SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2002
Commission File Number 1-9608
NEWELL RUBBERMAID INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3514169
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
29 East Stephenson Street
Freeport, Illinois 61032-0943
(Address of principal executive offices)
(Zip Code)
(815) 235-4171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
Yes /x/ No / /
Number of shares of common stock outstanding (net of treasury shares)
as of July 24, 2002: 267,171,518.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $1,894,990 $1,724,653 $3,491,998 $3,335,389
Cost of products sold 1,374,404 1,271,118 2,552,298 2,490,078
---------- ---------- ---------- ----------
GROSS INCOME 520,586 453,535 939,700 845,311
Selling, general and administrative expenses 330,039 278,459 629,194 543,066
Restructuring costs 8,852 7,695 18,639 17,674
Goodwill amortization - 14,182 - 28,255
---------- ---------- ---------- ----------
OPERATING INCOME 181,695 153,199 291,867 256,316
Nonoperating expenses:
Interest expense 29,313 35,596 54,373 74,917
Other, net 18,106 3,306 26,000 6,115
---------- ---------- ---------- ----------
Net nonoperating expenses 47,419 38,902 80,373 81,032
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 134,276 114,297 211,494 175,284
Income taxes 45,654 42,290 71,908 64,856
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 88,622 72,007 139,586 110,428
Cumulative effect of accounting change, net of tax - - (514,949) -
---------- ---------- --------- ----------
NET INCOME (LOSS) $88,622 $72,007 ($375,363) $110,428
========== ========== ======== =========
Weighted average shares outstanding:
Basic 267,032 266,648 266,929 266,633
Diluted 268,045 266,813 267,750 266,881
Earnings (loss) per share:
Basic
Before cumulative effect of accounting change $0.33 $0.27 $0.52 $0.41
Cumulative effect of accounting change - - (1.93) -
----- ----- ----- -----
Net income (loss) per common share $0.33 $0.27 ($1.41) $0.41
===== ===== ===== =====
2
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Diluted
Before cumulative effect of accounting
change $0.33 $0.27 $0.52 $0.41
Cumulative effect of accounting change - - (1.92) -
----- ----- ----- -----
Net income (loss) per common share $0.33 $0.27 ($1.40) $0.41
===== ===== ===== =====
Dividends per share $0.21 $0.21 $0.42 $0.42
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
2002 2001
-------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,068 $6,802
Accounts receivable, net 1,429,215 1,298,177
Inventories, net 1,290,715 1,113,797
Deferred income taxes 224,269 238,468
Prepaid expenses and other 208,182 193,408
---------- ----------
TOTAL CURRENT ASSETS 3,162,449 2,850,652
LONG-TERM INVESTMENTS - 79,492
OTHER ASSETS 308,767 293,245
PROPERTY, PLANT AND EQUIPMENT, NET 1,776,533 1,689,152
GOODWILL, NET 1,851,301 2,069,715
OTHER INTANGIBLE ASSETS, NET 298,414 283,866
---------- ----------
TOTAL ASSETS $7,397,464 $7,266,122
========== ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONT.)
(DOLLARS IN THOUSANDS)
June 30, December 31,
2002 2001
-------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 30,483 $19,104
Accounts payable 655,792 501,259
Accrued compensation 123,906 124,660
Other accrued liabilities 917,553 936,146
Income taxes 141,878 145,183
Current portion of long-term debt 300,165 807,500
---------- ----------
TOTAL CURRENT LIABILITIES 2,169,777 2,533,852
LONG-TERM DEBT 2,216,541 1,365,001
OTHER NONCURRENT LIABILITIES 399,467 359,526
DEFERRED INCOME TAXES 83,417 73,685
MINORITY INTEREST 2,504 685
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF A SUBSIDIARY TRUST 499,997 499,997
STOCKHOLDERS' EQUITY:
Common stock, authorized shares, 282,812 282,376
800.0 million at $1.00 par value;
Outstanding shares:
2002 - 282.8 million
2001 - 282.4 million
Treasury stock, at cost; (409,557) (408,457)
Shares held:
2002 - 15.7 million
2001 - 15.6 million
Additional paid-in capital 230,102 219,823
Retained earnings 2,083,610 2,571,255
Accumulated other comprehensive loss (161,206) (231,621)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,025,761 2,433,376
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,397,464 $7,266,122
========== ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Six Months Ended June 30,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income (loss) ($375,363) $110,428
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change 514,949 -
Depreciation and amortization 146,417 167,404
Deferred income taxes 38,134 3,395
Noncash restructuring charges 6,107 7,972
Other 13,311 1,620
Changes in current accounts excluding the
Effects of acquisitions:
Accounts receivable (53,196) (71,259)
Inventories (87,338) (26,739)
Other current assets (13,827) 14,876
Accounts payable 132,820 88,332
Accrued liabilities and other (23,311) 63,728
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 298,703 359,757
-------- --------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (228,821) (16,383)
Expenditures for property, plant and equipment (101,157) (124,273)
Disposals of noncurrent assets and other 6,907 17,684
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (323,071) (122,972)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 520,754 12,675
Payments on notes payable and long-term debt (391,031) (143,531)
Cash dividends (112,115) (111,990)
Proceeds from exercised stock options and other 9,448 992
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 27,056 (241,854)
-------- --------
Exchange rate effect on cash 578 (1,666)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,266 (6,735)
Cash and cash equivalents at beginning of year 6,802 22,525
-------- --------
6
Six Months Ended June 30,
2002 2001
---- ----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,068 $15,790
======== ========
Supplemental cash flow disclosures
cash paid during the period for:
Interest, net of amounts capitalized $40,988 $81,457
Income taxes, net of refunds 25,546 (27,643)
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL INFORMATION
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission, and reflect all
adjustments necessary to present a fair statement of the results for
the periods reported, subject to normal recurring quarter-end
adjustments, none of which is expected to be material. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto
included in the Company's latest Annual Report on Form 10-K.
SEASONAL VARIATIONS: The Company's product groups are only moderately
affected by seasonal trends. The Rubbermaid and Calphalon/WearEver
business segments typically have higher sales in the second half of the
year due to retail stocking related to the holiday season; the
Levolor/Hardware business segment typically has higher sales in the
second and third quarters due to an increased level of do-it-yourself
projects completed in the summer months; and the Parker/Eldon business
segment typically has higher sales in the second and third quarters due
to the back-to-school season. Because these seasonal trends are
moderate, the Company's consolidated quarterly sales generally do not
fluctuate significantly, unless there had been a major acquisition.
TRADE NAMES AND GOODWILL: In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 31, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized, but will be subject to periodic impairment tests in
accordance with the statements. Other intangible assets will continue
to be amortized over their useful lives. The statements also required
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and established new criteria
for recording intangible assets separate from goodwill.
Pursuant to the adoption of SFAS No. 142, all amortization expense on
trade names and goodwill ceased on January 1, 2002. During 2001 and
the first quarter of 2002, the Company performed the required
impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002 and recorded a pre-tax goodwill impairment charge of
8
$538.0 million in the first quarter of 2002 (with an after-tax charge
totaling $514.9 million). In determining this amount of goodwill
impairment, the Company measured the impairment loss as the excess of
the carrying amount of goodwill over the implied fair value of
goodwill. In addition, the Company will test again for impairment if
events or circumstances occur subsequent to the Company's annual
impairment tests that would more likely than not reduce the fair value
of a reporting unit below its carrying amount. There are no additional
impairment charges anticipated for 2002.
Goodwill represented the excess of cost over identifiable net assets of
businesses acquired. Prior to the adoption of SFAS No. 142, trade
names acquired in business combinations were not typically recognized
separately from goodwill. Through the year ended December 31, 2001,
trade names and goodwill were amortized over 40 years and other
identifiable intangible assets were amortized over 5 to 20 years. Upon
adoption of SFAS No. 142, certain trade names have not been "carved-
out" from goodwill as they had not been identified and measured at fair
value in the initial recording of a business combination.
A summary of changes in the Company's goodwill during the six months
ended June 30, 2002 is as follows (IN MILLIONS):
Balance at December 31, 2001 $2,069.7
Acquisitions and adjustments
American Tool 297.6
Other 22.0
---------
319.6
---------
Impairments -
Levolor/Hardware segment (322.0)
Parker/Eldon segment (126.9)
Calphalon/WearEver segment (89.1)
--------
(538.0)
--------
Balance at June 30, 2002 $1,851.3
========
The results of operations on a pro forma basis for the quarter and six
months ended June 30, restated as though the amortization of trade
names and goodwill had been discontinued on January 1, 2001 are as
follows (IN MILLIONS, EXCEPT PER SHARE AMOUNTS):
9
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported income before cumulative
effect of accounting change $88.6 $72.0 $139.5 $110.4
Cumulative effect of accounting change,
net of tax - - (514.9) -
----- ----- ------ ------
Reported net income (loss) 88.6 72.0 (375.4) 110.4
Add back: Goodwill and trade name
amortization, net of tax - 16.2 - 26.6
----- ----- ------ ------
Adjusted net income (loss) $88.6 $88.2 ($375.4) $137.0
===== ===== ====== ======
Reported basic net income (loss) per share $0.33 $0.27 ($1.41) $0.41
Add back: Goodwill and trade name
amortization, net of tax - 0.06 - 0.10
----- ----- ------ ------
Adjusted basic net income (loss)
per share $0.33 $0.33 ($1.41) $0.51
===== ===== ====== ======
Reported diluted net income (loss)
per share $0.33 $0.27 ($1.40) $0.41
Add back: Goodwill and trade name
amortization, net of tax - 0.06 - 0.10
----- ----- ------ ------
Adjusted diluted net income (loss)
per share $0.33 $0.33 ($1.40) $0.51
===== ===== ====== ======
10
NOTE 2 - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS:
On April 30, 2002, the Company completed the purchase of American Tool
Companies, Inc. ("American Tool"), a leading manufacturer of hand tools
and power tool accessories. The Company had previously held a 49.5%
stake in American Tool, which had been accounted for under the equity
method prior to acquisition. This purchase marks a significant
expansion and enhancement of the Company's product lines and customer
base, launching it squarely in the estimated $10 billion-plus global
market for hand tools and power tool accessories. The preliminary
purchase price was $467 million, which included $197 million for the
majority 50.5% ownership stake, the repayment of $243 million in
American Tool debt and $27 million of transaction costs. The purchase
price is subject to adjustment based on the final closing balance
sheet. At the time of acquisition, the Company paid off American
Tool's senior debt, senior subordinated debt and debt under their
revolving credit agreement. The Company is in the process of obtaining
third party valuations of certain financial positions; thus, the
allocation of the purchase price is subject to change.
