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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, 2003
Commission File Number 1-9608
NEWELL RUBBERMAID INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3514169
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Deerfield Corporate Centre One
13010 Morris Road, Suite 100
Alpharetta, Georgia 30004
(Address of principal executive offices)
(Zip Code)
(770) 670-2232
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes /x/ No / /
Number of shares of common stock outstanding (net of treasury shares)
as of October 24, 2003: 274.4 million.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $1,944.7 $1,948.3 $5,657.2 $5,440.3
Cost of products sold 1,422.5 1,398.0 4,121.6 3,950.3
-------- -------- -------- --------
GROSS MARGIN 522.2 550.3 1,535.6 1,490.0
Selling, general and administrative expenses 328.3 341.7 1,002.5 970.9
Restructuring costs 48.4 51.2 166.0 69.8
-------- -------- -------- --------
OPERATING INCOME 145.5 157.4 367.1 449.3
Nonoperating expenses:
Interest expense 27.4 29.7 88.0 84.1
Other, net 7.2 13.7 35.2 39.7
-------- -------- -------- --------
Net nonoperating expenses 34.6 43.4 123.2 123.8
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 110.9 114.0 243.9 325.5
Income taxes 35.7 37.8 78.9 109.8
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 75.2 76.2 165.0 215.7
Cumulative effect of accounting change, net of tax - - - 514.9
-------- -------- -------- --------
NET INCOME (LOSS) 75.2 76.2 165.0 (299.2)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 274.4 267.2 274.0 267.0
Diluted 274.4 277.7 274.3 267.7
Earnings (loss) per share:
Basic -
Before cumulative effect of accounting change $0.27 $0.29 $0.60 $0.81
Cumulative effect of accounting change - - - (1.93)
-------- -------- -------- -------
Net income (loss) per common share $0.27 $0.29 $0.60 ($1.12)
======== ======== ======== ========
Diluted -
Before cumulative effect of accounting change $0.27 $0.29 $0.60 $0.81
Cumulative effect of accounting change - - - (1.93)
-------- -------- -------- -------
Net income (loss) per common share $0.27 $0.29 $0.60 ($1.12)
======== ======== ======== ========
Dividends per share $0.21 $0.21 $0.63 $0.63
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
2
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
September 30, December 31,
2003 2002
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $77.1 $55.1
Accounts receivable, net 1,392.6 1,377.7
Inventories, net 1,271.2 1,196.2
Deferred income taxes 200.4 213.5
Prepaid expenses and other 221.2 237.5
-------- --------
TOTAL CURRENT ASSETS 3,162.5 3,080.0
OTHER ASSETS 316.3 286.7
PROPERTY, PLANT AND EQUIPMENT, NET 1,816.7 1,812.8
GOODWILL, NET 2,298.1 1,847.3
OTHER INTANGIBLE ASSETS, NET 373.5 362.1
-------- --------
TOTAL ASSETS $7,967.1 $7,388.9
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
September 30, December 31,
2003 2002
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $31.6 $25.2
Accounts payable 815.9 686.6
Accrued compensation 117.5 153.5
Other accrued liabilities 1,062.5 1,165.4
Income taxes 139.0 159.7
Current portion of long-term debt 30.8 424.0
-------- --------
TOTAL CURRENT LIABILITIES 2,197.3 2,614.4
LONG-TERM DEBT 2,538.8 1,856.6
OTHER NONCURRENT LIABILITIES 402.4 349.7
DEFERRED INCOME TAXES 2.3 4.7
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 290.1 283.1
Outstanding shares:
2003 - 290.1 million
2002 - 283.1 million
Treasury stock, at cost; (411.6) (409.9)
Shares held:
2003 - 15.7 million
2002 - 15.7 million
Additional paid-in capital 438.2 237.3
Retained earnings 2,135.1 2,143.2
Accumulated other comprehensive loss (125.5) (190.2)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 2,326.3 2,063.5
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,967.1 $7,388.9
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Nine Months Ended September 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income (loss) $165.0 ($299.2)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change - 514.9
Depreciation and amortization 208.6 218.4
Deferred income taxes 9.6 31.9
Noncash restructuring and restructuring related charges 73.0 44.7
Loss on sale of business 20.5 -
Other 30.7 35.2
Changes in current accounts excluding the
effects of acquisitions:
Accounts receivable 51.7 12.0
Inventories (44.8) (65.2)
Other current assets 7.1 (21.8)
Accounts payable 112.3 106.1
Accrued liabilities and other (213.2) (7.8)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 420.5 569.2
------- -------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (460.0) (228.5)
Expenditures for property, plant and equipment (247.1) (185.2)
Sale of business 10.2 -
Disposals of noncurrent assets and other - 7.8
------- -------
NET CASH USED IN INVESTING ACTIVITIES (696.9) (405.9)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 1,040.5 523.1
Proceeds from issuance of stock 200.1 -
Payments on notes payable and long-term debt (776.7) (535.8)
Cash dividends (173.1) (168.2)
Proceeds from exercised stock options and other 6.0 16.3
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 296.8 (164.6)
------- -------
Exchange rate effect on cash 1.6 1.2
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22.0 (0.1)
Cash and cash equivalents at beginning of year 55.1 6.8
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $77.1 $6.7
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Newell
Rubbermaid Inc. (collectively with its subsidiaries, the "Company")
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission, and do not include all the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the unaudited consolidated financial statements include
all adjustments, consisting of only normal recurring accruals,
considered necessary for a fair presentation of the financial position
and the results of operations. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest Annual Report on Form 10-K.
SEASONAL VARIATIONS: The Company's product groups are only moderately
affected by seasonal trends. The Rubbermaid and Calphalon Home
business segments typically have higher sales in the second half of
the year due to retail stocking related to the holiday season; the
Irwin business segment typically has higher sales in the second and
third quarters due to an increased level of do-it-yourself projects
completed in the summer months; and the Sharpie business segment
typically has higher sales in the second and third quarters due to the
back-to-school season. Because these seasonal trends are moderate,
the Company's consolidated quarterly sales generally do not fluctuate
significantly.
FAIR VALUE OF STOCK OPTIONS: On May 7, 2003, the Company's
stockholders approved the Newell Rubbermaid Inc. 2003 Stock Plan (the
"2003 Plan"). The 2003 Plan provides for grants of up to an aggregate
of 15.0 million stock options, stock awards and performance shares
(except that no more than 3.0 million of those grants may be stock
awards and performance shares). Under the 2003 Plan, the option
exercise price will equal the common stock's closing price on the date
of grant. Options will vest over five years (which may be shortened
to no less than three years) and expire ten years from the date of
grant. Also, under the 2003 Plan, none of the restrictions on stock
awards will lapse earlier than the third anniversary of the date of
grant.
