View:
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-1
August 9, 2006
United States Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549-7010
Attention: John Cash, Branch Chief
RE: Form 10-K for the Fiscal Year ended December 31, 2005
Form 10-Q for the Fiscal Quarter ended March 31, 2006
File No. 1-9608
Dear Mr. Cash:
We are in receipt of your comment letter dated July 19, 2006 to Newell
Rubbermaid Inc. (the "Company"). On behalf of the Company, we have
addressed your comment letter by reproducing each comment below and
providing the Company's response immediately following. We have also
provided supplemental information as requested or where we believe
appropriate to the response.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
----------------------------------------------
1. GENERAL
WHERE A COMMENT BELOW REQUESTS ADDITIONAL DISCLOSURES OR
OTHER REVISIONS, PLEASE SHOW US WHAT REVISIONS WILL LOOK
LIKE IN YOUR RESPONSE. THESE REVISIONS SHOULD BE INCLUDED
IN YOUR FUTURE FILINGS, INCLUDING YOUR INTERIM FILINGS WHERE
APPLICABLE.
Company's Response:
Where appropriate the Company has provided you a copy of the
revised disclosure that the Company intends to make in
future filings, beginning with the Company's Form 10-Q for
the fiscal quarter ended June 30, 2006.
2. GOODWILL IMPAIRMENT, PAGE 43
YOU DISCLOSED THAT YOU EVALUATE GOODWILL IMPAIRMENT AT ONE
LEVEL BELOW THE REPORTING SEGMENT. BASED ON YOUR
DISCLOSURES IN YOUR BUSINESS SECTION AND NOTE 20 - INDUSTRY
SEGMENT INDUSTRY, IT APPEARS THAT YOU MAY HAVE AGGREGATED
OPERATING SEGMENTS INTO YOUR REPORTING SEGMENTS. YOU
FURTHER STATE THAT THE COMPANY MEASURES THE GOODWILL
IMPAIRMENT BASED UPON THE FAIR VALUE OF THE UNDERLYING
ASSETS AND LIABILITIES OF THE REPORTING UNIT. AS DEFINED IN
PARAGRAPH 30 OF SFAS 142, A REPORTING UNIT IS AN OPERATING
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-2
SEGMENT OR ONE LEVEL BELOW AN OPERATING SEGMENT (REFERRED TO
AS A COMPONENT). PLEASE ADDRESS THE FOLLOWING COMMENTS.
* REVISE YOUR DISCLOSURES TO CLARIFY THE NATURE OF YOUR
REPORTING UNITS. ARE THEY OPERATING SEGMENTS OR
COMPONENTS OF YOUR OPERATING SEGMENTS?
Company's Response:
The Company will make the following revision to its
disclosures to clarify the nature of its reporting units.
Revised disclosure for Footnote 1 to the Company's 10-K:
The Company evaluates goodwill impairment at the operating
segment level (herein referred to as the reporting unit).
If the carrying amount of the reporting unit is greater than
the fair value, goodwill impairment may be present. The
Company measures the goodwill impairment based upon the fair
value of the underlying assets and liabilities of the
reporting unit, including any unrecognized intangible
assets, and estimates the implied fair value of goodwill.
An impairment charge is recognized to the extent the
recorded goodwill exceeds the implied fair value of
goodwill.
* IDENTIFY FOR US YOUR REPORTING UNITS.
Company's Response:
The following table summarizes the Company's reporting units
as of December 31, 2005:
Reportable Operating Segment/ Description
Segment Reporting Unit of Product
---------- ------------------ -----------
Cleaning & Rubbermaid Home Products, Material handling,
Organization Rubbermaid Commercial cleaning, refuse,
Products, Rubbermaid Food indoor/outdoor
Services and Rubbermaid organization, home
Europe/Asia storage, food storage
Office Sanford North America, Ballpoint/roller ball
Products Sanford Europe, Sanford pens, markers, high-
Latin America and Sanford lighters, pencils,
Asia Pacific correction fluids,
office products, art
supplies, on-demand
labeling products
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-3
Tools & Amerock, Lenox, Irwin Hand tools, power tool
Hardware North America Hand Tools, accessories, manual
Irwin North America Power paint applicators,
Tools Accessories, Tools cabinet, window and
Latin America and Tools convenience hardware,
Europe propane torches, solder
Home Levolor/Kirsch (formerly Drapery hardware, window
Fashions included, Home Decor treatments
Europe and Swish UK)
Other Graco, Little Tikes, Operating segments that
Goody and Calphalon do not meet aggregation
criteria with other
operating segments,
including premium
cookware and related
kitchenware, hair care
accessory products,
infant and juvenile
products, including
toys, high chairs, car
seats, strollers, and
play yards
* CLARIFY IN YOUR DISCLOSURES IF TWO OR MORE COMPONENTS
OF AN OPERATING SEGMENT HAVE BEEN AGGREGATED AND DEEMED
A SINGLE REPORTING UNIT.
Company's Response:
The Company aggregates certain of its operating segments
into five reportable segments in accordance with SFAS 131.
The Company's segment and corporate management regularly
review the operating performance of these operating
segments, but do not regularly review operating
performance below the operating segment. As prescribed by
SFAS 142 paragraph 30, the Company has determined that the
operating segment is the appropriate level for which to test
for goodwill impairment. Furthermore, because the Company's
segment management does not regularly review operating
performance below the operating segment, the Company does
not evaluate goodwill impairment at a component of an
operating segment and accordingly has not aggregated
components into a single reporting unit. The Company
conducts its testing for goodwill impairment at the
operating segment level and as stated in our response, will
clarify the nature of our reporting units in future
disclosures.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-4
* IF YOU ARE AGGREGATING OPERATING SEGMENTS INTO
REPORTABLE SEGMENTS, REVISE YOUR DISCLOSURES IN NOTE 20
TO INDICATE THIS FACT AS REQUIRED BY PARAGRAPH 26A OF
SFAS 131.
Company's Response:
The Company will clarify its disclosure to specify that it
aggregates certain of its operating segments into five
reporting segments, as follows:
Revised disclosure for Footnote 20 to the Company's Form 10-
K:
The Company's reporting segments reflect the Company's focus
on building large consumer brands, promoting organizational
integration, achieving operating efficiencies in sourcing
and distribution, and leveraging our understanding of
similar consumer segments and distribution channels. The
Company aggregates certain of its operating segments into
five reportable segments. The reportable segments are as
follows:
Segment Description of Products
------------------ -----------------------------------------
Cleaning & Material handling, cleaning, refuse,
Organization indoor/outdoor organization, home storage,
food storage
Office Products Ballpoint/roller ball pens, markers,
highlighters, pencils, correction fluids,
office products, art supplies, on-demand
labeling products
Tools & Hardware Hand tools, power tool accessories, manual
paint applicators, cabinet, window and
convenience hardware, propane torches,
solder
Home Fashions Drapery hardware, window treatments
Other Operating segments that do not meet
aggregation criteria with other operating
segments, including premium cookware and
related kitchenware, hair care accessory
products, infant and juvenile products,
including toys, high chairs, car seats,
strollers, and play yards
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-5
3. FOOTNOTE 2 - ACQUISITIONS OF BUSINESSES, PAGE 46
WE NOTE THAT YOU HAVE NOT ASSIGNED ANY VALUE TO AMORTIZABLE
INTANGIBLE ASSETS OF THE DYMO ACQUISITION. PLEASE DISCLOSE
ANY SIGNIFICANT INTANGIBLE ASSETS THAT ARE LIKELY TO BE
IDENTIFIED. PLEASE REFER TO SFAS 141. ALSO DISCLOSE THE
FACTORS THAT CONTRIBUTED TO THE RECOGNITION OF GOODWILL.
REFER TO PARAGRAPH 51 (b) OF SFAS 141.