Other than the American Tool purchase, the Company has not made any
significant acquisitions in 2002 or 2001. Other acquisitions
aggregated approximately $5.3 million and $6.5 million in the first six
months of 2002 and 2001, respectively, and $58.1 for the calendar year
2001.
The 2002 and 2001 transactions were all accounted for as purchases;
therefore, results of operations are included in the accompanying
Condensed Consolidated Financial Statements since their respective
acquisition dates. The purchase prices for the 2002 acquisitions have
been allocated on a preliminary basis to the fair market value of the
assets acquired and liabilities assumed. The Company's final
integration plans may include exit costs for certain plants and product
lines and employee termination costs. The final adjustments to the
purchase price allocations are not expected to be material to the
financial statements. The preliminary purchase price allocations for
the first and second quarter 2002 acquisitions and the final purchase
price allocations for all the 2001 acquisitions resulted in goodwill of
approximately $328 million.
The unaudited consolidated results of operations on a pro forma basis
(as though the 2002 acquisition of the American Tool business had been
completed on January 1, 2001) are as follows (IN MILLIONS, EXCEPT PER
SHARE AMOUNTS):
11
SIX MONTHS ENDED JUNE 30, 2002 2001
---- ----
Net sales $3,638.9 $3,776.1
Income before accounting change 139.6 110.6
Basic earnings per share before
accounting change $0.52 $0.41
Net income (loss) (375.3) 110.6
Basic earnings (loss) per share ($1.41) $0.41
WITHDRAWN DIVESTITURE:
On June 18, 2001, the Company announced an agreement for the sale of
Anchor Hocking. On January 14, 2002, the Federal Trade Commission (the
"FTC") filed a complaint seeking to enjoin the sale of Anchor. On
January 21, 2002, the Company signed an amended agreement with the
buyer to divest Anchor, excluding the foodservice business because the
FTC alleged the sale of Anchor to the current buyer could reduce
competition in the market for glassware in the foodservice industry.
On April 22, 2002, the U.S. District Court for the District of Columbia
granted the FTC's motion for a preliminary injunction.
On June 10, 2002, the Company announced that it had withdrawn plans to
sell its Anchor Hocking glass business to Libbey Inc. and will continue
to operate the business as part of its broad housewares portfolio.
Transaction costs approximating $13.6 million were recorded as
Nonoperating Expenses in the second quarter.
12
NOTE 3 - RESTRUCTURING COSTS
During 2002 and 2001, the Company recorded restructuring charges
associated with the Company's strategic restructuring plan announced on
May 3, 2001. Through this restructuring plan, management intends to
streamline the Company's supply chain to enable it to be the low cost
global provider throughout the Company's product portfolio. The plan's
terms include reducing worldwide headcount by approximately 3,000
people over the three years beginning in 2001, and consolidating
duplicative manufacturing facilities. In the first six months of 2002,
the Company incurred facility exit costs and employee severance and
termination benefit costs for approximately 850 employees, as described
in the table below. Under the restructuring plan, 22 facilities have
been exited and headcount has been reduced by 2,550 employees.
Certain expenses incurred in the reorganization of the Company's
operations are considered to be restructuring expenses. Pre-tax
restructuring costs consisted of the following (IN MILLIONS):
Quarter Ended Six Months Ended
June 30, June 30,
------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Facility and other exit costs $1.8 $1.8 $4.7 $3.3
Employee severance and termination benefits 7.0 3.9 13.3 9.8
Exited contractual commitments 0.1 - 0.6 -
Other - 2.0 - 4.6
---- ---- ----- -----
Recorded as Restructuring Costs 8.9 7.7 18.6 17.7
Discontinued Product Lines (in Cost of Sales) 0.5 - 4.1 -
---- ---- ----- -----
Total Costs Related to Restructuring Plans $9.4 $7.7 $22.7 $17.7
==== ==== ===== =====
Restructuring provisions were determined based on estimates prepared at
the time the restructuring actions were approved by management, and
also include amounts recognized as incurred. A summary of the
Company's restructuring plan reserves is as follows (IN MILLIONS):
13
12/31/00 COSTS 6/30/01
BALANCE PROVISION INCURRED* BALANCE
-------- --------- -------- -------
Facility and other exit costs $11.8 $3.3 ($7.1) $8.0
Employee severance and termination benefits 3.3 9.8 (6.7) 6.4
Exited contractual commitments 4.6 - (1.3) 3.3
Other 2.2 4.6 (2.0) 4.8
----- ----- ----- -----
$21.9 $17.7 ($17.1) $22.5
===== ===== ===== =====
12/31/01 COSTS 6/30/02
BALANCE PROVISION INCURRED* BALANCE
-------- --------- -------- -------
FACILITY AND OTHER EXIT COSTS $20.1 $8.8 ($11.6) $17.3
Employee severance and termination benefits 6.2 13.3 (15.3) 4.2
Exited contractual commitments 1.9 0.6 (0.7) 1.8
----- ----- ----- -----
$28.2 $22.7 ($27.6) $23.3
===== ===== ===== =====
* Cash paid for restructuring activities was $21.7 million and $12.5
million in the first six months of 2002 and 2001, respectively.
The facility and other exit cost reserves of $17.3 million at June 30,
2002 are primarily related to future minimum lease payments on a
vacated Levolor/Hardware European facility and closure costs related to
six additional facilities (one at Rubbermaid, one at Parker/Eldon, two
at Levolor/Hardware and two at Calphalon/WearEver). Severance reserves
of $4.2 million at June 30, 2002 are primarily related to payments to
approximately 33 former Newell executives who are receiving severance
payments under employment agreements. As of June 30, 2002, $1.8
million of reserves remain for restructuring charges recorded in 1999
for contractual commitments on abandoned Rubbermaid computer software.
14
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market value. The
components of inventories, net of LIFO reserve, were as follows (IN
MILLIONS):
June 30, December 31,
2002 2001
-------- ------------
Materials and supplies $241.1 $223.2
Work in process 200.6 162.0
Finished products 849.0 728.6
-------- --------
$1,290.7 $1,113.8
======== ========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Replacements and improvements are capitalized. Expenditures for
maintenance and repairs are charged to expense. Depreciation expense is
calculated to amortize, principally on the straight-line basis, the
cost of the depreciable assets over their depreciable lives. Maximum
useful lives determined by the Company are: buildings and improvements
(20 to 40 years) and machinery and equipment (3 to 12 years).
Property, plant and equipment consisted of the following (IN MILLIONS):
June 30, December 31,
2002 2001
-------- ------------
Land $63.0 $59.5
Buildings and improvements 779.7 732.5
Machinery and equipment 2,727.8 2,546.2
-------- --------
3,570.5 3,338.2
Accumulated depreciation (1,794.0) (1,649.0)
-------- --------
$1,776.5 $1,689.2
======== ========
15
NOTE 6 - LONG-TERM DEBT
The following is a summary of long-term debt (IN MILLIONS):
June 30, December 31,
2002 2001
-------- ------------
Medium-term notes $1,412.5 $1,012.5
Commercial paper 644.6 707.5
Preferred debt securities 450.0 450.0
Other long-term debt 9.6 2.5
-------- ---------
Total debt 2,516.7 2,172.5
Current portion of long-term debt (300.2) (807.5)
-------- --------
Long-term Debt $2,216.5 $1,365.0
======== ========
The revolving credit agreement (and related commercial paper), medium
term notes and mandatorily redeemable convertible preferred securities
are all unsecured.
On September 18, 2001, the Company entered into an agreement with a
financial institution creating a financing entity that is consolidated
in the Company's financial statements. Under the agreement, the
Company regularly enters into transactions with the financing entity to
sell an undivided interest in substantially all of the Company's United
States trade receivables to the financing entity. In the quarter ended
September 30, 2001, the financing entity issued $450.0 million in
preferred debt securities to the financial institution. Those
preferred debt securities must be retired or redeemed before the
Company can have access to the financing entity's receivables. The
receivables and the corresponding $450.0 million preferred debt issued
by the subsidiary to the financial institution are recorded in the
consolidated accounts of the Company. The proceeds of this debt were
used to pay down commercial paper issued by the Company. Under the
circumstances, the Company can require that the preferred debt
securities be converted into notes that mature in 2008. The entire
principal amount thereof is considered to be long-term debt. The
provisions of the debt agreement allow the entire outstanding debt to
be called upon certain events including the Company's debt rating
falling below investment grade and certain levels of accounts
receivable write-offs. As of June 30, 2002, the Company was in
compliance with the agreement. As of June 30, 2002 and December 31,
2001, the aggregate amount of outstanding receivables sold under the
agreement was $722.7 million and $689.3 million, respectively.
The Company completed a new $1,300.0 million Syndicated Revolving
Credit Facility ("Revolver") on June 14, 2002, replacing the existing
$1,300.00 revolving credit agreement, which was scheduled to terminate
in August 2002. The new Revolver consists of a $650.0 million 364-day
16
credit agreement and a $650.0 million five-year credit agreement. At
June 30, 2002, there were no borrowings under the Revolver.
On March 14, 2002 the Company issued $500.0 million of Senior Notes
with five-year and ten-year maturities. The $500.0 million Senior
Notes consist of $250.0 million in 6.00% Senior Notes due 2007 and
$250.0 million in 6.75% Senior Notes due 2012. On March 12, 2002, the
five-year notes were swapped to a floating rate, resulting in a 2.98%
rate for the first six months of the swap. The proceeds of this
issuance were used to pay down commercial paper. This issuance is
reflected in the outstanding amount of medium-term notes noted above
and the entire amount is considered to be long-term debt.