The Company's stock option plans are accounted for under Accounting
Principles Board Opinion No. 25. As a result, the Company grants fixed
stock options under which no compensation cost is recognized. Had
compensation cost for the plans been determined consistent with
Statement of Financial Accounting Standard No. 123 (FAS 123),
"Accounting for Stock Based Compensation," the Company's net income
and earnings per share would have been reduced to the following pro
forma amounts for the three and nine months ended September 30, (IN
MILLIONS, EXCEPT PER SHARE DATA):
6
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss):
As reported $75.2 $76.2 $165.0 ($299.2)
Fair value option expense (4.7) (4.2) (14.1) (12.6)
----- ----- ------ ------
Pro forma $70.5 $72.0 $150.9 ($311.8)
Basic earnings (loss) per share:
As reported $0.27 $0.29 $0.60 ($1.12)
Pro forma 0.26 0.27 0.55 (1.17)
Diluted earnings (loss) per share:
As reported $0.27 $0.29 $0.60 ($1.12)
Pro forma 0.26 0.27 0.55 (1.16)
RECENT ACCOUNTING PRONOUNCEMENTS: In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 (the Interpretation). The
Interpretation introduces a new consolidation model - the variable
interests model - which determines control and consolidation based on
potential variability in gains and losses of the entity being
evaluated for consolidation. Under the Interpretation, variable
interest entities (VIEs) are to be evaluated for consolidation based
on their variable interests. Variable interests are contractual,
ownership, or other interests in an entity that expose their holders
to the risks and rewards of the VIE. Variable interests include
equity investments, loans, leases, derivatives, guarantees, and other
instruments whose values change with changes in the VIE's assets. The
provisions of the Interpretation apply to interest in VIE's acquired
before February 1, 2003. A FASB Staff Position issued in October 2003
deferred the effective date of the Interpretation to the first interim
or annual period ending after December 15, 2003 for entities created
before February 1, 2003. The Company is currently evaluating the
impact FIN 46 will have on its financial statements for any VIE
created before February 1, 2003 in which the Company has an interest.
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149 (FAS 149), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." FAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement improves financial reporting
by requiring that contracts with comparable characteristics be
accounted for similarly, which will result in more consistent
reporting of contracts as either derivatives or hybrid instruments.
The Company adopted the provisions of FAS 149, effective June 30,
2003. Adoption of this standard did not have a material effect on the
Company's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standard No. 150 (FAS 150), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." FAS
150 establishes standards for how an issuer classifies and measures
7
certain financial instruments with characteristics of both liabilities
and equity. On October 29, 2003 the FASB deferred, indefinitely, the
application of paragraphs 9 and 10 of FAS 150 as it relates to
mandatorily redeemable non-controlling interests in consolidated
subsidiaries that would not be recorded as liabilities under FAS 150
by such subsidiaries. The adoption of the remainder of FAS 150 on
July 1, 2003, had no impact on the Company's consolidated financial
statements.
RECLASSIFICATIONS: Certain 2002 amounts have been reclassified to
conform to the 2003 presentation.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible
Assets." Pursuant to the adoption of FAS 142, the Company performed
the required impairment tests of goodwill and indefinite-lived
intangible assets and recorded a pre-tax goodwill impairment charge of
$538.0 million, $514.9 million net of tax, in the first quarter of
2002. In determining the goodwill impairment, the Company measured
the impairment loss as the excess of the carrying amount of goodwill
(which included the carrying amount of trademarks) over the implied
fair value of goodwill (which excluded the fair value of identifiable
trademarks). The Company conducts annual impairment tests in the
third quarter and also tests 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. For the nine months ended September 30, 2003, no
such impairment charges have been recorded.
A summary of changes in the Company's goodwill during the nine months
ended September 30, 2003 is as follows (IN MILLIONS):
Balance at December 31, 2002 $1,847.3
Acquisitions 432.8
Other (primarily foreign exchange) 18.0
--------
Balance at September 30, 2003 $2,298.1
========
NOTE 3 - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
Effective January 1, 2003, the Company completed its acquisition of
American Saw & Mfg. Co. (Lenox), a leading manufacturer of power tool
accessories and hand tools marketed under the Lenox brand. The
purchase price was approximately $450 million. This purchase marks
the continued expansion and enhancement of the Company's product lines
and customer base in the global power tool accessories and hand tools
market and strengthens the Company's platform in the professional and
fast growing "do-it-yourself" channels. Lenox had 2002 net sales of
$185.4 million and is included in the Irwin operating segment.
On April 30, 2002, the Company completed the purchase of American Tool
Companies, Inc. ("American Tool"), a leading manufacturer of hand
tools and power tool accessories. The Company had previously held a
49.5% stake in American Tool, which had been accounted for under the
equity method prior to acquisition. The purchase price was $467
8
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 2003 and 2002 transactions were accounted for as purchases;
therefore, results of operations are included in the accompanying
Consolidated Financial Statements since their respective acquisition
dates. The acquisition costs for 2003 were allocated on a preliminary
basis to the fair market value of the assets acquired and liabilities
assumed. The Company's final integration plans may include exit costs
for certain plants and product lines and employee termination costs.
The final adjustments to the purchase price allocations are not
expected to be material to the Consolidated Financial Statements.
The Company continues to formulate integration plans for Lenox and
other acquisitions. In 2003, integration plans for acquired
businesses resulted in integration plan liabilities of $14.1 million
for facility and other exit costs, $10.4 million for employee
severance and termination benefits and $6.2 million for other pre-
acquisition contingencies.
The unaudited consolidated results of operations on a pro forma basis,
as though the 2003 and 2002 acquisitions of Lenox and American Tool,
respectively, had been completed on January 1, 2002, are as follows
for the three months and nine months ended September 30, (IN MILLIONS,
EXCEPT PER SHARE AMOUNTS):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $1,944.7 $1,996.9 $5,657.2 $5,722.1
Income before accounting change $75.2 $83.7 $165.0 $230.3
Basic earnings per share before accounting change $0.27 $0.31 $0.60 $0.86
Net income (loss) $75.2 $83.7 $165.0 ($284.7)
Basic earnings (loss) per share $0.27 $0.31 $0.60 ($1.07)
DIVESTITURES
On March 27, 2003, the Company completed the sale of its Cosmolab
business, a division of the Sharpie segment, for approximately $13.0
million. The Cosmolab business had annual net sales of approximately
$50 million. The Company used the proceeds from the sale to reduce
its commercial paper borrowings. The Company recorded a pre-tax loss
on the sale of $21.2 million in the first quarter of 2003 as a
component of Other, net in the Consolidated Statement of Operations.
NOTE 4 - RESTRUCTURING COSTS
The Company continues to record restructuring charges associated with
the Company's strategic restructuring plan announced on May 3, 2001.
The specific objectives of the plan are to streamline the Company's
supply chain to be the low cost global provider throughout the
Company's portfolio by reducing worldwide headcount and consolidating
duplicative manufacturing facilities, over a three-year period
beginning in 2001. In the third quarter of 2003, the Company expanded
the scope and estimated cost of its original restructuring plan.
