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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, 2002
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 (net of treasury shares)
as of November 6, 2002: 267,347,442.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $1,948.3 $1,767.8 $5,440.3 $5,103.2
Cost of products sold 1,398.0 1,278.2 3,950.3 3,768.3
-------- -------- -------- --------
GROSS INCOME 550.3 489.6 1,490.0 1,334.9
Selling, general and administrative expenses 341.7 296.5 970.9 839.5
Restructuring costs 51.2 11.3 69.8 29.0
Goodwill amortization - 14.2 - 42.5
-------- -------- -------- -------
OPERATING INCOME 157.4 167.6 449.3 423.9
Nonoperating expenses:
Interest expense 29.7 32.3 84.1 107.2
Other, net 13.7 5.1 39.7 11.2
-------- -------- -------- -------
Net nonoperating expenses 43.4 37.4 123.8 118.4
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 114.0 130.2 325.5 305.5
Income taxes 37.8 46.7 109.8 111.6
-------- -------- -------- -------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 76.2 83.5 215.7 193.9
Cumulative effect of accounting change, net of tax - - 514.9 -
-------- -------- -------- -------
NET INCOME (LOSS) 76.2 83.5 (299.2) 193.9
======== ======= ======== =======
Weighted average shares outstanding:
Basic 267.2 266.7 267.0 266.6
Diluted 277.7 266.7 267.7 266.6
Earnings (loss) per share:
Basic -
Before cumulative effect of accounting
change $0.29 $0.31 $0.81 $0.73
Cumulative effect of accounting change - - (1.93) -
-------- -------- -------- -------
Net income (loss) per common share $0.29 $0.31 ($1.12) $0.73
======== ======== ======== =======
2
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Diluted -
Before cumulative effect of accounting
change $0.29 $0.31 $0.81 $0.73
Cumulative effect of accounting change - - (1.93) -
-------- -------- -------- -------
Net income (loss) per common share $0.29 $0.31 ($1.12) $0.73
======== ======== ======== =======
Dividends per share $0.21 $0.21 $0.63 $0.63
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
September 30, December 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6.7 $ 6.8
Accounts receivable, net 1,363.0 1,298.2
Inventories, net 1,277.3 1,113.8
Deferred income taxes 229.9 238.5
Prepaid expenses and other 216.5 193.4
-------- --------
TOTAL CURRENT ASSETS 3,093.4 2,850.7
LONG-TERM INVESTMENTS - 79.5
OTHER ASSETS 297.0 293.2
PROPERTY, PLANT AND EQUIPMENT, NET 1,826.4 1,689.1
GOODWILL, NET 1,800.7 2,069.7
OTHER INTANGIBLE ASSETS, NET 380.6 283.9
-------- --------
TOTAL ASSETS $7,398.1 $7,266.1
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
September 30, December 31,
2002 2001
------------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 29.6 $ 19.1
Accounts payable 684.9 501.3
Accrued compensation 142.5 124.7
Other accrued liabilities 996.3 936.1
Income taxes 163.2 145.2
Current portion of long-term debt 405.8 807.5
----------- ---------
TOTAL CURRENT LIABILITIES 2,422.3 2,533.9
LONG-TERM DEBT 1,990.2 1,365.0
OTHER NONCURRENT LIABILITIES 357.9 359.5
DEFERRED INCOME TAXES 76.4 73.6
MINORITY INTEREST 2.6 0.7
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF A SUBSIDIARY TRUST 500.0 500.0
STOCKHOLDERS' EQUITY:
Common stock, authorized shares,
800.0 million at $1.00 par value 283.0 282.4
Outstanding shares:
2002 - 283.0 million
2001 - 282.4 million
Treasury stock, at cost; (409.7) (408.5)
Shares held:
2002 - 15.7 million
2001 - 15.6 million
Additional paid-in capital 234.5 219.8
Retained earnings 2,103.6 2,571.3
Accumulated other comprehensive loss (162.7) (231.6)
TOTAL STOCKHOLDERS' EQUITY 2,048.7 2,433.4
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,398.1 $ 7,266.1
=========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Nine Months Ended September 30,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income (loss) ($299.2) $ 193.9
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change 514.9 -
Depreciation and amortization 218.4 254.7
Deferred income taxes 31.9 14.0
Noncash restructuring and restructuring related charges 44.7 12.6
Other 35.2 0.3
Changes in current accounts excluding the
effects of acquisitions:
Accounts receivable 12.0 (133.2)
Inventories (65.2) 58.7
Other current assets (21.8) 1.9
Accounts payable 106.1 102.9
Accrued liabilities and other (7.8) 71.0
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 569.2 576.8
------- -------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (228.5) (21.9)
Expenditures for property, plant and equipment (185.2) (184.7)
Disposals of noncurrent assets and other 7.8 27.0
------- -------
NET CASH USED IN INVESTING ACTIVITIES (405.9) (179.6)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 523.1 462.9
Payments on notes payable and long-term debt (535.8) (704.9)
Cash dividends (168.2) (168.0)
Proceeds from exercised stock options and other 16.3 1.1
------- -------
NET CASH USED IN FINANCING ACTIVITIES (164.6) (408.9)
------- -------
Exchange rate effect on cash 1.2 (1.5)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (0.1) (13.2)
Cash and cash equivalents at beginning of year 6.8 22.5
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6.7 $ 9.3
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
6
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Newell
Rubbermaid Inc. (collectively with its subsidiaries, the "Company")
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission, and do not include all the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the unaudited consolidated financial statements include
all adjustments, consisting of only normal recurring accruals,
considered necessary for a fair presentation of the financial position
and the results of operations. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest Annual Report on Form 10-K.
SEASONAL VARIATIONS: The Company's product groups are only moderately
affected by seasonal trends. The Rubbermaid and Calphalon Home
business segments typically have higher sales in the second half of
the year due to retail stocking related to the holiday season; the
Levolor/Hardware business segment typically has higher sales in the
second and third quarters due to an increased level of do-it-yourself
projects completed in the summer months; and the Sharpie business
segment typically has higher sales in the second and third quarters
due to the back-to-school season. Because these seasonal trends are
moderate, the Company's consolidated quarterly sales generally do not
fluctuate significantly, unless there has been a major acquisition.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified
to conform with the 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets." This
statement established a single accounting model for long-lived assets
to be disposed of by sale and provides additional implementation
guidance for assets to be held and used and assets to be disposed of.
The statement supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
amends the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30 related to the disposal of a
segment of a business. The statement was adopted by the Company on
January 1, 2002, and had no impact on earnings.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
7
disposal activities included in restructurings. This Statement
eliminates the definition and requirements for recognition of exit
costs as defined in EITF Issue 94-3, and requires that liabilities for
exit activities be recognized when incurred instead of at the exit
activity commitment date. The Company has not determined the effect
that the adoption of SFAS No. 146, effective January 1, 2003, will
have on its earnings or financial position.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Under SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized, but will be subject to periodic impairment tests in
accordance with the statements. Other intangible assets will continue
to be amortized over their useful lives.
Pursuant to the adoption of SFAS No. 142, all amortization expense on
trade names and goodwill ceased on January 1, 2002. As of January 1,
2002, the Company performed the required impairment tests of goodwill
and indefinite-lived intangible assets and recorded a pre-tax goodwill
impairment charge of $538.0 million in the first quarter of 2002 (with
an after-tax charge totaling $514.9 million). In determining this
amount of goodwill impairment, the Company measured the impairment
loss as the excess of the carrying amount of goodwill over the implied
fair value of goodwill. In addition, the Company will test again for
impairment if events or circumstances occur subsequent to the
Company's annual impairment tests that would more likely than not
reduce the fair value of a reporting unit below its carrying amount.
There are no additional impairment charges anticipated for 2002.
Goodwill represents the excess of cost over identifiable net assets of
businesses acquired. Prior to the adoption of SFAS No. 142, trade
names acquired in business combinations were not typically recognized
separately from goodwill. Through the year ended December 31, 2001,
trade names and goodwill were amortized over 40 years and other
identifiable intangible assets were amortized over 5 to 20 years.
Upon adoption of SFAS No. 142, certain trade names have not been
"carved-out" from goodwill as they had not been identified and
measured at fair value in the initial recording of a business
combination.