17
NOTE 7 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the year-
to-date period is shown below (IN MILLIONS, EXCEPT PER SHARE DATA):
"IN THE CONVERTIBLE
BASIC MONEY" PREFERRED DILUTED
METHOD OPTIONS(1) SECURITIES(2) METHOD
------ ---------- ------------- -------
QUARTER ENDED JUNE 30, 2002
Net income $88.6 - - $88.6
Weighted average shares outstanding 267.0 1.0 - 268.0
Earnings per share $0.33 $0.33
QUARTER ENDED JUNE 30, 2001
Net income $72.0 - - $72.0
Weighted average shares outstanding 266.6 0.2 - 266.8
Earnings per share $0.27 $0.27
SIX MONTHS ENDED JUNE 30, 2002
Income before cumulative effect of
accounting change $139.6 - - $139.6
Weighted average shares outstanding 266.9 0.9 - 267.8
Earnings per share $0.52 $0.52
Net loss ($375.4) - - ($375.4)
Weighted average shares outstanding 266.9 0.9 - 267.8
Loss per share ($1.41) ($1.40)
SIX MONTHS ENDED JUNE 30, 2001
Net income $110.4 - - $110.4
Weighted average shares outstanding 266.6 0.3 - 266.9
Earnings per share $0.41 $0.41
(1) The weighted average shares outstanding for the six months ended
June 30, 2002 and 2001 exclude approximately 3.7 million and 7.4
million stock options, respectively, because such options had an
exercise price in excess of the average market value of the
Company's common stock during the respective periods and would,
therefore, be anti-dilutive.
(2) The convertible preferred securities are anti-dilutive in 2002 and
2001, and therefore have been excluded from diluted earnings per
share. Had the convertible preferred shares been included in the
diluted earnings per share calculation, net income would be
increased by $8.8 million and $8.4 million in the six months ended
June 30, 2002 and 2001, respectively, and weighted average shares
outstanding would have increased by 9.9 million shares in both
periods.
18
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) encompasses net after-tax
unrealized gains or losses on securities available for sale, foreign
currency translation adjustments, net losses on derivative instruments
and net minimum pension liability adjustments and is recorded within
stockholders' equity.
The following table displays the components of accumulated other
comprehensive income or loss (IN MILLIONS):
Foreign After-tax After-tax Accumulated
After-Tax Currency Derivatives Minimum Other
Unrealized Translation Hedging Pension Comprehensive
Gain (Loss) Loss Gain (Loss) Liability Loss
------------ ----------- ----------- --------- -------------
Balance at December 31, 2001 $ - ($213.1) ($14.0) ($4.5) ($231.6)
Current year change - 62.7 7.7 - 70.4
-------- ------ ----- ---- ------
Balance at June 30, 2002 $ - ($150.4) ($6.3) ($4.5) ($161.2)
======== ====== ===== ==== ======
Total comprehensive income (loss) amounted to the following (IN
MILLIONS):
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $88.6 $72.0 ($375.3) $110.4
Foreign currency translation gain (loss) 96.3 (14.6) 62.7 (84.0)
After-tax derivatives hedging gain (loss) 6.0 8.9 7.7 (8.2)
After-tax unrealized gain on securities - 1.4 - 0.5
------ ----- ------ -----
Comprehensive income (loss) $190.9 $67.7 ($304.9) $18.7
====== ===== ====== =====
19
NOTE 9 - INDUSTRY SEGMENTS
In the first quarter of 2002, the Company announced the
realignment of its operating segment structure. This realignment
reflects the Company's focus on building large consumer brands,
promoting organizational integration and operating efficiencies and
aligning the businesses with the Company's key account strategy. The
four operating segments have been named for leading worldwide brands in
the Company's product portfolio. The realignment streamlines what had
previously been five operating segments. Last year's amounts have been
reclassified to conform with the 2002 presentation. The Company's
segment results are as follows (IN MILLIONS):
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES (1) (2)
Rubbermaid $649.9 $628.5 $1,271.7 $1,271.0
Parker/Eldon 542.1 505.1 922.5 866.0
Levolor/Hardware 447.2 349.4 778.3 680.4
Calphalon/WearEver 255.8 241.7 519.5 518.0
-------- -------- -------- --------
$1,895.0 $1,724.7 $3,492.0 $3,335.4
======== ======== ======== ========
OPERATING INCOME (3)
Rubbermaid $39.4 $42.8 $94.5 $100.7
Parker/Eldon 108.3 96.0 141.1 128.2
Levolor/Hardware 41.6 35.3 64.0 57.6
Calphalon/WearEver 9.4 9.0 30.2 31.1
Corporate (4) (7.7) (22.2) (15.2) (43.6)
-------- -------- -------- -------
191.0 160.9 314.6 274.0
Restructuring Costs (5) (9.3) (7.7) (22.7) (17.7)
------- -------- -------- --------
$181.7 $153.2 $291.9 $256.3
======== ======== ======== ========
CAPITAL EXPENDITURES
Rubbermaid $37.9 $25.8 $51.4 $50.8
Parker/Eldon 7.7 23.7 16.6 35.4
Levolor/Hardware 14.2 6.4 20.6 14.4
Calphalon/WearEver 2.9 10.7 7.9 22.9
Corporate 2.5 (2.0) 4.7 0.8
------- ------- -------- --------
$65.2 $64.6 $101.2 $124.3
======== ======== ======== ========
20
DEPRECIATION AND
AMORTIZATION
Rubbermaid $34.0 $30.2 $64.4 $61.1
Parker/Eldon 15.6 14.0 30.6 28.6
Levolor/Hardware 9.1 5.3 16.3 15.2
Calphalon/WearEver 11.0 10.6 21.7 22.7
Corporate 8.7 19.7 13.4 39.8
------- ------- -------- --------
$78.4 $79.8 $146.4 $167.4
======= ======= ======== ========
June 30, December 31,
IDENTIFIABLE ASSETS 2002 2001
-------- -----------
Rubbermaid $1,543.2 $1,551.3
Parker/Eldon 1,293.7 1,216.8
Levolor/Hardware 1,227.3 790.8
Calphalon/WearEver 744.2 787.4
Corporate (6) 2,589.1 2,919.8
-------- --------
$7,397.5 $7,266.1
======== ========
GEOGRAPHIC AREA INFORMATION
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES
United States $1,380.0 $1,238.5 $2,554.2 $2,399.6
Canada 81.7 79.0 145.4 145.0
-------- -------- -------- --------
North America 1,461.7 1,317.5 2,699.6 2,544.6
Europe (7) 328.4 299.4 620.6 605.9
Central and South America (8) 76.0 85.6 123.9 145.5
All other 28.9 22.2 47.9 39.4
-------- -------- -------- --------
$1,895.0 $1,724.7 $3,492.0 $3,335.4
======== ======== ======== ========
OPERATING INCOME
United States $139.2 $114.4 $231.7 $187.4
Canada 10.3 12.2 14.6 21.8
-------- ------- -------- --------
North America 149.5 126.6 246.3 209.2
Europe 15.7 13.1 22.6 28.6
Central and South America 10.7 12.3 13.5 15.9
All other 5.8 1.2 9.5 2.6
-------- -------- -------- --------
$181.7 $153.2 $291.9 $256.3
======== ======== ======== ========
21
June 30, December 31,
IDENTIFIABLE ASSETS (9) 2002 2001
-------- -----------
United States $4,923.4 $5,067.8
Canada 127.2 118.0
-------- --------
North America 5,050.6 5,185.8
Europe 1,982.0 1,737.0
Central and South America 285.1 295.7
All other 79.8 47.6
-------- --------
$7,397.5 $7,266.1
======== ========
1) Sales to Wal-Mart Stores, Inc. and subsidiaries amounted to
approximately 16% of consolidated net sales in the first six
months of 2002 and 2001. Sales to no other customer exceeded
10% of consolidated net sales for either period.
2) All intercompany transactions have been eliminated.
3) Operating income is net sales less cost of products sold and
selling, general and administrative expenses. Certain
headquarters expenses of an operational nature are allocated
to business segments and geographic areas primarily on a net
sales basis. Goodwill amortization is considered a corporate
expense and not allocated to business segments.
4) Corporate operating expenses consist primarily of
administrative costs that cannot be allocated to a particular
segment.
5) Restructuring costs are recorded as both Restructuring Costs
and as part of Cost of Products Sold in the Condensed
Consolidated Statements of Income (refer to Note 3 for
additional detail.) Restructuring Costs are not allocated to
business segments and are not part of Operating Income.
6) Corporate assets primarily include trade names, goodwill,
equity investments and deferred tax assets.
7) No sales attributed to any individual European country are
material.
8) This category includes Argentina, Brazil, Colombia, Mexico
and Venezuela.
9) Transfers of finished goods between geographic areas are not
significant.
22
NOTE 10 - ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." This statement
established a single accounting model for long-lived assets to be
disposed of by sale and provides additional implementation guidance for
assets to be held and used and assets to be disposed of other than by
sale. The statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and amends the accounting and reporting provisions of
Accounting Principles Board ("APB") Opinion No. 30 related to the
disposal of a segment of a business. The statement was adopted by the
Company on January 1, 2002, and had no impact on earnings.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities included in restructurings. This Statement
eliminates the definition and requirements for recognition of exit
costs as defined in EITF Issue 94-3, and requires that liabilities for
exit activities be recognized when incurred instead of at the exit
activity commitment date. The Company is in the process of determining
the impact of SFAS No. 146 on the financials, but does not expect a
material impact.
NOTE 11 - CONTINGENCIES
The Company is involved in legal proceedings in the ordinary course of
its business. These proceedings include claims for damages arising out
of use of the Company's products, allegations of infringement of
intellectual property, commercial disputes and employment matters, as
well as environmental matters. Some of the legal proceedings include
claims for punitive as well as compensatory damages, and a few
proceedings purport to be class actions.
Although management of the Company cannot predict the ultimate outcome
of these legal proceedings with certainty, it believes that the
ultimate resolution of the Company's legal proceedings, including any
amounts it may be required to pay in excess of amounts reserved, will
not have a material effect on the Company's financial statements.
