UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 17, 1998
-----------------
NEWELL CO.
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(Exact Name of Registrant as Specified in Charter)
Delaware 1-9608 36-3514169
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(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
29 East Stephenson Street, Freeport, Illinois 61032
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (815) 235-4171
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2
ITEM 5. OTHER EVENTS.
On May 7, 1998, pursuant to an Agreement and Plan of Merger, dated
March 29, 1998, by and among Newell Co., a Delaware corporation
("Newell"), Calphalon Corporation, an Ohio corporation ("Calphalon"),
Pots & Pans Co., an Ohio corporation and a wholly owned subsidiary of
Newell ("Merger Sub"), and the shareholders of Calphalon, Newell
acquired all of the outstanding capital stock of Calphalon through
the merger of Merger Sub with and into Calphalon (the "Calphalon Merger"),
with Calphalon surviving the Calphalon Merger as a wholly owned subsidiary
of Newell. The Calphalon Merger was previously reported on Newell's
Current Report on Form 8-K Filed with the Securities and Exchange
Commission May 12, 1998.
Newell is filing herewith as Exhibit 99.1 Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Consolidated Financial Statements of Newell, each restated
to reflect the Calphalon Merger, which was accounted for under the pooling
of interests method of accounting. The Consolidated Financial Statements
of Newell are restated for periods prior to the date of the Calphalon
Merger.
Newell is also filing herewith Exhbit 11.1 (Restated Computation of
Earnings Per Share of Common Stock) and Exhibit 12.1 (Restated Statement
of Computation of Ratio of Earnings to Fixed Charges), each as restated to
reflect the Calphalon Merger.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
11.1 Restated Computation of Earnings Per Share of Common
Stock
12.1 Restated Statement of Computation of Ratio of Earnings
to Fixed Charges
23.1 Consent of Arthur Andersen LLP.
27.1 Restated Financial Data Schedule for the Year Ended
December 31, 1997.
27.2 Restated Financial Data Schedule for the Year Ended
December 31, 1996.
27.3 Restated Financial Data Schedule for the Year Ended
December 31, 1995.
99.1 Restated Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and
Results of Operations, and Consolidated Financial
Statements.
3
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 hereunto duly authorized.
NEWELL CO.
(Registrant)
/s/ Dale L. Matschullat
Date: November 17, 1998 By: ----------------------------------
Dale L. Matschullat
Vice President -- General Counsel
4
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
11.1 Restated Computation of Earnings Per Share of Common
Stock
12.1 Restated Statement of Computation of Ratio of Earnings
to Fixed Charges
23.1 Consent of Arthur Andersen LLP.
27.1 Restated Financial Data Schedule for the Year Ended
December 31, 1997.
27.2 Restated Financial Data Schedule for the Year Ended
December 31, 1996.
27.3 Restated Financial Data Schedule for the Year Ended
December 31, 1995.
99.1 Restated Selected Financial Data, Management's Discussion
and Analysis of Financial Condition and Results of
Operations, and Consolidated Financial Statements.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
-------------------------------------------------
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(In thousands, except per share data)
Basic earnings per share:
Net income $293,147 $259,042 $226,475
Weighted average shares outstanding 162,173 161,858 161,306
Basic earnings per share: $1.81 $1.60 $1.40
Diluted earnings per share:
Net income $293,147 $259,042 $226,475
Minority interest in income of subsidiary trust, net of tax 923 - -
-------- -------- --------
Net income, assuming conversion of all
applicable securities $294,070 $259,042 $226,475
Weighted average shares outstanding 162,173 161,858 161,306
Incremental common shares applicable to common stock
options based on the average market price during the period 622 423 318
Average common shares issuable assuming conversion of the
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of a Subsidiary Trust 513 - -
-------- -------- --------
Weighted average shares outstanding assuming full dilution 163,308 162,281 161,624
Diluted earnings per share, assuming conversion of all
applicable securities $1.80 $1.60 $1.40
EXHIBIT 12.1
STATEMENT OF COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
----------------------------------
For The Year Ended December 31,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except ratio data)
Earnings available to fixed charges:
Income before income taxes $485,334 $428,300 $377,151 $338,432 $281,091
Fixed charge -
Interest expense 76,413 58,541 51,443 31,435 20,689
Portion of rent determined
to be interest (1) 16,963 15,185 12,964 10,824 8,910
Minority interest in income
of subsidiary trust 1,528 - - - -
Eliminate equity in earnings (5,831) (6,364) (5,993) (5,661) (3,811)
-------- -------- -------- -------- --------
$574,407 $495,662 $435,565 $375,030 $306,879
======== ======== ======== ======== ========
Fixed charges:
Interest expense $ 76,413 $ 58,541 $ 51,443 $ 31,435 $ 20,689
Portion of rent determined
to be interest (1) 16,963 15,185 12,964 10,824 8,910
Minority interest in income
of subsidiary trust 1,528 - - - -
-------- --------- --------- --------- ---------
$ 94,904 $ 73,726 $ 64,407 $ 42,259 $ 29,599
======== ========= ========= ========= =========
Ratio of earnings to
fixed charges 6.05 6.72 6.76 8.87 10.37
======== ========= ========= ========= =========
(1) A standard ratio of 33% was applied to gross rent expense to approximate
the interest portion of short-term and long-term leases.
EXHIBIT 23.1
[ARTHUR ANDERSEN LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our report dated May 7, 1998 included in Form 8-K, into the Company's
previously filed Form S-8 Registration Statement File Nos. 33-24447, 33-25196,
33-40641, 33-67620, 33-67632, 33-51063, 33-51961, 33-62047 and 333-38621, Form
S-3 Registration Statement File Nos. 33-64225 and 333-47261, Post-Effective
Amendment No. 1 to Form S-4 on Form S-8 Registration Statement File Nos.
33-49282 and 33-44957, and the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1997.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
November 11, 1998
5
5
5
EXHIBIT 99.1
Item 6. Selected Financial Data
- --------------------------------
The following is a summary of certain consolidated financial
information relating to the Company at December 31. The summary has
been derived in part from, and should be read in conjunction with, the
consolidated financial statements of the Company included elsewhere in
this report and the schedules thereto.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In millions, except per share data)
INCOME STATEMENT DATA
Net sales $3,336.2 $2,972.8 $2,580.3 $2,141.6 $1,694.7
Cost of products sold 2,259.5 2,020.1 1,759.9 1,437.5 1,127.2
-------- -------- -------- -------- --------
Gross income 1,076.7 952.7 820.4 704.1 567.5
Selling, general
and administrative expenses 497.7 461.8 392.9 335.6 274.4
Trade names and goodwill
amortization and other 31.9 23.6 19.3 15.4 10.1
-------- -------- ------- -------- --------
Operating income 547.1 467.3 408.2 353.1 283.0
Nonoperating expenses (income):
Interest expense 76.4 58.5 51.4 31.4 20.7
Other, net (14.6) (19.5) (20.4) (16.7) (18.8)
-------- -------- -------- --------- --------
Net 61.8 39.0 31.0 14.7 1.9
Income before income taxes 485.3 428.3 377.2 338.4 281.1
Income taxes 192.2 169.3 150.7 137.1 112.4
-------- -------- -------- -------- -------
Net income $ 293.1 $ 259.0 $ 226.5 $ 201.3 $ 168.7
======== ======== ======== ======== =======
Earnings per share
Basic $ 1.81 $ 1.60 $ 1.40 $ 1.25 $ 1.05
Diluted $ 1.80 $ 1.60 $ 1.40 $ 1.25 $ 1.05
Dividends per share $ 0.64 $ 0.56 $ 0.46 $ 0.39 $ 0.35
Weighted average shares outstanding
Basic 162.2 161.9 161.3 160.9 160.4
Diluted 163.3 162.3 161.6 161.1 160.8
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In millions)
BALANCE SHEET DATA
Inventories $ 653.2 $ 524.4 $ 518.0 $ 426.8 $ 304.8
Working capital 719.2 482.6 462.7 141.2 84.8
Total assets 4,011.7 3,058.4 2,965.2 2,517.8 1,975.7
Short-term debt 83.9 108.8 165.0 310.8 247.7
Long-term debt, net of
current maturities 786.8 685.6 776.6 424.0 234.7
Stockholders' equity 1,725.2 1,500.0 1,301.6 1,126.9 975.0
15
1993
- ----
On April 30, 1993, the Company acquired substantially all of the
assets of Levolor Corporation ("Levolor"), a manufacturer and
distributor of decorative window coverings. On September 22, 1993,
the Company acquired Lee Rowan Company, a manufacturer and marketer of
coated wire storage and organization products. On November 9, 1993,
the Company acquired Goody Products, Inc. ("Goody"), a manufacturer
and marketer of personal consumer products, including hair accessories
and beauty organizers. For these and other minor 1993 acquisitions,
the Company paid $293.1 million in cash (excluding the $13.1 million
of Goody Common Stock that the Company owned prior to the acquisition)
and assumed $30.7 million of debt.
These transactions were accounted for as purchases; therefore,
results of operations are included in the accompanying consolidated
financial statements since their respective dates of acquisition. The
acquisition costs were allocated to the fair market value of the
assets acquired and liabilities assumed and resulted in trade names
and goodwill of approximately $208.2 million.
1994
- ----
On August 29, 1994, the Company acquired the decorative window
coverings business of Home Fashions, Inc.("HFI"), including vertical
blinds and pleated shades sold under the Del Mar{R} and LouverDrape{R}
brand names. These HFI assets were combined with Levolor and together
they are operated as a single entity called Levolor Home Fashions. On
October 18, 1994, the Company acquired Faber-Castell Corporation
("Faber"), a maker and marketer of markers and writing instruments,
including wood-cased pencils and rolling ball pens, sold under the
Eberhard Faber{R} brand name. Faber was combined with Sanford and
together they are operated as a single entity called Sanford. On
November 30, 1994, the Company acquired the European consumer products
business of Corning Incorporated (now known as "Newell Europe"). This
acquisition included Corning's consumer products manufacturing
facilities in England, France and Germany, the European trademark
rights and product lines for Pyrex{R}, Pyroflam{R} and Visions{R}
brands in Europe, the Middle East and Africa, and Corning's consumer
distribution network throughout these areas under exclusive license
from Corning Incorporated. Additionally, the Company became the
distributor in Europe, the Middle East and Africa for Corning's U.S.
manufactured cookware and dinnerware brands. For these and other
minor 1994 acquisitions, the Company paid $360.8 million in cash and
assumed $12.8 million of debt.
