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 September 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 October 28, 1999: 282,038,302
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 1998* 1999 1998*
---- ---- ---- ----
Net sales $1,609,480 $1,559,774 $4,722,987 $4,521,404
Cost of products sold 1,164,910 1,081,725 3,434,303 3,170,204
---------- ---------- ---------- ----------
GROSS INCOME 444,570 478,049 1,288,684 1,351,200
Selling, general and
administrative expenses 267,485 227,399 849,978 690,509
Restructuring costs 14,506 21,812 201,227 73,740
Trade names and goodwill
amortization and other 12,692 11,448 37,355 43,832
---------- ---------- ---------- ----------
OPERATING INCOME 149,887 217,390 200,124 543,119
---------- ---------- ---------- ----------
Nonoperating expenses (income):
Interest expense 26,012 29,923 75,713 73,600
Other, net 4,634 (34,784) 10,922 (243,044)
---------- ---------- ---------- ----------
Net nonoperating
expenses (income) 30,646 (4,861) 86,635 (169,444)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES 119,241 222,251 113,489 712,563
Income taxes 46,504 104,849 89,697 294,653
---------- ---------- ---------- ----------
NET INCOME $ 72,737 $ 117,402 $ 23,792 $ 417,910
========== ========== ========== ==========
Earnings per share:
Basic $ 0.26 $ 0.42 $ 0.08 $ 1.49
Diluted 0.26 0.42 0.08 1.47
Dividends per share $ 0.20 $ 0.19 0.60 0.57
Weighted average shares
outstanding:
Basic 281,937 280,778 281,738 280,608
Diluted 292,044 292,250 291,765 291,728
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)
SEPTEMBER 30, % OF DECEMBER 31, % OF
1999 TOTAL 1998 TOTAL
------------- ----- ------------ -----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33,982 0.5% $ 86,554 1.4%
Accounts receivable, net 1,207,536 19.2% 1,078,530 17.2%
Inventories, net 1,037,793 16.5% 1,033,488 16.4%
Deferred income taxes 114,349 1.8% 108,192 1.7%
Prepaid expenses and other 145,802 2.3% 143,885 2.3%
---------- ---- ---------- ----
TOTAL CURRENT ASSETS 2,539,462 40.3% 2,450,649 39.0%
MARKETABLE EQUITY SECURITIES 14,387 0.2% 19,317 0.3%
OTHER LONG-TERM INVESTMENTS 64,298 1.0% 57,967 0.9%
OTHER ASSETS 290,256 4.7% 267,073 4.2%
PROPERTY, PLANT AND
EQUIPMENT, NET 1,482,262 23.5% 1,627,090 25.9%
TRADE NAMES AND GOODWILL 1,908,309 30.3% 1,867,059 29.7%
---------- ---- ---------- ----
TOTAL ASSETS $6,298,974 100.0% $6,289,155 100.0%
========== ===== ========== =====
See notes to consolidated financial statements.
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(Unaudited, in thousands)
SEPTEMBER 30, % OF DECEMBER 31, % OF
1999 TOTAL 1998 TOTAL
------------ ----- ----------- -----
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 81,673 1.3% $ 94,634 1.5%
Accounts payable 332,732 5.3% 322,080 5.1%
Accrued compensation 125,685 2.0% 110,471 1.8%
Other accrued liabilities 873,567 13.9% 610,618 9.7%
Income taxes - - 26,744 0.4%
Current portion of long-term debt 946 - 7,334 0.1%
---------- ---- ---------- ----
TOTAL CURRENT LIABILITIES 1,414,603 22.5% 1,171,881 18.6%
LONG-TERM DEBT 1,361,990 21.6% 1,393,865 22.2%
OTHER NONCURRENT LIABILITIES 326,576 5.2% 374,293 6.0%
DEFERRED INCOME TAXES - - 4,527 -
MINORITY INTEREST 1,842 - 857 -
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; 281,976 4.5% 281,747 4.5%
Outstanding shares:
1999 282.0 million
1998 281.7 million
Additional paid-in capital 209,406 3.4% 183,102 2.9%
Retained earnings 2,319,423 36.8% 2,465,064 39.2%
Accumulated other comprehensive
income (116,842) (1.9)% (86,181) (1.4)%
---------- ---- ---------- ----
TOTAL STOCKHOLDERS'
EQUITY 2,693,963 42.8% 2,843,732 45.2%
---------- ---- ---------- ----
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,298,974 100.0% $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 NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998*
---- ----
OPERATING ACTIVITIES:
Net income $ 23,792 $ 417,910
Adjustments to reconcile net income
to net cash provided by
Operating activities:
Depreciation and amortization 198,202 205,622
Deferred income taxes 25,061 34,915