Company's Response:
As part of the DYMO acquisition, the Company assigned $107.2
million to identifiable intangible assets other than
goodwill, including $31.1 million of amortizable intangible
assets. The Company will modify the disclosure related to
its DYMO acquisition to identify the estimated fair value of
the acquired intangibles separately and the factors
contributing to the recognition of goodwill.
Revised disclosure for Footnote 2 to the Company's 10-Q:
On November 23, 2005, the Company acquired DYMO, a global
leader in designing, manufacturing and marketing on-demand
labeling solutions, from Esselte AB ("Esselte"). The Company
preliminarily allocated the purchase price of $706 million
to the identifiable assets and liabilities. As of June 30,
2006, the Company had not yet settled contractually the
final purchase price adjustments with Esselte. The purchase
price allocation was based on management's estimate using
the assistance of appraisals at the date of acquisition as
follows (IN MILLIONS):
Current assets $ 30.2
Property, plant & equipment 21.8
Goodwill 623.4
Other intangible assets 109.1
Other assets 2.3
------
Total assets $786.8
======
Current liabilities $35.9
Deferred income taxes 41.7
Other noncurrent liabilities 3.2
------
Total liabilities $80.8
======
The preliminary allocation of the purchase price resulted in
the recognition of $623.4 million of goodwill primarily
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-6
related to the anticipated future earnings and cash flows of
the DYMO business including the estimated effects of the
integration of this business into the Office Products
segment. The transaction resulted in the recognition of
$109.1 million in intangible assets consisting primarily of
customer lists, patents, and trademarks. Approximately
$76.1 million were indefinite-lived intangible assets
related to trademarks and $33.0 million related to finite-
lived intangible assets that will be amortized over periods
of 3 to 10 years.
4. FOOTNOTE 4 - RESTRUCTURING COSTS, PAGE 50
YOU DISCLOSED REVERSALS OF RESTRUCTURING RESERVES IN THE
AMOUNT OF $6.4 MILLION IN 2005 AND $14.2 MILLION IN 2004.
HOWEVER, YOU DID NOT DISCLOSE THE AMOUNT OF THE
RESTRUCTURING RESERVE REVERSED FOR EACH REPORTABLE SEGMENT
OR THE AMOUNT OF THE RESTRUCTURING RESERVE REVERSED BY THE
TYPE OF RESTRUCTURING COST RESERVE. PLEASE PROVIDE THE
DISCLOSURES REQUIRED BY PARAGRAPH 20 OF SFAS 146 IN FUTURE
FILINGS.
Company's response:
The Company will revise future filings by including
additional disclosures regarding the reversal of
restructuring reserves by segment. The Company has
previously included the effect of these reversals in its
restructuring footnote net of charges, including the segment
rollforward tables included in the Form 10-K for the fiscal
year-ended December 31, 2005, which identifies that
Corporate's net provision was a credit of $3.9 million,
representing the majority of the 2004 change in estimate.
The Company believes that based on the materiality of the
amount in question it provided adequate description
indicating the nature of the reversal (i.e., greater than
expected proceeds for the sale of property plant and
equipment and favorable negotiations on exited contracts).
In 2005, approximately 2/3 of the change in estimate related
to greater than expected proceeds on the sale of property,
plant and equipment and 1/3 related to favorable settlements
on exited contracts. In 2004, approximately $9 million
related to greater than expected proceeds on the sale of
property, plant and equipment and $4 million related to the
favorable negotiation on exited contracts, and the remainder
related to severance which was less than expected.
The Company will add the following disclosure to the Form
10-K for the Fiscal Year ended December 31, 2006:
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-7
During 2005, the Company's restructuring cost included the
reversal of $6.4 million, the most significant of which
included $4.0 million in the Office Products segment and
$1.0 million in Corporate. During 2004, the Company's
restructuring cost included the reversal of $14.2 million,
the most significant of which included $5.3 million related
to the Home Fashions segment, $2.7 million related to the
Tools & Hardware segment and $3.9 million related to
Corporate.
5. FOOTNOTE 19- OTHER NON OPERATING (INCOME) EXPENSE, PAGE 66
YOU EXCLUDED A GAIN OF $14,600,000 ON THE DISPOSAL OF FIXED
ASSETS AND A GAIN OF $10,300,000 ON THE LIQUIDATION OF A
FOREIGN ENTITY FROM OPERATING INCOME IN 2005. WE ALSO NOTE
YOU EXCLUDED A $29.7 MILLION LOSS ON SALE OF BUSINESSES FROM
OPERATING INCOME IN 2003. PLEASE TELL US HOW YOU DETERMINED
THAT IT WAS APPROPRIATE TO EXCLUDE THESE GAINS AND LOSSES
FROM YOUR OPERATING INCOME GIVEN THE GUIDANCE OF PARAGRAPH
45 OF SFAS 144.
Company's Response:
Paragraph 45 of SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" states:
"A gain and loss recognized for a long-lived
assets (disposed group) classified as held
for sale that is not a component of an entity
shall be included in income from continuing
operations before taxes in the income
statement. If a subtotal such as income from
operations is presented, it shall include the
amounts of those gains or losses."
The Company believes that it has complied with paragraph 45
of SFAS 144 by including the gains and losses recognized for
the disposal of long-lived assets in income from continuing
operations before income taxes. The Company considers the
gains and losses associated with the sale of fixed assets
and the sale of its Cosmolab business to be outside of its
core operations and notes that related gains on such sales
have been consistently reported as other income in the
Company's financial statements, with full disclosure of the
nature of the amounts in the footnotes to the financial
statements.
The Company also considered the guidance in FASB CONCEPT
STATEMENT NO. 6, ELEMENTS ("FASB CONCEPT NO. 6") OF
FINANCIAL STATEMENT which defines expense and losses as:
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-8
"Expense are outflows or other using up of
assets or incurrence of liabilities (or a
combination of both) from delivering or
producing, rendering services, or carrying
out other activities that constitute the
entity's ongoing major or central operation."
"losses are decreases in equity from
peripheral or incidental transactions of an
entity ..."
Based on the criteria set forth in FASB Concept 6, the
Company believes that any gains and losses associated with
the sale of fixed assets is ancillary to the Company's
central operations, which is to manufacture, source, market
and distribute branded consumer products to its customers.
While the cost of using a fixed asset in the Company's
operations (i.e., depreciation expense) is recognized over
its productive life as a component of operating income, the
Company believes that once the asset is taken out of service
and sold, any gain or loss is not part of the Company's
major or central operation and should therefore be excluded
from operating income, but included as a component of income
from continuing operations before income taxes in accordance
with SFAS No. 144. The Company further notes, in accordance
with FASB statement 95, that the proceeds from the sale of
such assets is not considered an operating activity in the
statement of cash flows, which we believe further supports
the Company's position.
Furthermore, the Company believes that the inclusion of the
$14.6 million gain on the disposal of fixed assets in 2005
is immaterial to the Company's operating income of $522.2
million. The Company also considered the 2003 loss of $29.6
million on the sale of Cosmolab immaterial to the Company's
2003 operating income of $497.6 million.
The $10.3 million gain associated with the liquidation of
the foreign entity related to the amount of accumulated
currency translation adjustments. As such, the Company
believes that the recognition of the accumulated currency
translation adjustment in the income statement is
appropriately included as other income in accordance with
FASB Concept No. 6 as discussed above and paragraph 14 of
SFAS 52 ("FOREIGN CURRENCY TRANSLATION"), which states:
"Upon the sale or upon complete or
substantially complete liquidation of an
investment in a foreign entity, the amount
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-9
attributable to that entity and accumulated
in the translation adjustment component of
the equity shall be removed from the separate
component of equity and shall be reported as
part of the gain or loss on the sale or
liquidation of the investment for the period
during which the sale or liquidation
occurred."