23
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated items from the
Consolidated Statements of Income as a percentage of net sales.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.5% 73.7% 73.1% 74.7%
----- ----- ----- -----
GROSS INCOME 27.5% 26.3% 26.9% 25.3%
Selling, general and administrative expenses 17.4% 16.1% 18.0% 16.3%
Restructuring costs 0.5% 0.5% 0.5% 0.5%
Goodwill amortization -- % 0.8% -- % 0.8%
----- ----- ----- -----
OPERATING INCOME 9.6% 8.9% 8.4% 7.7%
Nonoperating expenses:
Interest expense 1.5% 2.1% 1.6% 2.2%
Other, net 1.0% 0.2% 0.7% 0.2%
----- ----- ---- -----
Net nonoperating expenses 2.5% 2.3% 2.3% 2.4%
----- ----- ---- -----
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 7.1% 6.6% 6.1% 5.3%
Income taxes 2.4% 2.4% 2.1% 2.0%
----- ----- ---- -----
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 4.7% 4.2% 4.0% 3.3%
Cumulative effect of accounting change,
net of tax -- % -- % (14.7)% -- %
----- ----- ----- -----
NET INCOME (LOSS) 4.7% 4.2% (10.7)% 3.3%
===== ===== ===== =====
24
ITEMS AFFECTING COMPARABILITY
Several events occurred during the first six months of 2002 and 2001
that affected the comparability of operating results. These events are
described below to help isolate their impact on continuing operations
and to help better identify operating trends. For purposes of
comparison, operating results will be discussed with and without the
following events:
* RESTRUCTURING ACTIVITIES: During 2002 and 2001, the Company
recorded restructuring charges associated with the Company's
strategic restructuring plan announced on May 3, 2001.
Through this strategic restructuring plan, management intends
to streamline the Company's supply chain to enable it to be
the low cost global provider throughout the Company's product
portfolio. The strategic restructuring plan includes
reducing worldwide headcount by approximately 3,000 people
over the three years beginning in 2001, and consolidating
duplicative manufacturing facilities. During the first six
months of 2002 and 2001, the Company incurred pre tax
restructuring expenses of $18.6 million and $17.7 million, or
$0.05 and $0.04 per diluted share, respectively. Under the
strategic restructuring plan, 22 facilities have been exited
and headcount has been reduced by approximately 2,550
employees. See Note 3 to the unaudited Condensed
Consolidated Financial Statements.
* ADOPTION OF NEW GOODWILL ACCOUNTING: On January 1, 2002, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). Pursuant to the adoption of SFAS
No. 142, all amortization expense on goodwill and intangible
assets with indefinite lives ceased on January 1, 2002.
Therefore, no goodwill and indefinite life intangible asset
amortization is recorded in 2002 earnings. On a comparative
basis, goodwill and indefinite life intangibles after- tax
amortization expense was $16.2 million ($0.06 per diluted
share) and $26.6 million ($0.10 per diluted share) for the
three months and six months ended June 30, 2001,
respectively.
In addition, during the first quarter of 2002, the Company
recorded a $514.9 million after tax goodwill impairment
charge. This charge was recorded as a cumulative effect of
an accounting change in the unaudited Condensed Consolidated
Statements of Income. There are no additional impairment
charges anticipated for 2002. See Note 1 to the unaudited
Condensed Consolidated Financial Statements for further
information on the adoption of SFAS No. 142.
* AMERICAN TOOL ACQUISITION: On April 30, 2002, the Company
acquired the remaining 50.5% ownership interest in American
Tool Companies, Inc. ("American Tool") for $467 million,
25
which included the assumption of all outstanding American
Tool debt and miscellaneous transaction costs. The purchase
price is preliminary and subject to adjustment based on the
final closing balance sheet. The Company now owns 100% of
the outstanding shares of American Tool. With fiscal 2001
revenue of $440.7 million and manufacturing and distribution
facilities around the world, the American Tool purchase marks
a significant expansion and enhancement of the Company's
product lines and customer base, launching it squarely into
the estimated $10 billion-plus global market for hand tools
and power tool accessories. The acquisition has been
accounted for as a purchase and is described further in Note
2 to the unaudited Condensed Consolidated Financial
Statements.
Since the acquisition, American Tool's operations have been
consolidated with the Company's. Prior to May 1, 2002, the
Company's 49.5% ownership interest in American Tool was
accounted for under the equity method of accounting, and was
recognized as other income and included in Non-operating
Expenses in the unaudited Condensed Consolidated Statements
of Income. The Company recorded other income of $0.6 million
and $4.3 million for the six months ended June 30, 2002 and
2001, respectively, related to the 49.5% equity income in
American Tool prior to the acquisition.
* ANCHOR HOCKING TRANSACTION: On June 10, 2002, the Company
withdrew plans to sell its Anchor Hocking glass business to
Libbey Inc. ("Libbey") and will continue to operate the
business as part of its broad housewares portfolio. The
Federal Trade Commission ("FTC") had been granted a
preliminary injunction against the sale of Anchor to Libbey,
as the FTC alleged the sale of Anchor to Libbey could reduce
competition in the market for glassware in the foodservice
industry. During the quarter ended June 30, 2002, the
Company expensed $13.6 million, or $0.03 per diluted share,
of transaction related costs in other Non-operating Expense.
THREE MONTHS ENDED JUNE 30, 2002 VS.
THREE MONTHS ENDED JUNE 30, 2001
CONSOLIDATED OPERATING RESULTS:
Net sales for the three months ended June 30, 2002 ("Second Quarter")
were $1,895.0 million, an increase of $170.3 million, or 9.9%, from
$1,724.7 million in the comparable quarter of 2001. Excluding $78.7
million of sales from the American Tool acquisition, sales increased
5.3%. The internal sales growth was driven primarily by the Company's
focus on sales and marketing initiatives toward strategic customers and
new product introductions, partially offset by product price
reductions.
26
Gross income was $520.6 million in the Second Quarter of 2002, a $67.1
million, or 14.8%, increase from $453.5 million in the comparable
quarter of 2001. Gross income margin also increased to 27.5% of sales
versus 26.3% in 2001. Excluding $0.8 million ($0.5 million after tax)
of product line exit costs related to recent acquisitions and strategic
restructurings, gross income was $521.4 million or 27.5% of net sales
in 2002. Gross income, both with and without acquisition and strategic
restructuring related charges, increased as a result of the American
Tool acquisition and the Company's implementation of strategic
restructuring and productivity improvement initiatives that continue to
focus on streamlining the Company's supply chain, such as eliminating
duplicative facilities, reducing headcount and sourcing product from
low cost countries. Productivity initiatives reduced costs by
approximately $50 million in the Second Quarter of 2002. The Company
was able to continue increasing gross income margin despite product
price reductions.
Selling, general and administrative expenses ("SG&A") were $330.0
million in the Second Quarter of 2002, a $51.5 million, or 18.5%,
increase from $278.5 million in the comparable quarter of 2001. SG&A
as a percentage of net sales was 17.4% in 2002 versus 16.1% in the
comparable quarter of 2001. Excluding $0.5 million ($0.3 million after
tax) of acquisition related charges in 2001, SG&A was $278.0 million or
16.1% of net sales for the Second Quarter of 2001. SG&A, both with and
without acquisition related charges, increased primarily due to the
American Tool acquisition, the Company's increased investment in new
product development and product launches, and planned marketing
initiatives (including Strategic Account Management and Phoenix), which
support the Company's strategic growth initiatives.
Strategic Account Management is the Company's sales and marketing
approach that focuses growth efforts on strategic accounts with high
long-term growth potential. Separate sales organizations have been
established to more effectively manage the relationship at the largest
strategic accounts, specifically Wal*Mart, The Home Depot and Lowe's.
The program allows the Company to present these customers with "one
face" to enhance the Company's response time, understand the customer's
needs and support the best possible customer relationship.
The Phoenix program is a field sales force consisting of approximately
500 recent university graduates that primarily work with strategic
accounts to perform in-store product demonstrations, event marketing,
on-shelf merchandising, enhance customer interaction and strengthen
ongoing relationships with store personnel. Phoenix allows the Company
to enhance product placement and minimize stock outages.
The Company recorded pre-tax strategic restructuring charges of $8.9
million ($5.9 million after taxes) and $7.7 million ($4.8 million after
tax) in the Second Quarter of 2002 and 2001, respectively. The 2002
Second Quarter pre-tax charge included $1.9 million of facility and
other exit costs and $7.0 million of employee severance and termination
benefits. The 2001 Second Quarter pre-tax charge included $1.8 million
27
of facility and other exit costs, $3.9 million of employee severance
and termination benefits and $2.0 million of other costs. See Note 3
to the unaudited Condensed Consolidated Financial Statements for
further information on the strategic restructuring plan.
Operating income was $181.7 million in the Second Quarter of 2002, a
$28.5 million, or 18.6%, increase from $153.2 million in the comparable
quarter of 2001. Operating income as a percentage of net sales was
9.6% in 2002 versus 8.9% in the comparable quarter of 2001. Excluding
strategic restructuring and acquisition related charges, operating
income was $191.4 million, or 10.1% of net sales in 2002 versus $161.4
million, or 9.4% of sales in 2001. The increase in operating income,
both with and without strategic restructuring and acquisition related
charges, is primarily due to 5.3% internal sales growth, approximately
$50 million of productivity improvements, the American Tool Acquisition
($7.2 million of operating income), and the impact of the non-
amortization provisions of SFAS No. 142 ($16.2 million of amortization
expense in the Second Quarter of 2001). Partially offsetting these
increases are the cost of the Company's continued investment in sales
and marketing initiatives and product price reductions.
Net nonoperating expenses were $47.4 million in the Second Quarter of
2002, an $8.5 million, or 21.9% increase from $38.9 million in the
comparable quarter of 2001. The increase in net nonoperating expense
was primarily due to $13.6 million ($9.0 million after tax) of Anchor
Hocking transaction related costs and reduced equity earnings in
American Tool, partially offset by $6.3 million in lower interest
expense as a result of lower interest rates on the Company's variable
rate borrowings.
The effective tax rate was 34.0% in the Second Quarter of 2002 versus
37.0% in the Second Quarter of 2001. The decrease in the effective tax
rate between years is due primarily to the impact of the non-
amortization provisions of SFAS No. 142.
