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September 26, 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 FORMS
10-Q FOR THE QUARTERS ENDED MARCH 31 AND JUNE 30, 2006 FILE
NO. 1-9608
Dear Mr. Cash:
We are in receipt of your comment letter dated September 12, 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 additional information as requested or where we believe
appropriate to the response.
1. In connection with responding to our comments please provide in
writing, a statement from the company acknowledging that:
* The company is responsible for the adequacy and accuracy of the
disclosure in their 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 laws of the United States.
Company Response:
-----------------
The Company hereby acknowledges that:
* The Company is responsible for the adequacy and accuracy of its
disclosures in its filings;
* Staff comments or changes to the Company's disclosures in
response to staff comments do not foreclose the Commission from
taking any action with respect to filings; and
* The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under
federal securities laws of the United States.
Management's Discussion and Analysis of Financial Condition and
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Results of Operations Critical Accounting Policies
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2. We have reviewed your response to comment six and note the
following regarding your goodwill impairment analysis:
* Your goodwill impairment analysis as of September 30, 2005
assumed an estimated fair value for your Home Decor operating
segment of $236.2 million. This valuation is in sharp contrast
to the $90 million assumed value of the Home Decor business as of
April 24, 2006.
* The basis for your September 30, 2005 valuation assumptions is
unclear and it does not appear that you have factored in the
cyclical nature of the Home Decor's operations into your long-
term cash flow forecast since it appears that you assumed
perpetual growth when your cash flows appear to have historically
varied along with the economic cycle.
* As we pointed out in our previous letter, the high valuations as
of September 30, 2005 and December 31, 2005 do not seem
consistent with the declines in revenues or the 81% decline in
operating income in the Home Fashions reporting segment since
2001.
* It appears from our analysis of your discounted cash flow that
the primary reason for the high estimated fair value of your Home
Decor operating segment at September 30, 2005 and December 31,
2005 may be due to optimistic forecasts of debt-free cash flows
over an indefinite time horizon.
We acknowledge, however, that fair value estimates are subjective
and that management is in the best position to determine the
estimated fair value of the Home Decor operating segment.
Accordingly, while it is still unclear to us whether the Home
Decor goodwill was realizable as of December 31, 2005, we have no
further comments in this regard based on your write-off of the
Home Decor's goodwill during the first quarter of 2006 and your
presentation of Home Decor's results of operations as
discontinued operations for the second quarter of 2006.
3. Notwithstanding the above, based on your disclosures in your Form
10-K for the year ended December 31, 2005, we are concerned that
investors may not have been prepared that an impairment of a
portion or all of Home Decor's goodwill was possible. In this
regard, it does not appear that investors had insight regarding
the risks, uncertainties, and assumptions underlying your
goodwill impairment tests. We also do not believe that
information presented in your Form 10-Q, the period in which the
impairment charge was taken, provided investors with a clear
understanding of the changes in the facts and circumstances and
in management's assumptions subsequent to year end that led to
this write-off.
Accordingly, please amend your 2005 10-K and Form 10-Q for the
quarter ended March 31, 2006 to disclose the following:
* The amount of goodwill allocated to the Home Decor operating
segment,
* The carrying value of the Home Decor operating segment,
* The significant assumptions involved in estimating the fair
value of the Home Decor operating segment, including
estimated growth rates in revenues, cash flows and capital
expenditures, assumed reductions in cost of sales despite
your disclosure that you expect continuing inflationary
pressures, and the cash flows discount rate and the terminal
value multiplier,
* Your basis for believing that the assumptions are
reasonable, including a comprehensive explanation as to how
the cyclical nature of your operations was factored into
your long-term forecast since it appears that you are
assuming perpetual growth when historically your growth has
varied along with the economic cycle,
* A sensitivity analysis of reasonably likely changes in your
assumptions,
* A comprehensive discussion as to why the projected value of
the Home Decor operating segment of $236.2 million at
September 30, 2005 and December 31, 2005 was more than twice
its actual market value approximately 90 days thereafter,
and
* Clarify why in the first quarter 2006 the Company began
exploring various options for certain businesses in the Home
Fashions segment. Identify what these various options were
and how they provided a better indication of the fair value
of the business.