8
A summary of changes in the Company's goodwill during the nine months
ended September 30, 2002 is as follows (IN MILLIONS):
Balance at December 31, 2001 $2,069.7
Acquisitions and adjustments -
American Tool Companies, Inc. 224.2
Other (minor acquisitions and foreign exchange) 44.8
--------
269.0
--------
Impairments -
Sharpie segment (126.9)
Levolor/Hardware segment (322.0)
Calphalon Home segment (89.1)
--------
(538.0)
--------
Balance at September 30, 2002 $1,800.7
========
The results of operations on a pro forma basis for the quarter and
nine months ended September 30, restated as though the amortization of
trade names and goodwill had been discontinued on January 1, 2001 are
as follows (IN MILLIONS, EXCEPT PER SHARE AMOUNTS):
Quarter Ended Nine months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported income before cumulative effect of
accounting change $76.2 $83.5 $215.7 $193.9
Cumulative effect of accounting change, net of tax - - (514.9) -
----- ----- ------ ------
Reported net income (loss) 76.2 83.5 (299.2) 193.9
Add back: Goodwill and trade name amortization,
net of tax - 13.4 - 40.0
----- ----- ------ ------
Adjusted net income (loss) $76.2 $96.9 ($299.2) $233.9
===== ===== ====== ======
Reported basic net income (loss) per share $0.29 $0.31 ($1.12) $0.73
Add back: Goodwill and trade name amortization,
net of tax - 0.05 - 0.15
----- ----- ------ ------
Adjusted basic net income (loss) per share $0.29 $0.36 ($1.12) $0.88
===== ===== ====== ======
9
Reported diluted net income (loss) per share $0.29 $0.31 ($1.12) $0.73
Add back: Goodwill and trade name amortization,
net of tax - 0.05 - 0.15
----- ----- ------ ------
Adjusted diluted net income (loss) per share $0.29 $0.36 ($1.12) $0.88
===== ===== ====== ======
NOTE 3 - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS:
On April 30, 2002, the Company completed the purchase of American Tool
Companies, Inc. ("American Tool"), a leading manufacturer of hand
tools and power tool accessories. The Company had previously held a
49.5% stake in American Tool, which had been accounted for under the
equity method prior to acquisition. This purchase marked a
significant expansion and enhancement of the Company's product lines
and customer base, launching it squarely in the estimated $10 billion-
plus global market for hand tools and power tool accessories. The
preliminary purchase price was $467 million, which included $197
million for the majority 50.5% ownership stake, the repayment of $243
million in American Tool debt and $27 million of transaction costs.
The purchase price is subject to adjustment based on the final closing
balance sheet. At the time of acquisition, the Company paid off
American Tool's senior debt, senior subordinated debt and debt under
their revolving credit agreement. The Company is in the process of
obtaining third party valuations of certain financial positions; thus,
the allocation of the purchase price is subject to change. During the
third quarter, the Company recorded nonoperating expenses of $8.7
million for transaction costs associated with the acquisition.
The 2002 and 2001 transactions were all accounted for as purchases;
therefore, results of operations are included in the accompanying
Consolidated Financial Statements since their respective acquisition
dates. The purchase prices for the 2002 acquisitions have been
allocated on a preliminary basis to the fair market value of the
assets acquired and liabilities assumed. The Company's final
integration plans may include exit costs for certain plants and
product lines, as well as employee termination costs. The final
adjustments to the purchase price allocations are not expected to be
material to the financial statements.
10
The unaudited consolidated results of operations on a pro forma basis
(as though the 2002 acquisition of the American Tool business had been
completed on January 1, 2001) are as follows (IN MILLIONS, EXCEPT PER
SHARE AMOUNTS):
NINE MONTHS ENDED SEPTEMBER 30, 2002 2001
---- ----
Net sales $5,580.5 $5,425.2
Income before accounting change $219.2 $195.2
Basic earnings per share before accounting change $0.82 $0.73
Net income (loss) ($299.3) $195.2
Basic earnings (loss) per share ($1.12) $0.73
WITHDRAWN DIVESTITURE:
On June 18, 2001, the Company announced an agreement for the sale of
Anchor Hocking. On January 14, 2002, the Federal Trade Commission
(the "FTC") filed a complaint seeking to enjoin the sale of Anchor.
On January 21, 2002, the Company signed an amended agreement with the
buyer to divest Anchor, excluding the food service business because
the FTC alleged the sale of Anchor to the current buyer could reduce
competition in the market for glassware in the foodservice industry.
On April 22, 2002, the U.S. District Court for the District of
Columbia granted the FTC's motion for a preliminary injunction.
On June 10, 2002, the Company announced that it had withdrawn plans to
sell its Anchor Hocking glass business to Libbey Inc. and will
continue to operate the business as part of its broad housewares
portfolio. Transaction costs approximating $13.6 million were
recorded as nonoperating expenses in the second quarter.
NOTE 4 - RESTRUCTURING COSTS
During 2002 and 2001, the Company recorded restructuring charges
associated with the Company's strategic restructuring plan announced
on May 3, 2001. Through this strategic restructuring plan, management
intends to streamline the Company's supply chain to enable it to be
the low cost global provider throughout the Company's product
portfolio. The plan's terms include reducing worldwide headcount and
consolidating duplicative manufacturing facilities, over a three year
period beginning in 2001. In the first nine months of 2002, the
Company incurred facility exit costs and employee severance and
termination benefit costs for approximately 1,450 employees, as
described in the table below. Under the restructuring plan, 28
facilities have been exited and headcount has been reduced by 3,150
employees.
11
Certain expenses incurred in the reorganization of the Company's
operations are considered to be restructuring expenses. Pre-tax
restructuring costs consisted of the following (IN MILLIONS):
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Facility and other exit costs $13.7 $3.4 $18.4 $8.8
Employee severance and termination benefits 30.5 7.9 43.8 17.6
Exited contractual commitments - - 0.6 -
Other 7.0 - 7.0 2.6
----- ----- ----- -----
Recorded as Restructuring Costs 51.2 11.3 69.8 29.0
Discontinued Product Lines (in Cost of products sold) 4.8 - 8.9 -
----- ----- ----- -----
Total Costs Related to Restructuring Plans 56.0 $11.3 $78.7 $29.0
===== ===== ===== =====
Restructuring provisions were determined based on estimates prepared
at the time the restructuring actions were approved by management, and
also include amounts recognized as incurred. Cash paid for
restructuring activities was $41.7 million and $16.4 million in the
first nine months of 2002 and 2001, respectively. A summary of the
Company's restructuring plan reserves is as follows (IN MILLIONS):
12/31/00 Costs 09/30/01
Balance Provision Incurred Balance
-------- --------- -------- --------
Facility and other exit costs $11.8 $8.8 ($13.0) $7.6
Employee severance and termination benefits 3.3 17.6 (11.2) 9.7
Exited contractual commitments 4.6 - (2.4) 2.2
Other 2.2 2.6 - 4.8
----- ----- ----- -----
$21.9 $29.0 ($26.6) $24.3
===== ===== ===== =====
12/31/01 Costs 09/30/02
Balance Provision Incurred Balance
-------- --------- -------- --------
Facility and other exit costs $20.1 $18.4 ($11.5) $27.0
Employee severance and termination benefits 6.2 43.8 (28.1) 21.9
Exited contractual commitments 1.9 0.6 (0.8) 1.7
12
12/31/01 Costs 09/30/02
Balance Provision Incurred Balance
-------- --------- -------- --------
Other - 7.0 (4.8) 2.2
----- ----- ----- -----
Recorded as Restructuring Costs 28.2 69.8 (45.2) 52.8
Discontinued Product Lines (in Cost of - 8.9 (8.8) 0.1
products sold) ----- ----- ----- -----
Total Costs Related to $28.2 $78.7 ($54.0) $52.9
Restructuring Plans ===== ===== ===== =====
The facility and other exit cost reserves of $27.0 million at
September 30, 2002 are primarily related to future minimum lease
payments on vacated facilities and other closure costs. The reserves
are for 28 vacant leased and owned facilities as follows:
Number of
Segment Vacated Facilities
------- ------------------
Rubbermaid 6
Sharpie 3
Levolor/Hardware 14
Calphalon Home 5
--
Total 28
==
Severance reserves of $21.9 million at September 30, 2002 are
primarily related to the employees of the exited facilities. In
addition to severance for employees at the exited facilities there are
approximately 15 former Newell executives who are receiving severance
payments under employment agreements.
NOTE 5 - INVENTORIES
Inventories are stated at the lower of cost or market value. The
components of inventories, net of LIFO reserve, were as follows (IN
MILLIONS):
September 30, December 31,
2002 2001
------------- ------------
Materials and supplies $364.7 $356.5
Work in process 188.1 150.5
Finished products 724.5 606.8
-------- --------
$1,277.3 $1,113.8
======== ========
13
NOTE 6 - LONG-TERM DEBT
The following is a summary of long-term debt (IN MILLIONS):
September 30, December 31,
2002 2001
------------- ------------
Medium-term notes $1,432.4 $1,012.5
Commercial paper 504.0 707.5
Preferred debt securities 450.0 450.0
Other long-term debt 9.6 2.5
-------- --------
Total debt 2,396.0 2,172.5
Current portion of long-term (405.8) (807.5)
debt -------- --------
Long-term Debt $1,990.2 $1,365.0
======== ========
The revolving credit agreement (and related commercial paper), medium
term notes and mandatorily redeemable convertible preferred securities
are all unsecured.
On September 18, 2001, the Company entered into an agreement with a
financial institution creating a financing entity that is consolidated
in the Company's financial statements. Under the agreement, the
Company regularly enters into transactions with the financing entity
to sell an undivided interest in substantially all of the Company's
United States trade receivables to the financing entity. In the
quarter ended September 30, 2001, the financing entity issued $450.0
million in preferred debt securities to the financial institution.