These transactions were accounted for as purchases; therefore,
results of operations are included in the accompanying consolidated
financial statements since their respective dates of acquisition. The
acquisition costs were allocated to the fair market value of the
assets acquired and liabilities assumed and resulted in trade names
and goodwill of approximately $202.2 million.
16
Subsequent Years
- ----------------
Information regarding businesses acquired in the last three years
is included in note 2 to the consolidated financial statements.
QUARTERLY SUMMARIES
Summarized quarterly data for the last three years is as follows
(unaudited):
Calendar Year 1st 2nd 3rd 4th Year
- ------------- --- --- --- --- ----
(In millions, except per share data)
1997
- ----
Net sales $650.0 $819.3 $925.7 $941.2 $3,336.2
Gross income 195.1 270.1 298.6 312.9 1,076.7
Net income 37.7 77.0 87.2 91.2 293.1
Earnings per share:
Basic 0.23 0.48 0.54 0.56 1.81
Diluted 0.23 0.47 0.54 0.56 1.80
1996
- ----
Net sales $638.8 $753.2 $791.7 $789.1 $2,972.8
Gross income 189.6 243.8 257.8 261.5 952.7
Net income 33.0 67.3 76.3 82.4 259.0
Earnings per share:
Basic 0.20 0.42 0.47 0.51 1.60
Diluted 0.20 0.42 0.47 0.51 1.60
1995
- ----
Net sales $574.9 $636.4 $675.8 $693.2 $2,580.3
Gross income 175.7 196.2 218.4 230.1 820.4
Net income 38.0 55.1 66.9 66.3 226.5
Earnings per share:
Basic 0.24 0.34 0.41 0.41 1.40
Diluted 0.24 0.34 0.41 0.41 1.40
17
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
- ----------------------------------------------------------------------
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of
the Company's consolidated results of operations and financial
condition. The discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
Introduction
- ------------
The Company's primary financial goals are to increase sales and
earnings per share an average of 15% per year, to achieve an annual
return on beginning equity ("ROE") of 20% or above, to increase
dividends per share in line with earnings growth, and to maintain a
prudent ratio of total debt to total capitalization, net of cash
("leverage"). The Company has achieved these goals over the last ten
years, increasing sales and earnings per share at compound annual
rates of 15% and 17%, respectively, averaging 21% ROE, increasing
dividends per share at a compound annual rate of 19% and averaging 26%
leverage. The Company believes that the principal factors affecting
its ability to achieve these objectives in the future are likely to be
the realized rates of both acquisition and internal growth and the
Company's continued ability to integrate acquired businesses through a
process called "Newellization."
Since 1990, the Company has nearly tripled its sales by acquiring
businesses with aggregate annual sales of more than $2 billion. The
rate at which the Company can integrate these recent acquisitions to
meet the Company's standards of profitability may affect near-term
financial results. Over the longer term, the Company's ability both
to make and to integrate strategic acquisitions will impact the
Company's financial results.
The Company pursues internal growth by introducing new products,
entering new domestic and international markets, adding new customers,
cross-selling existing product lines to current customers and
supporting its U.S. based customers' international expansion. The
Company's goal is to achieve an internal growth rate of 3-5% per year,
and over the last five years, has achieved an average of 5% annual
internal growth. Internal growth is defined by the Company as growth
from its "core businesses," which include continuing businesses owned
more than two years and minor acquisitions. The Company believes that
its future internal growth will likely depend on its continued success
in these areas, as well as external factors.
18
RESULTS OF OPERATIONS
The following table sets forth for the period indicated items
from the Consolidated Statements of Income as a percentage of net
sales at December 31:
1997 1996 1995
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 67.7 68.0 68.2
----- ----- -----
Gross income 32.3 32.0 31.8
Selling, general and
administrative expenses 14.9 15.5 15.2
Trade names and goodwill
amortization and other 1.0 0.8 0.8
----- ----- -----
Operating income 16.4 15.7 15.8
Nonoperating expenses:
Interest expense 2.3 2.0 2.0
Other, net (0.4) (0.7) (0.8)
----- ----- -----
Net 1.9 1.3 1.2
----- ----- -----
Income before income
taxes 14.5 14.4 14.6
Income taxes 5.7 5.7 5.8
----- ----- -----
Net income 8.8% 8.7 8.8%
===== ===== =====
1997 vs. 1996
- -------------
Net sales for 1997 were $3,336.2 million, representing an
increase of $363.4 million or 12.2% from $2,972.8 million in 1996.
The overall increase in net sales was primarily attributable to
contributions from Rolodex (acquired in March 1997), Kirsch (acquired
in May 1997), Eldon (acquired in June 1997) and 3% internal growth.
The 1997 acquisitions are described in note 2 to the consolidated
financial statements.
As of September 30, 1997, the Company began to present sales
information for its various product categories in three groups rather
than four groups. The Company's three product groups are Hardware and
Home Furnishings, Office Products and Housewares. The Company
believes that this presentation is appropriate because it organizes
its product categories into these groups when making operating
decisions and assessing performance, and the Company divisions
included in each group sell primarily to the same retail channel:
Hardware and Home Furnishings (home centers and hardware stores),
Office Products (office superstores and contract stationers) and
Housewares (discount stores and warehouse clubs). For ease of
comparison with previously published data, certain information is also
19
included separately for Hardware and Tools and Home Furnishings which
now comprise a single product group.
Net sales for each of the Company's product groups (and the
primary reasons for the increases) were as follows, in millions:
Year Ended December 31,
-----------------------
1997 1996 % Change
---- ---- --------
Home Furnishings $1,092.2 $ 916.2
Hardware and Tools 392.6 383.1
-------- --------
1,484.8 1,299.3 14.3%(1)
Office Products 899.2 741.8 21.2%(2)
Housewares 952.2 931.7 2.2%(3)
-------- --------
$3,336.2 $2,972.8 12.2%
======== ========
Primary Reasons for Increases:
(1) 2% internal growth and Kirsch (May 1997) acquisition
(2) 6% internal growth and Rolodex (March 1997) and Eldon (June 1997)
acquisitions
(3) Internal growth
Gross income as a percent of net sales in 1997 was 32.3% or
$1,076.7 million versus 32.0% or $952.7 million in 1996. Gross
margins improved as a result of cost savings achieved through the
integration of several picture frame businesses acquired by the
Company in recent years, profitability improvement at the Company's
Levolor Home Fashions division and increased gross margins at several
of the Company's other core businesses. The increase in gross margins
was offset partially by 1997 acquisitions which had gross margins
lower than the Company's average gross margins. As these acquisitions
are integrated, the Company expects its gross margins to improve.
Selling, general and administrative expenses ("SG&A") in 1997
were 14.9% of net sales or $497.7 million versus 15.5% or $461.8
million in 1996. Core business SG&A spending as a percentage of sales
decreased primarily as a result of cost savings arising from the
picture frame business integration. This decrease was offset
partially by the 1997 acquisitions, which had higher SG&A than the
Company's average SG&A as a percent of net sales. As these
acquisitions are integrated, the Company expects its SG&A spending as
a percentage of net sales to decline.
The Company has reclassified trade names and goodwill amortization
from nonoperating expenses to operating expenses for all periods presented.
Trade names and goodwill amortization as a percentage of net sales in 1997
was comparable to 1996.
20
Operating income in 1997 was 16.4% of net sales or $547.1 million
versus 15.7% or $467.3 million in 1996. The increase in operating
margins was primarily due to cost savings as a result of the picture
frame business integration, profitability improvement at the Company's
Levolor Home Fashions division and increased core business gross
margins, offset partially by 1997 acquisitions which had average
operating margins lower than the Company's average operating margins.
Net nonoperating expenses in 1997 were 1.9% of net sales or $61.8
million versus 1.3% or $39.0 million in 1996. The $22.8 million
increase was due primarily to a $16.6 million increase in interest
expense (as a result of additional borrowings related to the 1997
acquisitions), and a $7.0 million decrease in dividend income. Dividend
income decreased as a result of the conversion on October 15, 1996 by The
Black & Decker Corporation ("Black & Decker") of 150,000 shares of privately
placed Black & Decker convertible preferred stock, Series B, owned by the
Company (purchased at a cost of $150.0 million) into 6.4 million shares of
Black & Decker Common Stock. Prior to conversion, the preferred stock
paid a 7.75% cumulative dividend, aggregating $2.9 million per quarter, before
the effect of income taxes. If Black & Decker continues to pay dividends at
the current rate ($0.12 per share of Black & Decker Common Stock quarterly),
the dividends paid to the Company on the shares of Black & Decker Common Stock
owned by the Company as a result of the conversion would total $0.8 million
per quarter, before the effect of income taxes. For supplementary information
regarding other nonoperating expenses, see note 13 to the consolidated
financial statements.
For both 1997 and 1996, the effective tax rate was 39.6%. See
note 12 to the consolidated financial statements for an explanation of
the effective tax rate.
Net income for 1997 was $293.1 million, representing an increase
of $34.1 million or 13.2% from 1996. Basic earnings per share in 1997
increased 13.1% to $1.81 versus $1.60 in 1996; diluted earnings per
share in 1997 increased 12.5% to $1.80 versus $1.60 in 1996. The
increases in net income and earnings per share were primarily
attributable to cost savings arising from the picture frame business
integration, profitability improvement at the Company's Levolor Home
Fashions division, cost savings as a result of the Kirsch integration
into the Newell Window Furnishings division and increased operating
margins at several of the Company's other core businesses.
1996 vs. 1995
- -------------
Net sales for 1996 were $2,972.8 million, representing an
increase of $392.5 million or 15.2% from $2,580.3 million in 1995.
The overall increase in net sales was primarily attributable to
contributions from the 1995 acquisitions of Decorel and Berol, the
1996 acquisition of Holson Burnes, and internal growth of 5%. The
1995 and 1996 acquisitions are described in note 2 to the consolidated
financial statements.
21
Net sales for each of the Company's product groups (and the
primary reasons for the increases) were as follows, in millions:
Year Ended December 31,
-----------------------
1996 1995 % Change
---- ---- --------
Home Furnishings $ 916.2 $ 732.3
Hardware and Tools 383.1 364.3
-------- --------
1,299.3 1,096.6 18.5%(1)
Office Products 741.8 582.2 27.4%(2)
Housewares 931.7 901.5 3.3%(3)
-------- --------
$2,972.8 $2,580.3 15.2%
======== ========
Primary Reasons for Increases:
(1) 5% internal growth and Decorel (October 1995) and Holson Burnes
(January 1996) acquisitions
(2) 3% internal growth and Berol (November 1995) acquisition
(3) 6% internal growth offset by weaker than expected sales at Newell
Europe as a result of soft European retail conditions
Gross income as a percent of net sales for 1996 was 32.0% or
$952.7 million versus 31.8% or $820.4 million in 1995. Gross margins
improved slightly, primarily as a result of increases in gross margins
from the businesses acquired in 1995 and 1994.