We also urge you to provide similar disclosures at each reporting
date for your operating segments with significant goodwill
amounts. See SEC Releases 33-8040 and 33-8098.
Company Response:
-----------------
The Company has reviewed its disclosures related to impairment
included in our December 31, 2005 Form 10-K and believes that such
disclosures were appropriate given the information available at the
time of filing. The Company notes that Footnote 1 to its financial
statements includes a general discussion on the use of estimates,
which states:
"The preparation of these financial statements requires the
use of certain estimates by management in determining the
Company's assets, liabilities, revenue and expenses and
related disclosures. Actual results could differ from those
estimates."
Furthermore, the Company notes that the specific disclosure relating
to goodwill and other intangible assets states that:
"The Company cannot predict the occurrence of certain events
that might adversely affect the reported value of goodwill
and other intangible assets. Such events may include but
are not limited to, strategic decisions made in response to
economic or competitive conditions, the impact of the
economic environment on the Company's customer base, or a
material adverse change in its relationship with significant
customers."
These risk factors are also identified in management's discussion and
analysis (MD&A) under Critical Accounting Policies and in the
Company's Risk Factors. The Company also outlined its key initiatives
and strategies for 2006, including the strengthening of the Company's
portfolio through strategic acquisitions and selective divestitures.
Specifically, in MD&A, the Company noted that the Company "will
continue to review opportunities to optimize the portfolio through
selective acquisitions and divestitures."
The Company's third quarter 2005 testing, provided in response to your
initial comment letter, indicated that the enterprise value of the
Home Decor business exceeded its book value by $46.3 million or
approximately 24%, which the Company considered significant.
Additionally, the business met its fourth quarter 2005 estimate, which
did not indicate an impairment issue. Accordingly, the Company did
not believe that significant impairment risk related to the Home Decor
business's goodwill or other long-lived assets existed at December 31,
2005, and therefore does not believe that additional risk disclosures
relating to the Home Decor business were warranted as of the filing
date of the 2005 Form 10-K.
The Company believes that the decline in value was driven by its
change in strategic direction with regard to Home Decor. This was not
known or anticipated at the time of the 2005 10-K filing (February 16,
2006). As noted in the memos and other contemporaneous documentation
previously provided to you, the Company experienced a change in
leadership during the fourth quarter of 2005, replacing its former CEO
with an interim CEO (Mark Ketchum), while the Board of Directors
conducted an extensive search for a permanent replacement. During the
fourth quarter of 2005 and early first quarter of 2006, the Company's
Board of Directors interviewed several potential candidates, but
ultimately decided to appoint Mr. Ketchum as permanent CEO during the
middle of the first quarter of 2006. As interim CEO, Mr. Ketchum's
primary responsibility was to ensure that the day to day operations
and current initiatives remained on-track. During the fourth quarter,
he spent significant time reviewing the Company's business units and
gathering information on current business plans and strategies.
During this time, there were no significant changes in divestiture
strategy (in fact, a significant amount of time was devoted to the
integration plans for the Company's more than $700 million acquisition
of DYMO).
After accepting the position permanently during the first quarter of
2006, the Company's new CEO introduced strategies based on
differentiated products, best cost and consumer branding, and an
initiative to accelerate the pace to improve the Company's portfolio
of businesses to focus on those that are best aligned with such
strategies. In particular, this initiative included the divestiture
of businesses, such as Home Decor, that did not meet this strategic
profile. As a result, the Company began to evaluate alternatives for
the Home Decor business, including marketing the business for sale.
In connection with the evaluation of alternatives, the Company
received a preliminary offer in April 2006 which established an
indication of the value of the business to a third party. Accordingly,
in April 2006 the Company determined that it was likely the business
had a net book value greater than its estimated fair value. The
Company did not have the benefit of this indication of value as of
December 31, 2005.