Those preferred debt securities must be retired or redeemed before the
Company can have access to the financing entity's receivables. The
receivables and the corresponding $450.0 million preferred debt issued
by the subsidiary to the financial institution are recorded in the
consolidated accounts of the Company. The proceeds of this debt were
used to pay down commercial paper issued by the Company. Under
certain circumstances, the Company can require that the preferred debt
securities be converted into notes that mature in 2008. The entire
principal amount is therefore considered to be long-term debt. The
provisions of the debt agreement allow the entire outstanding debt to
be called upon certain events including the Company's debt rating
falling below investment grade and certain levels of accounts
receivable write-offs. As of September 30, 2002, the Company was in
compliance with the agreement. As of September 30, 2002 and December
31, 2001, the aggregate amount of outstanding receivables sold under
the agreement was $695.9 million and $689.3 million, respectively.
The Company completed a $1,300.0 million Syndicated Revolving Credit
Facility (the "Revolver") on June 14, 2002, replacing the existing
$1,300.00 revolving credit agreement, which was scheduled to terminate
14
in August 2002. The new Revolver consists of a $650.0 million 364-day
credit agreement and a $650.0 million five-year credit agreement. At
September 30, 2002, there were no borrowings under the Revolver.
On March 14, 2002 the Company issued $500.0 million of Senior Notes
with five-year and ten-year maturities. The $500.0 million Senior
Notes consist of $250.0 million in 6.00% Senior Notes due 2007 and
$250.0 million in 6.75% Senior Notes due 2012. On March 12, 2002, the
five-year notes were swapped to a floating rate, resulting in a 2.98%
rate for the first nine months of the swap. The proceeds of this
issuance were used to pay down commercial paper. This issuance is
reflected in the outstanding amount of medium-term notes noted above
and the entire amount is considered to be long-term debt.
In August 2002, the Company elected to terminate certain interest rate
swap agreements prior to their scheduled maturities and received cash
of $25.0 million. Of this amount, $20.8 million represents the fair
value of the swaps that were terminated and the remainder represents
interest receivable on the swaps. The cash received relating to the
fair value of the swaps was included as an operating activity in the
Statement of Cash Flows. The unamortized fair value gain on the
terminated interest rate swaps is accounted for as long-term debt. As
of September 30, 2002, the unamortized gain was $19.9 million, of
which $5.7 million is classified as current portion of long-term debt.
The unamortized gain will be amortized as a reduction to interest
expense over the remaining term of the underlying debt using the
effective interest method.
In August of 2002, the Company entered into several new interest rate
swap agreements to replace the terminated interest rate swap
agreements. These new interest rate swaps convert certain fixed rate
debt into floating rate debt based on a notional principal amount of
$500.0 million.
15
NOTE 7 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the year-
to-date period is shown below (IN MILLIONS, EXCEPT PER SHARE DATA):
"In the Convertible
Basic Money" Preferred Diluted
Method Options(1) Securities Method
------ ---------- ----------- -------
QUARTER ENDED SEPTEMBER 30, 2002
Net income $76.2 - 4.1 $80.3
Weighted average shares outstanding 267.2 0.6 9.9 277.7
Earnings per share $0.29 $0.29
QUARTER ENDED SEPTEMBER 30, 2001
Net income $83.5 - - $83.5
Weighted average shares outstanding 266.7 - - 266.7
Earnings per share $0.31 $0.31
NINE MONTHS ENDED SEPTEMBER 30, 2002
Income before cumulative effect of
accounting change $215.7 - - $215.7
Weighted average shares outstanding 267.0 0.7 - 267.7
Earnings per share $0.81 $0.81
Net loss ($299.2) - - ($299.2)
Weighted average shares outstanding 267.0 0.7 - 267.7
Loss per share ($1.12) ($1.12)
NINE MONTHS ENDED SEPTEMBER 30, 2001
Net income $193.9 - - $193.9
Weighted average shares outstanding 266.6 - - 266.6
Earnings per share $0.73 $0.73
(1) The weighted average shares outstanding for the nine months ended September 30, 2002 and 2001 exclude
approximately 4.4 million and 9.6 million stock options, respectively, because such options had an exercise
price in excess of the average market value of the Company's common stock during the respective periods and
would, therefore, be anti-dilutive.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) encompasses net after-
tax unrealized gains or losses on securities available for sale,
foreign currency translation adjustments, net losses on derivative
instruments and net minimum pension liability adjustments and is
recorded within stockholders' equity.
16
The following table displays the components of accumulated other
comprehensive income or loss (IN MILLIONS):
Foreign After-tax After-tax Accumulated
Currency Derivatives Minimum Other
Translation Hedging Pension Comprehensive
Loss Gain (Loss) Liability Loss
----------- ----------- --------- -------------
Balance at December 31, 2001 ($213.1) ($14.0) ($4.5) ($231.6)
Current year change 56.0 12.9 - 68.9
------ ---- ----- -----
Balance at September 30, 2002 ($157.1) ($1.1) ($4.5) (162.7)
====== ==== ===== =====
Total comprehensive income (loss) amounted to the following (IN
MILLIONS):
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $76.2 $83.5 ($299.2) $193.9
Foreign currency translation gain (loss) 5.1 40.2 56.0 (43.8)
After-tax derivatives hedging gain (loss) (6.7) (5.1) 12.9 (13.3)
After-tax unrealized gain on securities - (1.8) - (1.3)
----- ------ ------ ------
Comprehensive income (loss) $74.6 $116.8 ($230.3) $135.5
===== ====== ====== ======
NOTE 9 - INDUSTRY SEGMENTS
In the first quarter of 2002, the Company announced the realignment of
its operating segment structure. This realignment reflects the
Company's focus on building large consumer brands, promoting
organizational integration and operating efficiencies and aligning the
businesses with the Company's key account strategy. The four
operating segments have been named for leading worldwide brands in the
Company's product portfolio. The realignment streamlines what had
previously been five operating segments. Last year's amounts have
been reclassified to conform with the 2002 presentation. In the third
quarter of 2002, the Company re-named its Parker/Eldon and
Calphalon/Wearever segments as the Sharpie and Calphalon Home
segments, respectively, for public reporting.
17
The Company's segment results are as follows (IN MILLIONS):
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES (1) (2)
Rubbermaid $666.2 $657.5 $1,937.9 $1,928.5
Sharpie 495.7 466.0 1,418.2 1,332.0
Levolor/Hardware 479.3 353.0 1,257.6 1,033.4
Calphalon Home 307.1 291.3 826.6 809.3
-------- -------- -------- --------
$1,948.3 $1,767.8 $5,440.3 $5,103.2
======== ======== ======== ========
OPERATING INCOME (3)
Rubbermaid $65.6 $48.6 $160.1 $149.3
Sharpie 85.9 77.0 227.0 205.2
Levolor/Hardware 37.6 41.3 101.6 98.9
Calphalon Home 31.8 32.3 62.0 63.4
Corporate (4) (7.5) (20.3) (22.7) (63.9)
-------- -------- -------- --------
213.4 178.9 528.0 452.9
Restructuring Costs (5) (56.0) (11.3) (78.7) (29.0)
-------- -------- -------- --------
$157.4 $167.6 $449.3 $423.9
======== ======== ======== ========
CAPITAL EXPENDITURES
Rubbermaid $44.7 $24.6 $96.1 $75.4
Sharpie 7.7 11.2 24.3 46.6
Levolor/Hardware 19.1 6.0 39.7 20.4
Calphalon Home 5.8 9.3 13.7 32.2
Corporate 6.7 9.3 11.4 10.1
-------- -------- -------- --------
$84.0 $60.4 $185.2 $184.7
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Rubbermaid $27.2 $32.3 $91.6 $93.4
Sharpie 11.7 14.0 42.3 42.6
Levolor/Hardware 14.6 7.2 30.9 22.4
Calphalon Home 13.1 10.4 34.8 33.1
Corporate 5.4 23.4 18.8 63.2
-------- -------- -------- --------
$72.0 $87.3 $218.4 $254.7
======== ======== ======== ========
18
September 30, December 31,
IDENTIFIABLE ASSETS 2002 2001
---- ----
Rubbermaid $1,665.2 $1,551.3
Sharpie 1,165.1 1,216.8
Levolor/Hardware 1,210.7 790.8
Calphalon Home 749.1 787.4
Corporate (6) 2,608.0 2,919.8
-------- --------
$7,398.1 $7,266.1
======== ========
Geographic Area Information
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES
United States $1,427.5 $1,303.4 $3,981.8 $3,703.0
Canada 83.1 81.1 228.5 226.1
-------- -------- -------- --------
North America 1,510.6 1,384.5 4,210.3 3,929.1
Europe (7) 347.0 292.8 967.6 898.7
Central and South America (8) 66.2 63.1 190.1 208.6
All other 24.5 27.4 72.3 66.8
-------- -------- -------- --------
$1,948.3 $1,767.8 $5,440.3 $5,103.2
======== ======== ======== ========
OPERATING INCOME
United States $150.3 $145.0 $382.0 $332.4
Canada 12.8 12.4 27.4 34.2
-------- -------- -------- --------
North America 163.1 157.4 409.4 366.6
Europe (15.5) 5.5 7.1 34.1
Central and South America 7.6 2.4 21.1 18.3
All other 2.2 2.3 11.7 4.9
-------- -------- -------- --------
$157.4 $167.6 $449.3 $423.9
======== ======== ======== ========
19
September 30, December 31,
IDENTIFIABLE ASSETS (9) 2002 2001
---- ----
United States $4,954.0 $5,067.8
Canada 120.5 118.0
-------- --------
North America 5,074.5 5,185.8
Europe 2,002.1 1,737.0
Central and South America 242.3 295.7
All other 79.2 47.6
-------- --------
$7,398.1 $7,266.1
======== ========
1) Sales to Wal-Mart Stores, Inc. and subsidiaries amounted to
approximately 15% of consolidated net sales in the first nine
months of 2002 and 2001. Sales to no other customer exceeded
10% of consolidated net sales for either period.
