarter of 1999 were 0.8% of net sales or $12.6 million versus 0.7% or $10.6 million in the comparable quarter of 1998. Operating income in the second quarter of 1999 was 4.8% of net sales or $70.9 million versus operating income of 14.7% or $228.7 million in the comparable quarter of 1998. Excluding restructuring costs in 1998 and 1999 and other charges in 1999, operating income in the second quarter of 1999 was 13.3% or $213.0 million versus 15.2% or $237.2 million in the second quarter of 1998. The decrease in operating margins was primarily due to the 1998 Rotring, Panex and Gardinia acquisitions and to the Rubbermaid divisions whose margins declined in the second quarter of 1999 versus the second quarter of 1998. This decrease was offset partially by an increase in margins at several of the Company's core businesses. As the 1998 acquisitions and Rubbermaid are integrated, the Company expects their operating margins to improve. Net nonoperating expenses in the second quarter of 1999 were 1.7% of net sales or $27.6 million versus net nonoperating income of $0.3 million in the comparable quarter of 1998. The $27.9 million decrease in income was primarily due to a one-time net gain of $24.1 million on 20 the sale of the Company's decorative coverings product line in the second quarter of 1998. Excluding restructuring costs and other gains and charges in 1999 and 1998, the effective tax was 39.0% in the second quarter of 1999 versus 37.8% in the second quarter of 1998. Net income for the second quarter of 1999 was $30.1 million, compared to net income of $142.0 million in the second quarter of 1998. Diluted earnings per share were $0.11 in the second quarter of 1999 compared to $0.50 in the second quarter of 1998. Excluding 1999 restructuring costs of $8.7 million ($5.3 million after taxes), other 1999 pre-tax charges of $127.4 million ($77.7 million after taxes), 1998 restructuring costs of $8.5 million ($5.3 million after taxes), and the one-time net gain in 1998 on the sale of the Company's decorative coverings product line of $24.1 million ($14.7 million after taxes), net income declined $19.7 million or 14.8% to $113.1 million in the second quarter of 1999 versus $132.8 million in 1998. Diluted earnings per share, calculated on the same basis, decreased 14.9% to $0.40 in the second quarter of 1999 versus $0.47 in the second quarter of 1998. The decrease in net income and earnings per share in the second quarter of 1999 was primarily due to profit declines at the Rubbermaid divisions. These results were offset partially by an increase in operating results at several of the Newell's core businesses. Six Months Ended June 30, 1999 Vs. Six Months Ended June 30, 1998 ----------------------------------------------------------------- Net sales for the first six months of 1999 were $3,113.5 million, representing an increase of $151.9 million or 5.1% from $2,961.6 million in the comparable period of 1998. Results for 1998 have been restated to include the March 1999 Rubbermaid merger and the May 1998 Calphalon merger, which were accounted for as poolings of interests. The overall increase in net sales was primarily attributable to contributions from Panex (acquired in June 1998), Gardinia (acquired in August 1998), Rotring (acquired in September 1998), Ateliers 28 (acquired in March 1999) and 5% internal growth in the Newell core businesses. These increases were offset by a 3% decline at the Rubbermaid divisions. Net sales for each of the Company's segments (and the primary reasons for the increase or decrease) were as follows, in millions: 1999 1998 % change ---- ---- -------- Household Products: Former Housewares Group $ 409.9 $ 388.6 5.5%(1) Rubbermaid Divisions 1,228.6 1,268.4 (3.1)%(2) ------- ------- 1,638.5 1,657.0 (1.1)% Hardware & Home Furnishings 898.8 803.3 11.9%(3) Office Products 576.2 501.3 14.9%(4) ------- ------- $3,113.5 $2,961.6 5.1% ======= ======== 21 (1) Internal growth* of 7% plus Panex acquisition less Newell Plastics divestiture. (2) Unforecasted Rubbermaid promotional commitments made prior to the merger. (3) Internal growth of 2% plus the Gardinia and Ateliers 28 acquisitions. (4) Internal growth of 7% plus the Rotring acquisition less the Stuart Hall divestiture. * The Company defines internal growth as growth from the core businesses, which include continuing businesses owned more than two years and minor acquisitions. Gross income as a percentage of net sales in the first six months of 1999 was 27.1% or $844.1 million versus 29.5% or $873.1 million in the comparable period of 1998. Excluding charges of $38.4 million relating to the Rubbermaid merger, gross income in the first six months of 1999 was $882.5 million or 28.3% of net sales. Excluding charges, gross margins at the Newell core businesses increased while the 1998 acquisitions had gross margins which were lower than the Company's average gross margins and the Rubbermaid divisions' gross margins declined in the first six months of 1999 versus the first six months of 1998. As the 1998 acquisitions and Rubbermaid divisions are integrated, the Company expects their gross margins to improve. Selling, general and administrative expenses ("SG&A") in the first six months of 1999 were 18.7% of net sales or $582.5 million versus 15.6% or $463.1 million in the comparable period of 1998. Excluding charges of $89.0 million relating to the Rubbermaid merger, SG&A in the first six months of 1999 was $493.5 million or 15.9% of net sales. Excluding charges, SG&A as a percentage of net sales declined at Newell core businesses and at Newell Window Fashions Europe through integration efforts. This was more than offset by higher than average SG&A expenditures