Net income was $88.6 million in the Second Quarter of 2002, a $16.6
million, or 23.1%, increase from $72.0 million in the Second Quarter of
2001. Diluted earnings per share were $0.33 in the Second Quarter of
2002 compared to $0.27 in the Second Quarter of 2001. Net income,
excluding strategic restructuring and other charges, was $104.0 million
in 2002, an increase of $26.9 million from 2001. A reconciliation of
net income, excluding strategic restructuring and other charges for
2002 and 2001, is as follows:
28
2002 2001
------------------------ ----------------------
Amount Diluted EPS Amount Diluted EPS
------ ----------- ------ -----------
Net Income, as Reported $88.6 $0.33 $72.0 $0.27
Add Back
Restructuring Costs 5.9 0.02 4.8 0.02
Acquisition Related Costs 0.5 0.00 0.3 0.00
Anchor Hocking Transaction Costs 9.0 0.03 -- --
Rounding -- 0.01 -- --
------ ----- ----- -----
Net Income, Excluding Charges $104.0 $0.39 $77.1 $0.29
====== ===== ===== =====
The increase in net income and diluted earnings per share, excluding
charges, was primarily due to 5.3% internal sales growth, improved
gross margins from productivity improvements of approximately $50
million, the impact of the non-amortization provisions of the adoption
of SFAS No. 142 and lower interest expense, partially offset by product
price reductions and the Company's increased investment in sales and
marketing initiatives.
BUSINESS GROUP OPERATING RESULTS:
The Company operates in four general segments:
Net Sales by Group: Percentage
Increase/
2002 2001 Decrease
----- ----- ---------
Rubbermaid $649.9 $628.5 3.4%
Parker/Eldon 542.1 505.1 7.3
Levolor/Hardware 447.2 349.4 28.0
Calphalon/WearEver 255.8 241.7 5.8
-------- --------
Total Net Sales $1,895.0 $1,724.7 9.9%
======== ========
29
Operating Income by Group: Percentage
Increase/
2002 2001 Decrease
---- ---- ---------
Rubbermaid $39.4 $42.8 (7.9)%
Parker/Eldon 108.3 96.0 12.8
Levolor/Hardware 41.6 35.3 17.8
Calphalon/WearEver 9.4 9.0 4.4
------ ------
Group Operating Income* $198.7 $183.1 8.5%
====== ======
* Group Operating Income excludes Corporate costs and
Restructuring Expense. See Note 9 to the unaudited Condensed
Consolidated Financial Statements for the detail of Operating
Income by Group including Corporate and Restructuring Expense.
RUBBERMAID
Net sales for the 2002 Second Quarter were $649.9 million, an increase
of $21.4 million, or 3.4%, from $628.5 million in the comparable
quarter of 2001. The 3.4% sales growth was primarily due to 9.6% sales
growth at the Rubbermaid Home Products division, partially offset by
6.7% sales decline at Rubbermaid Commercial Products. The primary
reasons for the overall sales increase were sales gains at strategic
accounts and new product introductions, such as the Rubbermaid
TakeAlongs trademark, the Slim Cooler trademark and the Tool Tower
trademark and growth in existing products, partially offset by product
price reductions.
Operating income for the 2002 Second Quarter was $39.4 million, a
decrease of $3.4 million, or 7.9%, from $42.8 million in the comparable
quarter of 2001. The decrease is primarily related to continued
investment in divisional growth initiatives, including costs related to
new product development and product launches primarily television
advertising for featured items such as the Slim Cooler trademark and
the Tool Tower trademark. These investments and product pricing
reductions were partially offset by cost savings from productivity
initiatives.
PARKER / ELDON
Net sales for the 2002 Second Quarter were $542.1 million, an increase
of $37.0 million, or 7.3%, from $505.1 million in the comparable
quarter of 2001. The 7.3% sales growth was fueled primarily by strong
back-to-school sales in North America at strategic accounts, new
product introductions (including the Sharpie Registration Chisel Tip
and Liquid Paper Registration Backtracker trademark), and growth in
existing Paper Mate Registration pens, Sharpie Registration permanent
markers and Colorific Registration product lines.
30
Operating income for the 2002 Second Quarter was $108.3 million, an
increase of $12.3 million, or 12.8%, from $96.0 million in the
comparable quarter of 2001. The increase is primarily related to
productivity improvements and increased margin from new products,
partially offset by continued investments in divisional growth
initiatives, primarily television advertising for the Sharpie
Registration and Paper Mate Registration brands.
LEVOLOR / HARDWARE
Net sales for the 2002 Second Quarter were $447.2 million, an increase
of $97.8 million, or 28.0%, from $349.4 million in the comparable
quarter of 2001. Excluding $78.7 million in sales from the American
Tool acquisition, sales increased $19.1 million, or 5.5%. Sales growth
was fueled primarily by 10.0% sales growth at the Levolor / Kirsch
division related to the size-in-store window blinds rollout at a
strategic account. The American Tool acquisition integration continues
on plan.
Operating income for the 2002 Second Quarter was $41.6 million, an
increase of $6.3 million, or 17.8%, from $35.3 million in the
comparable quarter of 2001. Excluding $7.2 million in operating income
from the American Tool acquisition, operating income decreased $0.9
million, or 2.5%. The decrease in operating income, excluding American
Tool, was primarily due to product price reductions and continued
investment in sales and marketing growth initiatives, partially offset
by cost savings from productivity initiatives.
CALPHALON / WEAREVER
Net sales for the 2002 Second Quarter were $255.8 million, an increase
of $14.1 million, or 5.8%, from $241.7 million in the comparable
quarter of 2001. Sales growth related primarily to Calphalon and
Anchor Hocking divisions related to new product introductions and
existing product sales at strategic accounts, partially offset by
product price reductions.
Operating income for the 2002 Second Quarter was $9.4 million, an
increase of $0.4 million, or 4.4%, from $9.0 million in the comparable
quarter of 2001. The slight increase in operating income was due
primarily to cost savings from productivity initiatives and new and
existing product growth, offset by product price reductions.
31
SIX MONTHS ENDED JUNE 30, 2002 VS.
SIX MONTHS ENDED JUNE 30, 2001
CONSOLIDATED OPERATING RESULTS:
Net sales for the six months ended June 30, 2002 were $3,492.0 million,
an increase of $156.6 million, or 4.7%, from $3,335.4 million in 2001.
Excluding $78.7 million of sales from the American Tool acquisition,
sales increased 2.3% from 2001. The 2.3% sales growth was driven
primarily by the Company's focus on sales and marketing initiatives
toward strategic customers and new product introductions, partially
offset by product price reductions.
Gross income for the six months ended June 30, 2002 was $939.7 million,
a $94.4 million, or 11.2%, increase from $845.3 million in 2001. Gross
income margin also increased to 26.9% of sales versus 25.3% in 2001.
Excluding $7.5 million ($5.0 million after tax) of product line exit
costs related to recent acquisitions and strategic restructurings,
gross income was $947.2 million or 27.1% of net sales in 2002. In the
comparable period in 2001, excluding $3.1 million ($2.0 million after
tax) of product line exit costs related to recent acquisitions and
strategic restructurings, gross income was $848.4 million, or 25.4% of
sales. Gross income, with and without acquisition and strategic
restructuring related charges, increased as a result of the American
Tool acquisition and the Company's implementation of strategic
restructuring and productivity improvement initiatives that continue to
focus on streamlining the Company's supply chain, such as eliminating
duplicative facilities, reducing headcount and sourcing product from
low cost countries. Productivity initiatives reduced costs by
approximately $100 million in the first half of 2002. The Company was
able to continue increasing gross income margin despite product price
reductions.
SG&A for the six months ended June 30, 2002 was $629.2 million, an
$86.1 million, or 15.9%, increase from $543.1 million in 2001. SG&A as
a percentage of net sales was 18.0% in 2002 versus 16.3% in 2001.
Excluding $3.4 million ($2.2 million after tax) of acquisition related
charges in 2002, SG&A was $625.8 million or 17.9% of net sales in 2002.
In 2001, excluding $1.6 million ($1.0 million after tax) of
acquisition related charges, SG&A was $541.5 million, or 16.2%. SG&A,
both with and without acquisition related charges, increased primarily
due to the American Tool acquisition, the Company's increased
investment in new product development, product launches, and planned
marketing initiatives (including Strategic Account Management and
Phoenix), which support the Company's strategic growth initiatives.
The Company recorded pre-tax strategic restructuring charges of $18.6
million ($12.3 million after taxes) and $17.7 million ($11.1 million
after tax) for the six months ended June 30, 2002 and 2001,
respectively. The 2002 pre-tax charge included $5.3 million of
facility and other exit costs and $13.3 million of employee severance
and termination benefits. The 2001 pre-tax charge included $3.3 million
32
of facility and other exit costs, $9.8 million of employee severance
and termination benefits, and $4.6 million of other costs. See Note 3
to the unaudited Condensed Consolidated Financial Statements for
further information on the strategic restructuring plan.
Operating income for the six months ended June 30, 2002 was $291.9
million, a $35.6 million, or 13.9%, increase from $256.3 million in
2001. Operating income as a percentage of net sales was 8.4% in 2002
versus 7.7% in 2001. Excluding strategic restructuring and acquisition
related charges, operating income was $321.4 million, or 9.2% of net
sales in 2002 versus $278.7 million, or 8.4% of sales in 2001. The
increase in operating income, both with and without strategic
restructuring and acquisition related charges, is primarily due to
internal sales growth and productivity improvements discussed above,
the American Tool Acquisition, and the impact of the non-amortization
provisions of SFAS No. 142. Partially offsetting these increases is
the cost of the Company's continued investment in sales and marketing
initiatives and product price reductions.
Net nonoperating expenses for the six months ended June 30, 2002 were
$80.4 million, a $0.6 million, or 0.7% decrease from $81.0 million in
2001. The decrease in net nonoperating expense was due primarily to a
$20.5 million decrease in interest expense primarily related to lower
interest rates on the Company's variable rate borrowings, offset by
$13.6 million ($9.0 million after tax) of Anchor Hocking transaction
related costs and reduced equity earnings in American Tool.