2) All intercompany transactions have been eliminated.
3) Operating income is net sales less cost of products sold and
selling, general and administrative expenses. Certain
headquarters expenses of an operational nature are allocated to
business segments and geographic areas primarily on a net sales
basis. Goodwill amortization is considered a corporate expense
and not allocated to business segments.
4) Corporate operating expenses consist primarily of administrative
costs that cannot be allocated to a particular segment.
5) Restructuring costs are recorded as both Restructuring Costs and
as part of Cost of Products Sold in the Consolidated Statements
of Income (Unaudited) (refer to Note 4 for additional detail.)
Restructuring Costs are not allocated to business segments and
are not part of Operating Income.
6) Corporate assets primarily include trade names, goodwill, equity
investments and deferred tax assets.
7) No sales attributed to any individual European country are
material.
8) This category includes Argentina, Brazil, Colombia, Mexico and
Venezuela.
9) Transfers of finished goods between geographic areas are not
significant.
20
NOTE 10 - CONTINGENCIES
The Company is involved in legal proceedings in the ordinary course of
its business. These proceedings include claims for damages arising
out of use of the Company's products, allegations of infringement of
intellectual property, commercial disputes and employment related
matters, as well as environmental matters. Some of the legal
proceedings include claims for punitive as well as compensatory
damages, and a few proceedings purport to be class actions.
Although management of the Company cannot predict the ultimate outcome
of these legal proceedings with certainty, it believes that the
ultimate resolution of the Company's legal proceedings, including any
amounts it may be required to pay in excess of amounts reserved, will
not have a material effect on the Company's financial statements.
21
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,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 71.8% 72.3% 72.6% 73.8%
----- ----- ----- -----
GROSS INCOME 28.2% 27.7% 27.4% 26.2%
Selling, general and administrative expenses 17.5% 16.8% 17.8% 16.5%
Restructuring costs 2.6% 0.6% 1.3% 0.6%
Goodwill amortization --% 0.8% --% 0.8%
----- ----- ----- -----
OPERATING INCOME 8.1% 9.5% 8.3% 8.3%
Nonoperating expenses:
Interest expense 1.5% 1.8% 1.6% 2.1%
Other, net 0.7% 0.3% 0.7% 0.2%
----- ----- ----- -----
Net nonoperating expenses 2.2% 2.1% 2.3% 2.3%
----- ----- ----- -----
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
5.9% 7.4% 6.0% 6.0%
Income taxes 2.0% 2.7% 2.0% 2.2%
----- ----- ----- -----
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
3.9% 4.7 % 4.0% 3.8%
Cumulative effect of accounting change, net of tax --% --% 9.5% --%
----- ----- ----- -----
NET INCOME (LOSS) 3.9% 4.7% (5.5)% 3.8%
===== ===== ===== =====
22
ITEMS AFFECTING COMPARABILITY
Several events occurred during the first nine months of 2002 and 2001
that affected the comparability of operating results. These events
are described below to help isolate their impact on continuing
operations and to help better identify operating trends. For purposes
of comparison, operating results will be discussed with and without
the following events:
* RESTRUCTURING ACTIVITIES: During 2002 and 2001, the Company
recorded restructuring charges associated with the Company's
strategic restructuring plan announced on May 3, 2001.
Through this strategic restructuring plan, management
intends to streamline the Company's supply chain to enable
it to be the low cost global provider throughout the
Company's product portfolio. The plan's terms include
reducing worldwide headcount and consolidating duplicative
manufacturing facilities, over a three-year period beginning
in 2001. During the first nine months of 2002 and 2001, the
Company incurred pre-tax restructuring and restructuring
related expenses of $78.7 million and $29.0 million, or
$0.20 and $0.07 per diluted share, respectively. Under the
strategic restructuring plan, 28 facilities have been exited
and headcount has been reduced by approximately 3,150
employees. See Note 4 to the Consolidated Financial
Statements (Unaudited) for further information on the
strategic restructuring plan.
* ADOPTION OF NEW GOODWILL ACCOUNTING: On January 1, 2002,
the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). Pursuant to the
adoption of SFAS No. 142, all amortization expense on
goodwill and intangible assets with indefinite lives ceased
on January 1, 2002. Therefore, no goodwill and indefinite
life intangible asset amortization is recorded in 2002
earnings. On a comparative basis, goodwill and indefinite
life intangibles amortization expense was $15.6 million
($13.4 million after tax and $0.05 per diluted share) and
$46.6 million ($40.0 million after tax and $0.15 per diluted
share) for the three months and nine months ended September
30, 2001, respectively.
In addition, during the first quarter of 2002, the Company
recorded a $514.9 million after tax goodwill impairment
charge. This charge was recorded as a cumulative effect of
an accounting change in the Consolidated Statements of
Income (Unaudited). There are no additional impairment
charges anticipated for 2002. See Note 1 to the
Consolidated Financial Statements (Unaudited) for further
information on the adoption of SFAS No. 142.
23
* AMERICAN TOOL ACQUISITION: On April 30, 2002, the Company
acquired the remaining 50.5% ownership interest in American
Tool Companies, Inc. ("American Tool") for $467 million,
which included the assumption of all outstanding American
Tool debt and miscellaneous transaction costs. The purchase
price is preliminary and subject to adjustment based on the
final closing balance sheet. The Company now owns 100% of
the outstanding shares of American Tool. With fiscal 2001
revenue of $440.7 million and manufacturing and distribution
facilities around the world, the American Tool purchase
marks a significant expansion and enhancement of the
Company's product lines and customer base, launching it
squarely into the estimated $10 billion-plus global market
for hand tools and power tool accessories. The acquisition
has been accounted for as a purchase and is described
further in Note 3 to the Consolidated Financial Statements
(Unaudited).
Since the acquisition, American Tool's operations have been
consolidated with the Company's. Prior to May 1, 2002, the
Company's 49.5% ownership interest in American Tool was
accounted for under the equity method of accounting, and was
recognized as other income and included in nonoperating
expenses in the Consolidated Statements of Income
(Unaudited). The Company recorded other income of $0.7
million in 2002 prior to the acquisition and ultimate
consolidation of American Tool into the Company. In
contrast, the Company recorded $5.4 million of other income
during the nine months ended September 30, 2001, related to
the 49.5% equity income in American Tool prior to the
acquisition.
In the three months ended September 30, 2002, the Company
recorded approximately $8.7 million ($5.8 million after tax)
or $0.02 per diluted share in transaction costs related to
the American Tool acquisition in nonoperating expenses.
* ANCHOR HOCKING TRANSACTION: On June 10, 2002, the Company
withdrew plans to sell its Anchor Hocking glass business to
Libbey Inc. ("Libbey") and will continue to operate the
business as part of its broad housewares portfolio. The
Federal Trade Commission ("FTC") had been granted a
preliminary injunction against the sale of Anchor to Libbey,
as the FTC alleged the sale of Anchor to Libbey could reduce
competition in the market for glassware in the foodservice
industry. For the nine months ended September 30, 2002, the
Company expensed $13.6 million, or $0.03 per diluted share,
of transaction related costs in other nonoperating expenses.
24
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. THREE MONTHS ENDED SEPTEMBER
30, 2001
CONSOLIDATED OPERATING RESULTS:
Net sales for the three months ended September 30, 2002 ("Third
Quarter") were $1,948.3 million, an increase of $180.5 million, or
10.2%, from $1,767.8 million in the comparable quarter of 2001.
Excluding $110.5 million of sales from the American Tool acquisition,
sales increased 4.0%. The internal sales growth was driven primarily
by the Company's focus on sales and marketing initiatives toward
strategic customers and new product introductions, partially offset by
product price reductions.
Gross income was $550.3 million in the Third Quarter of 2002, a $60.7
million, or 12.4%, increase from $489.6 million in the comparable
quarter of 2001. Gross income margin also increased to 28.2% of sales
versus 27.7 % in 2001. Excluding $4.8 million ($3.2 million after
tax) of product line exit costs strategic restructurings, gross income
was $555.1 million or 28.5% of net sales in 2002. In the comparable
period in 2001, excluding $0.5 million ($0.3 million after tax) of
costs related to acquisitions, gross profit was $490.1 million, or
27.7% of sales. Gross income, both with and without acquisition and
strategic restructuring related charges, increased as a result of the
American Tool acquisition and the Company's implementation of
strategic restructuring and productivity improvement initiatives that
continue to focus on streamlining the Company's supply chain, such as
eliminating duplicative facilities, reducing headcount and sourcing
product from low cost countries. Productivity initiatives reduced
costs by approximately $50 million in the Third Quarter of 2002. The
Company continues to increase gross income margin despite product
price reductions.