at Rotring and Rubbermaid. As these acquisitions are integrated, the Company expects their SG&A spending as a percentage of net sales to decline. In the first six months of 1999, the Company recorded a pre-tax restructuring charge of $186.7 million ($159.3 million after taxes). The pre-tax charge related to the Rubbermaid acquisition, and included $36.8 million of merger costs (investment banking, legal and accounting fees), executive severance costs of $85.1 million, a $64.8 million of exit costs primarily related to impaired Rubbermaid capitalized computer software costs and facility exit costs (concurrent with the merger with Rubbermaid, the Company decided that all Rubbermaid businesses will be integrated into Newell's existing information systems, resulting in an impairment of Rubbermaid's capitalized software asset which will no longer be used). In the first six months of 1998, Rubbermaid recorded a pre-tax restructuring charge of $51.9 million ($33.7 million after taxes). The 1998 restructuring charge primarily included costs associated with 22 a U.S. plant closure in the Rubbermaid Home Products division, a reduction of the Rubbermaid sales and administrative staff in Asia, an Australian plant closure in the Rubbermaid Commercial Products division and the sale of Rubbermaid's joint venture in Japan. Trade names and goodwill amortization and other in the first six months of 1999 were 0.8% of net sales or $24.7 million versus 1.1% or $32.4 million in the first six months of 1998. Excluding charges in 1998 of $11.4 million (which included write-offs of intangible assets), trade names and goodwill amortization and other was 0.7% of net sales. Operating income in the first six months of 1999 was 1.6% of net sales or $50.2 million versus 11.0% or $325.7 million in the comparable period of 1998. Excluding restructuring costs in 1998 and 1999 and other charges in 1998 and 1999, operating income in the first six months of 1999 was 11.7% or $364.3 million versus 13.1% or $389.0 million in the first six months of 1999 versus 1998. The decrease in operating margins was primarily due to the 1998 acquisitions and to the Rubbermaid divisions whose margins declined in the first six months of 1998. This decrease was offset partially by an increase in margins at several of the Newell's core businesses. As the 1998 acquisitions and Rubbermaid are integrated, the Company expects their operating margins to improve. Net nonoperating expenses in the first six months of 1999 were 1.8% of net sales or $55.9 million versus net nonoperating income of 5.6% of net sales or 164.6 million in the comparable period of 1998. The $220.5 million decrease in income was primarily due to net gains of $191.5 million and $24.1 million on the sales of the Company's stake in Black & Decker and the Company's decorative coverings product line. Excluding restructuring costs and other gains and charges in 1999 and 1998, the effective tax was 39.0% in the first six months of 1999 versus 37.7% in the first six months of 1998. The net loss for the first six months of 1999 was $48.9 million, compared to net income of $300.5 million in the first six months of 1998. Diluted earnings (loss) per share were $(0.17) in the six months of 1999 compared to $1.06 in the first six months of 1998. Excluding 1999 restructuring costs of $186.7 million ($159.3 million after taxes), other 1999 pre-tax charges of $127.4 million ($77.7 million after taxes), 1998 restructuring costs of $51.9 million ($33.7 million after taxes), the net gain in 1998 on the sale of Black & Decker stock of $191.5 million ($115.7 million after taxes), the 1998 net gain of $24.1 million ($14.7 million after taxes) on the sale of the Company's decorative coverings product line, and other 1998 pre-tax charges of $11.4 million ($6.9 million after taxes), net income declined $22.6 million or 10.7% to $188.1 million the first six months of 1999 versus $210.7 million in 1998. Diluted earnings per share, calculated on the same basis, decreased 10.7% to $0.67 in the first six months of 1999 23 versus $0.75 in the first six months of 1998. The decrease in net income and earnings per share in the first six months of 1999 was primarily due to declines in profits at the Rubbermaid divisions. These results were offset partially by an increase in operating results at several of the Newell core businesses. 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 by operating activities in the first six months of 1999 was $24.1 million compared $47.4 million for the comparable period of 1998. On March 3, 1998, the Company received $378.3 million from the sale of 7,862,300 shares of Black & Decker common stock. In April 1998, the Company received $51.3 million from the sale of its decorative coverings product line. The proceeds from the sales were used to pay down commercial paper. The Company has short-term foreign and domestic uncommitted lines of credit with various banks which are available for short-term financing. Borrowings under the Company's uncommitted lines of credit are subject to discretion of the Lender. The Company's uncommitted lines of credit do not have a material impact on the Company's liquidity. Borrowings under the Company's uncommitted lines of credit at June 30, 1999 totaled $86.7 million. During 1997, the Company amended its revolving credit agreement to increase the aggregate borrowing limit to $1.3 billion, at a floating interest rate. The revolving credit agreement will terminate in August 2002. At June 30, 1999, there were no borrowings under the revolving credit agreement. In lieu of borrowings under the Company's revolving credit agreement, the Company may issue up to $1.3 billion of