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006
----------------------------------------------
6. FOOTNOTE 4 - GOODWILL IMPAIRMENT CHARGES, PAGE 8
YOU DISCLOSED THAT YOU OBTAINED A BETTER INDICATION OF THE
FAIR VALUE OF YOUR HOME FASHIONS SEGMENT IN THE FIRST
QUARTER OF 2006. BASED ON THE APPARENT DECLINE IN FAIR
VALUE, YOU PERFORMED AN IMPAIRMENT TEST OF GOODWILL OF THIS
SEGMENT AND RECORDED AN IMPAIRMENT CHARGE OF $50,900,000.
YOU ALSO DISCLOSED IN YOUR ANNUAL FINANCIAL REPORT THAT YOU
TEST GOODWILL FOR IMPAIRMENT DURING THE THIRD QUARTER OF THE
FISCAL YEAR TO COINCIDE WITH YOUR STRATEGIC PLANNING PRO-
CESS. GIVEN THAT HOME FASHIONS NET SALES DECLINED BY 10% IN
2005 FROM $906,800,000 IN 2004 TO $824,000,000 IN 2005 AND
THAT OPERATING INCOME FOR HOME FASHIONS HAS DECLINED FOR
THREE STRAIGHT YEARS FROM $44,400,000 IN 2003 TO $33,000,000
IN 2004 TO 22,700,000 IN 2005, PLEASE TELL US IF YOU TESTED
GOODWILL FOR IMPAIRMENT DURING THE FOURTH QUARTER OF 2005
AND IF NOT, WHY NOT. PLEASE ALSO PROVIDE US WITH A COPY OF
YOUR GOODWILL IMPAIRMENT TEST FOR THE HOME FASHIONS SEGMENT
AT MARCH 31, 2006 AND AT SEPTEMBER 30, AND IF TESTED, AS OF
DECEMBER 31, 2005 INCLUDING THE ASSUMPTIONS USED TO PROJECT
NET SALES AMOUNTS, ASSUMED NET SALES GROWTH, GROSS PROFIT
MARGIN PERCENTAGE, OPERATING EXPENSES AS A PERCENTAGE OF
REVENUES, CASH FLOWS OR OPERATING INCOME, PROJECTED TERMINAL
VALUES AND CASH FLOWS DISCOUNT RATES. HIGHLIGHT THE SIGNI-
FICANT CHANGES IN YOUR ASSUMPTIONS USED AS OF EACH EVALUA-
TION DATE. PLEASE ALSO PROVIDE US WITH ACTUAL REVENUES,
GROSS PROFIT MARGIN PERCENTAGES, OPERATING EXPENSES AS A
PERCENTAGE OF REVENUES AND CASH FLOWS OR OPERATING INCOME
FOR THE HOME FASHIONS SEGMENT FOR THE LAST THREE YEARS.
Company's Response:
We provide the following information as background to
facilitate an understanding of the operating segments, which
as described in our response to comment 2 above, represent
the level at which the Company conducts the annual goodwill
impairment test. During the relevant periods, the Home
Fashions segment was comprised of the following operating
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-10
segments: Levolor (North American Window business), Home
Decor (mainland Europe business), Swish UK (United Kingdom
business) and Frames Europe in 2003. The following table
highlights some of the Home Fashions reporting segment
financial results for the years ended December 31, 2005,
2004 and 2003:
2005 2004 2003
---- ---- ----
SALES: $824.0 $906.8 $901.0
GROSS MARGIN %: *** *** ***
OPERATING INCOME: $22.7 $33.0 $44.4
OPERATING INCOME %: 2.8% 3.6% 4.9%
The following table highlights the goodwill balances tested
for impairment at September 30, 2005 for the operating
segments within the Home Fashions reporting segment:
Pre-testing Post Testing
---------- ------------
Levolor $0.4 $0.4
Home Decor 51.1 51.1
Swish UK 19.5 -
Total $71.0 $51.5
As more fully described in the footnotes to the Company's
financial statements, the Company performs its annual
testing for impairment in the third quarter. The impairment
test includes determining the enterprise value of its
various reporting units (operating segments) and comparing
the enterprise value to the reporting units' net book value.
The Company typically conducts this test internally using
discounted cash flow analysis using assumptions included in
the reporting units' annual strategic review. The Company
utilizes a third party valuation specialist if the result of
the internal testing identifies the potential impairment
(i.e., enterprise value near or below book value).
Q3 2005 IMPAIRMENT TESTING:
HOME DECOR:
----------
The following table summarizes the results of the third
quarter impairment testing for the Home Decor reporting unit
(in millions):
Reporting unit's net book value $***
Estimated enterprise value of reporting unit ***
Excess Enterprise value over net book value $***
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-11
The decrease in revenues and operating income in the Home
Decor business necessitated a detailed review of the
businesses enterprise value. During the impairment testing,
the Company reviewed the operating assumptions of local
management, in connection with group management challenging
assumptions where appropriate, including sales growth,
productivity improvements, SG&A spending and working
capital. Based on the results of this testing, we concluded
that an impairment write-down was not necessary.
SWISH UK:
--------
During the third quarter 2005, the Company evaluated its
Swish UK business for impairment based on changes in the
strategic plan and as a result of continued challenges faced
by the business, particularly with regard to direct imports
as described below. The results of the testing indicated
that there was impairment. Accordingly, the Company wrote-
down the remaining goodwill as well as other long-lived
assets.
During the third quarter strategic planning process, the
Company changed its plan regarding the Swish UK business in
response to the retailers increasingly moving to a direct
import/private label strategy in the United Kingdom. In
2004, the Company restructured its Spur UK business, a unit
of Swish UK in order to improve its profitability. While
the restructuring provided some benefit, the pressure from
direct imports continued. In the third quarter of 2005, the
Company determined that additional efforts to restructure
the business to compete with the direct imports would not be
the best use of the Company's resources and as a result
decided to exit several low margin product lines (including
product lines in the Spur business), significantly reducing
the business's net sales. During 2005, Swish UK sales
decreased approximately $*** million due primarily to
product line rationalization as the Company phased out the
Douglas Kane product line with a plan to improve overall
profitability. That plan included leveraging the Swish UK
distribution center as a central distribution center for the
Company's Tools and Hardware, Office Products, Graco and
Rubbermaid Commercial businesses as well as the continued
execution of the Spur restructuring previously noted. The
rationalization of additional product lines resulted in
additional costs including inventory liquidation, moving
costs and higher overhead costs as a percentage of sales.
The 2005 operating cash flows for the Swish UK business were
approximately $*** million due to reduction of working
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-12
capital required to support the lower sales base resulting
from the product line exits.
Q4 2005 TESTING PROCEDURES:
SFAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" requires
testing between the annual testing if certain circumstances
occur subsequent to the annual testing. SFAS No. 142
provides example of factors that would warrant additional
testing, including:
* A significant change in legal factors or in the
business climate,
* An adverse action or assessment by a regulator,
* Unanticipated competition,
* A loss of key personnel,
* A more-likely-than-not expectation that a
reporting unit or a significant portion of a
reporting unit will be sold or otherwise disposed
of,
* The testing for recoverability under Statement 144
of a significant asset group within the reporting
unit,
* Recognition of a goodwill impairment loss in the
financial statements of a subsidiary that is a
component of a reporting entity.
The Company evaluated the condition of the Home Decor
business and determined that the above-mentioned conditions
were not present during the fourth quarter, although the
Company continued to monitor the financial performance of
the business as described below.