Selling, general and administrative expenses ("SG&A") were $341.7
million in the Third Quarter of 2002, an increase of $45.2 million, or
15.2%, from $296.5 million in the comparable quarter of 2001. SG&A as
a percentage of net sales was 17.5% in 2002 versus 16.8% in the
comparable quarter of 2001. Excluding $3.6 million ($2.4 million
after tax) of acquisition related charges in 2002, SG&A was $338.1
million or 17.4% of net sales for the Third Quarter of 2002. In the
comparable period in 2001, excluding $0.8 million ($0.5 million after
tax), of acquisition related charges , SG&A was $295.7 million or
16.7% of sales. SG&A, both with and without acquisition related
charges, increased primarily due to the American Tool acquisition, the
Company's increased investment in new product development and product
launches, and planned marketing initiatives (including Strategic
Account Management and Phoenix), which support the Company's strategic
growth initiatives.
Strategic Account Management is the Company's sales and marketing
approach that focuses growth efforts on strategic accounts with high
long-term growth potential. Separate sales organizations have been
25
established to more effectively manage the relationship at the largest
strategic accounts, specifically Wal*Mart, The Home Depot and Lowe's.
The program allows the Company to present these customers with "one
face" to enhance the Company's response time, understand the
customer's needs and support the best possible customer relationship.
The Phoenix program is a field sales force consisting of approximately
500 recent university graduates that primarily work with strategic
accounts to perform in-store product demonstrations, event marketing,
on-shelf merchandising, enhance customer interaction and strengthen
ongoing relationships with store personnel. Phoenix allows the
Company to enhance product placement and minimize stock outages.
The Company recorded pre-tax strategic restructuring charges of $51.2
million ($34.2 million after taxes) and $11.3 million ($7.3 million
after tax) in the Third Quarter of 2002 and 2001, respectively. The
2002 Third Quarter pre-tax charge included $13.7 million of facility
and other exit costs, $30.5 million of employee severance and
termination benefits, and $7.0 million in other restructuring costs.
The 2001 Third Quarter pre-tax charge included $3.4 million of
facility and other exit costs, and $7.9 million of employee severance
and termination benefits. See Note 4 to the Consolidated Financial
Statements (Unaudited) for further information on the strategic
restructuring plan.
Operating income was $157.4 million in the Third Quarter of 2002, a
decrease of $10.2 million, or 6.1% from $167.6 million in the
comparable quarter of 2001. Operating income as a percentage of net
sales was 8.1% in 2002 versus 9.5% in the comparable quarter of 2001.
As described in the section entitled "Items Affecting Comparability,"
the decrease in operating income relates primarily to increased
strategic restructuring and acquisition related costs. During the
quarter ended September 30, 2002 the company recognized restructuring
and acquisition related costs of $59.6 million pre-tax ($39.8 after
tax) compared to $12.6 million pre-tax ($8.1 after tax) for 2001, an
increase of $47.0 million. Excluding strategic restructuring and
acquisition related costs; operating income was $217.0 million, or
11.1% of net sales in 2002 versus $180.2 million, or 10.2% of sales in
2001. The increase in operating income, excluding strategic
restructuring and acquisition related costs, over the prior year is
primarily due to 4.0% internal sales growth, approximately $50 million
of productivity improvements, the American Tool acquisition, and the
impact of the non-amortization provisions of SFAS No. 142 ($15.6
million of amortization expense in the Third Quarter of 2001).
Partially offsetting these increases are the cost of the Company's
continued investment in sales and marketing initiatives and product
price reductions.
Net nonoperating expenses were $43.4 million in the Third Quarter of
2002, a $6.0 million, or 16.0% increase from $37.4 million in the
comparable quarter of 2001. Excluding acquisition related charges of
$10.3 million ($6.9 million net of tax), net nonoperating expenses
26
were $33.1 million, a decrease of $4.3 million or 11.5% from 2001.
Included in the $10.3 million in acquisition costs in approximately
$8.7 million ($5.8 million after tax) in costs related to the American
Tool acquisition, more fully described in Note 3 to the Consolidated
Financial Statements (Unaudited), respectively. The decrease in net
nonoperating expense was primarily due to reduced interest expense of
$2.6 million as a result of lower interest rates on the Company's
variable rate borrowings.
The effective tax rate was 33.2% in the Third Quarter of 2002 versus
35.9% in the Third Quarter of 2001. The decrease in the effective tax
rate between years is due primarily to the impact of the non-
amortization provisions of SFAS No. 142.
Net income was $76.2 million in the Third Quarter of 2002, a $7.3
million, or 8.7%, decrease from $83.5 million in the Third Quarter of
2001. Diluted earnings per share were $0.29 in the Third Quarter of
2002 compared to $0.31 in the Third Quarter of 2001. Net income,
excluding strategic restructuring and other charges, was $122.9
million in 2002, an increase of $31.3 million from 2001. A
reconciliation of net income, excluding strategic restructuring and
other charges for 2002 and 2001, is as follows:
(in millions; except per share data) 2002 2001
---- ----
Amount Diluted EPS Amount Diluted EPS
------- ----------- ------ -----------
Net Income, as Reported $76.2 $0.29 $83.5 $0.31
Add Back
Restructuring Costs 34.2 0.12 7.3 0.03
Product Line Exit Costs 3.2 0.01 - -
American Tool Acquisition Costs 5.8 0.02
Other Acquisition Related Costs* 3.5 0.01 0.8 0.00
Rounding -- 0.01 -- --
------ ----- ----- -----
Net Income, Excluding Charges $122.9 $0.46 $91.6 $0.34
====== ===== ===== =====
* Other Acquisition related costs are recorded in cost of products
sold, SG&A, and nonoperating expenses in the Consolidated
Statements of Income (Unaudited). In 2002, Other Acquistion
related costs (after tax) recorded in SG&A and nonoperating
expenses were $2.4 million and $1.1 million, respectively. In
2001, Other Acquisition related costs (after tax) recorded in
cost of product sold and SG&A were $0.3 million and $0.5 million,
respectively.
27
The increase in net income and diluted earnings per share, excluding
charges, was primarily due to 4.0% internal sales growth, improved
gross margins from productivity improvements of approximately $50
million, the impact of the non-amortization provisions of the adoption
of SFAS No. 142 and lower interest expense, partially offset by
product price reductions and the Company's increased investment in
sales and marketing initiatives.
BUSINESS GROUP OPERATING RESULTS:
The Company operates in four general segments:
Net Sales by Group:
Percentage
2002 2001 Increase
---- ---- ----------
Rubbermaid $666.2 $657.5 1.3%
Sharpie 495.7 466.0 6.4
Levolor/Hardware 479.3 353.0 35.8
Calphalon Home 307.1 291.3 5.4
-------- -------- -----
Total Net Sales $1,948.3 $1,767.8 10.2%
======== ======== =====
Operating Income by Group:
Percentage
Increase/
2002 2001 Decrease
---- ---- ----------
Rubbermaid $65.6 $48.6 35.0%
Sharpie 85.9 77.0 11.6
Levolor/Hardware 37.6 41.3 (9.0)
Calphalon Home 31.8 32.3 (1.5)
------ ------ -----
Group Operating Income* $220.9 $199.2 10.9%
====== ====== =====
* Group Operating Income excludes Corporate costs and Restructuring
Expense. See Note 9 to the Consolidated Financial Statements
(Unaudited) for the detail of Operating Income by Group including
Corporate and Restructuring Expense.
RUBBERMAID
Net sales for the 2002 Third Quarter were $666.2 million, an increase
of $8.7 million, or 1.3%, from $657.5 million in the comparable
quarter of 2001. The 1.3% sales growth was primarily due to 4.4%
sales growth at the Rubbermaid Home Products division, partially
offset by a 9.6% sales decline at Graco. The primary reasons for the
overall sales increase were sales gains at strategic accounts and new
28
product introductions, such as the Rubbermaid TakeAlongs{TM}, the Slim
Cooler{TM}, Stain Shield{TM}, and the Tool Tower{TM} and growth in
existing products, partially offset by product price reductions.
Operating income for the 2002 Third Quarter was $65.6 million, an
increase of $17.0 million, or 35.0%, from $48.6 million in the
comparable quarter of 2001. The increase is primarily related to
productivity improvements and increased margin for new products,
partially offset by product price reductions and continued investments
in divisional growth initiatives, including costs related to new
product development and product launches, primarily television
advertising for featured items such as the Slim Cooler{TM} and the
Tool Tower{TM}.
SHARPIE
Net sales for the 2002 Third Quarter were $495.7 million, an increase
of $29.7 million, or 6.4%, from $466.0 million in the comparable
quarter of 2001. The 6.4% sales growth was fueled primarily by strong
back-to-school sales in North America at strategic accounts, new
product introductions (including the Sharpie{R} Chisel Tip and Liquid
Paper{R} Backtracker{TM}), and growth in existing Paper Mate{R} pens,
Sharpie{R} permanent markers and Colorific{R} product lines.
Operating income for the 2002 Third Quarter was $85.9 million, an
increase of $8.9 million, or 11.6%, from $77.0 million in the
comparable quarter of 2001. The increase is primarily related to
productivity improvements and increased margin from new products,
partially offset by continued investments in divisional growth
initiatives, primarily television advertising for the Sharpie{R} and
Paper Mate{R} brands.