9
The original plan estimated approximately $350 million in total
restructuring charges. The revised restructuring plan (the "revised
plan") estimates total charges ranging from $460 million to $480
million. The increase in total charges from the original
restructuring plan is related to the currency translation impact for
future European projects (as the Euro and British Pound have
significantly strengthened against the US dollar) and the addition of
high return projects primarily in the Company's American Tool
business.
Pre-tax restructuring costs consisted of the following (IN MILLIONS):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Facility and other exit costs $10.7 $13.7 $67.3 $18.4
Employee severance and termination benefits 31.1 30.5 88.5 43.8
Exited contractual commitments and other 6.6 7.0 10.2 7.6
----- ----- ------ -----
Recorded as Restructuring Costs $48.4 $51.2 $166.0 $69.8
===== ===== ====== =====
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 $77.7 million and $41.7 million in the
first nine months of 2003 and 2002, respectively. A summary of the
Company's restructuring plan reserves is as follows (IN MILLIONS):
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 and other 1.9 7.6 (5.6) 3.9
------ ------ ----- ------
$28.2 $69.8 ($45.2) $52.8
====== ====== ===== ======
12/31/02 Costs 09/30/03
Balance Provision Incurred Balance
-------- --------- -------- -------
Facility and other exit costs $36.1 $67.3 ($58.6) $44.8
Employee severance and termination benefits 41.1 88.5 (69.7) 59.9
Exited contractual commitments and other 2.1 10.2 (11.8) 0.5
----- ------ ------ ------
$79.3 $166.0 ($140.1) $105.2
===== ====== ====== ======
The facility and other exit cost reserves are primarily related to
future minimum lease payments on vacated facilities and other closure
costs.
Under the revised plan, the Company expects to exit 84 facilities and
reduce headcount by approximately 12,000 people. At the plan's
completion, the Company expects total annual savings of between $150
and $175 million ($125 to $135 million related to the reduced
10
headcount, $10 to $15 million related to reduced depreciation, and $15
to $25 million related to other cash savings). As of September 30,
2003, restructuring reserves held on the Company's books were
representative of approximately 100 individual restructuring plans.
The following table depicts the material changes in these plans for
the nine months ended September 30, aggregated by reportable business
segment:
12/31/01 Costs 09/30/02
Segment Balance Provision Incurred Balance
------- -------- --------- -------- --------
Rubbermaid $3.1 $7.6 ($7.0) $3.7
Sharpie 2.0 4.9 (3.8) 3.1
Irwin 14.1 33.2 (14.9) 32.4
Calphalon Home 2.5 14.0 (10.8) 5.7
Corporate 6.5 10.1 (8.7) 7.9
----- ----- ----- ------
$28.2 $69.8 ($45.2) $52.8
===== ===== ===== ======
12/31/02 Costs 09/30/03
Segment Balance Provision Incurred Balance
------- -------- --------- -------- --------
Rubbermaid $11.9 $33.0 ($28.0) $16.9
Sharpie 22.5 24.9 (24.7) 22.7
Irwin 12.8 44.0 (24.8) 32.0
Calphalon Home 11.6 61.2 (52.7) 20.1
Corporate 20.5 2.9 (9.9) 13.5
----- ------ ------ ------
$79.3 $166.0 ($140.1) $105.2
===== ====== ====== ======
In the first nine months of 2003, the Company incurred facility exit
costs and employee severance and termination benefit costs for
approximately 4,400 employees. Under the restructuring plan, 73
facilities have been exited and headcount has been reduced by 9,200
employees.
In 2003, the Company announced its intention to close one of its
manufacturing facilities in the Calphalon Home operating segment by
the end of 2003. As a result of this decision, the Company evaluated
its long-lived assets, primarily property, plant and equipment, for
impairment and recorded a non-cash restructuring charge of $30.5
million. The amount of the impairment was determined using a
discounted cash flow analysis.
In 2003, the Company recorded a non-cash restructuring charge of $14.0
million relating to the curtailment of a pension plan associated with
the closure of one of the Company's exited facilities. The non-cash
restructuring charge has been included in employee severance and
termination benefits as disclosed in the table above.
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):
11
September 30, December 31,
2003 2002
---- ----
Materials and supplies $313.9 $308.8
Work in process 185.4 174.9
Finished products 771.9 712.5
-------- --------
$1,271.2 $1,196.2
======== ========
NOTE 6 - LONG-TERM DEBT
The following is a summary of long-term debt (IN MILLIONS):
September 30, December 31,
2003 2002
---- ----
Medium-term notes $1,712.6 $1,680.9
Commercial paper 398.2 140.0
Preferred debt securities 450.0 450.0
Other long-term debt 8.8 9.7
-------- --------
Total debt 2,569.6 2,280.6
Current portion of long-term debt (30.8) (424.0)
-------- --------
Long-term Debt $2,538.8 $1,856.6
======== ========
On June 13, 2003, Newell Rubbermaid rolled over the $650.0 million 364
day Revolving Credit Facility that was terminating on June 14, 2003.
The new agreement consists of 19 participating banks and will mature
on June 11, 2004. The revolver requires, among other things, that the
Company maintain certain interest coverage and total indebtedness to
total capital ratios, as defined in the agreement. The agreement also
limits subsidiary indebtedness. As of September 30, 2003, the Company
was in compliance with this agreement. No amounts are outstanding
under the Revolving Credit Facility as of September 30, 2003.
On May 6, 2003, the Company issued $400.0 million of medium term notes
with seven-year and two-year maturities. The $400.0 million of medium
term notes consist of $250.0 million in 4.00% notes due 2010 and
$150.0 million in 2.00% notes due 2005. The seven-year notes pay
interest semi-annually on May 1 and November 1 until final maturity on
May 1, 2010. The two-year notes pay interest semi-annually on May 1
and November 1 until final maturity on May 1, 2005. The proceeds of
these issuances were used to pay down commercial paper. These
issuances are reflected in the outstanding amount of medium-term notes
noted above and the entire amount is considered to be long-term debt.
On January 10, 2003, the Company completed the sale of 6.67 million
shares of its common stock at a public offering price of $30.10 per
share pursuant to a shelf registration statement filed with the
Securities and Exchange Commission. Total proceeds from the sale were
approximately $200.8 million, resulting in net proceeds to the
Company, before expenses, of $200.1 million. The proceeds were used
to reduce the Company's commercial paper borrowings.
12
Through the first nine months of 2003, the Company has terminated
certain interest rate swap agreements prior to their scheduled
maturities. The following table summarizes the arrangements of each
interest rate swap termination that occurred through the nine months
ended September 30, 2003:
Fair Value of Unamortized
Date of Interest Rate Total Cash the Terminated Gain as of
Swap Termination Received Swaps 9/30/03
---------------- --------- ----- -------
September 30, 2003 $6.4 $6.0 $6.0
September 15, 2003 5.7 5.4 5.3
June 16, 2003 11.4 10.8 9.8
February 24, 2003 21.0 17.3 14.7
----- ----- -----
Total $44.5 $39.5 $35.8
===== ===== =====
The cash received relating to the fair value of the swaps has been
included in Other as an operating activity in the Consolidated
Statement of Cash Flows. The unamortized gain on the terminated
interest rate swaps is accounted for as long-term debt (of which $9.0
million is classified as current). The unamortized gain will be
amortized as a reduction to interest expense over the remaining term
of the underlying debt.