The effective tax rate for the six months ended June 30, 2002 was 34.0%
versus 37.0% in 2001. The decrease in the effective tax rate between
years is due primarily to the impact of the non-amortization provisions
of SFAS No. 142.
Net income before cumulative effect of accounting change for the six
months ended June 30, 2002 was $139.6 million, a $29.2 million, or
26.4%, increase from $110.4 million in 2001. Diluted earnings per share
before cumulative effect of accounting change were $0.52 in 2002 as
compared to $0.41 in 2001.
During the first quarter of 2002, the Company completed the required
impairment tests of goodwill and indefinite life intangible assets,
which resulted in an impairment charge of $514.9 million, net of tax.
See Note 1 to the unaudited Condensed Consolidated Financial Statements
for further information on the Company's adoption of SFAS No. 142.
Net loss for the six months ended June 30, 2002 was $375.4 million or
$1.40 diluted loss per share. Net income for 2001 was $110.4 million,
or $0.41 diluted earnings per share. Excluding strategic restructuring
and other charges, and the goodwill impairment charge, net income was
$168.0 million in 2002, an increase of $43.5 million from 2002. A
reconciliation of net income, excluding certain charges for 2002 and
2001 is as follows:
33
(In millions; except per share data) 2002 2001
----------------------- -------------------------
Amount Diluted EPS Amount Diluted EPS
------ ----------- ------ -----------
Net Income (Loss), as Reported ($375.4) ($1.40) $110.4 $0.41
Add Back
Restructuring Costs 12.3 0.05 11.1 0.04
Acquisition Related Costs 7.2 0.03 3.0 0.01
Anchor Hocking Transaction Costs 9.0 0.03 -- --
Goodwill Impairment 514.9 1.92 -- --
Rounding -- -- -- 0.01
------ ----- ------ -----
Net Income, Excluding Charges $168.0 $0.63 $124.5 $0.47
====== ===== ====== =====
The increase in net income and diluted earnings per share, excluding
charges, was primarily due to 2.3% internal sales growth, improved
gross margins from productivity improvements of approximately $100
million, the impact of the non-amortization provisions of the adoption
of SFAS No. 142 and lower interest expense, partially offset by the
Company's increased investment in sales and marketing initiatives and
product price reductions.
BUSINESS SEGMENT OPERATING RESULTS:
Net Sales by Group: Percentage
Increase/
2002 2001 Decrease
---- ---- ----------
Rubbermaid $1,271.7 $1,271.0 0.1%
Parker/Eldon 922.5 866.0 6.5
Levolor/Hardware 778.3 680.4 14.4
Calphalon/WearEver 519.5 518.0 0.3
-------- --------
Total Net Sales $3,492.0 $3,335.4 4.7%
======== ========
34
Operating Income by Group: Percentage
Increase/
2002 2001 Decrease
---- ---- ----------
Rubbermaid $94.5 $100.7 (6.2)%
Parker/Eldon 141.1 128.2 10.1
Levolor/Hardware 64.0 57.6 11.1
Calphalon/WearEver 31.1 (2.9)
30.2 ------
------
Group Operating Income* $329.8 $317.6 3.8%
====== ======
* Group Operating Income excludes Corporate costs and Restructuring
Expense. See Note 9 to the unaudited Condensed Consolidated Financial
Statements for the detail of Operating Income by Group including
Corporate and Restructuring Expense.
RUBBERMAID
Net sales for the six months ended June 30, 2002 were $1,271.7 million,
an increase of $0.7 million, or 0.1%, from $1,271.0 million in 2001.
The overall sales increase was due to sales gains at strategic accounts
and new product introductions, offset by product price reductions.
Operating income for the six months ended June 30, 2002 was $94.5
million, a decrease of $6.2 million, or 6.2%, from $100.7 million in
2001. The decrease is primarily related to continued investment in
divisional growth initiatives, including costs related to new product
development and product launches primarily television advertising for
featured items such as the Slim Cooler[TM] and the Tool Tower[TM] and
product price reductions. These investments and product price reductions
were partially offset by cost savings from productivity initiatives and
margin increases on new product introductions.
PARKER / ELDON
Net sales for the six months ended June 30, 2002 were $922.5 million,
an increase of $56.5 million, or 6.5%, from $866.0 million in 2001.
The 6.5% sales growth was fueled by sales gains in North America at
strategic accounts from new product introductions, including the
Sharpie[REGISTERED] Chisel Tip and Liquid Paper[REGISTERED]
Backtracker[TM], and growth in existing Paper Mate[REGISTERED] pens,
Sharpie[REGISTERED] permanent markers and Colorific[REGISTERED]
product lines.
Operating income for the six months ended June 30, 2002 was $141.1
million, an increase of $12.9 million, or 10.1%, from $128.2 million in
2001. The increase is primarily related to productivity improvements
and increased margin from new products, partially offset by continued
investments in divisional growth initiatives, primarily television
advertising for the Sharpie[REGISTERED] and Paper Mate[REGISTERED]
brands.
35
LEVOLOR / HARDWARE
Net sales for the six months ended June 30, 2002 were $778.3 million,
an increase of $97.9 million, or 14.4%, from $680.4 million in 2001.
Excluding $78.7 million in sales from the American Tool acquisition,
sales increased $19.2 million, or 2.8%. Sales growth was related
primarily to the Levolor / Kirsch division size-in-store window blinds
rollout at a strategic account, partially offset by product price
reductions. The American Tool acquisition integration continues on
plan.
Operating income for the six months ended June 30, 2002 was $64.0
million, an increase of $6.4 million, or 11.1%, from $57.6 million in
2001. Excluding $7.2 million in operating income from the American
Tool acquisition, operating income decreased $0.8 million, or 1.4%.
The decrease in operating income, excluding American Tool, was
primarily due to product price reductions and continued investment in
sales and marketing growth initiatives, partially offset by cost
savings from productivity initiatives.
CALPHALON / WEAREVER
Net sales for the six months ended June 30, 2002 were $519.5 million,
an increase of $1.5 million, or 0.3%, from $518.0 million in 2001. The
slight increase in sales related primarily to the Calphalon division's
new product introductions at strategic accounts, offset by product
price reductions.
Operating income for the six months ended June 30, 2002 was $30.2
million, a decrease of $0.9 million, or 2.9%, from $31.1 million in
2001. The decrease in operating income was due primarily to product
price reductions and continued investment in sales and marketing growth
initiatives, partially offset by cost savings from productivity
initiatives.
36
LIQUIDITY AND CAPITAL RESOURCES
SOURCES:
The Company's primary sources of liquidity and capital resources
include cash provided from operations and use of available borrowing
facilities.
Cash provided from operating activities for the six months ended June
30, 2002 was $298.7 million compared to $359.8 million for the
comparable period of 2001. The Company generated free cash flow
(defined by the Company as cash provided by operating activities less
capital expenditures and dividends) of $85.4 million for the first six
months of 2002 compared to $123.5 million for 2001. The planned
decrease in free cash flow and operating cash flow between years is due
primarily to increased inventory levels for new product introductions
and reductions in accrued liabilities, partially offset by higher
accounts payable levels and planned capital spending reductions.
The Company has short-term foreign and domestic uncommitted lines of
credit with various banks, which are available for short-term
financing. Borrowings under the Company's uncommitted lines of credit
are subject to discretion of the lender. The Company's uncommitted
lines of credit do not have a material impact on the Company's
liquidity. Borrowings under the Company's uncommitted lines of credit
at June 30, 2002 totaled $30.5 million.
The Company completed a new $1,300.0 million Syndicated Revolving
Credit Facility ("Revolver") on June 14, 2002, replacing the existing
$1,300.0 revolving credit agreement, which was scheduled to terminate
in August 2002. The new Revolver consists of a $650.0 million 364-day
credit agreement and a $650.0 million five-year credit agreement. At
June 30, 2002, there were no borrowings under the $1,300.0 million
revolving credit agreement.
In lieu of borrowings under the Company's revolving credit agreement,
the Company may issue up to $1,300.0 million of commercial paper. The
Company's revolving credit agreement provides the committed backup
liquidity required to issue commercial paper. Accordingly, commercial
paper may only be issued up to the amount available for borrowing under
the Company's revolving credit agreement. At June 30, 2002, $644.6
million (principal amount) of commercial paper was outstanding.
Because $650 million of the backup Revolver expires in June 2007, the
entire $644.6 million is classified as long-term debt.
The Revolver permits the Company to borrow funds on a variety of
interest rate terms. This Revolver requires, among other things, that
the Company maintain Total Indebtedness to Total Capital Ratio of 60%
and an Interest Coverage Ratio of 4 to 1. As of June 30, 2002, the
Company was in compliance with this agreement.
37
The Company had outstanding at June 30, 2002 a total of $1,412.5
million (principal amount) of medium-term notes. The maturities on
these notes range from 3 to 30 years at an average interest rate of
5.41%. Of the outstanding amount of medium-term notes, $300.0 million
is classified as current portion of long-term debt and $1,112.5 million
is classified as long-term debt.
On March 14, 2002 the Company issued $500.0 million of Senior Notes
with five-year and ten-year maturities. The $500.0 million Senior
Notes consist of $250.0 million in 6.00% Senior Notes due 2007 and
$250.0 million in 6.75% Senior Notes due 2012. The five-year notes
were swapped to a floating rate, resulting in a 2.98% rate for the
first six months of the swap. The proceeds of this issuance were used
to pay down commercial paper. This issuance is reflected in the
outstanding amount of medium-term notes noted above and the entire
amount is considered to be long-term debt.
On September 18, 2001, the Company entered into an agreement with a
financial institution creating a financing entity that is consolidated
in the Company's financial statements. Under the agreement, the
Company regularly enters into transactions with the financing entity to
sell an undivided interest in substantially all of the Company's United
States trade receivables to the financing entity. In the quarter ended
September 30, 2001, the financing entity issued $450.0 million in
preferred debt securities to the financial institution. Those
preferred debt securities must be retired or redeemed before the
Company can have access to the financing entity's receivables. The
receivables and the corresponding $450.0 million preferred debt issued
by the subsidiary to the financial institution are recorded in the
consolidated accounts of the Company. The proceeds of this debt were
used to pay down commercial paper issued by the Company. Because this
debt matures in 2008, the entire amount is considered to be long-term
debt. The provisions of the debt agreement allow the entire
outstanding debt to be called upon certain events including the
Company's debt rating falling below investment grade and certain levels
of accounts receivable write-offs. As of June 30, 2002, the Company
was in compliance with the agreement. As of June 30, 2002 and December
31, 2001, the aggregate amount of outstanding receivables sold under
the agreement was $722.7 million and $689.3 million, respectively.