LEVOLOR / HARDWARE
Net sales for the 2002 Third Quarter were $479.3 million, an increase
of $126.3 million, or 35.8%, from $353.0 million in the comparable
quarter of 2001. Excluding $110.5 million in sales from the American
Tool acquisition, sales increased $15.8 million, or 4.5%. Sales
growth was fueled primarily by 22.6% sales growth at the BernzOmatic
division. The American Tool acquisition integration continues on
plan.
Operating income for the 2002 Third Quarter was $37.6 million, a
decrease of $3.7 million, or 9.0%, from $41.3 million in the
comparable quarter of 2001. Excluding $8.0 million in operating
income from the American Tool acquisition, operating income decreased
$11.7 million, or 28.3%. The decrease in operating income was
primarily due to product price reductions and continued investment in
sales and marketing growth initiatives, as well as, start-up costs
related to the American Tool acquisition, partially offset by cost
savings from productivity initiatives.
29
CALPHALON HOME
Net sales for the 2002 Third Quarter were $307.1 million, an increase
of $15.8 million, or 5.4%, from $291.3 million in the comparable
quarter of 2001. Sales growth related primarily to Calphalon and
Cookware Europe divisions related to new product introductions and
existing product sales at strategic accounts, partially offset by
product price reductions.
Operating income for the 2002 Third Quarter was $31.8 million, a
decrease of $0.5 million, or 1.5%, from $32.3 million in the
comparable quarter of 2001. The slight decrease in operating income
was due primarily to product price reductions and costs related to
marketing growth initiatives, offset by cost savings from productivity
initiatives and new and existing product growth.
NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. NINE MONTHS ENDED SEPTEMBER
30, 2001
CONSOLIDATED OPERATING RESULTS:
Net sales for the nine months ended September 30, 2002 were $5,440.3
million, an increase of $337.1 million, or 6.6%, from $5,103.2 million
in 2001. Excluding $189.2 million of sales from the American Tool
acquisition, sales increased 2.9% from 2001. The 2.9% internal sales
growth was driven primarily by the Company's focus on sales and
marketing initiatives toward strategic customers and new product
introductions, partially offset by product price reductions.
Gross income for the nine months ended September 30, 2002 was $1,490.0
million, a $155.1 million, or 11.6%, increase from $1,334.9 million in
2001. Gross income margin also increased to 27.4% of sales versus
26.2% in 2001. Excluding $8.9 million ($5.9 million after tax) of
product line exit costs related to strategic restructurings and $3.4
million ($2.3 million after tax) of costs related to recent
acquisitions, gross income was $1,502.3 million or 27.6 % of net sales
in 2002. In the comparable period in 2001, excluding $3.6 million
($2.3 million after tax) of costs related to acquisitions, gross
income was $1,338.5 million, or 26.2% of sales. Gross income, with
and without acquisition and strategic restructuring related charges,
increased as a result of the American Tool acquisition and the
Company's implementation of strategic restructuring and productivity
improvement initiatives that continue to focus on streamlining the
Company's supply chain, such as eliminating duplicative facilities,
reducing headcount and sourcing product from low cost countries.
Productivity initiatives reduced costs by approximately $150 million
in the first nine months of 2002. The Company was able to continue
increasing gross income margin despite product price reductions.
SG&A for the nine months ended September 30, 2002 was $970.9 million,
a $131.4 million, or 15.7%, increase from $839.5 million in 2001.
SG&A as a percentage of net sales was 17.8% in 2002 versus 16.5% in
30
2001. Excluding $6.9 million ($4.6 million after tax) of acquisition
related charges in 2002, SG&A was $964.0 million or 17.7% of net sales
in 2002. In 2001, excluding $2.4 million ($1.5 million after tax) of
acquisition related charges; SG&A was $837.1 million, or 16.4%. SG&A
increased primarily due to the American Tool acquisition, the
Company's increased investment in new product development, product
launches, and planned marketing initiatives (including Strategic
Account Management and Phoenix), which support the Company's strategic
growth initiatives.
The Company recorded pre-tax strategic restructuring charges of $69.8
million ($46.3 million after taxes) and $29.0 million ($18.4 million
after tax) for the nine months ended September 30, 2002 and 2001,
respectively. The 2002 pre-tax charge included $18.4 million of
facility and other exit costs, $43.8 million of employee severance and
termination benefits, and $7.6 million in other restructuring costs.
The 2001 pre-tax charge included $8.8 million of facility and other
exit costs, $17.6 million of employee severance, and $2.6 million in
other restructuring costs. See Note 4 to the Consolidated Financial
Statements (Unaudited) for further information on the strategic
restructuring plan.
Operating income for the nine months ended September 30, 2002 was
$449.3 million, a $25.4 million, or 6.0%, increase from $423.9 million
in 2001. Operating income as a percentage of net sales was 8.3% in
2002 and 2001. Excluding strategic restructuring and acquisition
related charges of $89.0 million ($59.0 million after taxes);
operating income was $538.3 million, or 9.9% of net sales in 2002
versus $458.9 million, or 9.0% of sales in 2001. The increase in
operating income is primarily due to internal sales growth and
productivity improvements discussed above, the American Tool
Acquisition, and the impact of the non-amortization provisions of SFAS
No. 142. Partially offsetting these increases is the cost of the
Company's continued investment in sales and marketing initiatives and
product price reductions.
Net nonoperating expenses for the nine months ended September 30, 2002
were $123.8 million, a $5.4 million increase, or 4.6%, from $118.4
million in 2001. Excluding acquisition and other one-time charges of
$24.0 million ($15.9 million net of tax), net nonoperating expenses
were $99.8 million, a decrease of $18.6 million or 15.7% from 2001.
Included in the $24.0 million in acquisition costs and one-time
charges is approximately $13.6 million ($9.0 million after tax) in
transaction costs related to the withdrawn divestiture of Anchor
Hocking and $8.7 million ($5.8 million after tax) in costs related to
the American Tool acquisition, more fully described in Notes 3 and 4
to the Consolidated Financial Statements (Unaudited), respectively.
The decrease in net nonoperating expense, excluding acquisition costs
and one-time charges, was due primarily to decreased interest expense
of $23.1 million primarily related to lower interest rates on the
Company's variable rate borrowings offset by reduced equity earnings
in American Tool.
31
The effective tax rate for the nine months ended September 30, 2002
was 33.7% versus 36.5% in 2001. The decrease in the effective tax
rate between years is due primarily to the impact of the non-
amortization provisions of SFAS No. 142.
Net income before cumulative effect of accounting change for the nine
months ended September 30, 2002 was $215.7 million, a $21.8 million,
or 11.2%, increase from $193.9 million in 2001. Diluted earnings per
share before cumulative effect of accounting change were $0.81 in 2002
as compared to $0.73 in 2001.
During the first quarter of 2002, the Company completed the required
impairment tests of goodwill and indefinite life intangible assets,
which resulted in an impairment charge of $514.9 million, net of tax.
See Note 1 to the Consolidated Financial Statements (Unaudited) for
further information on the Company's adoption of SFAS No. 142.
Net loss for the nine months ended September 30, 2002 was $299.2
million or $1.12 diluted loss per share. Net income for 2001 was
$193.9 million, or $0.73 diluted earnings per share. Excluding
strategic restructuring and other charges, and the goodwill impairment
charge, net income was $290.9 million in 2002, an increase of $74.8
million from $216.1 million in 2001. A reconciliation of net income,
excluding certain charges for 2002 and 2001 is as follows:
2002 2001
---- ----
Amount Diluted EPS Amount Diluted EPS
------ ----------- ------ -----------
Net Income (Loss), as Reported ($299.2) ($1.12) $193.9 $0.73
Add Back
Restructuring Costs 46.3 0.17 18.4 0.07
Product Line Exit Costs 5.9 0.02 -- --
Anchor Hocking Transaction Costs 9.0 0.03 -- --
American Tools Acquisition Costs 5.8 0.02
Other Acquisition Related Costs 8.0 0.03 3.8 0.01
Goodwill Impairment 514.9 1.93 -- --
Rounding 0.2 0.01 -- --
------ ----- ------ ------
$290.9 $1.09 $216.1 $0.81
Net Income, Excluding Charges ====== ===== ====== =====
* Other Acquisition related costs are recorded in cost of products
sold, SG&A, and nonoperating expenses in the Consolidated
Statements of Income (Unaudited). In 2002, Other Acquisition
related costs (after tax) recorded in cost of products sold, SG&A
and nonoperating expenses were $2.3 million, $4.6 million and
$1.1 million, respectively. In 2001, Other Acquisition related
32
costs (after tax) recorded in costs of products sold and SG&A
were $2.3 million and $1.5 million, respectively.
The increase in net income and diluted earnings per share, excluding
charges, was primarily due to 2.9% internal sales growth, improved
gross margins from productivity improvements of approximately $150
million, the impact of the non-amortization provisions of the adoption
of SFAS No. 142 and lower interest expense, partially offset by the
Company's increased investment in sales and marketing initiatives and
product price reductions.