NOTE 7 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the three
and nine months ended September 30, is shown below (IN MILLIONS,
EXCEPT PER SHARE DATA):
"In the Convertible
Basic Money" Preferred Diluted
Method Options(1) Securities(2) Method
------ ---------- ------------- ------
QUARTER ENDED SEPTEMBER 30, 2003
Net income $75.2 - - $75.2
Weighted average shares outstanding 274.4 - - 274.4
Earnings per share $0.27 $0.27
QUARTER ENDED SEPTEMBER 30, 2002
Net income $76.2 - 4.4 $80.6
Weighted average shares outstanding 267.2 0.6 9.9 277.7
Earnings per share $0.29 $0.29
NINE MONTHS ENDED SEPTEMBER 30, 2003
Net income $165.0 - - $165.0
Weighted average shares outstanding 274.0 0.3 - 274.3
Earnings per share $0.60 $0.60
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
13
Net loss ($299.2) - - ($299.2)
Weighted average shares outstanding 267.0 0.7 - 267.7
Loss per share ($1.12) ($1.12)
(1) The weighted average shares outstanding for the three months ended September 30, 2003 and 2002 exclude
approximately 10.0 million and 4.4 million stock options, respectively, and approximately 8.0 million and 4.4
million stock options for the nine months ended September 30, 2003 and 2002, respectively, because such
options had an exercise price in excess of the average market value of the Company's common stock during the
respective periods and would, therefore, be anti-dilutive.
(2) The convertible preferred securities are anti-dilutive for the three months ended September 30, 2003 and for
the nine months ended September 30, 2003 and 2002, and therefore have been excluded from diluted earnings per
share. Had the convertible preferred shares been included in the diluted earnings per share calculation, net
income would be increased by $4.2 million for the three months ended September 30, 2003, and by $12.6 million
and $13.2 million for the nine months ended September 30, 2003 and 2002, respectively, and weighted average
shares outstanding would have increased by 9.9 million shares in all periods.
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.
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 Liability Loss
---- ---- --------- ----
Balance at December 31, 2002 ($115.1) $0.4 ($75.5) ($190.2)
Current year change 54.0 4.0 6.7 64.7
------ ---- ----- ------
Balance at September 30, 2003 ($61.1) $4.4 ($68.8) ($125.5)
===== ==== ===== ======
Total comprehensive income (loss) amounted to the following (IN
MILLIONS):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $75.2 $76.2 $165.0 ($299.2)
Foreign currency translation (loss) gain (15.5) 5.1 54.0 56.0
After-tax derivatives hedging gain (loss) 0.5 (6.7) 4.0 12.9
After-tax minimum pension liability (0.2) - 6.7 -
----- ----- ------ ------
Comprehensive income (loss) $60.0 $74.6 $229.7 ($230.3)
===== ===== ====== ======
14
NOTE 9 - INDUSTRY SEGMENTS
In accordance with paragraph 26(a) of Statement of Financial
Accounting Standards No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," the Company has aggregated
certain of its operations segments into four reportable segments. The
Company manages its business in these four operating segments that
have been named for leading worldwide brands in the Company's product
portfolio. In the first quarter of 2003, the Company realigned its
Eldon and Panex divisions out of its Sharpie and Calphalon Home
operating segments, respectively, and into its Rubbermaid operating
segment (prior years' segment data has been reclassified to conform to
the current segment structure). This realignment reflects the
Company's focus on building large consumer brands, promoting
organizational integration and operating efficiencies and aligning the
businesses with the Company's strategic account management strategy.
In addition, the realignment reflects the revised management and
selling structure of the Company. The Company's segment results are
as follows (IN MILLIONS):
Three Months Ended Nine Months Ended
September 30, September 30,
------------ -------------
2003 2002 2003 2002
---- ---- ---- ----
NET SALES (1)
Rubbermaid $767.8 $759.3 $2,237.1 $2,207.7
Sharpie 389.1 412.1 1,168.6 1,178.0
Irwin 521.2 479.3 1,523.8 1,257.6
Calphalon Home 266.6 297.6 727.7 797.0
-------- -------- -------- --------
$1,944.7 $1,948.3 $5,657.2 $5,440.3
======== ======== ======== ========
OPERATING INCOME (2)
Rubbermaid $58.8 $77.6 $166.1 $190.4
Sharpie 62.8 74.4 200.2 196.7
Irwin 71.0 32.8 166.2 94.0
Calphalon Home 12.2 31.3 25.0 60.7
Corporate (3) (10.9) (7.5) (24.4) (22.7)
Restructuring Costs (48.4) (51.2) (166.0) (69.8)
-------- -------- -------- --------
$145.5 $157.4 $367.1 $449.3
======== ======== ======== ========
September 30, December 31,
2003 2002
---- ----
IDENTIFIABLE ASSETS
Rubbermaid $1,873.5 $1,847.2
Sharpie 940.6 991.5
Irwin 1,372.1 1,226.4
Calphalon Home 710.3 709.8
Corporate (4) 3,070.6 2,614.0
-------- --------
$7,967.1 $7,388.9
======== ========
15
GEOGRAPHIC AREA INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
------------ -------------
2003 2002 2003 2002
---- ---- ---- ----
NET SALES
United States $1,382.2 $1,427.5 $4,003.6 $3,981.8
Canada 97.9 83.1 268.5 228.5
-------- -------- -------- --------
North America 1,480.1 1,510.6 4,272.1 4,210.3
Europe 358.8 347.0 1,090.2 967.6
Central and South America 65.7 66.2 187.2 190.1
All other 40.1 24.5 107.7 72.3
-------- -------- -------- --------
$1,944.7 $1,948.3 $5,657.2 $5,440.3
======== ======== ======== ========
OPERATING INCOME
United States $130.2 $150.3 $341.8 $382.0
Canada 21.6 12.8 46.1 27.4
-------- -------- -------- --------
North America 151.8 163.1 387.9 409.4
Europe (13.8) (15.5) (44.4) 7.1
Central and South America (1.7) 7.6 6.9 21.1
All other 9.2 2.2 16.7 11.7
-------- -------- -------- --------
$145.5 $157.4 $367.1 $449.3
======== ======== ======== ========
September 30, December 31,
2003 2002
---- ----
IDENTIFIABLE ASSETS (5)
United States $5,650.1 $5,151.0
Canada 138.5 115.7
-------- --------
North America 5,788.6 5,266.7
Europe 1,832.6 1,802.0
Central and South America 236.4 224.4
All other 109.5 95.8
-------- --------
$7,967.1 $7,388.9
======== ========
1) All intercompany transactions have been eliminated. Sales to Wal*Mart Stores, Inc.
and subsidiaries amounted to approximately 16% and 15% of consolidated net sales in
the first nine months of 2003 and 2002, respectively. Sales to no other customer
exceeded 10% of consolidated net sales for either period.