Net (gain) loss on sale of marketable
equity securities 822 (115,674)
Sale of businesses - (15,114)
Write-off of intangible
assets and other - 4,288
Other 159,323 43,803
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (123,436) (77,256)
Inventories (57,339) (71,806)
Other current assets (12,756) (49,699)
Accounts payable 1,416 (46,768)
Accrued liabilities and other 73,210 (142,464)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 288,295 187,757
----------- -----------
INVESTING ACTIVITIES:
Acquisitions, net (34,907) (636,710)
Expenditures for property,
plant and equipment (139,726) (226,161)
Proceeds on the sale of businesses,
net of taxes paid - 261,225
Sale of marketable
Equity securities 11,438 378,321
Disposals of non-current assets
and other 22,301 (33,336)
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES $ (140,894) $ (256,661)
=========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998*
---- ----
FINANCING ACTIVITIES:
Proceeds from issuance of debt $ 548,779 $ 646,983
Payments on notes payable
and long-term debt (603,812) (491,669)
Proceeds from exercised stock
options and other 26,537 709
Cash dividends (169,437) (159,091)
---------- ----------
NET CASH USED IN FINANCING
ACTIVITIES (197,933) (3,068)
--------- ----------
Exchange rate effect on cash (2,040) (188)
DECREASE IN CASH
AND CASH EQUIVALENTS (52,572) (72,160)
Cash and cash equivalents at
beginning of year 86,554 150,131
--------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 33,982 $ 77,971
========== ==========
Supplemental cash flow disclosures -
Cash paid during the period for:
Income taxes $ 105,995 $ 188,220
Interest $ 100,841 $ 76,754
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 were 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 $680.0
million in cash and assumed $94.0 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 $545.3 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. The integration plans for Gardinia and Rotring were
finalized during the third quarter of 1999 and resulted in integration
liabilities of $80.1 million for exit costs and employee terminations.
The Company's integration plans combined Gardinia into Newell Window
Fashions Europe and Rotring into Sanford International and Sanford
North America.
No integration liabilities have been included in the allocation
of purchase price for Ateliers as of September 30, 1999. Such costs
will be accrued upon finalization of the acquisition's integration
plan. The Company's finalized integration plan may include exit costs
for certain plants and product lines and employee terminations
associated with the integration of Ateliers into Newell Window
Fashions Europe. The final adjustments to the purchase price
allocation are not expected to be material to the consolidated
financial statements.
The unaudited consolidated results of operations for the nine
months ended September 30, 1999 and 1998 on a pro forma basis, as
though the Curver, Swish, Century, Panex, Gardinia, Rotring and
8
Ateliers businesses had been acquired on January 1, 1998, are as
follows (in millions, except per share amounts):
Nine Months Ended
September 30,
--------------------
1999 1998
---- ----
Net sales $ 4,732.2 $ 4,960.5
Net income $ 23.9 $ 410.0
Basic earnings per share $ 0.08 $ 1.46
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 0.7883 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 $38.2
million ($.13 per common share) of merger costs which were expensed
during the nine months ended September 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 (in millions):
9
Nine months ended September 30, 1999 1998
---------- -----------
Net sales:
Newell $ 2,819.6 $ 2,580.7
Rubbermaid 1,816.3 1,871.1
Calphalon 87.1 69.6
---------- ---------
Combined $ 4,723.0 $ 4,521.4
========= =========
Net income (loss):
Newell $ 171.8 $ 339.3
Rubbermaid (154.2) 79.1
Calphalon 6.2 (0.5)
--------- ---------
Combined $ 23.8 $ 417.9
========= =========
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 nine
months of 1998, Rubbermaid recorded pre-tax charges of $73.7 million.