During the fourth quarter of 2005, the Company reviewed key
financial assumptions used to estimate the enterprise value
in its third quarter impairment testing. The third quarter
testing utilized information presented to executive
management, including the Company's CEO and CFO by the
business unit's management. That information included
sales, gross margin, SG&A and operating income forecast for
future years. During the fourth quarter review, the Company
compared estimates made by the business unit's management
during the strategic planning review to the approved 2006
budget. The Company noted that the financial assumptions
included in the 2006 budget, including sales, gross margin,
SG&A and operating income improved by several million
dollars over those presented during the strategic planning
process, and the management team presented detailed plans to
improve profitability, including productivity and
restructuring. The Company believes that the approved
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-13
budget validated the assumptions used as part of the
September 2005 testing and accordingly did not perform
additional formal testing at that time.
Q1 2006 TESTING:
---------------
In the fourth quarter of 2005, the Company appointed a
temporary CEO who ultimately accepted the position
permanently in the first quarter of 2006. One of the key
initiatives of the new CEO, after accepting the position
permanently, was to accelerate the pace with regard to
improving the Company's portfolio of businesses, in
particular the divestiture of businesses that were not
strategic to the Company. As a result, the Company
intensified efforts around evaluating alternatives for this
business, including marketing the Home Decor business for
potential sale. In connection with this evaluation of
alternatives, the Company obtained a preliminary offer in
April 2006 which provided a better indication of market
value of the business on a sale basis and determined that
the business had a net book value in excess of its fair
value. As a result of the revised market value estimate the
Company performed an impairment analysis that indicated that
the goodwill of the business was impaired. Based on its
estimate of fair value, the Company concluded that it should
write-off Home Decor Europe's goodwill ($50.9 million) as an
impairment charge. On June 27, 2006, the Company's board of
directors approved a plan to sell the Home Decor business,
resulting in the business being reclassified from continuing
operations to discontinued operations.
Attached to this letter, as requested by the Staff, are
copies of the Company's third quarter 2005 impairment
testing, including its third quarter impairment memorandum
and calculation of the enterprise value of the reporting
unit, and its first quarter 2006 impairment testing.
7. FOOTNOTE 4 - GOODWILL IMPAIRMENT CHARGES, PAGE 8
PLEASE ALSO PROVIDE US WITH AN ANALYSIS THAT SUMMARIZES
IMPAIRMENT CHARGES AND RESTRUCTURING CHARGES ATTRIBUTABLE TO
OPERATING SEGMENTS AND/OR REPORTING UNITS FOR 2005, 2004 AND
2003.
Company's response:
The Company has provided the information requested.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-14
The following table identifies by operating segment the
restructuring costs:
2005 2004 2003
---- ---- ----
Rubbermaid Home Products $*** $*** $***
Rubbermaid Food Services *** *** ***
Rubbermaid Commercial *** *** ***
Rubbermaid Europe/Asia *** *** ***
Cleaning & Organization 43.7 22.2 73.2
Sanford North America *** *** ***
Sanford Europe *** *** ***
Sanford Latin America *** *** ***
Sanford Asia Pacific *** *** ***
Office Products 6.8 10.3 41.9
Amerock *** *** ***
Irwin North America *** *** ***
Tools Latin America *** *** ***
Tools Europe *** *** ***
Lenox *** *** ***
Tools & Hardware 11.6 1.9 21.8
Levolor/Kirsch *** *** ***
Home Decor *** *** ***
Swish UK *** *** ***
Home Fashions (0.2) 7.3 36.2
Graco *** *** ***
Little Tikes *** *** ***
Goody *** *** ***
Calphalon *** *** ***
Home & Family 8.1 6.4 3.6
Corporate 2.2 (3.9) 12.6
Total $72.2 $44.2 $189.3
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-15
The following table identifies by operating segment the
impairment charge:
2005 2004 2003
---- ---- ----
Rubbermaid Home Products *** $*** $***
Rubbermaid Food Services *** *** ***
Rubbermaid Commercial *** *** ***
Rubbermaid Europe/Asia *** *** ***
Cleaning & Organization - $11.3 $22.4
Sanford North America *** *** ***
Sanford Europe *** *** ***
Sanford Latin America *** *** ***
Sanford Asia Pacific *** *** ***
Office Products - 242.8 -
Amerock *** ***
Irwin North America *** *** ***
Tools Latin America *** *** ***
Tools Europe *** *** ***
Lenox *** *** ***
Tools & Hardware 0.3 6.7 4.5
Levolor/Kirsch *** *** ***
Home Decor *** *** ***
Swish UK *** *** ***
Home Fashions 34.0 31.2 7.6
Graco *** *** ***
Little Tikes *** *** ***
Goody *** *** ***
Calphalon *** *** ***
Home & Family - 1.5 -
Corporate 1.6 -
Total 34.3 295.1 34.5
The Company hereby acknowledges that:
* The Company is responsible for the adequacy and
accuracy of the disclosure in its filings;
* Staff comments or changes to disclosure in
response to staff comments do not foreclose the
Commission from taking any action with respect to
the filing; and
* The Company may not assert staff comments as a
defense in any proceeding initiated by the
Commission or any person under the federal
securities of the United States.
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-16
If you have any questions regarding our response or any related
matters, please call Ronald L. Hardnock, Vice President - Corporate
Controller, at (410) 785-5808, or if you can't contact him, call
me at (410) 785-5806.
Sincerely,
Newell Rubbermaid Inc.
By: /s/ J. Patrick Robinson
Title: Vice President - CFO
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-17
ATTACHMENT
----------
[Newell Rubbermaid Logo]
To: Accounting Issues Manual
From: Mike Ritz; Justin Duvall
Re: Q3 2005 Impairment Memo
BACKGROUND:
----------
ACCOUNTING BACKGROUND - INDEFINITE-LIVED INTANGIBLES
Newell Rubbermaid (the Company) acquired several companies over the
past several years and recorded goodwill, as well as other intangible
assets as a result of these acquisitions. The adoption of Statement
of Financial Accounting Standards No 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS" ("FAS 142") on January 1, 2002 changed the
accounting rules regarding goodwill and certain other intangible
assets determined to be indefinite-lived assets. Prior to the
adoption of FAS 142, all intangible assets, including goodwill, were
amortized over the useful life of the assets or over 40 years,
whichever was shorter (i.e., no indefinite-lived assets existed). As
a result of the adoption of this standard, the Company identified
several categories of intangible assets (goodwill, trademarks and
tradenames) with indefinite-live.
ANNUAL IMPAIRMENT TESTING
FAS 142 requires that a company perform an annual impairment test on
goodwill and other indefinite-lived intangible assets (and periodic
tests if there are impairment indicators present).
The Company conducts its annual impairment testing in the third
quarter of each year because it coincides with its annual strategic
planning process for all of its businesses. The Company also tests
for impairment throughout the year if events or circumstances indicate
that an indefinite-lived intangible asset might be impaired. The
annual strategic planning provides a forum for executive management to
be updated on changes in the businesses long-term strategy and to
outline new initiatives that the division and group management believe
to be appropriate. Specifically, a strategic plan is prepared by the
executive management of each division and this plan is reviewed by the
CEO and CFO. From the strategic plan sessions, executive management
is then able to develop the Company's resource allocation plan over
the next three years. The strategic plan generally focuses on
discussing the following for each business:
* Market overview (current and projected)
* Sustainable competitive advantage of the division, if any
* High value-add potential
* Demographics
* Distribution base / dependency on certain channels
* Competitive set (weak or fragmented)
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-18
* Critical mass or global potential
* Relative risk with respect to operations, economics, financial,
or geographic
* Financial return potential
* Acquisition targets
* Divestiture requirements
In some instances, management has recommended divestitures or
restructuring activities for certain brands, which may have an
accounting impact on the long-lived intangible assets. Given that the
overall strategy for each division is set during the third quarter and
that this strategy could have broad ramifications across the company,
we have concluded that it is most appropriate to conduct our annual
impairment testing at the same time.