SG&A in 1996 was 15.5% of net sales or $461.8 million versus
15.2% or $392.9 million in 1995. There was no material change in
spending at the core businesses; the increase as a percentage of sales
was primarily due to SG&A at Holson Burnes.
The Company has reclassified trade names and goodwill amortization
from nonoperating expenses to operating expenses for all periods presented.
Trade names and goodwill amortization as a percentage of net sales in 1996
was comparable to 1995.
Net nonoperating expenses for 1996 were 1.3% of net sales or
$39.0 million versus 1.2% or $31.0 million in 1995. The $8.0 million
increase was due primarily to a $7.2 million increase in interest expense (as
a result of additional borrowings related to the 1995 and 1996 acquisitions).
For supplementary information regarding other nonoperating expenses, see note
13 to the consolidated financial statements.
22
The effective tax rate was 39.6% in 1996 versus 40.0% in 1995.
See note 12 to the consolidated financial statements for an
explanation of the effective tax rate.
Net income for 1996 was $259.0 million, representing an increase
of $32.5 million or 14.3% from 1995. Basic and diluted earnings per share
in 1996 increased 14.3% to $1.60 versus $1.40 in 1995. The increases in net
income and earnings per share were primarily attributable to contributions
from Berol (net of associated interest expense and goodwill amortization) and
an improvement in operating margins at several of the core businesses.
International Operations
- ------------------------
The Company's non-U.S. business is growing at a faster pace than
its business in the United States. This growth outside the U.S. has
been fueled by recent international acquisitions, which supplemented
sales of the Company's existing Canadian businesses and sales of
Newell International, the Company's subsidiary responsible for the
majority of exports of the Company's products. For the year ended
December 31, 1997, the Company's non-U.S. business accounted for
approximately 16.2% of sales and 13.9% of operating income (see note 14
to the consolidated financial statements). Growth of both the U.S.
and the non-U.S. businesses is shown below, dollars in millions:
Year Ended December 31,
-----------------------
1997 1996 % Change
---- ---- --------
(in millions)
Net sales:
- U.S. $2,796.6 $2,558.2 9.3%
- Non-U.S. 539.6 414.6 30.1
-------- --------
Total $3,336.2 $2,972.8 12.2%
======== ========
Operating income:
- U.S. $ 470.8 $ 420.3 12.0%
- Non-U.S. 76.3 47.0 62.3
-------- --------
Total $ 547.1 $ 467.3 17.1%
======== ========
Year Ended December 31,
-----------------------
1996 1995 % Change
---- ---- --------
(in millions)
Net sales:
- U.S. $2,558.2 $2,238.9 14.3%
- Non-U.S. 414.6 341.4 21.4
-------- --------
Total $2,972.8 $2,580.3 15.2%
======== ========
Operating income:
- U.S. $ 420.3 $ 378.4 11.1%
- Non-U.S. 47.0 29.8 57.7
-------- --------
Total $ 467.3 $ 408.2 14.5%
========= ========
23
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Sources:
- -------
The Company's primary sources of liquidity and capital resources
include cash provided from operations and use of available borrowing
facilities.
Cash provided by operating activities in 1997 was $376.4 million,
representing an increase of $10.4 million from $366.0 million for
1996, primarily due to an increase in net income.
Cash provided by financing activities totaled $464.6 million in
1997, primarily due to proceeds from the issuance of Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities of a
Subsidiary Trust. These proceeds, which were obtained in December
1997, were used to pay down commercial paper, which was used to fund
the earlier 1997 acquisitions.
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 December 31, 1997 totaled $52.6 million.
During 1997, the Company amended and restated its revolving
credit agreement to permit the Company to borrow, repay and reborrow
funds in an aggregate amount up to $1.3 billion, at a floating
interest rate. The revolving credit agreement will terminate in
August 2002. At December 31, 1997, there were no borrowings under the
revolving credit agreement.
In lieu of borrowings under the Company's revolving credit
agreement, the Company may issue up to $1.3 billion of commercial
paper. The Company's revolving credit agreement provides the
committed backup liquidity required to issue commercial paper.
Accordingly, commercial paper may only be issued up to the amount
available for borrowing under the Company's revolving credit
agreement. At December 31, 1997, $517.0 million (principal amount) of
commercial paper was outstanding. The entire amount is classified as
long-term debt.
The Company has a universal shelf registration statement under
which the Company may issue up to $500.0 million of debt and equity
securities, subject to market conditions. At December 31, 1997, the
Company had not yet issued any securities under that registration
statement.
At December 31, 1997, the Company had outstanding $263.0 million
(principal amount) of medium-term notes issued under a previous shelf
24
registration statement with maturities ranging from five to ten years
at an average rate of interest equal to 6.3%.
Uses:
- ----
The Company's primary uses of liquidity and capital resources
include acquisitions, dividend payments and capital expenditures.
Cash used in acquiring businesses was $715.3 million, $58.2
million and $187.8 million in 1997, 1996 and 1995, respectively. In
1997, the Company acquired Rolodex, Kirsch and Eldon and made other
minor acquisitions for cash purchase prices totaling $737.8 million.
In 1996, the Company acquired Holson Burnes and completed other minor
acquisitions for consideration that included cash of $42.6 million.
In 1995, the Company completed acquisitions with total cash purchase
prices of $210.6 million. All of these acquisitions were accounted
for as purchases and were paid for with proceeds obtained from the
issuance of commercial paper, medium-term notes, notes payable under
the Company's lines of credit or shares of the Company's Common Stock.
Capital expenditures were $103.2 million, $96.2 million and $86.5
million in 1997, 1996 and 1995, respectively.
The Company has paid regular cash dividends on its Common Stock
since 1947. On February 10, 1998, the quarterly cash dividend was
increased to $0.18 per share from the $0.16 per share that had been
paid since February 11, 1997. Prior to this date, the quarterly cash
dividend paid was $0.14 per share since February 6, 1996, which was an
increase from the $0.12 per share paid since May 11, 1995. Dividends
paid during 1997, 1996 and 1995 were $101.8 million, $88.9 million and
$72.8 million, respectively.
Retained earnings increased in 1997, 1996 and 1995 by $191.3
million, $170.1 million and $153.7 million, respectively. The average
dividend payout ratio to Common stockholders in 1997, 1996 and 1995
was 35%, 35% and 33%, respectively (represents the percentage of earnings per
share paid in cash to stockholders).
Working capital at December 31, 1997 was $719.2 million compared
to $482.6 million at December 31, 1996 and $462.7 million at December
31, 1995. The current ratio at December 31, 1997 was 2.01:1 compared
to 1.72:1 at December 31, 1996 and 1.67:1 at December 31, 1995.
Working capital and the current ratio increased in 1997 as a result of
the 1997 acquisitions.
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 .27:1
at December 31, 1997, .34:1 at December 31, 1996 and .40:1 at December
31, 1995.
25
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.
Environmental Matters
- ---------------------
As of December 31, 1997, the Company was involved in various
matters concerning federal and state environmental laws and
regulations, including 35 matters in which they have been identified
by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at
contaminated sites under the Federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and equivalent
state laws. In assessing its environmental response costs, the
Company has considered several factors, including: the extent of the
Company's volumetric contribution at each site relative to that of
other PRPs; the kind of waste; the terms of existing cost sharing and
other applicable agreements; the financial ability of other PRPs to
share in the payment of requisite costs; the Company's prior
experience with similar sites; environmental studies and cost
estimates available to the Company; the effects of inflation on cost
estimates; and the extent to which the Company's and other parties'
status as PRPs are disputed. Based on information available to it,
the Company's estimate of environmental response costs associated with
these matters as of December 31, 1997 ranged between $16.7 million and
$24.1 million. As of December 31, 1997, the Company had a reserve
equal to $20.3 million for such environmental response costs in the
aggregate. No insurance recovery was taken into account in
determining the Company's cost estimates or reserve, nor do the
Company's cost estimates or reserve reflect any discounting for
present value purposes. Because of the uncertainties associated with
environmental investigations and response activities, the possibility
that the Company could be identified as a PRP at sites identified in
the future that require the incurrence of environmental response costs
and the possibility of additional sites as a result of businesses
acquired, actual costs to be incurred by the Company may vary from the
Company's estimates. Subject to difficulties in estimating future
environmental response costs, the Company does not expect that any sum
it may have to pay in connection with environmental matters in excess
of amounts reserved will have a material effect on its consolidated
financial statements.
Market Risk
- -----------
The Company's market risk is impacted by changes in interest
rates, foreign currency exchange rates, and certain commodity prices.
Pursuant to the Company's policies, natural hedging techniques and
derivative financial instruments may be utilized to reduce the impact
of adverse changes in market prices. The Company does not hold or
issue derivative instruments for trading purposes, and has no material
26
sensitivity to changes in market rates and prices on its derivative
financial instrument positions.
The Company's primary market risk is interest rate exposure,
primarily in the United States. The Company manages interest rate
exposure through its conservative debt ratio target and its mix of
fixed and floating rate debt. Interest rate exposure was reduced
significantly in 1997 from the issuance of $500 million 5.25%
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust, the proceeds of which reduced
commercial paper. Interest rate swaps may be used to adjust interest
rate exposures when appropriate based on market conditions, and, for
qualifying hedges, the interest differential of swaps is included in
interest expense.
The Company's foreign exchange risk management policy emphasizes
hedging anticipated intercompany and third-party commercial
transaction exposures of one year duration or less. The Company
focuses on natural hedging techniques of the following form: (1)
offsetting or netting of like foreign currency flows, (2) structuring
foreign subsidiary balance sheets with appropriate levels of debt to
reduce subsidiary net investments and subsidiary cash flows subject to
conversion risk, (3) converting excess foreign currency deposits into
U.S. dollars or the relevant functional currency and (4) avoidance of
risk by denominating contracts in the appropriate functional currency.
In addition, the Company utilizes forward contracts and purchased
options to hedge commercial and intercompany transactions. Gains and
losses related to qualifying hedges of commercial transactions are
deferred and included in the basis of the underlying transactions.
Derivatives used to hedge intercompany transactions are marked to
market with the corresponding gains or losses included in the
consolidated statements of income.
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.
Based on the Company's overall interest rate, currency rate and
commodity price exposures at December 31, 1997, management of the
Company believes that a short-term change in any of these exposures
will not have a material effect on the consolidated financial
statements of the Company.