The 1998 restructuring charge included: (1) $4.5 million relating to
employee severance and termination benefits for sales and
administrative employees, (2) $37.0 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
10
Rubbermaid's Asia Pacific regional headquarters and the related joint
venture in Japan and the closure of a distribution facility in France.
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 nine months of 1999, the Company recorded a pre-tax
restructuring charge of $201.2 million ($168.1 million after taxes).
The pre-tax charge related primarily to the Rubbermaid acquisition,
and included $38.2 million of merger costs (investment banking, legal
and accounting fees), executive severance costs of $89.4 million and a
$73.6 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):
September 30, December 31,
1999 1998
------------- -----------
Materials and supplies $ 255.5 $ 223.8
Work in process 149.1 137.2
Finished products 633.2 672.5
--------- ---------
$ 1,037.8 $ 1,033.5
========= =========
11
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
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):
September 30, December 31,
1999 1998
------------- ------------
Aggregate market value $ 14.4 $ 19.3
Aggregate cost 13.8 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):
September 30, December 31,
1999 1998
------------- ------------
Land $ 54.6 $ 78.4
Buildings and improvements 681.6 705.6
Machinery and equipment 2,151.7 2,166.9
---------- ---------
2,887.9 2,950.9
Allowance for depreciation (1,405.6) (1,323.8)
---------- ----------
$ 1,482.3 $ 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):
September 30, December 31,
1999 1998
------------- -----------
Medium-term notes $ 877.5 $ 883.5
Commercial paper 463.0 500.2
Other long-term debt 22.4 17.5
--------- --------
1,362.9 1,401.2
Current portion (0.9) (7.3)
--------- --------
$ 1,362.0 $ 1,393.9
========= =========
Commercial paper in the amount of $463.0 million at September 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
nine months of 1999 and 1998 is shown below (in millions, except per
share data):
14
Convertible
Basic "In the money" Preferred Diluted
Method stock options Securities Method(1)
------ ------------- ---------- ---------
Three months ended
September 30, 1999:
Net Income $ 72.7 N/A 4.1 $ 76.8
Weighted average
shares outstanding 281.9 0.2 9.9 292.0
Earnings per Share $ 0.26 - - $ 0.26
Three months ended
September 30, 1998:
Net Income $ 117.4 $ N/A $ 4.0 $ 121.4
Weighted average
shares outstanding 280.8 1.6 9.9 292.3
Earnings per share $ 0.42 - - $ 0.42
First nine months, 1999:
Net Income $ 23.8 N/A N/A $ 23.8
Weighted average
shares outstanding 281.7 N/A N/A 281.7
Earnings per Share $ 0.08 - - $ 0.08
First nine months, 1998:
Net Income $ 417.9 N/A $ 12.2 $ 430.1
Weighted average
shares outstanding 280.6 1.2 9.9 291.7
Earnings per share $ 1.49 - - $ 1.47
(1) Diluted earnings per share for the nine months ended
September 30, 1999 exclude the impact of "in the money" stock
options and convertible preferred securities because they are
antidilutive.
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.
15
The following table displays the components of Accumulated Other
Comprehensive Income (in millions):
Net Accumulated
Unrealized Foreign Other
Gains/(Losses) Currency Comprehensive
on Securities Translation Income (Loss)
-------------- ----------- --------------
Balance at December 31, 1998 $ (4.1) $ (82.1) $ (86.2)
Change during nine months 4.5 (35.1) (30.6)
------- ------- --------
Balance at September 30, 1999 $ 0.4 $ (117.2) $ (116.8)
======= ======== =========
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
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 September 30,
--------- -----------------------------
1999 1998
(In Millions)
Household Products $ 824.7 $ 853.7
Hardware & Home Furnishings 475.5 439.8
Office Products 309.3 266.3
--------- ---------
Total Net Sales $ 1,609.5 $ 1,559.8
========= =========
16
Three Months
Operating Income Ended September 30,
--------------------------
1999 1998
---- ----
(In Millions)
Household Products $ 67.5 $ 101.0
Hardware & Home Furnishings 67.2 89.7
Office Products 46.8 61.4
Corporate (17.1) (12.9)
-------- -------
Subtotal $ 164.4 $ 239.2
Restructuring costs (14.5) (21.8)
-------- -------
Total Operating Income $ 149.9 $ 217.4
======== =======
Nine Months
Net Sales Ended September 30,
--------- -----------------------------
1999 1998
---- -----
(In Millions)
Household Products $ 2,463.2 $ 2,510.7
Hardware & Home Furnishings 1,374.3 1,243.1
Office Products 885.5 767.6
--------- ---------
Total Net Sales $ 4,723.0 $ 4,521.4
========= =========
Nine Months
Operating Income Ended September 30,
----------------- ----------------------------
1999 1998
---- ----
(In Millions)
Household Products $ 104.7 $ 294.4
Hardware & Home Furnishings 196.0 202.4
Office Products 158.4 173.0
Corporate (57.8) (53.0)
-------- --------
Subtotal $ 401.3 $ 616.8
Restructuring costs (201.2) (73.7)
-------- --------
Total Operating Income $ 200.1 $ 543.1
======== =======
17
Identifiable Assets September 30, December 31,
------------------- ------------------------------
1999 1998
---- ----
(In Millions)
Household Products $ 2,201.2 $ 2,286.3
Hardware & Home Furnishings 1,030.1 995.8
Office Products 662.0 643.0
Corporate 2,394.3 2,364.1
--------- ---------
Total Identifiable Assets $ 6,287.6 $ 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 and the sales of Stuart Hall,
Newell Plastics and Decora. 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.