As a result of the strategic plan meetings, economic and other
factors, we have identified impairment issues with goodwill as well as
some of the trademarks and tradenames. In addition, we considered
whether there were impairment indicators on long-lived assets,
including fixed assets and amortizable intangible assets. This memo
details the specific considerations and results of the overall
evaluation.
ISSUES:
------
This memo will address several issues, including the following:
1. Document the Company's consideration of the FAS 144 testing
criteria, including the following:
a. Determine if there are impairment indicators.
b. Testing of undiscounted cash flows if an impairment
indicator was present, including documenting the lowest
level of cash flows for evaluation.
c. Calculation of impairment loss to be recorded,
including determination of discount rate.
2. Document the Company's evaluation of each indefinite-lived
intangible asset and the conclusion as to whether or not
there is an impairment.
3. Determine if there is evidence that any indefinite-lived
intangible assets have a finite life, and conclude on the
appropriate useful life.
4. Document the Company's approach to the FAS 142 impairment
testing including the following:
a. Document the Company's process for identifying those
indefinite-lived intangible assets that require
valuation by an appraisal company.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-19
b. Document the Company's aggregation criteria (unit of
accounting) for certain indefinite-lived intangible
assets.
5. Determine what if any disclosure requirements exist,
including potential 8-K disclosures for material impairment.
ACCOUNTING GUIDANCE:
-------------------
LONG-LIVED ASSET TESTING GUIDANCE:
---------------------------------
The relevant accounting guidance is FASB Statement No. 144,
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" (FAS
144). FAS 144 requires that a long-lived asset be tested for
impairment whenever events or changes in circumstances indicate that
its carrying amount might not be recoverable through future cash
flows. The guidance requires that the test be performed at the lowest
level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities.
FAS 144 indicates the following:
* Future cash flows only include the cash flows that are
directly associated with and that are expected to arise as a
direct result of the use and eventual disposition of the
asset/asset group. The future cash flow estimate should
exclude interest charges. If alternative scenarios as to
the future expected cash flows exist then a probability
weighted cash flow analysis should be performed to determine
the estimated fair value of the asset(s) being tested.
* Quoted market prices should be used to estimate the value of
the asset if available.
* Present value techniques are often the best available
valuation technique for valuing an asset or group of assets.
If a present value technique is used to estimate the fair
value of an asset the technique should be consistent with
the guidance of FASB Concept Statement No. 7, "Using Cash
Flow information and Present Value in Accounting
Measurements." There are two permissible methods used for
identifying the present value of the group of assets: (1)
the first employs the use of multiple cash flow scenarios
that reflect the range of possible outcomes the guidance
anticipates that risk free rate will be used to value these
cash flows, (2) the second method is to use one cash flow
and a risk adjusted rate to present value the cash flows.
INDEFINITE-LIVED INTANGIBLE ASSETS TESTING GUIDANCE:
---------------------------------------------------
Annual testing for impairment is required under FAS 142 on all
indefinite-lived intangible assets; additional testing throughout the
year should be performed if events or changes in circumstances
indicate that the asset might be impaired.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-20
"The impairment test shall consist of a comparison of the
fair value of an intangible asset with its carrying amount.
If the carrying amount of an intangible asset exceeds its
fair value, an impairment loss shall be recognized in an
equal to that excess."
The guidance also discusses a unit of accounting method for purposes
of performing the required FASB Statement No. 142 testing on the
indefinite-lived intangible assets. This EITF 02-7 Issue provides
guidance for determining the unit of accounting in testing indefinite-
lived intangible assets for impairment:
"The Task Force reached a consensus that separately recorded
indefinite-lived intangible assets, whether acquired or
internally developed, should be combined into a single unit
of accounting for purposes of testing impairment if they are
operated as a single asset and, as such, are essentially
inseparable from one another. The Task Force agreed that
determining whether several indefinite-lived intangible
assets are essentially inseparable is a matter of judgment
that depends on the relevant facts and circumstances and
that the indicators set forth below should be considered in
making that determination. The Task Force agreed that none
of the indicators should be considered presumptive or
determinative.
Indicators that two or more indefinite-lived intangible
assets should be combined as a single unit of accounting for
impairment testing purposes:
The intangible assets were purchased in order to
construct or enhance a single asset (that is, they
will be used together).
Had the intangible assets been acquired in the
same acquisition they would have been recorded as
one asset.
The intangible assets as a group represent the
highest and best use of the assets (for example,
they yield the highest price if sold as a group).
This may be indicated if (a) it is unlikely that a
substantial portion of the assets would be sold
separately or (b) the sale of a substantial
portion of the intangible assets individually
would result in a significant reduction in the
fair value of the remaining assets as a group.
The marketing or branding strategy provides evidence that the
intangible assets are complementary."
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-21
GOODWILL IMPAIRMENT TESTING GUIDANCE:
------------------------------------
Identification of the Reporting Units to Test for Goodwill Impairment
---------------------------------------------------------------------
Annual testing for impairment is required under FAS 142; additional
testing throughout the year should be performed if events or changes
in circumstances indicate that the asset might be impaired. The
guidance further requires that the testing for impairment be performed
at a reporting unit level which is defined as:
"An operating segment or one level below an operating
segment (referred to as a component). A component of an
operating segment is a reporting unit if the component
constitutes a business for which discrete financial
information is available and segment management regularly
reviews the operating results of that component. However,
two or more components of an operating segment shall be
aggregated and deemed a single reporting unit if the
components have similar economic characteristics."
Testing for Impairment of Goodwill
----------------------------------
After the reporting unit is identified, the Company must determine if
there is impairment. The first step of the impairment test is to
compare the fair value of the reporting unit to the carrying amount,
including goodwill. The second step is to measure the amount of
impairment loss, if any. FAS 142 paragraphs 23 to 25 identify the
specific methodology to be used in determining the fair value of a
reporting unit:
"The fair value of an asset (or liability) is the amount at
which that asset (or liability) could be bought (or
incurred) or sold (or settled) in a current transaction
between willing parties, that is, other than in a forced or
liquidation sale. Thus, the fair value of a reporting unit
refers to the amount at which the unit as a whole could be
bought or sold in a current transaction between willing
parties. Quoted market prices in active markets are the
best evidence of fair value and shall be used as the basis
for the measurement, if available. However, the market
price of an individual equity security (and thus the market
capitalization of a reporting unit with publicly traded
equity securities) may not be representative of the fair
value of the reporting unit as a whole. The quoted market
price of an individual equity security, therefore, need not
be the sole measurement basis of the fair value of a
reporting unit.
"If quoted market prices are not available, the estimate of
fair value shall be based on the best information available,
including prices for similar assets and liabilities and the
results of using other valuation techniques. If a present
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-22
value technique is used to measure fair value, estimates of
future cash flows used in that technique shall be consistent
with the objective of measuring fair value. Those cash flow
estimates shall incorporate assumptions that marketplace
participants would use in their estimates of fair value. If
that information is not available without undue cost and
effort, an entity may use its own assumptions. Those cash
flow estimates shall be based on reasonable and supportable
assumptions and shall consider all available evidence. The
weight given to the evidence shall be commensurate with the
extent to which the evidence can be verified objectively..."
In estimating the fair value of a reporting unit, a
valuation technique based on multiples of earnings or
revenue or a similar performance measure may be used if that
technique is consistent with the objective of measuring fair
value. Use of multiples of earnings or revenue in
determining the fair value of a reporting unit may be
appropriate, for example, when the fair value of an entity
that has comparable operations and economic characteristics
is observable and the relevant multiples of the comparable
entity are known. Conversely, use of multiples would not be
appropriate in situations in which the operations or
activities of an entity for which the multiples are known
are not of a comparable nature, scope, or size as the
reporting unit for which fair value is being estimated."
Calculation of Goodwill Impairment
----------------------------------
The guidance states that best estimate of goodwill impairment would be
based on a purchase price allocation methodology. The approach
required that both recognized and unrecognized net assets should be
deducted from the fair value of the reporting unit to determine the
implied goodwill.