Business Segment Operating Results:
Net Sales by Group:
Percentage
2002 2001 Increase
---- ---- ----------
Rubbermaid $1,937.9 $1,928.5 0.5%
Sharpie 1,418.2 1,332.0 6.5
Levolor/Hardware 1,257.6 1,033.4 21.7
Calphalon Home 826.6 809.3 2.1
-------- -------- -----
Total Net Sales $5,440.3 $5,103.2 6.6%
======== ======== =====
Operating Income by Group:
Percentage
Increase/
2002 2001 Decrease
---- ---- ----------
Rubbermaid $160.1 $149.3 7.2%
Sharpie 227.0 205.2 10.6
Levolor/Hardware 101.6 98.9 2.7
Calphalon Home 62.0 63.4 (2.2)
------ ------ ----
Group Operating Income* $550.7 $516.8 6.6%
====== ====== ====
* Group Operating Income excludes Corporate costs and Restructuring
Expense. See Note 9 to the Consolidated Financial Statements
(Unaudited) for the detail of Operating Income by Group including
Corporate and Restructuring Expense.
RUBBERMAID
Net sales for the nine months ended September 30, 2002 were $1,937.9
million, an increase of $9.4 million, or 0.5%, from $1,928.5 million
in 2001. The overall sales increase was due to sales gains at
33
strategic accounts and new product introductions, offset by product
price reductions.
Operating income for the nine months ended September 30, 2002 was
$160.1 million, an increase of $10.8 million, or 7.2%, from $149.3
million in 2001. The increase is primarily related to productivity
improvements and increased margin from new products, partially offset
by continued investments in divisional growth initiatives, including
costs related to new product development and product launches
primarily television advertising for featured items such as the Slim
Cooler{TM} and the Tool Tower{TM}.
SHARPIE
Net sales for the nine months ended September 30, 2002 were $1,418.2
million, an increase of $86.2 million, or 6.5%, from $1,332.0 million
in 2001. The overall sales growth was fueled by sales gains in North
America at strategic accounts from new product introductions,
including the Sharpie{R} Chisel Tip and Liquid Paper{R}
Backtracker{TM}, and growth in existing Paper Mate{R} pens, Sharpie{R}
permanent markers and Colorific{R} product lines.
Operating income for the nine months ended September 30, 2002 was
$227.0 million, an increase of $21.8 million, or 10.6%, from $205.2
million in 2001. The increase is primarily related to productivity
improvements and increased margin from new products, partially offset
by continued investments in divisional growth initiatives, primarily
television advertising for the Sharpie{R} and Paper Mate{R} brands.
LEVOLOR / HARDWARE
Net sales for the nine months ended September 30, 2002 were $1,257.6
million, an increase of $224.2 million, or 21.7%, from $1,033.4
million in 2001. Excluding $189.2 million in sales from the American
Tool acquisition, sales increased $35.0 million, or 3.4%. Sales
growth was related primarily to the BernzOmatic and Levolor / Kirsch
divisions partially offset by product price reductions. The American
Tool acquisition integration continues on plan.
Operating income for the nine months ended September 30, 2002 was
$101.6 million, an increase of $2.7 million, or 2.7%, from $98.9
million in 2001. Excluding $15.3 million in operating income from the
American Tool acquisition, operating income decreased $12.6 million,
or 12.7%. The decrease in operating income, excluding American Tool,
was primarily due to product price reductions and continued investment
in sales and marketing growth initiatives, as well as, start-up cost
related to the American Tool acquisition, partially offset by cost
savings from productivity initiatives.
34
CALPHALON HOME
Net sales for the nine months ended September 30, 2002 were $826.6
million, an increase of $17.3 million, or 2.1%, from $809.3 million in
2001. The slight increase in sales related primarily to the Calphalon
division's new product introductions at strategic accounts, offset by
product price reductions.
Operating income for the nine months ended September 30, 2002 was
$62.0 million, a decrease of $1.4 million, or 2.2%, from $63.4 million
in 2001. The decrease in operating income was due primarily to
product price reductions and continued investment in sales and
marketing growth initiatives, partially offset by cost savings from
productivity initiatives.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES:
The Company's primary sources of liquidity and capital resources
include cash provided from operations and use of available borrowing
facilities.
Cash provided from operating activities for the nine months ended
September 30, 2002 was $569.2 million compared to $576.8 million for
the comparable period of 2001. The Company generated free cash flow
(defined by the Company as cash provided by operating activities less
capital expenditures and dividends) of $215.8 million for the first
nine months of 2002 compared to $224.1 million for 2001. The planned
decrease in free cash flow and operating cash flow between years is
due primarily to increased inventory levels for new product
introductions and reductions in accrued liabilities, partially offset
by higher accounts payable levels.
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 September 30, 2002 totaled $29.6 million.
The Company completed a $1,300.0 million Syndicated Revolving Credit
Facility (the "Revolver") on June 14, 2002, replacing the existing
$1,300.0 revolving credit agreement, which was scheduled to terminate
in August 2002. The Revolver consists of a $650.0 million 364-day
credit agreement and a $650.0 million five-year credit agreement. At
September 30, 2002, there were no borrowings under the $1,300.0
million Revolver.
In lieu of borrowings under the Company's Revolver, the Company may
issue up to $1,300.0 million of commercial paper. The Company's
35
Revolver provides the committed backup liquidity required to issue
commercial paper. Accordingly, commercial paper may only be issued up
to the amount available for borrowing under the Company's Revolver.
At September 30, 2002, $504.0 million (principal amount) of commercial
paper was outstanding. Because $650 million of the backup Revolver
expires in June 2007, the entire $504.0 million is classified as long-
term debt.
The Revolver permits the Company to borrow funds on a variety of
interest rate terms. The Revolver requires, among other things, that
the Company maintain Total Indebtedness to Total Capital Ratio of 60%
and an Interest Coverage Ratio of 4 to 1. As of September 30, 2002,
the Company was in compliance with this agreement.
The Company had outstanding at September 30, 2002 a total of $1,432.4
million (principal amount) of medium-term notes, including the
unamortized fair value gain of $19.9 million on the terminated
interest rate swaps described in Note 4. The proceeds from the
termination of the fair value swap were used to pay down commercial
paper. The maturities on these notes range from 3 to 30 years at an
average interest rate of 5.41%. Of the outstanding amount of medium-
term notes, $405.8 million is classified as current portion of long-
term debt and $1,026.6 million is classified as long-term debt.
On March 14, 2002 the Company issued $500.0 million of Senior Notes
with five-year and ten-year maturities. The $500.0 million Senior
Notes consist of $250.0 million in 6.00% Senior Notes due 2007 and
$250.0 million in 6.75% Senior Notes due 2012. The five-year notes
were swapped to a floating rate, resulting in a 2.98% rate for the
first nine months of the swap. The proceeds of this issuance were
used to pay down commercial paper. This issuance is reflected in the
outstanding amount of medium-term notes noted above and the entire
amount is considered to be long-term debt.
On September 18, 2001, the Company entered into an agreement with a
financial institution creating a financing entity that is consolidated
in the Company's financial statements. Under the agreement, the
Company regularly enters into transactions with the financing entity
to sell an undivided interest in substantially all of the Company's
United States trade receivables to the financing entity. In the
quarter ended September 30, 2001, the financing entity issued $450.0
million in preferred debt securities to the financial institution.
Those preferred debt securities must be retired or redeemed before the
Company can have access to the financing entity's receivables. The
receivables and the corresponding $450.0 million preferred debt issued
by the subsidiary to the financial institution are recorded in the
consolidated accounts of the Company. The proceeds of this debt were
used to pay down commercial paper issued by the Company. Because this
debt matures in 2008, the entire amount is considered to be long-term
debt. The provisions of the debt agreement allow the entire
outstanding debt to be called upon certain events including the
Company's debt rating falling below investment grade and certain
36
levels of accounts receivable write-offs. As of September 30, 2002,
the Company was in compliance with the agreement. As of September 30,
2002 and December 31, 2001, the aggregate amount of outstanding
receivables sold under the agreement was $695.9 million and $689.3
million, respectively.
A $500.0 million universal shelf registration statement became
effective in July 2002 under which debt and equity securities may be
issued. No securities have been issued under this shelf registration
statement.
USES:
The Company's primary uses of liquidity and capital resources include
acquisitions, dividend payments and capital expenditures.
Cash used for acquisitions was $228.5 million for the first nine
months of 2002, an increase of $206.6 million from the same period in
2001. The increase is related primarily to the American Tool
acquisition, less a $17.5 million refund of purchase price related to
the December 30, 2000 Gillette stationery products group acquisition.
In the first nine months of 2001, the Company made minor acquisitions.
These acquisitions were accounted for as purchases and were paid for
with proceeds obtained from the issuance of commercial paper.
The Company repaid $535.8 million of long-term debt for the first nine
months of 2002. The Company's ability to pay down debt was due
primarily to current year cash earnings and continued focus on working
capital management.
Cash used for restructuring activities was $41.7 million and $16.4
million in the first nine months of 2002 and 2001, respectively. Such
cash payments primarily represent employee termination benefits and
facility exit costs.
Capital expenditures were $185.2 million and $184.7 million in the
first nine months of 2002 and 2001, respectively. The Company
continues to invest in new product development and productivity.
Aggregate dividends paid were approximately $168 million during both
2002 and 2001.
Retained earnings decreased $467.7 million in the first nine months of
2002. The reduction in retained earnings is due primarily to the
$514.9 million, net of tax, non-cash goodwill impairment charge in
2002, partially offset by current year earnings.