NOTE 13 - SUBSEQUENT EVENTS
The Company announced on October 12, 1999 that it had agreed to
purchase shares in Reynolds S.A. ("Reynolds"), representing 51.24% of
Reynolds capital. The minority shareholders have been offered the
possibility of selling their shares in a public tender offer. If
following the offer the Company holds at least 95% of the voting
rights of Reynolds, it will submit a public offer of withdrawal
followed by a corporate merger after which the Company will own 100%
of the shares of Reynolds. Reynolds, located in France, is a leading
innovator, manufacturer and supplier of writing instruments in Europe,
Asia and South America.
The Company announced on October 29, 1999 that it acquired the
consumer products division of McKechnie plc ("McKechnie"), which is
based in the United Kingdom and has operations in Germany, the United
18
States and the Netherlands. Companies acquired include Harrison
Drape, a manufacturer and marketer of drapery hardware and window
furnishings, Spur Shelving, a manufacturer and marketer of shelving
and storage products, Douglas Kane, a manufacturer and marketer of
cabinet hardware, and Nenplas/Homelux, a manufacturer and marketer of
functional trims.
19
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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998* 1999 1998*
---- ---- ---- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.4% 69.4% 72.7% 70.1%
----- ----- ----- -----
GROSS INCOME 27.6% 30.6% 27.3% 29.9%
Selling, general and
administrative expenses 16.6% 14.6% 18.0% 15.3%
Restructuring costs 0.9% 1.4% 4.3% 1.6%
Trade names and goodwill
amortization and other 0.8% 0.7% 0.8% 1.0%
----- ----- ----- -----
OPERATING INCOME 9.3% 13.9% 4.2% 12.0%
----- ----- ----- -----
Nonoperating expenses (income):
Interest expense 1.6% 1.9% 1.6% 1.6%
Other, net 0.3% (2.2)% 0.2% (5.3)%
----- ----- ----- -----
Net nonoperating
expenses (income) 1.9% (0.3)% 1.8% (3.7)%
----- ----- ----- -----
INCOME BEFORE INCOME
TAXES 7.4% 14.2% 2.4% 15.7%
Income taxes 2.9% 6.7% 1.9% 6.5%
----- ----- ----- -----
NET INCOME 4.5% 7.5% 0.5% 9.2%
===== ===== ===== =====
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.
20
Three Months Ended September 30, 1999 Vs. Three Months Ended September
30, 1998
----------------------------------------------------------------------
Net sales for the three months ended September 30, 1999 ("third
quarter") were $1,609.5 million, representing an increase of $49.7
million or 3.2% from $1,559.8 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 3.2% increase in net
sales was primarily attributable to contributions from Gardinia
(acquired in August 1998), Rotring (acquired in September 1998),
Ateliers 28 (acquired in March 1999) and strong sales at Graco/Century
and Rubbermaid Commercial Products. These increases were partially
offset by lower sales at Rubbermaid Home Products, Little Tikes and
the short term impact of the Hechinger bankruptcy. 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 $ 236.9 $ 251.0 (5.6)% (a)
Rubbermaid Divisions 587.8 602.7 (2.5)% (b)
-------- --------
824.7 853.7 (3.4)%
Hardware & Home Furnishings 475.5 439.8 8.1% (c)
Office Products 309.3 266.3 16.1% (d)
--------- --------
$1,609.5 $1,559.8 3.2%
========= ========
(a) Newell Plastics divestiture.