Order of Impairment Testing
---------------------------
FAS 142 and 144 require that amortizable long-lived assets be tested
for impairment prior to the testing of indefinite-lived intangibles.
Goodwill is tested subsequent to the testing of specific indefinite-
lived intangible assets. The following list identifies the impairment
testing process:
1. Test for impairment of long-lived assets, such as property,
plant and equipment and amortizable intangibles, such as
patents or non-compete agreements.
2. Test for impairment of indefinite-lived intangible assets,
such as trademarks and tradenames.
3. Test for impairment of goodwill.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-23
SECTION 1: LONG-LIVED ASSETS (PP&E, PATENTS, OTHER AMORTIZABLE
ASSETS)
PROCESS FOR TESTING LONG-LIVED ASSETS:
-------------------------------------
As prescribed by FAS 144, the Company tests for impairment if events
or changes in circumstances exist that indicate impairment may exit.
In the third quarter, the Company noted impairment indicators exist in
the Swish UK and Cookware Europe businesses due to expected changes in
the strategic plan resulting from the annual strategy review. The
current strategy includes the potential sale or liquidation of the
Spur business within Swish UK as well as the potential sale of the
Cookware Europe business. See separate memo and analysis for Cookware
Europe. As a result of the revised strategy, the Company performed
cash flow analysis at the lowest level of identifiable cash flows.
CASH FLOW ESTIMATION
--------------------
The FAS 144 guidance requires that the cash flows used to test for
impairment be identified and tested based on the primary asset. In
this regard, indefinite-lived intangible assets cannot be the primary
asset. The Company has considered this guidance in it's testing
approach and considered the individual asset to be the primary asset
when testing the held for sale assets (i.e., the asset that is most
significant in generating the cash flows).
For the asset groups where we noted impairment indicators, we
developed estimates of future cash flows, primarily by location.
Based on the operations we utilized the business's strategic plan
financial statements. The plan included forward-looking income
statements, balance sheets and cash flow data, including working
capital %, depreciation and capital spending. As the strategic
planning process utilized by the divisions only extends forward three
years, we developed longer-term estimates of cash flows through
discussion with the executives at the business, based on the remaining
useful life of the primary asset.
Under FAS 144 you can only evaluate using direct costs to the asset
group. We estimated this reduction by discussing with the business
controller the direct cost (historic costs) that the business required
and excluded the residual costs. Furthermore, we had the business
(Division Controller) review the data utilized and confirm that the
data used to estimate the cash flow of the businesses were appropriate
based on information available now. We believe these cash flows are
our best estimate of the business as of today, but note that it is
inherently difficult to estimate the operating results of the business
for periods up to eight years.
Based on the undiscounted cash flows of the business we determined
whether additional testing was required (i.e., the determination of
fair market value of the assets). If the sum of the undiscounted cash
flows exceeds the value of the assets being tested no impairment
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-24
exists, and no further testing is required. However, if the sum of
the undiscounted cash flows does not exceed the value of the assets
being tested then impairment is present and the Company must determine
the amount of the impairment charge by comparing the fair value of the
asset group to the book value.
Swish UK ($14.6 million)
As a result of the strategic plan meeting, management determined that
changes in strategic direction in it's Swish UK business was
warranted. The change in direction is the result of unsuccessful cost
cutting and restructuring efforts over the past few years and the
movement by retailers to non-branded low cost suppliers. The current
plan includes liquidating portions of the business, primarily in the
United Kingdom and restructuring and/or selling other portions of the
business assets, including facilities. Based on this review, and
through our initial impairment analysis process we have determined
that impairment indicators exist on the Swish UK businesses long-lived
asset as well as its indefinite lived assets. The following table
identifies the charges taken at Swish UK related to our review:
Description / Impairment
Asset Category Impairment Indicator Recognized
-------------- -------------------- ----------
Fixed Assets Change in strategy & continued $2.6
weaker than expected results
Trademarks (Finite Life) after restructuring efforts - 12.0
possible liquidation of assets
Total Long-lived $14.6
Impairment
To evaluate the business's long-lived assets for impairment we
performed cash flow evaluation. We have described our process for
estimating fair value above under the caption "Cash Flow Estimation."
In estimating the cash flows, the Company identified the machinery &
equipment to be the primary assets for the Swish UK business. The
machinery and equipment is the assets that derive the majority of the
business cash flow. Accordingly, the Company used the estimated
useful lives of the machinery and equipment to estimate the cash flows
(i.e., the number of years). As the cash flows are expected to be
negative, we believe fair value is the amount we could receive upon
selling the existing assets.
The method for estimating fair value included inquiries of internal
management personnel as well as industry standards. For the land and
building we utilized the expertise of the Director of Corporate Real
Estate. The Director, with assistance from local internal management,
estimated the value the land and building by estimating the average
price paid per square foot for space within the market and multiplying
that rate by the square footage of the buildings that we own. In
addition, Corporate Real Estate worked with local real estate
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-25
professionals to verify the rates used in the respective markets were
appropriate and that the overall estimated fair value that we
determined was consistent with the third party real estate firm's
opinion. We estimate the impairment on land and building of the Swish
UK business to be $0.8 million, the difference between the estimated
fair market value and the net book value, see separate analysis. The
entire impairment related to the Ashbourne facility. In addition,
fair value analysis was not performed on the Fradley facility due to
the projected cash flows of the facility. The Fradley is the primary
distribution facility for the Swish UK and Home Decor business in the
UK and is planned to add incremental volume from several of our other
businesses, including Sanford and RCP. Accordingly, the asset base
should be fully recovered as the other businesses are very profitable.
For machinery and equipment and other fixed assets we estimated the
value of the assets by having the division's operational personnel
estimate the selling value of the assets using an orderly liquidation
approach of twelve months. The divisions operation personnel are
actively involved the procurement of new machinery, accordingly they
are very familiar with the market related to their machinery and
equipment and the respective their value in the secondary market.
Generally, the machinery and equipment in the Swish UK business are
not specific to our production and therefore a secondary market exists
for these machines. Based on the current market conditions we do not
anticipate being able to recover a significant portion of the asset
costs through a sale in the secondary market. In aggregate, we have
estimated that we will be able to recover approximately ***% of the
identified asset base. We believe this is appropriate given the
current market condition, and is consistent with our realized recovery
rates on other auctions and sales in this region.
The business has two finite-lived trademarks that are currently being
amortized over a five-year period. We estimated the fair value of
these trademarks based on what we believe a third party would be
willing to pay for the trademarks. Based on the current financial
outlook represented in the business's strategic plan and the change in
the market condition in the United Kingdom (i.e., the retailers moving
to a non-branded sourced private label strategy), we believe the
trademarks have no value.
Based on our fair value estimates of the land and buildings, machinery
and equipment, and the trademarks we estimated the individual residual
value of each asset base and compared that to the current carrying
value of those assets and recorded an impairment charge for the
difference.
SECTION 2: INDEFINITE LIVED ASSETS
THE COMPANY'S PROCESS FOR TESTING INDEFINITE-LIVED ASSETS:
---------------------------------------------------------
In 2005, the Company conducted its annual impairment test of
indefinite-lived assets in the third quarter utilizing financial data
provided by the relevant division in their strategic plan. The
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-26
Company reviewed every indefinite-lived intangible asset for
impairment in accordance with FAS 142. See separate memo documenting
the appropriateness of the indefinite lives for the intangibles.