2) Operating income is net sales less cost of products sold, selling, general and
administrative expenses, and restructuring costs. Certain headquarters expenses
of an operational nature are allocated to business segments and geographic areas
primarily on a net sales basis. Trade names amortization is considered a
corporate expense and not allocated to business segments.
3) Corporate operating expenses consist primarily of administrative costs that cannot
be allocated to a particular segment.
4) Corporate assets primarily include trade names, goodwill, equity investments and
deferred tax assets.
5) Transfers of finished goods between geographic areas are not significant.
16
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.
In the normal course of business and as part of its acquisition and
divestiture strategy, the Company may provide certain representations
and indemnifications related to legal, environmental, product
liability, tax or other types of issues. Based on the nature of these
representations and indemnifications, it is not possible to predict
the maximum potential payments under all of these agreements due to
the conditional nature of the Company's obligations and the unique
facts and circumstances involved in each particular agreement.
Historically, payments made by the Company under these agreements did
not have a material effect on the Company's business, financial
condition or results of operation.
As of September 30, 2003, the Company has identified and quantified
exposures under these representations and indemnifications of
approximately $46.0 million, which expire in 2006. As of September
30, 2003, no amounts have been recorded on the balance sheet related
to these indemnifications, as the risk of loss is considered remote.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated items from
the Consolidated Statements of Operations as a percentage of net
sales:
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 73.1% 71.8% 72.9% 72.6%
------ ------ ------ ------
GROSS MARGIN 26.9% 28.2% 27.1% 27.4%
Selling, general and administrative expenses 16.9% 17.5% 17.7% 17.8%
Restructuring costs 2.5% 2.6% 2.9% 1.3%
------ ------ ------ ------
OPERATING INCOME 7.5% 8.1% 6.5% 8.3%
Nonoperating expenses:
Interest expense 1.4% 1.5% 1.6% 1.6%
Other, net 0.4% 0.7% 0.6% 0.7%
------ ------ ------ ------
Net nonoperating expenses 1.8% 2.2% 2.2% 2.3%
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5.7% 5.9% 4.3% 6.0%
Income taxes 1.8% 2.0% 1.4% 2.0%
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 3.9% 3.9% 2.9% 4.0%
------ ------ ------ ------
Cumulative effect of accounting change --% --% --% 9.5%
------ ------ ------ ------
NET INCOME (LOSS) 3.9% 3.9% 2.9% (5.5)%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. THREE MONTHS ENDED
SEPTEMBER 30, 2002
CONSOLIDATED OPERATING RESULTS:
Net sales for the three months ended September 30, 2003 (third
quarter) were $1,944.7 million, a decrease of $3.6 million, or 0.2%,
from $1,948.3 million in the comparable quarter of 2002. The decrease
resulted from the continued planned exit of high-risk customers and
pricing declines, partially offset by a benefit from foreign currency
translation and the impact of the Lenox acquisition.
Gross margin as a percentage of net sales in the third quarter of 2003
was 26.9%, or $522.2 million, versus 28.2%, or $550.3 million, in the
comparable quarter of 2002. The reduction in gross margin is
18
primarily related to unfavorable pricing of 2.1% and lower
manufacturing volumes as inventories were reduced by $94 million in
the third quarter and sales volumes were lower than prior year.
Selling, general and administrative expenses ("SG&A") in the third
quarter of 2003 were 16.9% of net sales, or $328.3 million, versus
17.5%, or $341.7 million, in the comparable quarter of 2002. The
decrease in SG&A is primarily the result of the Company's streamlining
initiatives.
The Company recorded pre-tax strategic restructuring charges of $48.4
million ($32.8 million after taxes) and $51.2 million ($34.2 million
after tax) in the third quarter of 2003 and 2002, respectively. The
2003 third quarter pre-tax charge included $10.7 million of facility
and other exit costs, $31.1 million of employee severance and
termination benefits, and $6.6 million in other restructuring costs.
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.
See Note 4 to the Consolidated Financial Statements (Unaudited) for
further information on the strategic restructuring plan.
Operating income in the third quarter of 2003 was 7.5% of net sales,
or $145.5 million, versus operating income of 8.1%, or $157.4 million,
in the comparable quarter of 2002. Operating income includes
restructuring charges of $48.4 million ($32.8 million after taxes) and
$51.2 million ($34.2 million after taxes) in the third quarter of 2003
and 2002, respectively. The decrease in operating margins is
primarily the result of pricing pressures, increased prices for
certain raw materials, lower manufacturing volumes and unfavorable
mix, partially offset by a decrease in selling, general and
administrative expense related to the Company's streamlining
initiatives.
Net nonoperating expenses in the third quarter of 2003 were 1.8% of
net sales, or $34.6 million, versus 2.2%, or $43.4 million, in the
comparable quarter of 2002. The decrease in expenses is primarily due
to acquisition related charges of $8.7 million ($5.8 million after
tax) incurred in the third quarter of 2002 relating to the Company's
acquisition of American Tool Companies, Inc.
The effective tax rate was 32.2% in the third quarter of 2003 versus
33.2% in the third quarter of 2002. This lower rate reflects, among
other things, the increase in earnings in low-tax jurisdictions and,
in certain jurisdictions, the year over year reduction in current year
losses and the use of net operating loss carryforwards.
Net income for the third quarter of 2003 was $75.2 million, compared
to $76.2 million in the third quarter of 2002. Diluted earnings
per share were $0.27 in the third quarter of 2003 compared to $0.29 in
the third quarter of 2002. The decrease in net income and earnings
per share was primarily due to pricing pressures, increased prices for
certain raw materials, lower manufacturing volumes and unfavorable
mix, partially offset by a decrease in selling, general and
administrative expense related to the Company's streamlining
initiatives.
19
BUSINESS GROUP OPERATING RESULTS:
Net sales in the four segments in which the Company operates were as
follows for the three months ended September 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $767.8 $759.3 1.1%
Sharpie 389.1 412.1 (5.6)
Irwin 521.2 479.3 8.7
Calphalon Home 266.6 297.6 (10.4)
-------- -------- ----
Total Net Sales (1) $1,944.7 $1,948.3 (0.2)%
======== ======== ====
Operating income by segment was as follows for the three months ended
September 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $58.8 $77.6 (24.2)%
Sharpie 62.8 74.4 (15.6)
Irwin 71.0 32.8 116.5
Calphalon Home 12.2 31.3 (61.0)
Corporate Costs (2) (10.9) (7.5)
Restructuring Costs (48.4) (51.2)
------ ------
Total Operating Income (3) $145.5 $157.4
====== ======
(1) All intercompany transactions have been eliminated. Sales to
Wal*Mart Stores, Inc. and subsidiaries amounted to approximately
16% and 14% of consolidated net sales in the three months ended
September 30, 2003 and 2002, respectively. Sales to no other
customer exceeded 10% of consolidated net sales for either period.