(b) Strong sales at Graco/Century and Rubbermaid Commercial Products, offset by
lower sales at Little Tikes and Rubbermaid Home Products due mainly to SKU
reductions.
(c) Gardinia and Ateliers 28 acquisitions offset partially by the impact of the
Hechinger bankruptcy.
(d) Internal growth* of 3% plus the Rotring acquisition less the Stuart Hall
divestiture.
* The Company defines internal growth as growth from core businesses, which
include continuing businesses owned more than two years and minor
acquisitions.
21
Gross income as a percentage of net sales in the third quarter of
1999 was 27.6% or $444.6 million versus 30.6% or $478.0 million in the
comparable quarter of 1998. Excluding charges of $23.2 million
relating primarily to the Rubbermaid merger, gross income in the third
quarter of 1999 was $467.8 million or 29.1% of net sales. Excluding
charges, gross margins were negatively affected by lower sales as a
result of the Hechinger bankruptcy, labor ramp-up costs at a window
treatments facility, start-up costs associated with a rebuilt glass
furnace at a glassware plant and higher resin costs.
Selling, general and administrative expenses ("SG&A") in the
third quarter of 1999 were 16.6% of net sales or $267.5 million versus
14.6% or $227.4 million in the comparable quarter of 1998. Excluding
charges of $47.2 million relating primarily to the Rubbermaid merger,
SG&A in the third quarter of 1999 was $220.3 million or 13.7% of net
sales. Excluding charges, SG&A as a percent of sales declined
significantly, primarily as a result of the aggressive cost savings
measures taken as part of the Rubbermaid integration process.
In the third quarter of 1999, the Company recorded a pre-tax
restructuring charge of $14.5 million ($8.9 million after taxes). The
pre-tax charge related to the Rubbermaid merger, and included $1.3
million of merger costs, severance costs of $4.5 million and $8.7
million of exit costs primarily related to impaired Rubbermaid
capitalized computer software costs and facility exit costs
(concurrent with the Rubbermaid merger, 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 third quarter of 1998, Rubbermaid recorded a pre-tax
restructuring charge of $21.8 million ($14.2 million after taxes).
The 1998 restructuring charge included costs associated with a
restructuring program implemented by previous Rubbermaid management in
the first quarter of 1998. This program included, among other items,
facility closures.
Trade names and goodwill amortization and other in the third
quarter of 1999 were 0.8% of net sales or $12.7 million versus 0.7% or
$11.5 million in the comparable quarter of 1998.
Operating income in the third quarter of 1999 was 9.3% of net
sales or $149.9 million versus operating income of 13.9% or $217.4
million in the comparable quarter of 1998. Excluding restructuring
costs in 1998 and 1999 and other charges in 1999, operating income in
the third quarter of 1999 was 14.6% of net sales or $234.8 million
versus 15.3% or $238.9 million in the third quarter of 1998. The
decrease in operating margins was primarily due to the impact of the
Hechinger bankruptcy, labor ramp-up costs at a window treatments
facility, start-up costs associated with a rebuilt glass furnace at a
glass manufacturing facility and higher resin costs. This was
22
partially offset by aggressive cost savings measures taken as a part
of the integration process at Rubbermaid.
Net nonoperating expenses in the third quarter of 1999 were 1.9%
of net sales or $30.6 million versus net nonoperating income of $4.9
million in the comparable quarter of 1998. The $35.6 million decrease
in income was primarily due to the net pre-tax gain of $36.8 million
gain on the sales of Newell Plastics and Stuart Hall in the third
quarter of 1998.
Excluding restructuring costs and other gains and charges in 1999
and 1998, the effective tax was 39.0% in the third quarter of 1999
versus 37.4% in the third quarter of 1998.
Net income for the third quarter of 1999 was $72.7 million,
compared to net income of $117.4 million in the third quarter of 1998.