The Company notes that it is inherently difficult to determine
marketplace assumptions to estimate the value of a business to a third
party. Accordingly, the FASB recognized that in some circumstances,
the only information available to estimate fair value without undue
cost and effort will be the entity's estimates of future cash flows.
FAS 142 specifies that when cash flows are used to estimate fair
value, those cash flows should be consistent with the most recent
budgets and plans approved by management, which is an entity-specific
measurement notion. The Company believes that the valuation
methodology used to estimate the enterprise value in 2005 was
appropriate and believes that the model appropriately reflected the
cyclical nature of the business. The Company also notes that the
business was then and is currently in a down cycle and therefore
believes that the Company included the impact of the down cycle in its
valuation. Furthermore, the cash flow models used to value the
enterprise value of the business assumed that the business never
recovered to its historical operating performance levels, which the
Company believes would occur if the Company continued to operate the
business and made needed operational changes. The Company's estimates
of future cash flows for its 2005 impairment test used cash flow
assumptions based on its long-term strategic plan approved by
executive management (this plan also served to establish Home Decor's
2006 operating budget). The Company further notes that the first
quarter 2006 results of the Home Decor business exceeded the 2006
budgeted amounts, as well as the amounts used in the third quarter
valuation. Accordingly, the valuation of Home Decor Europe
contemplated the value of the business in its then current state,
including the synergies of one overhead structure (i.e., shared
services, human resources, information technology, etc.) across 22
pan-European countries.
In fact, at its August 2006 meeting the FASB Board directed the FASB
staff to draft a proposed FSP clarifying that an entity using a
present value technique to measure the fair value of a nonfinancial
asset may only use entity-specific assumptions if market-participant
assumptions are not available without undue cost and effort. The
Company believes that until the initiative to explore marketing the
business for sale was conducted assumptions used by market
participants could not be known without undue cost and therefore
believes that the specific entity cash flow method was appropriate.
As a result of the initiative to explore marketing the business for
sale during the later part of the first quarter of 2006, the Company
realized that the population of strategic buyers with adequate
financial resources was limited for a pan-European business. As a
result, the value of the business to a third party was lower than the
fair value the Company estimated using its expected cash flow
estimates. In April the Company received an offer from a single
strategic investor, offering to purchase only selective portions of
the business. (To-date, the Company has not received an offer to
purchase Home Decor as an entire interest).
Valuation experts and accounting regulators have long noted that
prices determined in observable markets may frequently vary from
valuations determined using cash flow models. In FASB Concept
Statement 7, USING CASH FLOW INFORMATION AND PRESENT VALUE IN
ACCOUNTING MEASUREMENTS, the FASB noted that observable marketplace
amounts are generally more reliable and are more efficiently
determined than measurements that must employ estimates of future cash
flows. When observable amounts are not available, accountants often
turn to estimated cash flows to determine the carrying amount of an
asset or a liability. An entity's best estimate of the present value
of cash flows will not necessarily equal the fair value of those
uncertain cash flows. The FASB in paragraph 32 of the Statement
delineated several reasons why an entity might expect to realize or
pay cash flows that differ from those expected by others in the
marketplace.
The Company believes there are several factors that caused the low
marketplace valuation in April 2006, as follows:
* There was only one serious strategic buyer with significant
interest;
* It became clear that the Company would not be able to sell
the entire business in one transaction, which limited the
ability of a buyer to realize the synergies of the entire
division, (this fact alone caused the value of certain
trademarks to decrease as a buyer would not own pan-European
trademarks, but would be limited by country and hence,
research and development and promotional investment could
not be leveraged across all of Europe); and
* The prospective buyer of the business in the current down
cycle assigned a higher risk-adjusted discount rate to the
business due to some of the factors listed above, as well as
perceived disadvantages relative to others in the
marketplace.