27
Year 2000 Computer Compliance
- -----------------------------
State of Readiness
In order to address Year 2000 compliance, the Company has initiated a
comprehensive project designed to minimize or eliminate any business
disruption associated with potential date processing problems in its
information technology ("IT") systems, as well as its non-IT systems
(e.g., HVAC systems, building security systems, etc.). The project
consists of six phases: company recognition, inventory of systems,
impact analysis, planning, fixing and testing.
For both IT and non-IT systems, all six phases are either complete or
currently underway. All phases are expected to be completed by June 1999.
As part of its Year 2000 project, the Company has initiated
communications with all of its vendors, services suppliers and major
customers to assess their state of Year 2000 readiness. Many of its vendors
have responded in writing to the Company's Year 2000 readiness inquiries that
they will be Year 2000 compliant by year end 1999. The Company plans to
continue assessment of its third party business partners, including
face-to-face meetings with management and/or onsite visits as deemed
appropriate. Despite the Company's efforts, there can be no guarantee that
the systems of other companies which the Company relies upon to conduct its
day-to-day business will be compliant.
COSTS
Management believes that the total cost of implementing the Year 2000
plan will not be significant to the Company's financial results.
28
RISKS
With respect to the risks associated with its IT and non-IT systems,
the Company believes that the most likely worst case scenario is that
the Company may experience minor system malfunctions and errors in the
early days and weeks of the Year 2000 that were not detected during
its renovation and testing efforts. The Company also believes that
these problems will not have a material effect on the Company's
financial condition or results of operations.
With respect to the risks associated with third parties, the Company
believes that the most likely worst case scenario is that some of the
Company's vendors will not be compliant and will have difficulty
filling orders and flowing goods. Management also believes that the
number of such vendors will have been minimized by the Company's
program of identifying non-compliant vendors and replacing or jointly
developing alternative supply or delivery solutions prior to the Year
2000.
The Company has limited the scope of its risk assessment to those
factors which it can reasonably be expected to have an influence upon.
For example, the Company has made the assumption that government
agencies, utility companies, and national telecommunications providers
will continue to operate. Obviously, the lack of such services could
have a material effect on the Company's ability to operate, but the
Company has little if any ability to influence such an outcome, or to
reasonably make alternative arrangements in advance for such services
in the event they are unavailable.
CONTINGENCY PLANS
The Company has not yet completed its planning and preparations to
handle the most likely worst case scenarios described above. The
Company intends to develop contingency plans for these scenarios by
December 31, 1998.
29
Forward Looking Statements
- --------------------------
Forward-looking statements in this Report are made in reliance
upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements may relate to,
but are not limited to, such matters as sales, income, earnings per
share, return on equity, capital expenditures, dividends, capital
structure, free cash flow, debt to capitalization ratios, interest rates,
internal growth rates, the Year 2000 plan and related risks, pending legal
proceedings and claims (including environmental matters,) future economic
performance, management's plans, goals and objectives for future operations
and growth or the assumptions relating to any of the forward-looking
information. The Company cautions that forward-looking statements are not
guarantees since there are inherent difficulties in predicting future results,
and that actual results could differ materially from those expressed or implied
in the forward-looking statements. Factors that could cause actual results to
differ include, but are not limited to, those matters set forth in this Exhibit
99.1 to the Company's Current Report 8-K, dated November 17, 1998, the document
incorporated by reference herein, and in Exhibit 99 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
30
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Report of Independent Public Accountants
----------------------------------------
To the Stockholders and Board of Directors of Newell Co.:
We have audited the accompanying consolidated balance sheets of
Newell Co. (a Delaware corporation) and subsidiaries as of December
31, 1997, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of Newell Co.'s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Newell Co. and subsidiaries as of December 31, 1997, 1996 and 1995,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in
Part IV Item 14(a)(2) of this Exhibit 99.1 to Newell Co.'s Current Report on
Form 8-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Milwaukee, Wisconsin
May 7, 1998
31
NEWELL CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1997 1996 1995
---- ---- ----
(In thousands, except per share data)
Net sales $3,336,233 $2,972,839 $2,580,313
Cost of products sold 2,259,551 2,020,116 1,759,871
---------- ---------- ----------
GROSS INCOME 1,076,682 952,723 820,442
Selling, general and administrative expenses 497,739 461,802 392,921
Trade names and goodwill amortization and other 31,882 23,554 19,280
---------- ---------- ----------
OPERATING INCOME 547,061 467,367 408,241
Nonoperating expenses (income):
Interest expense 76,413 58,541 51,443
Other, net (14,686) (19,474) (20,353)
---------- ---------- ----------
Net 61,727 39,067 31,090
---------- ---------- ----------
Income before income taxes 485,334 428,300 377,151
Income taxes 192,187 169,258 150,676
---------- ---------- ----------
NET INCOME $ 293,147 $ 259,042 $ 226,475
========== ========== ==========
Earnings per share
Basic $1.81 $1.60 $1.40
Diluted 1.80 1.60 1.40
Weighted average shares outstanding
Basic 162,173 161,858 161,306
Diluted 163,308 162,281 161,624
See notes to consolidated financial statements.
32
NEWELL CO. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36,107 $ 4,363 $ 60,792
Accounts receivable, net 544,375 424,479 402,837
Inventories, net 653,200 524,444 518,039
Deferred income taxes 134,732 126,200 109,438
Prepaid expenses and other 65,280 68,978 67,121
----------- ----------- -----------
TOTAL CURRENT ASSETS 1,433,694 1,148,464 1,158,227
MARKETABLE EQUITY SECURITIES 307,121 240,789 53,309
OTHER LONG-TERM INVESTMENTS 51,020 58,703 203,857
OTHER ASSETS 144,475 119,720 123,225
PROPERTY, PLANT AND EQUIPMENT, NET 711,325 567,880 542,459
TRADE NAMES AND GOODWILL, NET 1,364,099 922,874 884,113
----------- ----------- -----------
TOTAL ASSETS $ 4,011,734 $ 3,058,430 $ 2,965,190
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 52,636 $ 73,877 $ 104,017
Accounts payable 138,531 114,158 119,604
Accrued compensation 82,676 67,269 75,299
Other accrued liabilities 397,561 337,729 321,530
Income taxes 11,797 37,914 14,061
Current portion of long-term debt 31,278 34,937 61,033
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 714,479 665,884 695,544
LONG-TERM DEBT 786,793 685,608 776,565
OTHER NON-CURRENT LIABILITIES 186,673 159,439 160,509
DEFERRED INCOME TAXES 90,216 47,477 30,987
MINORITY INTEREST 8,352 0 0
33
NEWELL CO. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF A SUBSIDIARY TRUST 500,000 0 0
STOCKHOLDERS' EQUITY
Common stock - authorized shares,
400.0 million at $1 par value; 162,330 161,965 161,720
Outstanding shares:
1997 - 162.3 million
1996 - 162.0 million
1995 - 161.7 million
Additional paid-in capital 201,045 194,829 187,800
Retained earnings 1,305,643 1,114,294 944,152
Net unrealized gain on securities
available for sale 78,839 36,595 15,912
Cumulative translation adjustment (22,636) (7,661) (7,999)
----------- ----------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,725,221 1,500,022 1,301,585
----------- ----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,011,734 $ 3,058,430 $2,965,190
=========== =========== ==========
See notes to consolidated financial statements.
34
NEWELL CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
OPERATING ACTIVITIES
Net income $293,147 $259,042 $226,475
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 131,964 118,109 103,038
Deferred income taxes 57,792 44,203 40,024
Net gain on sale of marketable equity securities (2,853) 0 (15,819)
Investment write-off 2,365 1,338 16,054
Equity earnings of investment (5,831) (6,364) (5,993)
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 675 (5,956) 14,491
Inventories 5,233 21,110 (7,045)
Other current assets (5,577) (214) (4,667)
Accounts payable (21,974) (22,416) (12,681)
Accrued liabilities and other (78,544) (42,832) (72,796)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 376,397 366,020 281,081
INVESTING ACTIVITIES
Acquisitions, net (715,316) (58,213) (187,788)
Expenditures for property, plant and equipment (103,195) (96,230) (86,460)
Purchase of marketable equity securities 0 (3,513) 0
Sale of marketable securities 6,389 0 37,324
Disposals of non-current assets and other 5,082 8,430 (1,342)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (807,040) (149,526) (238,266)
FINANCING ACTIVITIES
Proceeds from issuance of debt 148,073 4,164 317,191
Proceeds from the issuance of company-obligated
mandatorily redeemable convertible preferred
securities of a subsidiary trust 500,000 0 0
Proceeds from exercised stock options and other 17,026 7,274 7,100
Payments on notes payable and long-term debt (98,714) (195,799) (252,234)
Cash dividends (101,798) (88,900) (72,766)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 464,587 (273,261) (709)
Exchange rate effect on cash (2,200) 338 2,599
35
NEWELL CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D.)
Year Ended December 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,744 (56,429) 44,705
Cash and cash equivalents at beginning of year 4,363 60,792 16,087
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36,107 $ 4,363 $ 60,792
========= ========= =========
Supplemental cash flow disclosures -
Cash paid during the year for:
Income taxes $ 162,100 $127,392 $132,060
Interest 69,263 57,036 46,538
See notes to consolidated financial statements.
36
NEWELL CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Net Unrealized
Gain On
Add'l Securities Cumulative
Common Paid-In Retained Available Translation
Stock Capital(1) Earnings for Sale Adjustment
------ -------- -------- -------------- -----------
(In thousands, except per share data)
Balance at December 31, 1994 $ 160,938 $ 172,158 $ 790,443 $ 9,868 $ ($6,466)
Net income 226,475
Cash dividends:
Common stock $0.46 per share (72,766)
Stock issued for acquisitions 381 8,943
Exercise of stock options 412 6,759
Change in net unrealized
gain on securities
available for sale 6,044
Foreign currency translation
and other (11) (60) (1,533)
--------- ------- --------- -------- ----------
Balance at December 31, 1995 161,720 187,800 944,152 15,912 (7,999)
Net income 259,042
Cash dividends:
Common stock $0.56 per share (88,900)
Exercise of stock options 245 7,088
Change in net unrealized
gain on securities
available for sale 20,683
Foreign currency translation
and other (59) 338
-------- -------- --------- ------- -------
Balance at December 31, 1996 161,965 194,829 1,114,294 36,595 (7,661)
Net income 293,147
Cash dividends:
Common stock $0.64 per share (101,798)
Exercise of stock options 365 6,818
Change in net unrealized
gain on securities
available for sale 42,244
Foreign currency translation
and other (602) (14,975)
--------- --------- ----------- -------- --------
Balance at December 31, 1997 $ 162,330 $ 201,045 $ 1,305,643 $ 78,839 $ (22,636)
========= ========= =========== ======== ==========
(1) Net of treasury stock (at cost) of $665, $199 and $161 as of December
31, 1997, 1996 and 1995, respectively.
See notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial
statements include the accounts of Newell and its majority owned
subsidiaries ("the Company") after elimination of intercompany
accounts and transactions.
Use of estimates: The preparation of these financial statements
required the use of certain estimates by management in determining the
Company's assets, liabilities, revenue and expenses and related
disclosures.
Revenue Recognition: Sales of merchandise are recognized upon
shipment to customers.
Disclosures about Fair Value of Financial Instruments: The
following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Long-term Investments: The fair value of the investment in
convertible preferred stock of The Black & Decker Corporation
("Black & Decker") in 1995 was based on an independent appraisal.
This preferred stock was converted into Black & Decker Common
Stock on October 15, 1996 and reclassified to Long-term
Marketable Equity Securities at December 31, 1996.
Long-term Debt: The fair value of the Company's long-term debt
issued under the medium-term note program is estimated based on
quoted market prices which approximate cost. All other
significant long-term debt is pursuant to floating rate
instruments whose carrying amounts approximate fair value.
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust: The fair value of the
company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust was $522.5 million at December
31, 1997.
Allowances for Doubtful Accounts: Allowances for doubtful
accounts at December 31 totaled $21.2 million in 1997, $15.0 million
in 1996 and $12.3 million in 1995.
Inventories: Inventories are stated at the lower of cost or
market value. Cost of certain domestic inventories (approximately
82%, 86% and 89% of total inventories at December 31, 1997, 1996 and
1995, respectively) was determined by the "last-in, first-out"
("LIFO") method; for the balance, cost was determined using the
"first-in, first-out" ("FIFO") method. If the FIFO inventory
valuation method had been used exclusively, inventories would have
increased by $19.2 million, $27.4 million and $30.4 million at
December 31, 1997, 1996 and 1995, respectively.
38
The components of inventories at December 31, net of the LIFO
reserve, were as follows:
1997 1996 1995
------- ------- -------
(In millions)
Materials and supplies $ 142.8 $ 128.7 $ 150.2
Work in process 109.9 91.4 89.1
Finished products 400.5 304.3 278.7
------- ------ -------
$ 653.2 $ 524.4 $ 518.0
======= ======= =======
Inventory reserves at December 31 totaled $93.9 million in 1997,
$82.6 million in 1996 and $68.7 million in 1995.
Other Long-term Investments: At December 31, 1995, the Company
owned 150,000 shares of privately placed Black & Decker convertible
preferred stock, Series B, purchased at a cost of $150.0 million. On
October 15, 1996, in accordance with the terms of the preferred stock,
Black & Decker exercised its option to convert the preferred stock
into 6.4 million shares of Black & Decker Common Stock. As a result
of the conversion, the Common Stock is classified as a Long-term
Marketable Equity Security in the December 31, 1997 and 1996
consolidated balance sheets.
The Company has a 49% ownership interest in American Tool
Companies, Inc., a manufacturer of hand tools and power tool accessory
products marketed primarily under the VISE-GRIP{R} and IRWIN{R}
trademarks. This investment is accounted for on the equity method
with a net investment of $51.0 million at December 31, 1997.
Long-term Marketable Equity Securities: Long-term Marketable
Equity Securities classified as available for sale are carried at fair
value with adjustments to fair value reported separately, net of tax,
as a component of stockholders' equity (and excluded from earnings).
Long-term marketable equity securities at December 31 are summarized
as follows:
1997 1996 1995
---- ---- ----
(In millions)
Aggregate market value $ 307.1 $ 240.8 $ 53.3
Aggregate cost 176.8 180.3 26.8
------ ------ ------
Unrealized gain $ 130.3 $ 60.5 $ 26.5
======= ======= ======
During 1995, the Company received proceeds of $37.3 million from
the sale of Long-term Marketable Equity Securities and recorded a gain
of $15.8 million on the sale. Gains and losses on the sales of
Long-term Marketable Equity Securities are based upon
the average cost of securities sold.
39
Property, Plant and Equipment: Property, plant and equipment at
December 31 consisted of the following:
1997 1996 1995
---- ---- ----
(In millions)
Land $ 34.1 $ 21.4 $ 16.5
Buildings and
improvements 278.6 213.2 201.1
Machinery and
equipment 854.9 714.5 633.3
-------- -------- --------
1,167.6 949.1 850.9
Allowance for
depreciation (456.3) (381.2) (308.4)
-------- -------- --------
$ 711.3 $ 567.9 $ 542.5
======== ======== ========
Replacements and improvements are capitalized. Expenditures for
maintenance and repairs are charged to expense. The components of
depreciation are provided by annual charges to income calculated to
amortize, principally on the straight-line basis, the cost of the
depreciable assets over their depreciable lives. Estimated useful
lives determined by the Company are as follows:
Buildings and improvements 20-40 years
Machinery and equipment 5-12 years
Trade Names and Goodwill: The cost of trade names and the excess
of cost over identifiable net assets of businesses acquired are
amortized over 40 years on a straight-line basis. Total accumulated
amortization of trade names and goodwill was $136.7 million, $103.2
million and $78.2 million at December 31, 1997, 1996 and 1995,
respectively.
Subsequent to an acquisition, the Company periodically evaluates
whether later events and circumstances have occurred that indicate the
remaining estimated useful life of goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. If
factors indicate that goodwill should be evaluated for possible
impairment, the Company would use an estimate of the relevant
business' undiscounted net cash flow over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
40
Accrued Liabilities: Accrued Liabilities at December 31 included
the following:
1997 1996 1995
---- ---- ----
(In millions)
Customer accruals $ 135.9 $ 95.8 $ 86.5
Accrued self-insurance
liability 42.8 47.0 40.4
Customer accruals are promotional allowances and rebates given to
customers in exchange for their selling efforts. The self-insurance
accrual is primarily for workers' compensation and is estimated based
upon historical claim experience.
Foreign Currency Translation: Foreign currency balance sheet
accounts are translated into U.S. dollars at the rates of exchange in
effect at fiscal year end. Income and expenses are translated at the
average rates of exchange in effect during the year. The related
translation adjustments are made directly to a separate component of
stockholders' equity. International subsidiaries operating in highly
inflationary economies translate non-monetary assets at historical
rates, while net monetary assets are translated at current rates, with
the resulting translation adjustment included in net income. Foreign
currency transaction gains and losses were immaterial in 1997, 1996
and 1995.
Earnings per share: The earnings per share amounts are computed
based on the weighted average monthly number of shares outstanding
during the year. "Basic" earnings per share is calculated by dividing
net income (before cumulative effect of accounting change) by weighted
average shares outstanding. "Diluted" earnings per share is
calculated by dividing net income (before cumulative effect of
accounting change) by weighted average shares outstanding, including
the assumption of the exercise and/or conversion of all potentially
dilutive securities ("in the money" stock options and Company-
Obligated Mandatorily Redeemable Convertible Preferred Securities of a
Subsidiary Trust). Effective December 31, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share." As a result, the Company's
reported earnings per share for 1996 and 1995 were restated. The
impact on previously reported earnings per share was immaterial.
Accounting Principles Adopted: In 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." The adoption of this statement in 1996 was not material
to the consolidated financial statements.
In 1995, FASB also issued SFAS No. 123, "Accounting for Stock
Based Compensation." The Company adopted the disclosure requirements
of this statement (see note 11 to the consolidated financial
statements) and will continue to apply APB Opinion No. 25 to its stock
option plans.
Reclassification: Certain 1996 and 1995 amounts have been
reclassified to conform with the 1997 presentation.
Reclassification of Trade Names and Goodwill Amortization: The Company
is reclassifying trade names and goodwill amortization from nonoperating
expenses to operating expenses for all periods presented.
41
2) ACQUISITIONS OF BUSINESSES
1995
- ----
On October 2, 1995, the Company acquired Decorel Incorporated
("Decorel"), a manufacturer and marketer of ready-made picture frames.
Decorel was combined with Intercraft. On November 2, 1995, the
Company acquired Berol Corporation ("Berol"), a designer, manufacturer
and marketer of markers and writing instruments. Berol was combined
with Sanford. For these and other minor 1995 acquisitions, the
Company paid $210.6 million in cash, issued 379,507 shares of the
Company's Common Stock (valued at approximately $9.5 million) and
assumed $144.2 million of debt.
These transactions were accounted for as purchases; therefore
results of operations are included in the accompanying consolidated
financial statements since their respective dates of acquisition. The
acquisition costs were allocated to the fair market value of the
assets acquired and liabilities assumed and resulted in trade names
and goodwill of approximately $181.1 million.
1996 and 1997
- -------------
On January 19, 1996, the Company acquired The Holson Burnes
Group, Inc. ("Holson Burnes"), a manufacturer and marketer of photo
albums and picture frames. Holson Burnes was combined with
Intercraft, creating the Intercraft/Burnes division.
On March 5, 1997, the Company purchased Insilco Corporation's
Rolodex business unit ("Rolodex"), a marketer of office products
including card files, personal organizers and paper punches. Rolodex
was integrated into the Company's Newell Office Products division. On
May 30, 1997, the Company acquired Cooper Industries Incorporated's
Kirsch business ("Kirsch"), a manufacturer and distributor of drapery
hardware and custom window coverings in the United States and
international markets. The Kirsch North American operations were
combined with the Newell Window Furnishings division. The European
operations of Kirsch exist as a separate division called Kirsch Window
Fashions Europe. On June 13, 1997, the Company acquired Rubbermaid
Incorporated's office products business, including the ELDON{R} brand
name (now referred to as "Eldon"). Eldon is a designer, manufacturer
and supplier of computer and plastic desk accessories, resin-based
office furniture and storage and organization products. Eldon was
integrated into the Company's Newell Office Products division. For
these and other minor acquisitions, the Company paid $780.4 million in
cash and assumed $59.9 million of debt. The transactions were
accounted for as purchases; therefore, results of operations are
included in the accompanying consolidated financial statements since
their respective dates of acquisition. The acquisition costs were
allocated on a preliminary basis to the fair market value of the
assets acquired and liabilities assumed and resulted in trade names
and goodwill of approximately $562.4 million. The final adjustments
42
to the purchase price allocations are not expected to be material to
the consolidated financial statements.