(2) Corporate operating expenses consist primarily of administrative
costs that cannot be allocated to a particular segment.
(3) Operating income is net sales less cost of products sold, selling,
general and administrative expenses, and restructuring costs.
Certain headquarters expenses of an operational nature are
allocated to business segments and geographic areas primarily
on a net sales basis. Trade names amortization is considered a
corporate expense and not allocated to business segments.
RUBBERMAID
Net sales for the third quarter of 2003 were $767.8 million, an
increase of $8.5 million, or 1.1%, from $759.3 million in the third
quarter of 2002. A high single digit increase at Rubbermaid Home
Products and a double-digit increase at Rubbermaid Europe (primarily
currency driven) were partially offset by declines in the Little Tikes
and Graco businesses, as orders originally scheduled in September
slipped to October.
Operating income for the third quarter of 2003 was $58.8 million, a
decrease of $18.8 million, or 24.2%, from $77.6 million in the third
quarter of 2002. The decrease in operating income is primarily the
result of pricing pressure on non-differentiated items in the
Rubbermaid Home Products business and an increase in prices for
certain raw materials.
20
SHARPIE
Net sales for the third quarter of 2003 were $389.1 million, a
decrease of $23.0 million, or 5.6%, from $412.1 million in the third
quarter of 2002. The decrease in sales is caused primarily by
softness in the commercial sector, lower back-to-school replenishment
orders and the disposition of Cosmolab in March 2003.
Operating income for the third quarter of 2003 was $62.8 million, a
decrease of $11.6 million, or 15.6%, from $74.4 million in the third
quarter of 2002. The decrease in operating income is primarily the
result of lower sales, inventory reductions and increased investment
in strategic marketing initiatives.
IRWIN
Net sales for the third quarter of 2003 were $521.2 million, an
increase of $41.9 million, or 8.7%, from $479.3 million in the third
quarter of 2002. The increase in net sales for the third quarter of
2003 was primarily due to sales from the Lenox acquisition, a high
single digit increase at Home Decor (primarily currency driven), and
double digit increases in the tools and accessories businesses,
partially offset by double-digit declines at Levolor/Kirsch resulting
from the planned exit of low margin product lines.
Operating income for the third quarter of 2003 was $71.0 million, an
increase of $38.2 million, or 116.5%, from $32.8 million in the third
quarter of 2002. The improvement in operating income was driven by
productivity, double-digit sales increases in the tools and
accessories businesses and the Lenox acquisition, partially offset by
the planned product line exits at Levolor/Kirsch.
CALPHALON HOME
Net sales for the third quarter of 2003 were $266.6 million, a
decrease of $31.0 million, or 10.4%, from $297.6 million in the third
quarter of 2002. The sales decrease was primarily the result of a
double-digit decline at the US picture frame business and a high
single digit decline in the low-end cookware and bakeware business.
Operating income for the third quarter of 2003 was $12.2 million, a
decrease of $19.1 million, or 61.0%, from $31.3 million in the third
quarter of 2002. The decrease in operating income is primarily due to
the decline in sales at the US picture frame business, unfavorable
product mix and pricing pressure on opening price point products.
NINE MONTHS ENDED SEPTEMBER 30, 2003 VS. NINE MONTHS ENDED
SEPTEMBER 30, 2002
CONSOLIDATED OPERATING RESULTS:
Net sales for the nine months ended September 30, 2003 were $5,657.2
million, an increase of $216.9 million, or 4.0%, from $5,440.3 million
in 2002. The increase resulted from sales contributions from the
American Tool Companies, Inc. (American Tool) (acquired April 2002)
and American Saw & Mfg. Co. (Lenox) (acquired January 2003)
acquisitions and favorable currency translation, offset by unfavorable
pricing of 2%.
21
Gross margin as a percentage of net sales for the nine months ended
September 30, 2003 was 27.1%, or $1,535.6 million, versus 27.4%, or
$1,490.0 million, in the comparable period of 2002. The reduction in
gross margin is primarily related to pricing pressures, increased
prices for certain raw materials and unfavorable product mix at
certain businesses, offset by productivity initiatives.
Selling, general and administrative expenses ("SG&A") for the nine
months ended September 30, 2003 were 17.7% of net sales, or $1,002.5
million, versus 17.8%, or $970.9 million, in the comparable period of
2002. The increase in SG&A is primarily the result of the American
Tool and Lenox acquisitions and planned investments in marketing
initiatives, including the Company's Strategic Account Management
Program and Phoenix Program, supporting the Company's brand portfolio
and strategic account strategy, partially offset by the Company's
streamlining initiatives.
The Company recorded pre-tax strategic restructuring charges of $166.0
million ($112.4 million after taxes) and $69.8 million ($46.3 million
after tax) for the nine months ended September 30, 2003 and 2002,
respectively. The 2003 pre-tax charge included $67.3 million of
facility and other exit costs, $88.5 million of employee severance and
termination benefits, and $10.2 million in other restructuring costs.
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. 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, 2003 was 6.5%
of net sales, or $367.1 million, versus operating income of 8.3%, or
$449.3 million, in the comparable period of 2002. The decrease in
operating margins is primarily the result of increased restructuring
charges to streamline the Company's supply chain and the decrease in
gross margins.
Net nonoperating expenses for the nine months ended September 30, 2003
were 2.2% of net sales, or $123.2 million, versus 2.3%, or $123.8
million, in the comparable period of 2002. The reduction in expenses
is primarily due to acquisition related charges of $8.7 million ($5.8
million after tax) incurred in 2002 relating to the Company's
acquisition of American Tool Companies, Inc. and $13.6 million ($9.0
million after tax) of Anchor Hocking transaction related costs
incurred in 2002 associated with the Company's withdrawn divestiture,
partially offset by the $21.2 million non-cash pre-tax loss recognized
on the sale of the Cosmolab business in March 2003.
The effective tax rate was 32.3% for the nine months ended September
30, 2003 versus 33.7% in the comparable period of 2002. This lower
rate reflects, among other things, the increase in earnings in low-tax
jurisdictions and, in certain jurisdictions, the year over year
reduction in current year losses and the use of net operating loss
carryforwards.
Income before cumulative effect of accounting change for the nine
months ended September 30, 2003 was $165.0 million, compared to $215.7
million in the comparable period of 2002. Diluted earnings per share
before cumulative effect of accounting change were $0.60 for the nine
22
months ended September 30, 2003 compared to $0.81 in the comparable
period of 2002. The decrease in income and earnings per share before
cumulative effect of accounting change was primarily due to increased
restructuring charges to streamline the Company's supply chain and the
decrease in gross margins.