A $500.0 million universal shelf registration statement became
effective in July 2002 under which debt and equity securities may be
issued. No securities have been issued under this shelf registration
statement.
USES:
The Company's primary uses of liquidity and capital resources include
acquisitions, dividend payments and capital expenditures.
Cash used for acquisitions was $228.8 million for the first six months
of 2002, an increase of $212.4 million from the same period in 2001.
38
The increase is related primarily to the American Tool acquisition,
less a $17.5 million refund of purchase price related to the December
30, 2000 Gillette stationery products group acquisition. In the first
six months of 2001, the Company made minor acquisitions. These
acquisitions were accounted for as purchases and were paid for with
proceeds obtained from the issuance of commercial paper.
The Company repaid $391.0 million of long-term debt for the first six
months of 2002. The Company's ability to pay down debt was due
primarily to current year cash earnings and increased focus on working
capital management (primarily accounts payable).
Cash used for restructuring activities was $21.7 million and $12.5
million in the first six months of 2002 and 2001, respectively. Such
cash payments primarily represent employee termination benefits and
facility exit costs.
Capital expenditures were $101.2 million and $124.3 million in the
first six months of 2002 and 2001, respectively. The decrease in
capital expenditures is primarily due to a Company-wide effort to
effectively manage and thus reduce these expenditures. Aggregate
dividends paid were approximately $112 million during both 2002 and
2001.
Retained earnings decreased $487.6 million in the first six months of
2002. The reduction in retained earnings is due primarily to the
$514.9 million, net of tax, non-cash goodwill impairment charge in
2002.
Working capital at June 30, 2002 was $992.7 million compared to $316.8
million at December 31, 2001. The current ratio at June 30, 2002 was
1.46:1 compared to 1.13:1 at December 31, 2001. The increase in
working capital and the current ratio is due to the American Tool
acquisition, increases in inventory, higher receivables related to
sales growth and reduced current portion of long-term debt.
Total debt to total capitalization (total debt is net of cash and cash
equivalents, and total capitalization includes total debt, company-
obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust and stockholders' equity) was .50:1 at June 30, 2002
and .43:1 at December 31, 2001. The increase in total debt to total
capitalization is due to the American Tool acquisition. This
acquisition was funded by the issuance of commercial paper.
The Company believes that cash provided from operations and available
borrowing facilities will continue to provide adequate support for the
cash needs of existing businesses; however, certain events, such as
significant acquisitions, could require additional external financing.
39
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements in conformity
with Generally Accepted Accounting Principles in the United States ("US
GAAP") requires management to make estimates and judgments regarding
future events that affect the amounts reported in the financial
statements or disclosed in the accompanying footnotes. Future events
and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of
judgment. Actual results inevitably will differ from those estimates,
and historically such differences have not had a significant impact on
the consolidated financial statements.
The following are the more significant accounting policies and methods
used by the Company:
* REVENUE RECOGNITION: As required by US GAAP, the Company
recognizes revenues and freight billed to customers, net of
provisions for customer discounts upon shipment, and when all
substantial risks of ownership change. See Note 1 to the
consolidated financial statements in the 2001 Form 10-K.
* RECOVERY OF ACCOUNTS RECEIVABLE: The Company evaluates the
collectibility of accounts receivable based on a combination
of factors. When aware of a specific customer's inability to
meet its financial obligations, such as in the case of
bankruptcy filings or deterioration in the customer's
operating results or financial position, the Company records
a specific reserve for bad debt to reduce the related
receivable to the amount the Company reasonably believes is
collectible. The Company also records reserves for bad debts
for all other customers based on a variety of factors
including the length of time the receivables are past due and
historical collection experience. If circumstances related
to specific customers change, the Company's estimates of the
recoverability of receivables could be further adjusted.
* INVENTORY RESERVES: The Company reduces its inventory value
for estimated obsolete and slow moving inventory in an amount
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions
are less favorable than those projected by management,
additional inventory write-downs may be required.
* GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSETS: Goodwill and
indefinite life intangible assets are assessed for impairment
annually or whenever changes in facts and circumstances
indicate a possible significant deterioration in the fair
value of the reporting unit. If, upon review, the fair value
is less than the carrying value of the reporting unit, the
40
carrying value is written down to estimated fair value.
Reporting units are typically operating segments or
operations one level below operating segments for which
discrete financial information is available and for which
segment management regularly reviews the operating results.
Because there usually is a lack of quoted market prices for
the reporting units, the fair value usually is based on the
present values of expected future cash flows using discount
rates commensurate with the risks involved in the asset
group. The expected future cash flows used for impairment
reviews and related fair value calculations are based on
judgmental assessments of future production volumes, prices
and costs, considering all available information at the date
of review. Significant unexpected changes could result in
material adjustments.
MARKET RISK
The Company's market risk is impacted by changes in interest rates,
foreign currency exchange rates and certain commodity prices. Pursuant
to the Company's policies, natural hedging techniques and derivative
financial instruments may be utilized to reduce the impact of adverse
changes in market prices. The Company does not hold or issue
derivative instruments for trading purposes.
The Company's primary market risk is interest rate exposure, primarily
in the United States. The Company manages interest rate exposure
through its conservative debt ratio target and its mix of fixed and
floating rate debt. Interest rate exposure was reduced significantly
in 1997 from the issuance of $500.0 million 5.25% Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities of a Subsidiary
Trust, the proceeds of which reduced commercial paper. Interest rate
swaps may be used to adjust interest rate exposures when appropriate
based on market conditions, and, for qualifying hedges, the interest
differential of swaps is included in interest expense.
The Company's foreign exchange risk management policy emphasizes
hedging anticipated intercompany and third party commercial transaction
exposures of one-year duration or less. The Company focuses on natural
hedging techniques of the following form: 1) offsetting or netting of
like foreign currency flows, 2) structuring foreign subsidiary balance
sheets with appropriate levels of debt to reduce subsidiary net
investments and subsidiary cash flows subject to conversion risk, 3)
converting excess foreign currency deposits into U.S. dollars or the
relevant functional currency and 4) avoidance of risk by denominating
contracts in the appropriate functional currency. In addition, the
Company utilizes forward contracts and purchased options to hedge
commercial and intercompany transactions. Gains and losses related to
qualifying hedges of commercial and intercompany transactions are
deferred and included in the basis of the underlying transactions.
Derivatives used to hedge intercompany loans are marked to market with
41
the corresponding gains or losses included in the consolidated
statements of income.
Due to the diversity of its product lines, the Company does not have
material sensitivity to any one commodity. The Company manages
commodity price exposures primarily through the duration and terms of
its vendor contracts.
The amounts shown below represent the estimated potential economic loss
that the Company could incur from adverse changes in either interest
rates or foreign exchange rates using the value-at-risk estimation
model. The value-at-risk model uses historical foreign exchange rates
and interest rates to estimate the volatility and correlation of these
rates in future periods. This model estimates a loss in fair market
value using statistical modeling techniques that are based on a
variance/covariance approach and includes substantially all market risk
exposures (specifically excluding equity-method investments). The fair
value losses shown in the table below have no impact on results of
operations or financial condition as they represent economic, not
financial losses.
2002 JUNE 30, 2001 JUNE 30, CONFIDENCE
AVERAGE 2002 AVERAGE 2001 LEVEL
------- -------- ------- -------- ----------
(In millions)
Interest rates $15.5 $15.7 $10.7 $9.1 95%
Foreign exchange $0.2 $0.3 $1.2 $1.2 95%
The 95% confidence interval signifies the Company's degree of
confidence that actual losses would not exceed the estimated losses
shown above. The amounts shown here disregard the possibility that
interest rates and foreign currency exchange rates could move in the
Company's favor. The value-at-risk model assumes that all movements in
these rates will be adverse. Actual experience has shown that gains
and losses tend to offset each other over time, and it is highly
unlikely that the Company could experience losses such as these over an
extended period of time. These amounts should not be considered
projections of future losses, since actual results may differ
significantly depending upon activity in the global financial markets.
EURO CURRENCY CONVERSION
On January 1, 1999, the "Euro" became the common legal currency for 11
of the 15 member countries of the European Union. On that date, the
participating countries fixed conversion rates between their existing
sovereign currencies ("legacy currencies") and the Euro. On January 4,
1999, the Euro began trading on currency exchanges and became available
for non-cash transactions, if the parties elected to use it. On
January 1, 2002, participating countries introduced Euro-denominated
bills and coins, and effective July 1, 2002, legacy currencies are no
longer legal tender.
42
All businesses in participating countries must conduct all transactions
in the Euro and must convert their financial records and reports to be
Euro-based. The Company completed an internal analysis of the Euro
conversion process to prepare its information technology systems for
the conversion and analyze related risks and issues, such as the
benefit of the decreased exchange rate risk in cross-border
transactions involving participating countries and the impact of
increased price transparency on cross-border competition in these
countries. The Company believes that the Euro conversion process did
not have a material impact on the Company's businesses or financial
condition on a consolidated basis.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Report are made in reliance upon the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements may relate to, but are not
limited to, such matters as sales, income, earnings per share, return
on equity, return on invested capital, capital expenditures, working
capital, dividends, capital structure, free cash flow, debt to
capitalization ratios, interest rates, internal growth rates, Euro
conversion plans and related risks, pending legal proceedings and
claims (including environmental matters), future economic performance,
operating income improvements, synergies, management's plans, goals and
objectives for future operations and growth or the assumptions relating
to any of the forward-looking statements. The Company cautions that
forward-looking statements are not guarantees since there are inherent
difficulties in predicting future results. Actual results could differ
materially from those expressed or implied in the forward-looking
statements. Factors that could cause actual results to differ include,
but are not limited to, those matters set forth in this Report and
Exhibit 99 to this Report.