The unaudited consolidated results of operations for the years
ended December 31, 1997 and 1996 on a pro forma basis, as though the
Holson Burnes, Rolodex, Kirsch and Eldon businesses had been acquired
on January 1, 1996, are as follows:
1997 1996
---- ----
(In millions, except per share amounts)
Net sales $3,574.3 $3,554.2
Net income 287.1 256.5
Earnings per share 1.77 1.58
43
3) CREDIT ARRANGEMENTS
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 December 31, 1997 totaled $52.6 million.
The following is a summary of borrowings under foreign and
domestic lines of credit at December 31:
1997 1996 1995
---- ---- ----
(In millions)
Notes payable to banks:
Outstanding at year-end
- borrowing $ 52.6 $ 73.9 $ 104.0
- weighted average
interest rate 4.5% 4.7% 6.6%
Average for the year
- borrowing $ 132.6 $ 100.9 $ 102.4
- weighted average
interest rate 5.4% 5.3% 6.7%
Maximum borrowing
outstanding during
the year $417.3 $127.0 $137.8
The Company can also issue commercial paper, as described in note
4 to the consolidated financial statements. The following is a
summary of commercial paper at December 31:
1997 1996 1995
---- ---- ----
(In millions)
Commercial paper:
Outstanding at year-end
- borrowing $ 517.0 $ 404.0 $ 448.6
- average interest rate 6.5% 5.9% 5.8%
Average for the year
- borrowing $ 731.3 $ 512.3 $ 410.4
- average interest rate 5.6% 5.3% 6.0%
Maximum borrowing
outstanding during
the year $1,177.6 $ 594.0 $ 500.0
44
4) LONG-TERM DEBT
The following is a summary of long-term debt at December 31:
1997 1996 1995
---- ---- ----
(In millions)
Medium-term notes $ 263.0 $ 295.0 $ 345.0
Commercial paper 517.0 404.0 448.6
Other long-term debt 38.1 21.5 44.0
------- ------- -------
818.1 720.5 837.6
Current portion (31.3) (34.9) (61.0)
------- -------- --------
$786.8 $ 685.6 $ 776.6
======= ======== ========
During 1997, the Company amended and restated its revolving
credit agreement to permit the Company to borrow, repay and reborrow
funds in an aggregate amount up to $1.3 billion, at a floating
interest rate. The revolving credit agreement will terminate in
August 2002. At December 31, 1997, there were no borrowings under the
revolving credit agreement.
In lieu of borrowings under the Company's revolving credit
agreement, the Company may issue up to $1.3 billion of commercial
paper. The Company's revolving credit agreement provides the
committed backup liquidity required to issue commercial paper.
Accordingly, commercial paper may only be issued up to the amount
available for borrowing under the Company's revolving credit
agreement. At December 31, 1997, $517.0 million (principal amount) of
commercial paper was outstanding. The entire amount is classified as
Long-Term Debt.
The Company has a universal shelf registration statement under
which the Company may issue up to $500.0 million of debt and equity
securities, subject to market conditions. At December 31, 1997, the
Company had not yet issued any securities under that registration
statement.
At December 31, 1997, the Company had outstanding $263.0 million
(principal amount) of medium-term notes issued under a previous shelf
registration statement with maturities ranging from five to ten years
at an average rate of interest equal to 6.3%.
The revolving credit agreement permits the Company to borrow
funds using Committed loans (Base Rate loans or Committed LIBOR loans)
or Competitive loans (Set Rate loans or Competitive LIBOR loans), as
selected by the Company. The terms of these agreements require, among
other things, that the Company maintain a certain Total Debt to Total
Capital Ratio as defined in these agreements. As of December 31,
1997, the Company was in compliance with these agreements.
45
The aggregate maturities of Long-Term Debt outstanding at
December 31, 1997, are as follows:
Year Aggregate Maturities
---- --------------------
(In millions)
1998 $ 31.3
1999 8.6
2000 148.6
2001 1.5
2002 617.7
Thereafter 10.4
-------
$ 818.1
=======
5) COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF A SUBSIDIARY TRUST OF THE COMPANY
In December 1997, a wholly owned subsidiary trust of the Company
issued 10,000,000 of its 5.25% convertible quarterly income preferred
securities (the "Convertible Preferred Securities"), with a
liquidation preference of $50 per security, to certain institutional
buyers. The Convertible Preferred Securities represent an undivided
beneficial interest in the assets of the trust. Each of the
Convertible Preferred Securities is convertible at the option of the
holder into shares of the Company's Common Stock at the rate of 0.9865
shares of Common Stock for each preferred security (equivalent to the
approximate conversion price of $50.685 per share of Common Stock),
subject to adjustment in certain circumstances. Holders of the
Convertible Preferred Securities are entitled to a quarterly cash
distribution at the annual rate of 5.25% of the $50 liquidation
preference commencing March 1, 1998. The Convertible Preferred
Securities are subject to a limited guarantee by the Company and are
callable by the Company initially at 103.15% of the liquidation
preference beginning in December 2001 and decreasing over time to 100%
of the liquidation preference beginning in December 2007.
The trust invested the proceeds of this issuance of Convertible
Preferred Securities in $500 million of the Company's 5.25% Junior
Convertible Subordinated Debentures due 2027 (the "Debentures"). The
Debentures are the sole assets of the trust, mature on December 1,
2027, bear interest at the rate of 5.25%, payable quarterly,
commencing March 1, 1998, and are redeemable by the Company beginning
in December 2001. The Company may defer interest payments on the
Debentures for a period not to exceed 20 consecutive quarters during
which time distribution payments on the Convertible Preferred
Securities are also deferred. Under this circumstance, the Company
may not declare or pay any cash distributions with respect to its
capital stock or debt securities that rank pari passu with or junior
to the Debentures. The Company has no current intention to exercise
its right to defer payments of interest on the Debentures.
46
The Convertible Preferred Securities are reflected as outstanding
in the Company's consolidated financial statements as Company-
Obligated Mandatorily Redeemable Convertible Preferred Securities of a
Subsidiary Trust.
6) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes.
They are used to manage certain interest rate and foreign currency
risks.
Interest rate swap agreements are utilized to convert certain
floating rate debt instruments into fixed rate debt. Cash flows
related to interest rate swap agreements are included in interest
expense over the terms of the agreements.
The Company uses forward exchange contracts and options to hedge
certain purchase commitments denominated in currencies other than the
domestic currency. Unamortized premiums are included in other assets
in the consolidated balance sheets. Gains and losses relating to
qualifying hedges of firm commitments are deferred and are recognized
in income or expense as adjustments of carrying amounts when the
hedged transaction occurs.
The Company does not obtain collateral or other security to
support derivative financial instruments subject to credit risk but
monitors the credit standing of the counterparties.
7) LEASES
The Company has minimum rental payments through the year 2007
under noncancellable operating leases as follows:
Year Minimum Payments
----- ----------------
(In millions)
1998 $23.6
1999 15.5
2000 10.2
2001 8.2
2002 6.2
Thereafter 15.6
-----
$79.3
=====
47
Total rental expense for all operating leases was approximately
$50.9 million, $45.2 million and $38.3 million in 1997, 1996 and 1995,
respectively.
8) EMPLOYEE BENEFIT RETIREMENT PLANS
The Company and its subsidiaries have noncontributory pension and
profit sharing plans covering substantially all of its foreign and
domestic employees. Pension plan benefits are generally based on
years of service and/or compensation. The Company's funding policy is
to contribute not less than the minimum amounts required by the
Employee Retirement Income Security Act of 1974 or local statutes to
assure that plan assets will be adequate to provide retirement
benefits. Due to the overfunded status of most of the pension plans,
contributions to these plans were insignificant during the past three
years.
The net periodic pension cost components for all significant
pension plans for the years ended December 31 are as follows:
1997 1996 1995
---- ---- ----
(In millions)
Service cost-benefits earned
during the year $ 16.0 $ 16.3 $ 14.5
Interest cost on projected
benefit obligation 38.7 36.3 35.1
Actual return on assets (124.5) (74.2) (64.1)
Net amortization and
other components 70.9 24.4 17.5
----- ---- ----
Total pension
plan expense $ 1.1 $ 2.8 $ 3.0
===== ==== ====
The principal actuarial assumptions used are as follows:
1997 1996 1995
---- ---- ----
(In percent)
Measurement of projected
benefit obligation:
Discount rate 7.75% 7.75% 7.75%
Long-term rate of
compensation increase 5.00% 5.00% 5.00%
Long-term rate of return
on plan assets 9.00% 9.00% 9.00%
48
The following table sets forth the funded status of the pension
plans and the amount recognized in the Company's consolidated balance
sheets:
Plans Whose Assets Exceed
Accumulated Benefits
1997 1996 1995
---- ---- ----
(In millions)
Actuarial present value of
benefit obligations:
- Vested $467.7 $413.9 $329.0
- Nonvested 13.1 10.6 10.1
----- ----- -----
Accumulated benefit
obligation 480.8 424.5 339.1
Effect of projected future
salary increases 26.5 20.5 15.2
----- ----- -----
Projected benefit
obligation 507.3 445.0 354.3
Plan assets at
market value (primarily
Common Stock and
fixed income investments) 713.8 585.8 463.1
----- ----- -----
Plan assets in excess of
projected benefit
obligation 206.5 140.8 108.8
Unrecognized transition
net asset (6.0) (7.3) (4.5)
Unrecognized prior
service cost (7.1) (7.7) (3.0)
Unrecognized net gain (116.0) (54.5) (21.9)
----- ----- -----
Net pension asset in
Other Non-current
Assets $ 77.4 $ 71.3 $ 79.4
===== ===== =====
49
Plans Whose Accumulated
Benefits Exceed Assets
1997 1996 1995(1)
---- ---- ----
(In millions)
Actuarial present value of
benefit obligations:
Vested $ 44.7 $ 19.2 $ 90.3
Nonvested 12.1 9.3 10.7
----- ----- -----
Accumulated benefit
obligation 56.8 28.5 101.0
Effect of projected future
salary increases 14.3 11.2 18.6
----- ----- -----
Projected benefit
obligation 71.1 39.7 119.6
Plan assets at
market value (primarily
Common Stock and
fixed income investments) 24.7 1.8 77.4
----- ----- -----
Plan assets less than
projected benefit
obligation (46.4) (37.9) (42.2)
Unrecognized transition
net (asset) obligation 0.4 2.6 (2.8)
Unrecognized prior
service cost 1.9 0.7 1.0
Unrecognized net loss 11.1 7.6 11.3
----- ----- -----
Net pension liability
in Other Non-current
Liabilities $(33.0) $(27.0) $(32.7)
===== ===== =====
(1) During 1995, the defined benefit plan covering certain hourly
employees contained a temporary unfunded obligation. This plan
was fully funded in 1996.