We appreciate your assistance in improving the quality of the
Company's disclosures, and the Company proposes to include the
following disclosures with respect to impairment in future filings:
* Sensitivity disclosures related to asset impairment for
operating units with estimated fair values that nominally
exceed carrying value (e.g., 10% or less);
* Increased disclosures of specific business risks for those
same operating units whose fair value does not significantly
exceed its carrying value; and
* Beginning with the September 30, 2006 Form 10-Q, more
specific disclosures relating to the change in estimated
fair value of the Home Decor business, based on the
information provided above.
The Company does not believe that retroactively amending the
disclosures related to risks associated with goodwill impairment in
its 2005 Form 10-K would be the appropriate manner to inform
shareholders of events that occurred in 2006 that changed reasonable
and good faith estimates of subjective fair values in 2005. We agree
with the Staff that given the significant change in the estimate of
fair value of Home Decor in 2006, more disclosure of the circumstances
leading to the change, which occurred in 2006, would be useful.
Accordingly, our September 30, 2006 Form 10-Q will include the
following additional disclosures:
Impairment testing performed by the Company in 2005, utilizing a
discounted cash flow analysis, indicated that the enterprise value of
the Home Decor Europe business significantly exceeded the book value
of this business unit, and no impairment was recorded in respect of
this business in 2005. However, during the first quarter of 2006, as
a result of a revised corporate strategy and an initiative to improve
the Company's portfolio of businesses to focus on those that are best
aligned with the Company's strategies of differentiated products, best
cost and consumer branding, the Company began exploring various
options for its Home Decor European business. Those options included
marketing the business for potential sale. As a result of this
effort, the Company received a preliminary offer from a potential
buyer which gave the Company a better indication of the business's
fair value, and revealed that the value of the business to a third
party was lower than the fair value the Company had previously
estimated using expected future cash flows. Based on this offer, the
Company determined that the business had a net book value in excess of
it fair value. Due to the apparent decline in value, the Company
conducted an impairment test and recorded a $50.9 million impairment
loss in the first quarter.
In June 2006, the Company's Board of Directors committed to a plan to
sell the Home Decor Europe business. As a result, the business's
operating results, including the impairment loss recognized in the
first quarter, have been included in the loss from operations of
discontinued operations for the nine months ended September 30, 2006.
The Home Decor Europe business designs, manufactures and sells drapery
hardware and window treatments in Europe under Gardinia{R} and other
local brands and was previously classified in the Company's Home
Fashions segment.
On September 19, 2006, the Company entered into an agreement for the
intended sale of portions of the Home Decor Europe business to Hunter
Douglas, a global manufacturer and marketer of window treatments and
furnishings. The sale includes the businesses in Portugal and the
Nordic, Central and Eastern European regions. For the intended
purchase of the Central and Eastern European operations, Hunter
Douglas would take a minority position in a management buyout of those
businesses. This sale includes the largest portion of the total Home
Decor Europe business. The transaction is expected to close by the
end of the year, subject to receipt of financing by the purchasers and
completion of all required regulatory approvals, including
consultation proceedings with works councils, trade unions and
employee representatives in the affected countries. The Company
continues to explore the potential sale of the remaining portions of
this business. The intended sale of Home Decor Europe would not
affect the Company's North American window furnishings business.
Financial Statements
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Footnote 19 - Other Non-operating (Income) Expense, page 66
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4. We have reviewed your response to comment five. Given paragraph
45 of SFAS 144's requirement to include gains and losses
recognized for long-lived assets (disposal group) within income
from operations, it is unclear why you believe you complied with
paragraph 45 of SFAS 45. In future filings please revise your
financial statements to include the gains and losses associated
with the sale of operating long-lived assets within operating
income.
Company Response:
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The Company will prospectively report gains and losses from the sale
of long-lived assets in operating income.
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 cannot contact him, call me
at (410) 785-5806.
Sincerely,
Newell Rubbermaid Inc.
By: /s/ J. Patrick Robinson
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Title: Vice President - Chief Financial Officer