Diluted earnings per share were $0.26 in the third quarter of 1999
compared to $0.42 in the third quarter of 1998. Excluding 1999 pre-
tax restructuring costs of $14.5 million ($8.9 million after taxes)
and other 1999 pre-tax charges of $70.4 million ($42.9 million after
taxes), net income in the third quarter of 1999 was $124.5 million.
Excluding 1998 pre-tax restructuring costs of $21.8 million ($14.2
million after taxes) and net pre-tax gains in 1998 from the sales
Stuart Hall and Newell Plastics and other non-recurring items of $36.5
million ($2.1 million after taxes), net income in the third quarter of
1998 was $129.5 million. Diluted earnings per share, calculated on
the same basis, decreased 4.2% to $0.44 in the third quarter of 1999
versus $0.46 in the third quarter of 1998. The decrease in net income
and earnings per share in the third quarter of 1999 was primarily due
to the impact of the Hechinger bankruptcy, labor ramp-up costs at a
window treatments facility, start-up costs associated with a rebuilt
glass furnace at a glass manufacturing facility and higher resin
costs. This was partially offset by aggressive cost savings measures
taken as a part of the integration process at Rubbermaid.
Nine Months Ended September 30, 1999 Vs. Nine Months Ended September
30, 1998
--------------------------------------------------------------------
Net sales for the first nine months of 1999 were $4,723.0
million, representing an increase of $201.6 million or 4.5% from
$4,521.4 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 is attributable in part
to strong sales at Mirro, Calphalon, Sanford, Rubbermaid Commercial
Products and Graco/Century, plus the 1998 acquisitions of Gardinia and
Rotring, and the 1999 acquisition of Ateliers 28. These increases
were offset partially by the 1998 divestitures of Stuart Hall,
Newell Plastics and Decora and lower sales volume at Rubbermaid Home
Products and Little Tikes, due in part to promotional commitments made
prior to the Rubbermaid merger and planned SKU reductions. Net sales
23
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 $ 646.8 $ 639.6 1.1%(a)
Rubbermaid Divisions 1,816.4 1,871.1 (2.9)%(b)
------- -------
2,463.2 2,510.7 (1.9)%
Hardware & Home Furnishings 1,374.3 1,243.1 10.6%(c)
Office Products 885.5 767.6 15.4%(d)
------- -------
$4,723.0 $4,521.4 4.5%
======== ========
(a) Internal growth* of 5% less the Newell Plastics divestiture.
(b) Strong sales at Graco/Century and Rubbermaid Commercial
Products, offset by lower sales at Little Tikes and
Rubbermaid Home Products due primarily to 1 promotional
commitments made prior to the Rubbermaid merger that
primarily affected first half 1999 results, and 2 planned
SKU reductions.
(c) Internal growth of 1% plus Gardinia and Ateliers 28
acquisitions.
(d) Internal growth of 6% plus Rotring acquisition less the
divestiture of Stuart Hall.
* 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 nine
months of 1999 was 27.3% or $1,288.7 million versus 29.9% or $1,351.2
million in the comparable period of 1998. Excluding charges of $61.6
million relating primarily to the Rubbermaid merger, gross income in
the first nine months of 1999 was $1,350.3 million or 28.6% of net
sales. The decrease in gross margins was primarily due to lower
sales as a result of the Hechinger bankruptcy, higher resin costs, and
in the first half of 1999, the effect of promotional commitments made
prior to the Rubbermaid merger.
Selling, general and administrative expenses ("SG&A") in the
first nine months of 1999 were 18.0% of net sales or $850.0 million
versus 15.3% or $690.5 million in the comparable period of 1998.
Excluding charges of $136.2 million relating primarily to the Rubbermaid
merger, SG&A in the first nine months of 1999 was $713.8 million or
15.1% of net sales. Excluding charges, SG&A as a percentage of net sales
24
was relatively constant from 1998 to 1999. Higher than average spending
at Rotring was offset by significant decreases at Rubbermaid as a result
of aggressive cost cutting programs. As Rotring and Rubbermaid continue
to be integrated, the Company expects its SG&A spending to decline.
In the first nine months of 1999, the Company recorded a pre-tax
restructuring charge of $201.2 million ($168.1 million after taxes).