Total expense under all profit sharing plans was $8.0 million,
$7.1 million and $5.9 million for the years ended December 31, 1997,
1996 and 1995, respectively.
50
9) RETIREE HEALTH CARE
Several of the Company's subsidiaries currently provide retiree
health care benefits for certain employee groups.
The components of the net postretirement health care cost for the
years ended December 31 are as follows:
1997 1996 1995
---- ---- ----
(In millions)
Service cost-benefits
attributed to service
during the period $1.6 $2.1 $1.7
Interest cost on accumulated
postretirement benefit
obligation 8.0 7.7 7.5
Net amortization
and deferral (0.2) (0.3) (0.5)
--- --- ---
Net postretirement
health care cost $9.4 $9.5 $8.7
=== === ===
The following table reconciles the accumulated postretirement
benefit obligation as recognized in the Company's consolidated balance
sheets at December 31:
1997 1996 1995
---- ---- ----
(In millions)
Accumulated postretirement
benefit obligation:
Retirees $ (88.0) $ (63.5) $ (67.4)
Fully eligible active
plan participants (3.1) (5.5) (5.6)
Other active plan
participants (23.8) (28.1) (23.4)
---- ---- ----
Accumulated postretirement
benefit obligation (114.9) (97.1) (96.4)
Market value of assets - - -
----- ---- ----
Funded status (114.9) (97.1) (96.4)
Unrecognized net gain (18.3) (13.0) (13.0)
Other Non-current
Liability $(133.2) $(110.1) $(109.4)
===== ===== =====
The actuarial calculation assumed a 9% increase in the health
care cost trend rate for fiscal year 1997. The assumed rate decreases
51
one percent every year through the year 2000 to 6% and remains
constant beyond that point. The health care cost trend rate has a
significant effect on the amounts reported. For example, a one
percentage point increase in the health care cost trend rate would
increase the accumulated postretirement benefit obligation by $5.7
million and increase net periodic cost by $0.8 million. The discount
rate used in determining the accumulated postretirement benefit
obligation was 7.5% in 1997 and 7.75% in both 1996 and 1995.
10) STOCKHOLDERS' EQUITY
The Company's Common Stock consists of 400.0 million authorized
shares, with a par value of $1 per share. Of the total unissued
common shares at December 31, 1997, total shares in reserve included
8.5 million shares for issuance under the Company's stock option
plans.
Each share of Common Stock includes a preferred stock purchase
right (a "Right"). Each Right will entitle the holder, until the
earlier of October 31, 1998 or the redemption of the Rights, to buy
one four-hundredth of a share of a new series of preferred stock,
denominated "Junior Participating Preferred Stock, Series B," at a
price of $25 per one four-hundredth of a share (as adjusted to reflect
stock splits since the issuance of the Rights). This preferred stock
is nonredeemable and will have 100 votes per share. The Company has
reserved 500,000 Series B preferred shares for issuance upon exercise
of such Rights. The Rights will be exercisable only if a person or
group acquires 20% or more of voting power of the Company or announces
a tender offer following which it would hold 30% or more of the
Company's voting power.
In the event that any person becomes the beneficial owner of 30%
or more of the Company's voting stock, the Rights (other than Rights
held by the 30% stockholder) would become exercisable for that number
of shares of the Company's Common Stock having a market value of two
times the exercise price of the Right. Furthermore, if, following the
acquisition by a person or group of 20% or more of the Company's
voting stock, the Company was acquired in a merger or other business
combination or 50% or more of its assets were sold, or in the event of
certain types of self-dealing transactions by a 20% stockholder, each
Right (other than Rights held by the 20% stockholder) would become
exercisable for that number of shares of Common Stock of the Company
(or the surviving company in a business combination) having a market
value of two times the exercise price of the Right.
The Company may redeem the Rights at one cent per Right prior to
the occurrence of an event that causes the Rights to become
exercisable for Common Stock. The Board of Directors may terminate
the Company's right to redeem the Rights prior to the time the Rights
become exercisable for Common Stock at any time after a group or
person acquires 20% or more of the Company's voting stock under
certain circumstances.
52
11) STOCK OPTIONS
The Company's stock option plans are accounted for under APB
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 FASB Statement No. 123,
the Company's net income and earnings per share would have been
reduced to the following pro forma amounts for the years ended
December 31:
1997 1996
---- ----
(In thousands, except per share data)
Net income: As reported $293,147 $259,042
Pro forma
Basic EPS: As reported $1.81 $1.60
Pro forma
Because the FASB Statement No. 123 method of accounting has not
been applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost may not be representative of
that to be expected in future years.
The Company may grant up to 8.0 million shares under the 1993
Stock Option Plan, of which, the Company has granted 1.9 million
shares and cancelled 0.3 million shares through December 31, 1997.
Under this plan, the option exercise price equals the Common Stock's
closing price on the date of grant, vests over a five-year period and
expires after ten years.
53
The following summarizes the changes in number of shares of
Common Stock under option:
1997
--------------
Weighted Average
Shares Exercise Price
------ ----------------
Outstanding at
beginning of year 1,959,034 $21
- Granted 395,600 38
- Exercised (364,587) 18
- Cancelled (68,688) 22
---------
Outstanding at
end of year 1,921,359 24
=========
Exercisable at
end of year 886,445 19
=========
Weighted average
fair value of
options granted
during the year $ 13
=========
The 1,822,389 options outstanding at December 31, 1997 have
exercise prices between $12 and $43 and are summarized below:
Options Outstanding
--------------------------------------------------------
Weighted
Range of Number Weighted Average
Exercise Outstanding at Average Remaining
Prices December 31, 1997 Exercise Price Contractual Life
- -------- ----------------- -------------- ----------------
$ 5-15 300,884 $11 3
16-25 905,025 20 6
26-35 327,950 20 8
36-43 387,500 37 9
---------
5-43 1,921,359 24 7
=========
54
The 886,445 options exercisable at December 31, 1997 have
exercise prices between $12 and $35 and are summarized below:
Options Exercisable
-----------------------------------
Range of Number Weighted
Exercise Exercisable at Average
Prices December 31, 1997 Exercise Price
- -------- ----------------- --------------
$12-15 191,914 $14
16-25 625,661 20
26-35 68,870 27
-------
12-35 886,445 19
=======
1996
--------------
Weighted Average
Shares Exercise Price
------ ----------------
Outstanding at
beginning of year 1,945,730 $20
- Granted 400,820 21
- Exercised (243,596) 17
- Cancelled (143,920) 21
---------
Outstanding at
end of year 1,959,034 21
=========
Exercisable at end of year 999,118 18
=========
Weighted average fair value of
options granted during
the year $10
=========
55
1995
--------------
Weighted Average
Shares Exercise Price
------ ----------------
Outstanding at
beginning of year 2,155,758 $19
- Granted 284,250 24
- Exercised (411,528) 16
- Cancelled (82,750) 21
---------
Outstanding at
end of year 1,945,730 20
=========
Exercisable at
end of year 1,113,118 17
=========
Weighted average
fair value of
options granted
during the year $9
=========
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1997, 1996 and 1995, respectively:
risk-free interest rate of 6.3%, 6.4% and 6.6%; expected dividend
yields of 1.8%, 1.8% and 1.8%; expected lives of 9.9, 9.9 and 9.5
years; and expected volatility of 23%, 20% and 20%.
12) INCOME TAXES
The provision for income taxes for the years ended December 31
consists of the following:
1997 1996 1995
------ ------ ------
(In millions)
Current:
- Federal $ 97.7 $ 98.6 $ 91.9
- State 17.6 15.9 16.4
- Foreign 19.1 10.6 2.4
------ ------ ------
134.4 125.1 110.7
Deferred 57.8 44.2 40.0
------ ------ ------
Total $192.2 $169.3 $150.7
====== ====== ======
56
The components of the net deferred tax asset at December 31 are
as follows:
1997 1996 1995
---- ---- ----
(In millions)
Deferred tax assets:
-Accruals, not currently
deductible for tax purposes $117.3 $111.9 $106.3
-Postretirement liabilities 53.0 43.9 43.9
-Inventory reserves 35.7 29.2 17.1
-Self-insurance liability 15.4 16.5 13.2
-Other 1.0 1.9 1.2
----- ----- -----
222.4 203.4 181.7
Deferred tax liabilities:
-Accelerated depreciation (60.3) (46.9) (45.7)
-Prepaid pension asset (31.1) (30.5) (31.6)
-Unrealized gain on
securities available
for sale (51.5) (23.9) (10.6)
-Amortization of intangibles (11.9) (4.1) -
-Other (23.1) (19.3) (15.3)
----- ----- -----
(177.9) (124.7) (103.2)
----- ----- -----
Net deferred tax asset $ 44.5 $ 78.7 $ 78.5
====== ====== ======
The net deferred tax asset is classified in the consolidated
balance sheets at December 31 as follows:
1997 1996 1995
---- ---- ----
(In millions)
Current net deferred
income tax asset $134.7 $126.2 $109.4
Non-current deferred
income tax liability (90.2) (47.5) (30.9)
----- ----- -----
$ 44.5 $ 78.7 $ 78.5
===== ===== =====
57
A reconciliation of the U.S. statutory rate to the effective
income tax rate for the years ended December 31 is as follows:
1997 1996 1995
---- ---- ----
(In percent)
Statutory rate 35.0% 35.0% 35.0%
Add (deduct) effect of:
-State income taxes, net
of federal income tax effect 3.6 3.6 4.3
-Nondeductible trade names
and goodwill amortization 1.6 1.5 1.4
-Other (0.6) (0.5) (0.7)
--- --- ---
Effective rate 39.6% 39.6% 40.0%
==== ==== ====
No U.S. deferred taxes have been provided on the undistributed
non-U.S. subsidiary earnings which are considered to be permanently
invested. At December 31, 1997, the estimated amount of total
unremitted non-U.S. subsidiary earnings is $62.9 million.
The non-U.S. component of income before income taxes was $64.5
million in 1997, $40.4 million in 1996 and $19.3 million in 1995.
13) OTHER NONOPERATING EXPENSES (INCOME)
Total other nonoperating expenses (income) for the years ended
December 31 consist of the following:
1997 1996 1995
---- ---- ----
(In millions)
Equity earnings* $ (5.8) $ (6.4) $ (6.0)
Interest income (5.3) (3.7) (1.9)
Dividend income (4.0) (11.0) (12.8)
Net gain on marketable
equity securities (2.9) - (15.8)
Minority interest in income
of subsidiary trust 1.5 - -
Write-downs in carrying value
of a long-term foreign
investment accounted for
under the equity method - 1.3 16.0
Other 1.8 0.3 0.1
---- ---- ----
$(14.7) $(19.5) $(20.4)
==== ==== ====
* Equity earnings in American Tool Companies, Inc., in which the
Company has a 49% interest.