commercial paper. The Company's revolving credit agreement provides the committed backup liquidity required to issue commercial paper. Accordingly, commercial paper may only be issued up to the amount available for borrowing under the Company's revolving credit agreement. At June 30, 1999, $644.5 million (principal amount) of commercial paper was outstanding. The entire amount is classified as long-term debt. The Company had outstanding at June 30, 1999 a total of $470.5 million of Medium-term notes issued during 1998. The maturities on 24 these notes range from five to thirty years at an average interest rate of 6.0%. At June 30, 1999, the Company also had outstanding $257.0 million (principal amount) of Medium-term notes issued under a previous program with maturities ranging from five to ten years at an average interest rate of 6.2%. At June 30, 1999 the Company had outstanding $150.0 million (principal amount) of Senior Notes with a maturity of November 15, 2006 at an interest rate of 6.6%. Uses: The Company's primary uses of liquidity and capital resources include acquisitions, dividend payments and capital expenditures. Cash used in acquiring businesses was $48.8 million and $370.5 million in the first six months of 1999 and 1998, respectively. In the first six months of 1998, the Company acquired Swish Track and Pole, Curver, Panex and made another minor acquisition for cash purchase prices totaling $371.6 million. In the first six months of 1999, the Company acquired Ateliers 28 for a cash purchase price of $40.3 million. All of these acquisitions were accounted for as purchases and were paid for with proceeds obtained from the issuance of commercial paper. Cash used for restructuring activities was $121.7 million and $19.7 million in the first six months of 1999 and 1998, respectively. Such cash payments represent primarily employee termination benefits and other merger expenses. There are no remaining cash payments to be made associated with the restructuring charges reflected in the consolidated financial statements. Capital expenditures were $89.0 million and $117.5 million in the first six months of 1999 and 1998, respectively. Aggregate dividends paid during the first six months of 1999 and 1998 were $113.0 million ($0.40 per share) and $105.8 million ($0.38 per share), respectively. Retained earnings decreased in the first six months of 1999 by $161.9 million. Retained earnings increased in the first six months of 1998 by $168.2 million. The decrease in 1999 was primarily due to restructuring costs of $186.7 million ($159.3 million after taxes) and other pre-tax charges of $127.4 million ($77.7 million after taxes). The increase in 1998 was primarily due to a net gain of $191.5 million ($115.7 million after taxes) on the sale of the Black & Decker common stock. Working capital at June 30, 1999 was $1,283.6 million compared to $1,278.8 million at December 31, 1998. The current ratio at June 30, 1999 was 2.03:1 compared to 2.09:1 at December 31, 1998. 25 Total debt to total capitalization (total debt is net of cash and cash equivalents, and total capitalization includes total debt, convertible preferred securities and stockholders equity) was .33:1 at June 30, 1999 and .30:1 at December 31, 1998. 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, and has no material sensitivity to changes in market rates and prices on its derivative financial instrument positions. The Company's primary market risk is interest rate exposure, primarily in the United States. The Company manages interest rate exposure through its conservative debt ratio target and its mix of fixed and floating rate debt. Interest rate exposure was reduced significantly in 1997 from the issuance of $500 million 5.25% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of a Subsidiary Trust, the proceeds of which reduced commercial paper. 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 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 transactions are deferred and included in the basis of the underlying transactions. Derivatives used to hedge intercompany transactions are marked to market with the corresponding gains or losses included in the consolidated statements of income. 26 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. It estimates a loss in fair market value using statistical modeling techniques and including 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 as they represent economic not financial losses. Time Confidence June 30, 1999 Period Level ------------- ------ ---------- (In millions) Interest rates $9.2 1 day 95% Foreign exchange $2.5 1 day 95% The 95% confidence interval signifies the Company's degree of confidence that actual losses would not exceed the estimated losses shown above. The amounts shown here disregard the possibility that interest rates and foreign currency exchange rates could move in the Company's favor. The value-at-risk model assumes that all movements in these rates will be adverse. Actual experience has shown that gains and losses tend to offset each other over time, and it is highly unlikely that the Company could experience losses such as these over an extended period of time. These amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets. YEAR 2000 COMPUTER COMPLIANCE State of Readiness ------------------ Any computer equipment that uses two digits instead of four to specify the year will be unable to interpret dates beyond the year 1999. This "Year 2000" issue could result in system failures or miscalculations causing disruptions of operations. 