43
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Market Risk" in the Company's
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Part I, Item 2).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal proceedings in the ordinary course of
its business. These proceedings include claims for damages arising out
of use of the Company's products, allegations of infringement of
intellectual property, commercial disputes and employment matters, as
well as the environmental matters described below. Some of the legal
proceedings include claims for punitive as well as compensatory
damages, and a few proceedings purport to be class actions.
As of June 30, 2002, the Company was involved in various matters
concerning federal and state environmental laws and regulations,
including matters in which the Company has been identified by the U.S.
Environmental Protection Agency and certain state environmental
agencies as a potentially responsible party ("PRP") at contaminated
sites under the Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and equivalent state laws.
In assessing its environmental response costs, the Company has
considered several factors, including: the extent of the Company's
volumetric contribution at each site relative to that of other PRPs;
the kind of waste; the terms of existing cost sharing and other
applicable agreements; the financial ability of other PRPs to share in
the payment of requisite costs; the Company's prior experience with
similar sites; environmental studies and cost estimates available to
the Company; the effects of inflation on cost estimates; and the extent
to which the Company's and other parties' status as PRPs is disputed.
The Company's estimate of environmental response costs associated with
these matters as of June 30, 2002 ranged between $15.5 million and
$19.5 million. As of June 30, 2002, the Company had a reserve equal to
$17.5 million for such environmental response costs in the aggregate.
No insurance recovery was taken into account in determining the
Company's cost estimates or reserve, nor do the Company's cost
estimates or reserve reflect any discounting for present value
purposes, except with respect to two long-term (30 year) operations and
maintenance CERCLA matters which are estimated at present value.
Because of the uncertainties associated with environmental
investigations and response activities, the possibility that the
44
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.
Although management of the Company cannot predict the ultimate outcome
of these legal proceedings with certainty, it believes that the
ultimate resolution of the Company's legal proceedings, including any
amounts it may be required to pay in excess of amounts reserved, will
not have a material effect on the Company's financial statements.
45
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY-HOLDERS
On May 8, 2002, the 2002 Annual Meeting of Stockholders of the Company
was held. The following is a brief description of the matter voted
upon at the meeting and tabulation of the voting therefore:
Proposal 1. Election of a Board of Directors to hold office for a term
of three years.
Number of Shares
----------------------------
Nominee For Withheld
Alton F. Doody 220,624,796 8,555,139
William D. Marohn 224,914,913 4,265,022
Raymond G. Viault 224,878,872 4,301,063
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12. Statement of Computation of Ratio of Earnings to
Fixed Charges
99.1. Safe Harbor Statement
99.2. Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.3. Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
Registrant filed a Report on Form 8-K dated April 1,
2002 and a Report on Form 8-K/A dated April 3, 2002,
reporting a change in the Company's certifying accountant.
Registrant filed a Report on Form 8-K dated July 10,
2002, setting forth the transitional disclosures required by
SFAS Nos. 141 and 142, updated from the transitional
disclosures contained in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NEWELL RUBBERMAID INC.
Registrant
Date: August 9, 2002 /s/ William T. Alldredge
-------------------------------------
William T. Alldredge
President Corporate Development and
Chief Financial Officer
Date: August 9, 2002 /s/ J. Patrick Robinson
-------------------------------------
J. Patrick Robinson
Vice President Corporate Controller
and Chief Accounting Officer
47
EXHIBIT 12
----------
NEWELL RUBBERMAID INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO DATA)
Quarter Ended Six Months
June 30, Ended June 30,
--------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
Earnings available for fixed charges:
Income before income taxes and cumulative effect $134,276 $114,297 $211,494 $175,284
of accounting change
Fixed charges:
Interest expense 29,313 35,596 54,373 74,917
Portion of rent determined to be interest (1) 10,256 8,637 19,903 17,579
Minority interest in income of subsidiary 6,676 6,677 13,361 13,354
trust
Equity earnings 155 (1,422) (749) (3,728)
-------- -------- -------- --------
$180,676 $163,785 $298,382 $277,406
======== ======== ======== ========
Fixed charges:
Interest expense $29,313 $35,596 $54,373 $74,917
Portion of rent determined to be interest (1) 10,256 8,637 19,903 17,579
Minority interest in income of subsidiary trust 6,676 6,677 13,361 13,354
-------- -------- -------- --------
$46,245 $50,910 $87,637 $105,850
======== ======== ======== ========
Ratio of earnings to fixed charges 3.91 3.22 3.40 2.62
======== ======== ======== ========
(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 99.1
------------
NEWELL RUBBERMAID INC. SAFE HARBOR STATEMENT
The Company has made statements in its Annual Report on Form 10-K for
the year ended December 31, 2001, as well as in its Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, and the documents
incorporated by reference therein that constitute forward-looking
statements, as defined by the Private Securities Litigation Reform Act
of 1995. These statements are subject to risks and uncertainties. The
statements relate to, and other forward-looking statements that may be
made by the Company may relate to, information or assumptions about
sales, income, earnings per share, return on equity, return on invested
capital, capital expenditures, working capital, dividends, capital
structure, free cash flow, debt to capitalization ratios, interest
rates, internal growth rates, Euro conversion risks, impact of changes
in accounting standards, pending legal proceedings and claims
(including environmental matters), future economic performance,
operating income improvements, synergies, management's plans, goals and
objectives for future operations and growth. These statements
generally are accompanied by words such as "intend," "anticipate,"
"believe," "estimate," "project," "target," "expect," "should" or
similar statements. You should understand that forward-looking
statements are not guarantees since there are inherent difficulties in
predicting future results. Actual results could differ materially from
those expressed or implied in the forward-looking statements. The
factors that are discussed below, as well as the matters that are set
forth generally in the 2001 Form 10-K, the 2nd Quarter 2002 Form 10-Q
and the documents incorporated by reference therein could cause actual
results to differ. Some of these factors are described as criteria for
success. Our failure to achieve, or limited success in achieving,
these objectives could result in actual results differing materially
from those expressed or implied in the forward-looking statements. In
addition, there can be no assurance that we have correctly identified
and assessed all of the factors affecting the Company or that the
publicly available and other information we receive with respect to
these factors is complete or correct.
RETAIL ECONOMY
Our business depends on the strength of the retail economies in various
parts of the world, primarily in North America and to a lesser extent
Europe, Central and South America and Asia.
These retail economies are affected primarily by such factors as
consumer demand and the condition of the consumer products retail
industry, which, in turn, are affected by general economic conditions
and events such as the terrorist attacks of September 11, 2001. In
recent years, the consumer products retail industry in the U.S. and,
increasingly, elsewhere has been characterized by intense competition
and consolidation among both product suppliers and retailers. Because
such competition, particularly in weak retail economies, can cause
retailers to struggle or fail, the Company must continuously monitor,
and adapt to changes in, the creditworthiness of its customers.
NATURE OF THE MARKETPLACE
We compete with numerous other manufacturers and distributors of
consumer products, many of which are large and well-established. Our
principal customers are large mass merchandisers, such as discount
stores, home centers, warehouse clubs and office superstores. The
rapid growth of these large mass merchandisers, together with changes
in consumer shopping patterns, have contributed to the formation of
dominant multi-category retailers, many of which have strong bargaining
power with suppliers. This environment significantly limits our
ability to recover cost increases through selling price increases.
Other trends among retailers are to foster high levels of competition
among suppliers, to demand that manufacturers supply innovative new
products and to require suppliers to maintain or reduce product prices
and deliver products with shorter lead times. Another trend is for
retailers to import products directly from foreign sources.
The combination of these market influences has created an intensely
competitive environment in which our principal customers continuously
evaluate which product suppliers to use, resulting in pricing pressures
and the need for strong end-user brands, the continuing introduction of
innovative new products and constant improvements in customer service.
NEW PRODUCT DEVELOPMENT
Our long-term success in this competitive retail environment depends on
our consistent ability to develop innovative new products that create
consumer demand for our products. Although many of our businesses have
had notable success in developing new products, we need to improve our
new product development capability. There are numerous uncertainties
inherent in successfully developing and introducing innovative new
products on a consistent basis.
MARKETING
Our competitive success also depends increasingly on our ability to
develop, maintain and strengthen our end-user brands so that our
retailer customers will need our products to meet consumer demand. Our
success also requires increased focus on serving our largest customers
through key account management efforts. We will need to continue to
devote substantial marketing resources to achieving these objectives.
PRODUCTIVITY AND STREAMLINING
Our success also depends on our ability to improve productivity and
streamline operations to control and reduce costs. We need to do this
while maintaining consistently high customer service levels and making
substantial investments in new product development and in marketing our
end-user brands. Our objective is to become our retailer customers'
2
low-cost provider and global supplier of choice. To do this, we will
need continuously to improve our manufacturing efficiencies and develop
sources of supply on a world-wide basis.
ACQUISITIONS AND INTEGRATION
The acquisition of companies that sell name-brand, staple consumer
product lines to volume purchasers has historically been one of the
foundations of our growth strategy. Over time, our ability to continue
to make sufficient strategic acquisitions at reasonable prices and to
integrate the acquired businesses successfully, obtaining anticipated
cost savings and operating income improvements within a reasonable
period of time, will be important factors in our future growth.
FOREIGN OPERATIONS
Foreign operations, especially in Europe (which is a focus of our
international growth) but also in Asia, Central and South America and
Canada, are increasingly important to our business. Foreign operations
can be affected by factors such as currency devaluation, other currency
fluctuations and the Euro currency conversion, tariffs,
nationalization, exchange controls, interest rates, limitations on
foreign investment in local business and other political, economic and
regulatory risks and difficulties.
3
EXHIBIT 99.2
------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Newell Rubbermaid Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Joseph Galli, Jr., Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations
of the Company.
/s/ Joseph Galli, Jr.
Joseph Galli, Jr.
Chief Executive Officer
August 13, 2002
EXHIBIT 99.3
------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Newell Rubbermaid Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, William T. Alldredge, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations
of the Company.
/s/ William T. Alldredge
William T. Alldredge
Chief Financial Officer
August 13, 2002