The pre-tax charge related to the Rubbermaid acquisition, and included
$38.2 million of merger costs (investment banking, legal and
accounting fees), executive severance costs of $89.4 million and $73.6
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 nine months of 1998, Rubbermaid recorded a pre-tax
restructuring charge of $73.7 million ($47.9 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 first nine
months of 1999 were 0.8% of net sales or $37.4 million versus 1.0% or
$43.8 million in the first nine months of 1998. Excluding charges in
1998 of $11.1 million (which included write-offs of intangible
assets), trade names and goodwill amortization and other was 0.7% of
net sales in the first nine months of 1998.
Operating income in the first nine months of 1999 was 4.2% of net
sales or $200.1 million versus 12.0% or $543.1 million in the
comparable period of 1998. Excluding restructuring costs and other
charges in 1999 and 1998, operating income in the first nine months of
1999 was 12.7% of net sales or $599.1 million versus 13.9% or $627.9
million in the first nine months of 1998. The decrease in operating
margins was due primarily to the impact of the Hechinger bankruptcy,
higher resin costs, and, in the first half of 1999, the effect of
promotional commitments made prior to the Rubbermaid merger.
These were partially offset by cost savings achieved in the ongoing
Rubbermaid integration.
Net nonoperating expenses in the first nine months of 1999 were
1.8% of net sales or $86.6 million versus net nonoperating income of
3.7% of net sales or $169.4 million in the comparable period of 1998.
The $256.0 million decrease in income was primarily due to a net pre-
tax gain of $191.5 million on the sale of the Company's stake in Black
& Decker and $60.9 million of net pre-tax gains on the sales of Stuart
Hall, Newell Plastics and Decora.
25
Excluding restructuring costs and other gains and charges in 1999
and 1998, the effective tax was 39.0% in the first nine months of 1999
versus 37.6% in the first nine months of 1998.
Net income for the first nine months of 1999 was $23.8 million,
compared to net income of $417.9 million in the first nine months of
1998. Diluted earnings per share were $0.08 in the nine months of 1999
compared to $1.47 in the first nine months of 1998. Excluding 1999
pre-tax restructuring costs of $201.2 million ($168.1 million after
taxes) and other 1999 pre-tax charges of $197.8 million ($120.7
million after taxes), net income in the first nine months of 1999 was
$312.6 million. Excluding 1998 pre-tax restructuring costs of $73.7
million ($47.9 million after taxes), the net pre-tax gain in 1998 on
the sale of Black & Decker stock of $191.5 million ($116.8 million
after taxes), 1998 net pre-tax gains of $60.9 million ($15.6 million
after taxes), on the sales of Stuart Hall, Newell Plastics and Decora,
and other 1998 pre-tax charges of $11.1 million ($6.8 million after
taxes), net income for the first nine months of 1998 was $340.2
million. Diluted earnings per share, calculated on the same basis,
decreased 8.3% to $1.11 in the first nine months of 1999 versus $1.21
in the first nine months of 1998. The decreases in net income and
earnings per share in the first nine months of 1999 was primarily due
to the impact of the Hechinger bankruptcy, higher resin costs, and in
the first half of 1999, the effect of promotional commitments made
prior to the Rubbermaid merger. This was offset partially by cost
savings achieved in the Rubbermaid integration.
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 nine months of
1999 was $288.3 million compared $187.8 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 the
second quarter of 1998, the Company received $51.3 million from the
sale of its decorative coverings product line. In the third quarter of
1998, the company received $199.0 million from the sale of Stuart Hall
and Newell Plastics. 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
26
lines of credit do not have a material impact on the Company's
liquidity. Borrowings under the Company's uncommitted lines of credit
at September 30, 1999 totaled $104.1 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 September 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 September 30, 1999, $463.0 million (principal amount)
of commercial paper was outstanding. The entire amount is classified
as long-term debt.
The Company had outstanding at September 30, 1999 a total of
$470.5 million (principal amount) of Medium-Term Notes issued during
1998. The maturities on these notes range from five to thirty years
at an average interest rate of 6.0%. At September 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 September 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%.
A new universal shelf registration was declared effective on
September 14, 1999, for issuances up to $779.5 million. As of
September 30, 1999, no debt was outstanding under this shelf.
Uses:
The Company's primary uses of liquidity and capital resources
include acquisitions, dividend payments and capital expenditures.