27 In order to address Year 2000 compliance issues, the Company has initiated a comprehensive project designed to minimize or eliminate these kinds of operational disruptions in its information technology ("IT") systems, as well as its non-IT systems (e.g., HVAC systems and building security systems). The project consists of six phases: company recognition, inventory of systems, impact analysis, planning, fixing and testing. The Company's project is approximately 90% complete with all phases for its IT systems and 80% complete for its non-IT systems in the United States and Canada. The Company anticipates that all phases will be completed for all IT and non-IT systems in the United States and Canada by November 30, 1999. With respect to International IT systems, approximately 75% of the Company's business systems are currently compliant and approximately 25% are in the process of being fixed and tested. With respect to International non-IT systems, approximately 80% of the Company's non-IT systems are currently compliant and 20% are in the process of being fixed and tested. The Company anticipates that all phases will be completed for all foreign IT and non-IT systems by November 30, 1999. As part of its Year 2000 project, the Company has initiated communications with all of its key vendors and services suppliers (including raw material and utility providers) to assess their state of Year 2000 readiness. Most of its key vendors and service suppliers have responded in writing to the Company's Year 2000 readiness inquiries and have said they will be Year 2000 compliant. The Company plans to continue assessment of its third party business partners, including face-to-face meetings with management and/or onsite visits as deemed appropriate. The Company is prepared in cases where its main vendor or service provider cannot continue with its business due to Year 2000 problems to use alternate vendors as sources for required materials. Despite the Company's efforts, there can be no guarantee that the systems of other companies which the Company relies upon to conduct its day-to-day business will be compliant. Costs ----- The Company estimates that it will incur total expenses of $14 million to $16 million in conjunction with the Year 2000 compliance project (including such expenses relating to the Rubbermaid operations). As of June 30, 1999, the Company has spent $15 million in conjunction with this project. The majority of these expenditures were capitalized since they were associated with purchased software that would have been replaced in the normal course of business. 28 Risks ----- With respect to the risks associated with its IT and non-IT systems, the Company believes that the most likely worst case scenario is that the Company may experience minor system malfunctions and errors in the early days and weeks of 2000 that were not detected during its fixing and testing efforts. The Company also believes that these problems will not have a material effect on the Company's financial condition or results of operations. With respect to the risks associated with third parties, the Company believes that the most likely worst case scenario is that some of the Company's vendors will not be compliant and will have difficulty filling orders and delivering goods. Management also believes that the number of such vendors will have been minimized by the Company's program of identifying non-compliant vendors and replacing or jointly developing alternative supply or delivery solutions prior to 2000. Due to the diversity of its product lines, the Company does not have material sensitivity to any one vendor or service supplier. The Company has limited the scope of its risk assessment to those factors upon which it can reasonably be expected to have an influence. For example, the Company has made the assumption that government agencies, utility companies and telecommunications providers will continue to operate. Obviously, the lack of such services could have a material effect on the Company's ability to operate, but the Company has little if any ability to influence such an outcome, or to reasonably make alternative arrangements in advance for such services in the event they are unavailable. Newell Rubbermaid products are not dependent on dates and therefore are not affected by the transition to the Year 2000. Contingency Plans ----------------- In the United States, the Company has all of its major business systems running on a centralized system for all of its operating divisions. Although extensive testing has been completed for these systems, the following contingency plan has been adopted for Year 2000 issues that may occur on January 1, 2000 and thereafter: - A triage team has been assembled which has the authority and financial capabilities to rectify all systems problems that may occur. - The team consists of Corporate officers and managers from every support function. - The team has access to vendor support hotlines and internal staffs. - Once a problem has been identified and course of action determined, staff will be assigned to provide around-the-clock corrective actions until the problem is resolved. 