Working capital at September 30, 2002 was $671.1 million compared to
$316.8 million at December 31, 2001. The current ratio at September
30, 2002 was 1.28:1 compared to 1.13:1 at December 31, 2001. The
increase in working capital and the current ratio is due to the
American Tool acquisition, increases in inventory, and reduced current
portion of long-term debt.
37
Total debt to total capitalization (total debt is net of cash and cash
equivalents, and total capitalization includes total debt, company-
obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust and stockholders' equity) was .49:1 at September 30,
2002 and .43:1 at December 31, 2001. The increase in total debt to
total capitalization is due to the American Tool acquisition and the
write-off of goodwill; see Note 2 for additional details. This
acquisition was funded by the issuance of commercial paper.
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.
MINIMUM PENSION LIABILITY
The recent dramatic decline in U.S. equity markets has reduced the
value of the company's pension plan assets. As a result, the
Company's pension plan, which historically has had an over-funded
position, currently is under-funded. In accordance with Financial
Accounting Standards Board (FASB) Statement No. 87, Employers'
Accounting for Pensions, the Company expects to record an additional
minimum pension liability adjustment at December 31, 2002. Based on
September 30, 2002 plan asset values, the approximate effect of this
non-cash adjustment would be to increase the pension liability by
approximately $75 to $85 million, with a corresponding charge to
equity, net of taxes of approximately $48 to $56 million. The direct
charge to stockholders' equity would not affect net income, but would
be included in other comprehensive income. The Company remains
confident that its pension plan has the appropriate long-term
investment strategy and the Company's liquidity position is expected
to remain strong.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements in conformity
with Generally Accepted Accounting Principles in the United States
("US GAAP") requires management to make estimates and judgments
regarding future events that affect the amounts reported in the
financial statements or disclosed in the accompanying footnotes.
Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from
those estimates, and historically such differences have not had a
significant impact on the consolidated financial statements.
The following are the more significant accounting policies and methods
used by the Company:
* REVENUE RECOGNITION: As required by US GAAP, the Company
recognizes revenues and freight billed to customers, net of
provisions for customer discounts upon shipment, and when
38
all substantial risks of ownership change. See Note 1 to
the Consolidated Financial Statements in the 2001 Form 10-K.
* RECOVERY OF ACCOUNTS RECEIVABLE: The Company evaluates the
collectibility of accounts receivable based on a combination
of factors. When aware of a specific customer's inability
to meet its financial obligations, such as in the case of
bankruptcy filings or deterioration in the customer's
operating results or financial position, the Company records
a specific reserve for bad debts to reduce the related
receivable to the amount the Company reasonably believes is
collectible. The Company also records reserves for bad
debts for all other customers based on a variety of factors
including the length of time the receivables are past due
and historical collection experience. If circumstances
related to specific customers change, the Company's
estimates of the recoverability of receivables could be
further adjusted.
* INVENTORY RESERVES: The Company reduces its inventory value
for estimated obsolete and slow moving inventory in an
amount equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about
future demand and market conditions. If actual market
conditions are less favorable than those projected by
management, additional inventory write-downs may be
required.
* GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSETS: Goodwill
and indefinite life intangible assets are assessed for
impairment annually or whenever changes in facts and
circumstances indicate a possible significant deterioration
in the fair value of the reporting unit. If, upon review,
the fair value is less than the carrying value of the
reporting unit, the carrying value is written down to
estimated fair value. Reporting units are typically
operating segments or operations one level below operating
segments for which discrete financial information is
available and for which segment management regularly reviews
the operating results. Because there usually is a lack of
quoted market prices for the reporting units, the fair value
usually is based on the present values of expected future
cash flows using discount rates commensurate with the risks
involved in the asset group. The expected future cash flows
used for impairment reviews and related fair value
calculations are based on judgmental assessments of future
production volumes, prices and costs, considering all
available information at the date of review. Significant
unexpected changes could result in material adjustments.
39
MARKET RISK
The Company's market risk is impacted by changes in interest rates,
foreign currency exchange rates and certain commodity prices.
Pursuant to the Company's policies, natural hedging techniques and
derivative financial instruments may be utilized to reduce the impact
of adverse changes in market prices. The Company does not hold or
issue derivative instruments for trading purposes.
The Company's primary market risk is 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 $500.0 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 and intercompany
transactions are deferred and included in the basis of the underlying
transactions. Derivatives used to hedge intercompany loans are marked
to market with the corresponding gains or losses included in the
consolidated 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. This model estimates a
loss in fair market value using statistical modeling techniques that
are based on a variance/covariance approach and includes substantially
all market risk exposures (specifically excluding equity-method
40
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.
2002 September 30, 2001 September 30, Confidence
Average 2002 Average 2001 Level
------- ------------- ------- ------------- ----------
(In millions)
Interest rates $17.4 $21.2 $10.7 $10.5 95%
Foreign exchange $0.3 $0.4 $1.2 $0.7 95%
The 95% confidence interval signifies the Company's degree of
confidence that actual losses would not exceed the estimated losses
shown above. The amounts shown here disregard the possibility that
interest rates and foreign currency exchange rates could move in the
Company's favor. The value-at-risk model assumes that all movements
in these rates will be adverse. Actual experience has shown that
gains and losses tend to offset each other over time, and it is highly
unlikely that the Company could experience losses such as these over
an extended period of time. These amounts should not be considered
projections of future losses, because actual results may differ
significantly depending upon activity in the global financial markets.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Report are made in reliance upon
the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements relate to, but are not
limited to, such matters as sales, income, earnings per share, return
on equity, return on invested capital, capital expenditures, working
capital, dividends, capital structure, free cash flow, debt to
capitalization ratios, interest rates, internal growth rates, impacts
of changes in accounting standards, pending legal proceedings and
claims (including environmental matters), future economic performance,
operating income improvements, synergies, management's plans, goals
and objectives for future operations and growth or the assumptions
relating to any of the forward-looking statements. The Company
cautions that forward-looking statements are not guarantees because
there are inherent difficulties in predicting future results. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Factors that could cause actual results
to differ include, but are not limited to, those matters set forth in
this Report and Exhibit 99 to this Report.
41
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Market Risk" in the Company's
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Part I, Item 2).
ITEM 4. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of a
date within 90 days of the filing of this Report, the
Company's chief executive officer and chief financial
officer have evaluated the effectiveness of the Company's
disclosure controls and procedures. Based on that
evaluation, the chief executive officer and the chief
financial officer concluded that the Company's disclosure
controls and procedures were effective.
b) CHANGES IN INTERNAL CONTROLS. There have been no
significant changes in the Company's internal controls or in
other facts that could significantly affect internal
controls subsequent to the date of their evaluation.
42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal proceedings in the ordinary course of
its business. These proceedings include claims for damages arising
out of use of the Company's products, allegations of infringement of
intellectual property, commercial disputes and employment related
matters, as well as the environmental matters described below. Some
of the legal proceedings include claims for punitive as well as
compensatory damages, and a few proceedings purport to be class
actions.
As of September 30, 2002, 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 ("PRP") 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.
The Company's estimate of environmental response costs associated with
these matters as of September 30, 2002 ranged between $14.2 million
and $18.6 million. As of September 30, 2002, the Company had a
reserve equal to $16.3 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, except with respect to two long-term (30 year)
operations and maintenance CERCLA matters which are estimated at
present value.
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.
43
Although management of the Company cannot predict the ultimate outcome
of these legal proceedings with certainty, it believes that the
ultimate resolution of the Company's legal proceedings, including any
amounts it may be required to pay in excess of amounts reserved, will
not have a material effect on the Company's financial statements.
44
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12. Statement of Computation of Ratio of Earnings to
Fixed Charges
99.1. Safe Harbor Statement
99.2. Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.3. Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
Registrant filed a Report on Form 8-K dated July 10,
2002, setting forth the transitional disclosures required by
SFAS Nos. 141 and 142, updated from the transitional
disclosures contained in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
Registrant filed a Report on Form 8-K dated August 1,
2002, regarding submission to the Commission of Sworn
Statements pursuant to the Commission's June 27, 2002 Order
Requiring Filing of Sworn Statements Pursuant to Section
21(a)(1) of the Securities Exchange Act of 1934.
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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 13, 2002 /s/ William T. Alldredge
---------------------------------------
William T. Alldredge
President - Corporate Development and
Chief Financial Officer
Date: November 13, 2002 /s/ J. Patrick Robinson
---------------------------------------
J. Patrick Robinson
Vice President - Corporate Controller
and Chief Accounting Officer
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CERTIFICATION
I, Joseph Galli, Jr., certify that:
1. I have reviewed this quarterly report on Form 1O-Q of Newell
Rubbermaid Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "EVALUATION
DATE"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
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b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: NOVEMBER 13, 2002
/s/ Joseph Galli, Jr.
----------------------------------
Joseph Galli, Jr.
Chief Executive Officer
48
CERTIFICATION
I, William T. Alldredge, certify that:
1. I have reviewed this quarterly report on Form 1O-Q of Newell
Rubbermaid Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "EVALUATION
DATE"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
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b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: NOVEMBER 13, 2002
/s/ William T. Alldredge
----------------------------------
William T. Alldredge
Chief Financial Officer
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