58
14) OTHER OPERATING INFORMATION
Industry Segment Information
The Company is a manufacturer and full-service marketer of staple
consumer products sold to high-volume purchasers, including, but not
limited to, discount stores and warehouse clubs, home centers and
hardware stores, and office superstores and contract stationers. The
Company's multi-product offering consists of products in three major
product groups: Hardware and Home Furnishings, Office Products, and
Housewares.
Product Principal
Product Group Categories Brands (1)
- ------------- ---------- ----------
Hardware and Window Treatments Levolor
Home Furnishings LouverDrape
Del Mar
Newell
Kirsch
Hardware Amerock
and Tools Bulldog
EZ Paintr
BernzOmatic
Picture Frames Intercraft
Decorel
Burnes of Boston
Holson
Home Storage Lee Rowan
Products System Works
- ---------------------------------------------------------------------
Office Products Markers and Writing Sanford
Instruments Eberhard Faber
Berol
Office Storage and Rogers
Organization Eldon
Rolodex
School Supplies Stuart Hall
and Stationery
- --------------------------------------------------------------------
Housewares Glassware and Anchor Hocking
Plasticware Pyrex (2)
Aluminum Cookware Mirro
and Bakeware WearEver
Calphalon
59
Product Principal
Product Group Categories Brands (1)
- ------------- ---------- ----------
Housewares Hair Accessories Goody
Ace
Wilhold
(1) All listed brand names are trademarks, which are registered in
the United States Patent and Trademark Office.
(2) Used under exclusive license from Corning Incorporated and its
subsidiaries in Europe, the Middle East and Africa only.
Sales to Wal-Mart Stores, Inc. and subsidiaries amounted to
approximately 15%, 14% or 13% of consolidated net sales in 1997, 1996 and
1995 respectively. Sales to each of the Company's other customers,
individually, amounted to less than 10% of consolidated net sales.
Geographic Information
Prior to the 1994 acquisition of Newell Europe, the 1995
acquisition of Berol, and the 1997 acquisition of Kirsch, the Company
operated principally in the United States. The Company now operates
in several non-U.S. locations, including Australia, Canada, Colombia,
England, France, Germany, Italy, Mexico, Portugal, Spain, Sweden and
Venezuela. Summary financial information by geographic area included
in the consolidated financial statements as of and for the years ended
December 31 is as follows:
1997 1996 1995
----------------- ---------------- -------------------
% of % of % of
$ Total $ Total $ Total
------- ----- ------- ----- ------- -----
(In millions) (In millions) (In millions)
Net sales:
-U.S. $2,796.6 83.8% $2,558.2 86.1% $2,238.9 86.8%
-Non-U.S. 539.6 16.2 414.6 13.9 341.4 13.2
------- ----- ------- ----- ------- -----
Total $3,336.2 100.0% $2,972.8 100.0% $2,580.3 100.0%
======= ===== ======= ===== ======= =====
Operating income:
-U.S. $ 470.8 86.1% $ 420.3 89.9% 378.4 92.7%
-Non-U.S. 76.3 13.9 47.0 10.1 29.8 7.3
------- ----- ------- ----- ------- -----
Total $ 547.1 100.0% $ 467.3 100.0% $ 408.2 100.0%
======= ===== ======= ===== ======= =====
Total assets at December 31:
-U.S. $3,342.0 83.3% $2,626.5 85.9% $2,539.1 85.6%
-Non-U.S. 669.7 16.7 431.9 14.1 426.1 14.4
------- ----- ------- ----- ------- -----
Total $4,011.7 100.0% $3,058.4 100.0% $2,965.2 100.0%
======= ===== ======= ===== ======= =====
60
Sales between geographic areas are not material. The Company's
export sales, defined as sales of products made in the U.S. and sold
primarily by the Company's export division to foreign customers, were
approximately 2.8% of consolidated net sales in 1997, 2.5% in 1996 and
2.9% in 1995 (financial information is included in the non-U.S.
category in the tables above).
15) LITIGATION
The Company and its subsidiaries are subject to certain legal
proceedings and claims, including the environmental matters described
below, that have arisen in the ordinary conduct of its business.
As of December 31, 1997, the Company was involved in various
matters concerning federal and state environmental laws and
regulations, including 35 matters in which they have been identified
by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at
contaminated sites under the Federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and equivalent
state laws.
In assessing its environmental response costs, the Company has
considered several factors, including: the extent of the Company's
volumetric contribution at each site relative to that of other PRPs;
the kind of waste; the terms of existing cost sharing and other
applicable agreements; the financial ability of other PRPs to share in
the payment of requisite costs; the Company's prior experience with
similar sites; environmental studies and cost estimates available to
the Company; the effects of inflation on cost estimates; and the
extent to which the Company's and other parties' status as PRPs are
disputed.
Based on information available to it, the Company's estimate of
environmental response costs associated with these matters as of
December 31, 1997 ranged between $16.7 million and $24.1 million. As
of December 31, 1997, the Company had a reserve equal to $20.3 million
for such environmental response costs in the aggregate. No insurance
recovery was taken into account in determining the Company's cost
estimates or reserve, nor do the Company's cost estimates or reserve
reflect any discounting for present value purposes.
Because of the uncertainties associated with environmental
investigations and response activities, the possibility that the
Company could be identified as a PRP at sites identified in the future
that require the incurrence of environmental response costs and the
possibility of additional sites as a result of businesses acquired,
actual costs to be incurred by the Company may vary from the Company's
estimates.
Subject to difficulties in estimating future environmental
response costs, the Company does not expect that any sum it may have
to pay in connection with environmental matters in excess of amounts
61
reserved will have a material adverse effect on its consolidated
financial statements.
The Company is involved in several legal proceedings relating to
the importation and distribution of vinyl mini-blinds made with
plastic containing lead stabilizers. In 1996, the Consumer Product
Safety Commission found that such stabilizers deteriorate over time
from exposure to sunlight and heat, causing lead dust to form on
mini-blind surfaces and presenting a health risk to children under six
years of age.
In July 1996, the California Attorney General and the Alameda
County District Attorney filed a civil suit against 12 named
companies, including a subsidiary of the Company, alleging failure to
warn consumers adequately about the presence of lead in accordance
with California law and seeking injunctions, civil penalties and
restitutionary relief.
In August 1996, 15 companies, including a subsidiary of the
Company, were named as defendants in a national and California private
class action in Sacramento County Superior Court. In October 1997, 16
additional companies were named as defendants in this case, in which
the plaintiffs currently allege that the Company's subsidiary used
false and misleading advertising and employed unfair or fraudulent
business practices in connection with the presence of lead in their
blinds.
The plaintiffs seek injunctive relief, restitution of purchase
price, suit costs, and reasonable attorneys' fees with respect to
their claims against the Company's subsidiary. The Company has agreed
to indemnify several of its retail customers that are named as
defendants in one or both of these cases for liability directly
related to actions or omissions of the Company. These two cases were
coordinated in 1997, a coordination trial judge was appointed, and
discovery is proceeding.
In February 1997, a subsidiary of the Company was named as the
defendant in another case involving the importation and distribution
of vinyl mini-blinds containing lead, which was filed as an Illinois
and national private class action in the Cook County Chancery
Division. In this case, the plaintiffs alleged violations of the
Illinois Consumer Fraud and Deceptive Trade Practices Act and the
Illinois version of the Uniform Deceptive Trade Practices Act, breach
of implied warranty, fraud, negligent misrepresentation, negligence,
unjust enrichment, and reception and retention of money unlawfully
received. The plaintiffs seek injunctive relief, unspecified damages,
suit costs and punitive damages.
Although management of the Company cannot predict the ultimate
outcome of these matters with certainty, it believes that their
ultimate resolution will not have a material effect on the Company's
consolidated financial statements.
16) SUBSEQUENT EVENTS
On March 3, 1998, the Company sold all of its marketable equity
securities, which included 7,862,300 shares it held in The Black & Decker
Corporation. The Black & Decker transaction resulted in net proceeds of
approximately $378.3 million and a net pre-tax gain, after fees and expenses,
of approximately $191.5 million.
On March 27, 1998 the Company acquired Swish Track and Pole ("Swish")
from Newmond PLC. Swish is a manufacturer and marketer of decorative and
functional window furnishings in Europe and operates as part of Kirsch
Window Furnishings Europe.
62
For this acquisition, the Company paid $96.6 million in cash. The
acquisition costs were allocated on a preliminary basis to the fair market
value of the assets acquired and liabilities assumed and resulted in trade
names and goodwill of approximately $93.9 million. The final adjustments
to the purchase price are not expected to be material to the consolidated
financial statements.
On May 7, 1998, a subsidiary of the Company merged with Calphalon
Corporation ("Calphalon"), a manufacturer and marketer of gourmet cookware.
The Company issued approximately 3.1 million shares of common stock for all
of the common stock of Calphalon. This transaction has been accounted for a
pooling of interests; therefore, the financial statements and related
disclosures as of December 31, 1997, 1996 and 1995, have been restated to
reflect this merger.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
- ----------------------------------------------------------------
(a)(2) SCHEDULE. The following consolidated financial statement schedule
of the Company included in this Exhibit 99.1 to the Company's Current
Report on Form 8-K is filed herewith pursuant to Item 14(d) and appears
immediately after this page:
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
63
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
Additions
----------------------
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts Deductions End of
Description of Period Expenses (A) (B) Period
- ----------- --------- -------- -------- ---------- -----------
Allowance for
doubtful accounts
for the years ended:
December 31, 1997 $ 14,990 $5,888 $8,321 $(8,006) $21,193
December 31, 1996 12,314 6,534 2,200 (6,058) 14,990
December 31, 1995 11,586 3,438 1,990 (4,700) 12,314
Note A - Represents recovery of accounts previously written off, along with
reserves of acquired businesses.
Note B - Represents accounts charged off.
Balance at Balance at
Beginning Other End of
of Period Provision Write-offs (C) Period
--------- --------- ---------- ------- ----------
Inventory reserves for
the years ended:
December 31, 1997 $ 82,554 $22,469 $(30,332) $19,203 $93,894
December 31, 1996 68,675 22,251 (30,721) 22,349 82,554
December 31, 1995 52,599 9,021 (17,200) 24,255 68,675
Note C - Represents reserves of acquired businesses, including provisions for
product line rationalization.