29 EURO CURRENCY CONVERSION On January 1, 1999, the "Euro" became the common legal currency for 11 of the 15 member countries of the European Union. On that date, the participating countries fixed conversion rates between their existing sovereign currencies ("legacy currencies") and the Euro. On January 4, 1999, the Euro began trading on currency exchanges and became available for non-cash transactions, if the parties elect to use it. The legacy currencies will remain legal tender through December 31, 2001. Beginning January 1, 2002, participating countries will introduce Euro-denominated bills and coins, and effective July 1, 2002, legacy currencies will no longer be legal tender. After the dual currency phase, all businesses in participating countries must conduct all transactions in the Euro and must convert their financial records and reports to be Euro-based. The Company has commenced an internal analysis of the Euro conversion process to prepare its information technology systems for the conversion and analyze related risks and issues, such as the benefit of the decreased exchange rate risk in cross-border transactions involving participating countries and the impact of increased price transparency on cross-border competition in these countries. The Company believes that the Euro conversion process will not have a material impact on the Company's businesses or financial condition on a consolidated basis. FORWARD LOOKING STATEMENTS Forward-looking statements in this Report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to, but are not limited to, such matters as sales, income, earnings per share, return on equity, capital expenditures, dividends, capital structure, free cash flow, debt to capitalization ratios, interest rates, internal growth rates, the Euro conversion plan and related risks, the Year 2000 plan and related risks, pending legal proceeding and claims (including environmental matters), future economic performance, management's plans, goals and objectives for future operations and growth or the assumptions relating to any of the forward-looking information. The Company cautions that forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and that 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 the Company's Annual Report on Form 10-K, the documents incorporated by reference therein and in Exhibit 99 thereto. 30 PART I. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the section entitled "Market Risk" in the Company's Management's Discussion and Analysis of Results of Operations and Financial Condition (Part I, Item 2). PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to certain legal proceedings and claims, including the environmental matters described below, that have arisen in the ordinary conduct of its business. As of June 30, 1999, the Company was involved in various matters concerning federal and state environmental laws and regulations, including matters in which the Company has been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as a potentially responsible party ("PRPs") at contaminated sites under the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and equivalent state laws. In assessing its environmental response costs, the Company has considered several factors, including: the extent of the Company's volumetric contribution at each site relative to that of other PRPs; the kind of waste; the terms of existing cost sharing and other applicable agreements; the financial ability of other PRPs to share in the payment of requisite costs; the Company's prior experience with similar sites; environmental studies and cost estimates available to the Company; the effects of inflation on cost estimates; and the extent to which the Company's and other parties' status as PRPs is disputed. Based on information available to it, the Company's estimate of environmental response costs associated with these matters as of June 30, 1999 ranged between $17.0 million and $22.0 million. As of June 30, 1999, the Company had a reserve equal to $20.3 million for such environmental response costs in the aggregate. No insurance recovery was taken into account in determining the Company's cost estimates or reserve, nor do the Company's cost estimates or reserve reflect any discounting for present value purposes. Because of the uncertainties associated with environmental investigations and response activities, the possibility that the Company could be identified as a PRP at sites identified in the future that require the incurrence of environmental response costs and the possibility of additional sites as a result of businesses acquired, 31 actual costs to be incurred by the Company may vary from the Company's estimates. Subject to difficulties in estimating future environmental response costs, the Company does not expect that any amount it may have to pay in connection with environmental matters in excess of amounts reserved will have a material adverse effect on its consolidated financial statements. Reference is made to the disclosure of several legal proceedings relating to the importation and distribution of vinyl mini-blinds made with plastic containing lead stabilizers in Note 14 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. All such litigation is pending. Although management of the Company cannot predict the ultimate outcome of these matters with certainty, it believes that their ultimate resolution will not have a material effect on the Company's consolidated financial statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.12 The Company's 1993 Stock Option Plan, effective February 9, 1993, as amended May 26, 1999. 11. Computation of Earnings per Share of Common Stock 12. Statement of Computation of Ratio of Earnings to Fixed Charges 27. Financial Data Schedule (b) Reports on Form 8-K: Registrant filed a Current Report on Form 8-K dated June 30, 1999, restating Registrant's financial statements for 1998, 1997 and 1996 to reflect the pooling of interests accounting used in the merger with Rubbermaid Incorporated. 32 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: August 13, 1999 /s/ William T. Alldredge ------------------------------------ William T. Alldredge Vice President - Finance Date: August 13, 1999 /s/ Brett E. Gries ------------------------------------- Brett E. Gries Vice President - Accounting & Audit 33