The following table lists all of the indefinite lived
trademarks/names, their respective net book value and the impairment
charge recorded, if any:
Testing Net Book Impairment
Description / Asset Category Strategy Value Recognized
---------------------------- -------- -------- ----------
Sanford:
Prismacolor DCF $*** -
Papermate & Liquid Paper DCF *** -
Parker Pen DCF *** -
Tools & Hardware:
Lenox DCF *** -
American Tool DCF *** -
Irwin DCF *** -
Marathon DCF *** -
Quick-grip DCF *** -
Speedbor DCF *** -
Straight-Line DCF *** -
Unibit DCF *** -
Vise-Grip DCF *** -
*** No future 0.3 0.3
use or
market to
sell
Bernzomatic (Sterling) DCF *** -
Levolor DCF *** -
Total $*** $0.3
* DCF - Discounted Cash Flows
** As a result of the ATC acquisition we acquired several
trademarks with value less than $0.1 million individually, all of
which have no future sales projection. They were grouped for
simplicity purposes due to their immaterial nature.
We utilized the guidance of EITF 02-7 to test the intangible asset of
the Company's businesses. For certain of these trademarks such as
Lenox, the value was determined based on the division's financial
forecast, while for others the value was based on a more specific
product line financial forecast. Those forecasts estimate the
worldwide value of the trademarks as these assets were typically
acquired in the same acquisition and the brands are globally marketed
and management control over brand strategy is performed on a worldwide
basis (e.g., Global Strategic Business Units ("SBU")).
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-27
CASH FLOW ESTIMATION:
-------------------
To estimate the cash flows of the operations we utilized the
business's strategic plan financial statements. The plan included
forward-looking income statements, balance sheets and cash flow data,
including working capital %, depreciation and capital spending. As
the strategic planning process utilized by the divisions only extends
forward three years, we developed longer-term estimates of cash flows
through the use of terminal value. We estimated the long-term growth
rate based on discussions with the businesses as appropriate.
The Company estimated cash flows by utilizing the estimated income of
the respective business and adding back depreciation and subtracting
the required capital spending to maintain the business. We focused on
the following components to ensure that the cash flow projection was
accurate; revenue trends, gross margin percentage, SG&A percentage and
operating income % as well as depreciation and capital spending.
We used present value techniques utilizing a risk-adjusted rate of ***%
to estimate the fair value of the trademarks. We believe that this
approach is the most appropriate as there are not ready markets for
specific brands that we were analyzing (i.e., there were no quoted
markets to use, to estimate the value of the brands). Based on the
results of the analysis, the Company compared the net present value of
the cash flows to the carrying value of the intangible assets to
determine if impairment existed. If the fair value of the intangible
assets exceeded the carrying value no additional procedures were
performed. If the carrying value of the asset exceeded the fair value
an impairment charge was recorded to write the asset down to its fair
value.
We utilized ***% as the risk adjusted rate because it is the rate that
we believe an investor would utilize to estimate the value of the
trademarks if we were to sell the trademarks. We estimated this rate
by using a debt to equity ratio of 40% debt and 60% equity. We
further utilized a ***% pre tax cost of debt and a ***% cost of
equity. The after tax weighted average cost of capital was estimated
at ***% using this method. We rounded the rate up to ***%. We
verified the pre-tax cost of debt with that used by the third party
appraiser for our goodwill valuation.
Based on our testing, the Company determined that the majority of its
indefinite-lived assets were not impaired, see table above. However,
several individually insignificant trademarks and tradenames resulting
from the American Tool Acquisition were determined to be impaired.
During the Company's evaluation of these trademarks and tradenames the
Company determined that the Tools & Hardware business had no current
plan to market under any of these brands. As a result, the Company
recorded an impairment charge for $0.3 million, their entire book
value.
*** Confidential treatment requested; certain information has been
omitted and filed separately with the Commission Staff.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-28
SECTION 3: GOODWILL
For a listing of the Company's goodwill, refer to exhibit ________.
IDENTIFICATION OF THE REPORTING UNITS TO TEST FOR GOODWILL IMPAIRMENT:
As part of the testing approach, the Company identified the reporting
units as prescribed by FAS 142 paragraph 30, which the Company
believes is its operating segments.
IMPAIRMENT TESTING:
INITIAL SCREENING APPROACH (FAS 142):
------------------------------------
After identifying all of the reporting units, we performed an initial
screening to identify businesses that may be impaired. The accounting
rules allow several valuation techniques for estimating the fair value
of a business, including quoted market price, multiple of
sales/earnings or some other financial matrix in addition to
discounted cash flows. In estimating the fair value of the reporting
units, we used a two-step approach. The initial screening method we
used to estimate the fair value of the reporting units was a multiple
of our full year estimated 2005 EBITDA. We believe that this approach
is consistent with the initial approach used by the Company at the
time of the adoption of FAS 142, and remains a useful tool for
identifying potential impairment. In addition to the EBITDA screening
method described above, the Company also considered other impairment
indicators such as potential plans to sell or exit product lines that
were identified in the strategic planning process.
As noted above, the initial evaluation method used to determine fair
value was the EBITDA Multiple Approach. To estimate the EBITDA
multiple that should be used, we referred to the 2005 Mid-Year M&A
Market Analysis prepared by Baird, (Exhibit _____). Baird is a well-
respected investment-banking company that the Company has utilized in
the past for mergers as well as other deals. The Baird analysis
provided current market data including EBITDA multiples for recent
middle market M&A deals. The analysis further stratified the multiple
by deal size (e.g., a deal worth $200 million typically had a higher
multiple than a deal worth $50 million). The Baird analysis
stratified the EBITDA multiple into three categories.
Our analysis only utilized the lower two categories (i.e., 8.6x and
10.5x EBITDA) to value the reporting units. For certain of our
reporting units that would have exceeded the 10.5x EBITDA category, we
conservatively used the 10.5x EBITDA multiple to value the reporting
unit. To identify whether our reporting units should be valued using
the lower multiple of 8.6x EBITDA (>100M) or the higher multiple of
10.5x EBITDA (<$100M), we estimated the value of the reporting units
using the lower multiple first. If the lower multiple times the 2005
estimated EBITDA indicated a value greater than $100 million, we
recalculated the value using the higher multiple to value the
reporting unit. For further evaluation of this calculation please
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-29
refer to Exhibit _______. However, if the estimated value under the
EBITDA Multiple Approach was in excess of the book value no additional
testing was performed.
After the entire population was screened, we determined that
additional analysis was required on the Home Decor Europe and Swish UK
business. We identified the Home Decor business based on its recent
operating performance declines vs. budget and vs. prior years. We
identified the Swish UK business based on several factors, including
the continued weakness in its operating performance as well as the
recent change in its strategic plan presented during the strategic
operating reviews. For further evaluation of this analysis please
refer to Exhibit _______ and discussion below regarding Specific
Impairment Analysis.
SPECIFIC IMPAIRMENT ANALYSIS (FAS 142):
--------------------------------------
For the reporting units that had fair value significantly less than
book value in the initial screening (based on the EBITDA Multiple
Approach), we performed long-term cash flow analysis and present value
techniques based on the division's current strategic plan to more
precisely estimate the fair value of the business. We believe this is
consistent with how third parties would value the business and is
consistent with how Newell values potential acquisition targets. The
long-term cash flow analysis calculated a fair value of the business
(net present value of the long-term cash flows) that was less than the
carrying value of the business being evaluated. Based on the
evaluation the Company determined that a third party valuation company
should be utilized to assist with valuing the Swish UK business. We
utilized the services of Enterprise Appraisal Company to assist us in
this evaluation. Enterprise Appraisal specializes in FAS 142
valuation as well as other business valuations. For a description of
the appraiser's qualification, please refer to the Swish UK valuation
Exhibit _______.
As noted above, the Company performed a second internal analysis to
determine fair value of the Home Decor business. That analysis
included estimating the cash flows of the business based on
information provided by the business in their strategic planning
process. The information included forward-looking income statement
information from sales through operating income. It also included
balance sheet and cash flow data such as working capital % and
depreciation and capital spending plans. Based on the result of that
discounted cash flow evaluation the business was determined to have a
value greater than its book value.