Cash used in acquiring businesses was $34.9 million and $636.7
million in the first nine months of 1999 and 1998, respectively. In
the first nine months of 1998, the Company acquired Swish Track and
Pole, Curver, Century, Panex, Rotring and Gardinia and made another minor
acquisition for cash purchase prices totaling $635.4 million. In the
first nine months of 1999, the Company acquired Ateliers 28 for a cash
purchase price of $35.1 million. All of these acquisitions were
accounted for as purchases and were paid for with proceeds obtained
from the issuance of commercial paper.
27
Cash used for restructuring activities was $127.6 million and
$41.5 million in the first nine months of 1999 and 1998, respectively.
Such cash payments primarily represent 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 $139.7 million and $226.2 million in
the first nine months of 1999 and 1998, respectively.
Aggregate dividends paid during the first nine months of 1999 and
1998 were $169.4 million ($0.60 per share) and $159.1 million ($0.57
per share), respectively.
Retained earnings decreased in the first nine months of 1999 by
$145.6 million. Retained earnings increased in the first nine months
of 1998 by $258.8 million. The change from 1998 to 1999 of $404.4
million was primarily due to pre-tax 1999 restructuring costs of
$201.2 million ($168.1 million after taxes), other 1999 pre-tax charges
of $197.8 million ($120.7 million after taxes) and the 1998 net gain of
$191.5 million ($116.8 million after taxes) on the sale of the Black
& Decker common stock.
Working capital at September 30, 1999 was $1,124.9 million
compared to $1,278.8 million at December 31, 1998. The current ratio
at September 30, 1999 was 1.80:1 compared to 2.09:1 at December 31,
1998.
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 .31:1 at
September 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.
28
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.
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.
29
Time Confidence
September 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.
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 95% complete with all
phases for its IT systems and 90% 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 90% of the Company's business systems are
currently compliant and approximately 10% are in the process of being
fixed and tested. With respect to International non-IT systems,
approximately 90% of the Company's non-IT systems are currently
compliant and 10% are in the process of being fixed and tested. The
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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 September 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.
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,
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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.
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.
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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, Euro conversion plans and related risks, Year
2000 plans and related risks, pending legal proceedings 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 on Exhibit 99 attached hereto.
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).
33
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 September 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 or foreign 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
September 30, 1999 ranged between $17.2 million and $22.1 million. As
of September 30, 1999, the Company had a reserve equal to $19.9
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,
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.
34
In October and November 1999, five complaints were filed against
the Company and certain of its officers and directors in the U.S.
District Court for the Northern District of Illinois on behalf of a
purported class consisting of persons who purchased common stock of
the Company, Newell Co. or Rubbermaid Incorporated during the period
from October 21, 1998 through September 3, 1999 or exchanged shares of
Rubbermaid common stock for the Company's common stock as part of the
Newell Rubbermaid merger. The complaints allege that during the
relevant time period the defendants violated Sections 10(b) and 20(a)
of the Securities Exchange Act by, among other things, issuing false
and misleading statements concerning the Company's financial condition
and results of operations. The Company believes that these claims are
without merit and intends to vigorously defend these lawsuits.
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. On October 8, 1999,
the Superior Court of New Jersey entered a final judgment and order
of dismissal based on a national settlement with the California, New
Jersey and Illinois plaintiffs. The settlement will require the Company
and each of the other defendants to make a contribution to a collective
fund. The Company believes that its contribution will not have a material
effect on the Company's consolidated financial statements. The only
legal proceeding relating to vinyl mini-blinds that remains pending
(although presently subject to two stay orders entered by the
Massachusetts Superior Court) is the Massachusetts case. Although
management of the Company cannot predict the ultimate outcome of this
matter with certainty, it believes that its 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:
3.2 By-laws of Newell Rubbermaid Inc., as amended through
August 8, 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
99. Safe Harbor Statement
(b) Reports on Form 8-K:
None.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NEWELL RUBBERMAID INC.
Registrant
Date: November 12, 1999 /s/ William T. Alldredge
-------------------------------------
William T. Alldredge
Vice President - Finance
Date: November 12, 1999 /s/ Brett E. Gries
-------------------------------------
Brett E. Gries
Vice President - Accounting & Audit
36