Net income (loss) for the nine months ended September 30, 2003 was
$165.0 million, compared to ($299.2) million in the comparable period
of 2002. Diluted earnings (loss) per share were $0.60 for the nine
months ended September 30, 2003 compared to ($1.12) in the comparable
period of 2002. The difference in net income and diluted earnings per
share is primarily the result of the $538.0 million, $514.9 million
net of tax, cumulative effect of an accounting change adjustment
related to the Company's adoption of FAS 142 as discussed in Note 2 to
the Consolidated Financial Statements (Unaudited), and the decrease in
income before cumulative effect of accounting change discussed above.
BUSINESS SEGMENT OPERATING RESULTS:
Net sales in the four segments in which the Company operates were as
follows for the nine months ended September 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $2,237.1 $2,207.7 1.3%
Sharpie 1,168.6 1,178.0 (0.8)
Irwin 1,523.8 1,257.6 21.2
Calphalon Home 727.7 797.0 (8.7)
-------- -------- ----
Total Net Sales (1) $5,657.2 $5,440.3 4.0%
======== ======== ====
Operating income by segment was as follows for the nine months ended
September 30, (IN MILLIONS):
2003 2002 % Change
---- ---- --------
Rubbermaid $166.1 $190.4 (12.8)%
Sharpie 200.2 196.7 1.8
Irwin 166.2 94.0 77.0
Calphalon Home 25.0 60.7 (58.8)
Corporate Costs (2) (24.4) (22.7)
Restructuring Costs (166.0) (69.8)
------ ------
Total Operating Income (3) $367.1 $449.3
====== ======
(1) All intercompany transactions have been eliminated. Sales to
Wal*Mart Stores, Inc. and subsidiaries amounted to approximately
16% and 15% of consolidated net sales in the first nine months
of 2003 and 2002. Sales to no other customer exceeded 10% of
consolidated net sales for either period.
(2) Corporate operating expenses consist primarily of administrative
costs that cannot be allocated to a particular segment.
(3) Operating income is net sales less cost of products sold, selling,
general and administrative expenses, and restructuring costs.
Certain headquarters expenses of an operational nature are
allocated to business segments and geographic areas primarily on
a net sales basis. Trade names amortization is considered a
corporate expense and not allocated to business segments.
23
RUBBERMAID
Net sales for the nine months ended September 30, 2003 were $2,237.1
million, an increase of $29.4 million, or 1.3%, from $2,207.7 million
in the comparable period of 2002. A double-digit increase at
Rubbermaid Europe (primarily currency driven) and mid-single digit
increase at Rubbermaid Home Products was partially offset by a high-
single digit decrease in the Graco business and mid-single digit
decrease in the Little Tikes business.
Operating income for the nine months ended September 30, 2003 was
$166.1 million, a decrease of $24.3 million, or 12.8%, from $190.4
million in the comparable period of 2002. The decrease in operating
income is primarily the result of pricing pressure in opening price
point items and increased costs of certain raw materials.
SHARPIE
Net sales for the nine months ended September 30, 2003 were $1,168.6
million, a decrease of $9.4 million, or 0.8%, from $1,178.0 million in
the comparable period of 2002. The decrease in sales is primarily the
result of the disposition of Cosmolab in March 2003. Excluding sales
from the divested Cosmolab business, net sales were up by $14.1
million, or 1.2%.
Operating income for the nine months ended September 30, 2003 was
$200.2 million, an increase of $3.5 million, or 1.8%, from $196.7
million in the comparable period of 2002. Operating income was
positively impacted by sales growth (excluding Cosmolab), productivity
and favorable mix management, partially offset by investments in
marketing initiatives.
IRWIN
Net sales for the nine months ended September 30, 2003 were $1,523.8
million, an increase of $266.2 million, or 21.2%, from $1,257.6
million in the comparable period of 2002. The increase in net sales
through the first nine months of 2003 was primarily due to incremental
sales from the American Tool and Lenox acquisitions, a double digit
sales increase at Home Decor (primarily currency driven) and double-
digit increases in the tools and accessories businesses, partially
offset by double-digit sales declines at Levolor/Kirsch resulting from
the planned exit of low margin product lines.
Operating income for the nine months ended September 30, 2003 was
$166.2 million, an increase of $72.2 million, or 77.0%, from $94.0
million in the comparable period of 2002. The improvement in
operating income was driven by productivity, the Lenox and American
Tool acquisitions and double-digit sales increases in the tools and
accessories businesses, partially offset by the planned product line
exits at Levolor/Kirsch.
CALPHALON HOME
Net sales for the nine months ended September 30, 2003 were $727.7
million, a decrease of $69.3 million, or 8.7%, from $797.0 million in
the comparable period of 2002. The sales decrease was primarily due
to the decline in sales at the US picture frame business, the result
24
of the Company's planned exit from certain high risk customers and
pricing pressure on opening price point items.
Operating income for the nine months ended September 30, 2003 was
$25.0 million, a decrease of $35.7 million, or 58.8%, from $60.7
million in the comparable period of 2002. The decrease in operating
income is primarily due to the decline in sales at the US picture
frame business and pricing pressure on opening price point products.
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, 2003 was $420.5 million compared to $569.2 million for
the comparable period of 2002. The decrease in cash provided from
operating activities was due to a decrease in earnings before non-cash
charges of $57.2 million and a net increase in working capital which
used an additional $110.2 million, partially offset by deferred gains
of $18.7 million relating to the early termination of certain interest
rate swap arrangements.
Through the first nine months of 2003, the Company received proceeds
from the issuance of debt of $1,040.5 million compared to $523.1
million in the year ago period.
On January 10, 2003, the Company completed the sale of 6.67 million
shares of its common stock at a public offering price of $30.10 per
share pursuant to a shelf registration statement filed with the
Securities and Exchange Commission. Total proceeds from the sale were
approximately $200.8 million, resulting in net proceeds to the
Company, before expenses, of $200.1 million. The proceeds were used
to reduce the Company's commercial paper borrowings.
The Company has a $1.0 billion universal shelf registration statement
that became effective in April 2003 under which debt and equity
securities may be issued. Through the first nine months of 2003,
$400.0 million of medium term notes were issued under this shelf
registration statement, the proceeds of which were used to pay down
commercial paper.
USES:
The Company's primary uses of liquidity and capital resources include
acquisitions, dividend payments and capital expenditures.
Cash used for acquisitions was $460.0 million for the first nine
months of 2003, compared to $228.5 million in the year ago period, and
is related primarily to the acquisition of Lenox, which was funded
through the issuance of commercial paper.
On March 27, 2003, the Company completed the sale of its Cosmolab
business, a division of the Sharpie segment. The Company received
25
cash proceeds of $7.5 million related to the Cosmolab transaction.
The Company used the proceeds from the sale to reduce its commercial
paper borrowings.
In the first nine months of 2003, the Company made payments on long-
term debt of $776.7 million compared to $535.8 million in the year ago
period.
On January 10, 2003, the Company received proceeds from the issuance
of stock of $200.1 million. The proceeds received were used to reduce
the Company's commercial paper borrowings. Refer to Note 6 in the
Consolidated Financial Statements (Unaudited) for further information.