The strategic plan utilized only extended forward through 2009;
accordingly, we had significant discussion with the business
representatives with regards to what they believed the operating
trends would be out past the three-year strategic planning horizon.
We developed our cash flow estimate by utilizing the estimated income
of the business and adding back depreciation and subtracting the
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-30
required capital spending to maintain the business. Accordingly, we
focused on the following components to ensure that the cash flow
projection was accurate; revenue trends, gross margin percentage, SG&A
percentage and operating income % as well as depreciation and capital
spending. We believe these cash flows are our best estimate of the
business as of today, but note that it is inherently difficult to
estimate the operating results of a business for periods of up to
eight years given the uncertainty of results in a longer horizon. For
a detailed calculation of the cash flows and assumptions used to
estimate the net present value (fair market value) of our Swish UK
business, please refer to the exhibits noted above in the table.
Furthermore, the Company compared the future operating performance
with past result and known changes in the business to ensure that the
forward-looking operating performance was reasonable. We noted that
the current downturn in the business's operating performance is
primarily due to the poor economic environment in a couple of its
European markets (e.g., the Southern European market is in recession).
The division management expects that the economic environment will
improve as the economic recession ends.
As noted above, prior to utilizing Enterprise Appraisal Company to
assist in valuing the Swish UK business we performed a second internal
analysis to determine fair value. That analysis included estimating
the cash flows of the business based on information provided by the
business in their strategic planning process. The information
included forward-looking income statement information from sales
through operating income. It also included balance sheet and cash
flow data such as working capital % and depreciation and capital
spending plans.
The strategic plan utilized only extended forward three years;
accordingly, we had significant discussion with the business
representatives with regards to what they believed the operating
trends would be out past the three-year strategic planning horizon.
We developed our cash flow estimate by utilizing the estimated income
of the business and adding back depreciation and subtracting the
required capital spending to maintain the business. Accordingly, we
focused on the following components to ensure that the cash flow
projection was accurate; revenue trends, gross margin percentage, SG&A
percentage and operating income % as well as depreciation and capital
spending. We believe these cash flows are our best estimate of the
business as of today, but note that it is inherently difficult to
estimate the operating results of a business for periods of up to
eight years given the uncertainty of results in a longer horizon. For
a detailed calculation of the cash flows and assumptions used to
estimate the net present value (fair market value) of our Swish UK
business, please refer to the exhibits noted above in the table.
As noted above, we used the services of Enterprise Appraisal Company
to assist in the valuation of the Swish UK business. The Company
provided them with the following items for purposes of their review:
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-31
1. a brief description of the business
2. the markets that the business operates in and key customers
and competitors
3. past, current and forward looking P&L, balance sheet and
cash flow information
We also shared the Company's current business plan with them to better
assist them in valuing the business. The Company indicated that its
current business plan includes the liquidation and potential sale of
certain portion of the business. Furthermore we indicated that the
business was experiencing intense competition from low cost private
label imports and management believes the trend will continue at the
retail level.
As noted in the valuation performed by Enterprise Appraisal Company
the method used to value the business was a discounted cash flow
analysis, please refer to Exhibit _______. Swish UK is not publicly
traded independent of the Company, and therefore no quoted market
prices were available. In addition to the lack of quoted values,
there were no recent M&A deals of businesses with similar
characteristics for the valuation company to utilize to compute a fair
value. Accordingly, they used the discounted cash flow method to
value the business. As noted above, we provided forward looking
information (2006 - 2013 estimates) regarding the business including
sales, GM%, SG&A% and tax rate assumptions as well as other balance
sheet and cash flow information as requested. For more specific
information about the assumptions used in future years, please refer
to the valuation at Exhibit _______. In addition to the information
that we provided them regarding our outlook on the business they
utilized an industry average as well as other tools to evaluate the
appropriateness of the figures we provided. They determined the
discount rate utilized based on a number of factors, including risk
premiums for size of business, capitalization mix and other factors.
Please refer to Exhibit _______ for a more detailed discussion of
their methodology.
The historical and future performance estimates were based on data
provided to Enterprise Appraisal Company in the third quarter of 2005.
BOOK VALUE CALCULATION:
----------------------
To determine the carrying value of Swish UK's net assets we reviewed
the balance sheet of the business as of June 30, 2005 and adjusted it
for intercompany receivables/liabilities, investment in subsidiaries,
and certain assets and liabilities reported on corporate books such as
goodwill, other intangible assets, purchase accounting reserves, legal
and EPA, pension reserves, as well as other contingencies.
For purposes of evaluating the net assets, we have excluded the
cumulative currency translation adjustment from the net assets of the
business. We believe guidance in EITF 01-05, "Application of FASB
Statement No. 52 to an Investment Being Evaluated for Impairment That
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-32
Will Be Disposed Of" provides analogous guidance. As noted in
paragraph 3 of Issue 01-5, "Statement 52, as interpreted by
Interpretation 37, it is clear that no basis exists to include the CTA
in an impairment assessment if that assessment does not contemplate a
planned sale or liquidation that will cause reclassification of some
amount of the CTA. The Company has not yet determined the magnitude
of the liquidation to determine if a reversal of CTA will be required.
Therefore, we believe that only if the Company has committed to a plan
that will cause the CTA for the reporting unit to be reclassified to
earnings should the CTA be included as part of the carrying amount of
the reporting unit when testing goodwill of the reporting unit for
impairment. As of September 30, 2005, the Company has not committed
to a planned sale or other liquidation for any of its business units.
Calculation of Impairment:
-------------------------
FAS 142 required the purchase price allocation method for determining
impairment of goodwill as described above. Accordingly, we valued the
working capital, fixed assets and other intangible assets of Swish UK
at their respective fair value to determine the goodwill impairment.
We estimated that the book value of working capital approximates the
fair value. Furthermore, we used the fair value of the fixed assets
and intangibles, as determined above to evaluate whether goodwill
impairment exists. If the net book value of goodwill exceeded the
derived fair value of goodwill, impairment was recorded. For a
reconciliation of the carrying value of goodwill by reporting unit,
please refer to Exhibit ________.
To determine if any impairment exists with regards to goodwill the
Company performed the purchase price allocation method noted above.
Based on the evaluation of the purchase price allocation methodology
we have determined that impairment exists in the Swish UK business.
For details of the calculation to determine the impairment please
refer to Exhibit _______.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-33
Description / Impairment
Asset Category Impairment Indicator Recognized
-------------- -------------------- ----------
Goodwill Annual testing and the change 19.4
in strategy & continued
weaker than expected results
after restructuring efforts
(tested based on enterprise
value)
CONCLUSION:
----------
We have determined based on the above noted tests of long-lived
assets, indefinite-lived intangible assets (trademarks), and goodwill
that impairment in the amount of approximately $34.0 million exists;
all of which is related the Company's Swish UK business. Due to the
materiality of the charge, the Company has disclosed the impairment
charge via an 8-K filing and will include the description of the
charge in the MD&A and footnotes of its 10Q filing as of September 30,
2005. As prescribed by the Securities and Exchange Commission Rules
an 8-K must be issued within four business days of a material event.
The triggering date for this impairment was the date that the audit
committee approved the charge, and the Company issued the 8-K within
the four-business day guidance.
The following table identifies the charge by asset classification:
Long-lived
Business Assets Trademarks Goodwill Total
-------- ------ ---------- -------- -----
Swish UK $2.6 $12.0 $19.4 $34.0
We have also evaluated all of the indefinite-lived assets (trademarks
and tradenames) companywide, see separate memo.
CONFIDENTIAL TREATMENT REQUESTED BY NEWELL RUBBERMAID INC.
PAGE NR-34
ATTACHMENT
----------