Cash used for restructuring activities was $77.7 million and $41.7
million in the first nine months of 2003 and 2002, respectively. Such
cash payments represent primarily employee termination benefits.
Capital expenditures were $247.1 million and $185.2 million in the
first nine months of 2003 and 2002, respectively. The increase in
capital expenditures is primarily due to the acquisitions of American
Tool and Lenox and the Company's increased investment in new product
development and productivity initiatives.
Aggregate dividends paid were $173.1 million and $168.2 million during
the first nine months of 2003 and 2002, respectively.
Retained earnings decreased in the first nine months of 2003 by $8.1
million. The reduction in retained earnings is due to cash dividends
paid on common stock, partially offset by current year earnings.
Working capital at September 30, 2003 was $965.2 million compared to
$465.6 million at December 31, 2002. The current ratio at September
30, 2003 was 1.44:1 compared to 1.18:1 at December 31, 2002. The
increase in working capital and the current ratio is due to the
American Tool and Lenox acquisitions, and a reduction in the current
portion of long-term debt.
Total debt to total capitalization (total debt is net of cash and cash
equivalents, and total capitalization includes total debt and
stockholders' equity) was .47:1 at September 30, 2003 and .47:1 at
December 31, 2002.
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 decline in U.S. and European interest rates since November 2002
has caused the Company to change the discount rate used to calculate
the present value of its pension liabilities from 6.75% at December
31, 2002 to an estimated 6.25% at December 31, 2003, increasing the
Company's pension plan liability. As a result, the Company's pension
plan, which historically has had an over-funded position, currently is
under-funded. In accordance with the Financial Accounting Standards
Board (FASB) Statement No. 87, Employers' Accounting for Pensions, the
26
Company expects to record an additional minimum pension liability
adjustment at December 31, 2003. Based on September 30, 2003 plan
asset values, the approximate effect of this non-cash adjustment would
be to increase the pension liability by approximately $175 to $210
million, with a corresponding charge to equity, net of taxes of
approximately $110 to $130 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.
MARKET RISK
-----------
The Company's market risk is impacted by changes in interest rates,
foreign currency exchange rates and certain commodity prices.
Pursuant to the Company's policies, natural hedging techniques and
derivative financial instruments may be utilized to reduce the impact
of adverse changes in market prices. The Company does not hold or
issue derivative instruments for trading purposes.
The Company's primary market risk is foreign exchange and interest
rate exposure.
The Company manages interest rate exposure through its conservative
debt ratio target and its mix of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures when
appropriate based on market conditions, and, for qualifying hedges,
the interest differential of swaps is included in interest expense.
The Company's foreign exchange risk management policy emphasizes
hedging anticipated intercompany and third party commercial
transaction exposures of one-year duration or less. The Company
focuses on natural hedging techniques of the following form: 1)
offsetting or netting of like foreign currency flows, 2) structuring
foreign subsidiary balance sheets with appropriate levels of debt to
reduce subsidiary net investments and subsidiary cash flows subject to
conversion risk, 3) converting excess foreign currency deposits into
U.S. dollars or the relevant functional currency and 4) avoidance of
risk by denominating contracts in the appropriate functional currency.
In addition, the Company utilizes forward contracts and purchased
options to hedge commercial and intercompany transactions. Gains and
losses related to qualifying hedges of commercial and intercompany
transactions are deferred and included in the basis of the underlying
transactions. Derivatives used to hedge intercompany loans are marked
to market with the corresponding gains or losses included in the
Company's Consolidated Statements of Operations.
Due to the diversity of its product lines, the Company does not have
material sensitivity to any one commodity. The Company manages
commodity price exposures primarily through the duration and terms of
its vendor contracts.
The amounts shown below represent the estimated potential economic
loss that the Company could incur from adverse changes in either
interest rates or foreign exchange rates using the value-at-risk
estimation model. The value-at-risk model uses historical foreign
27
exchange rates and interest rates to estimate the volatility and
correlation of these rates in future periods. This model estimates a
loss in fair market value using statistical modeling techniques that
are based on a variance/covariance approach and includes substantially
all market risk exposures (specifically excluding equity-method
investments). The fair value losses shown in the table below have no
impact on results of operations or financial condition at September
30, 2003 as they represent hypothetical, not realized losses. The
following table indicates the calculated amounts for the nine months
ended September 30, (IN MILLIONS):
2003 2002
Nine Nine
Month September 30, Month September 30, Confidence
Average 2003 Average 2002 Level
------- ---- ------- ---- -----
Interest rates $22.4 $21.1 $17.4 $21.2 95%
Foreign exchange $1.2 $1.1 $0.3 $0.4 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, debt to capitalization ratios,
interest rates, internal growth rates, impacts of changes in
accounting standards, pending legal proceedings and claims (including
environmental matters), future economic performance, operating income
improvements, synergies, management's plans, goals and objectives for
future operations and growth or the assumptions relating to any of the
forward-looking statements. The Company cautions that forward-looking
statements are not guarantees because there are inherent difficulties
in predicting future results. Actual results could differ materially
from those expressed or implied in the forward-looking statements.
Factors that could cause actual results to differ include, but are not
limited to, those matters set forth in this Report and Exhibit 99.1 to
this Report.
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
28
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
September 30, 2003, the Company's chief executive officer
and chief financial officer have evaluated the effectiveness
of the Company's disclosure controls and procedures. Based
on that evaluation, the chief executive officer and the
chief financial officer concluded that the Company's
disclosure controls and procedures were effective.
b) CHANGES IN INTERNAL CONTROLS. There have been no
significant changes in the Company's internal controls or in
other facts that could significantly affect internal
controls subsequent to the date of their evaluation.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required under this Item is contained above in Part I.
Financial Information, Item 1 and is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.3 Rights Agreement, dated as of August 6, 1998, between
the Company and First Chicago Trust Company of New
York, as Rights Agent (incorporated by reference to
Exhibit 4 to the Company's Current Report on Form 8-K
dated August 6, 1998), as amended by a First Amendment
to Rights Agreement effective as of September 29, 2003,
between the Company and The Bank of New York, as Rights
Agent (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form 8-A/A, filed
October 27, 2003).
4.7 Specimen Common Stock.
12. Statement of Computation of Ratio of Earnings to Fixed
Charges.
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) , As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Safe Harbor Statement.
(b) Reports on Form 8-K:
Report on Form 8-K, dated July 31, 2003, that included a
press release announcing the Company's results for the
second fiscal quarter ended June 30, 2003.
Report on Form 8-K, dated September 2, 2003, that included a
press release announcing the Company's appointment of three
key executives to expanded roles.
Report on Form 8-K, dated September 10, 2003, that included
a press release announcing the appointment of The Bank of
New York as the Company's new stock transfer agent,
registrar and dividend disbursement and reinvestment agent,
effective September 29, 2003.
30
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 10, 2003 /s/ J. Patrick Robinson
-------------------------------------
J. Patrick Robinson
Vice President - Corporate Controller
and Chief Financial Officer
31