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NEWELL RUBBERMAID INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto. Business Overview Newell Rubbermaid is a global marketer of consumer and commercial products that help people get more out of life every day, where they live, learn, work and play. The Company's products are marketed under a strong portfolio of leading brands, including Sharpie®, Paper Mate®, Parker®, Waterman®, Dymo®, Rubbermaid®, Levolor®, Goody®, Calphalon®, Irwin®, Lenox®, Rubbermaid Commercial Products®, Graco® and Aprica®. The Company is executing its Growth Game Plan, which is its strategy to simplify the organization and free up resources to invest in growth initiatives and strengthened capabilities in support of the Company's brands. The changes being implemented in the execution of the Growth Game Plan are considered key enablers to building a bigger, faster-growing, more global and more profitable company. During 2013, the Company continued the cadence of consistent execution and delivery while simultaneously driving its change agenda to propel the Growth Game Plan into action. During 2013, the Company transitioned from the delivery phase of the Growth Game Plan to the strategic phase. The Company expects to remain focused on the strategic phase in 2014. The Company is driving the Growth Game Plan into action and simplifying its structure through the execution of Project Renewal. In the Growth Game Plan operating model, the Company has reorganized around two core activity systems, Development and Delivery, supported by three business partnering functions, Human Resources, Finance/IT and Legal, and four winning capabilities in Design, Marketing & Insight, Supply Chain and Customer Development, all in service to drive accelerated performance in the Company's five segments. The Company's five segments and the key brands included in each segment are as follows: Segment Key Brands Description of Primary Products Writing Sharpie®, Paper Mate®, Writing instruments, including markers and Expo®, Parker®, highlighters, pens and pencils; art Waterman®, products; fine writing instruments; office Dymo® Office, Endicia® technology solutions, including labeling and on-line postage solutions Home Solutions Rubbermaid®, Indoor/outdoororganization, food storage Calphalon®, Levolor®, and home storage products; gourmet Goody® cookware, bakeware and cutlery; drapery hardware and windowtreatments; hair care accessories Tools Irwin®, Lenox®, Hand tools and power tool accessories; hilmor™, industrial bandsaw blades; tools for HVAC Dymo® Industrial systems; label makers and printers for industrial use Commercial Products Rubbermaid Cleaning and refuse products, hygiene Commercial systems, material handling solutions; Products®, medical and computer carts and wall-mounted Rubbermaid® Healthcare workstationsBaby & Parenting Graco®, Aprica®, Infant and juvenile products such as car Teutonia® seats, strollers, highchairs and playards During 2013, the Company divested its Hardware and Teach businesses, which were primarily included in the former Specialty segment at December 31, 2012. Accordingly, the results of operations of these businesses have been classified as discontinued operations for all periods presented. These divested businesses consist of convenience, cabinet and window hardware (Bulldog, Ashland and Amerock, as well as the Levolor®-branded and private label drapery hardware business), manual paint applicators (Shur-line) and interactive teaching solutions (mimio and Headsprout). The remaining businesses in the former Specialty segment, specifically Dymo Office and Endicia, were combined with the Writing segment given the significant channel and operating synergies. 22-------------------------------------------------------------------------------- Table of Contents Market and Performance Overview The Company operates in the consumer and commercial products markets, which are generally impacted by overall economic conditions in the regions in which the Company operates. The following is a summary of the Company's progress in 2013 in driving the Growth Game Plan into action: • Core sales, which exclude foreign currency, increased 3.2% in 2013 compared to 2012, with core sales growth in every segment. Core sales increased 10.2% in the Baby & Parenting segment, with improved sales in North America primarily due to launches of innovative new products and expanded distribution. Core sales grew 3.9% in the Commercial Products segment, driven by volume growth in both North America and Latin America. Core sales in the Tools segment grew 3.4% due in large part to expanded distribution and the success of expanded product offerings in Brazil. Core sales grew 2.9% in the Home Solutions segment, primarily driven by targeted marketing initiatives in Rubbermaid Consumer, new Levolor product launches and increased distribution in Calphalon. Core sales increased 0.1% in the Writing segment, as core sales growth in Latin America and price increases, particularly in Venezuela, was substantially offset by weak Fine Writing results in China and office superstore channel contraction in the U.S. Core sales is determined by applying a fixed exchange rate, calculated as the 12-month average in the prior year, to the current and prior year local currency sales amounts, with the difference equal to changes in core sales, and the difference between the changes in reported sales and the changes in core sales being attributable to currency. • Core sales growth in Latin America and North America of 26.6% and 3.0%, respectively, were partially offset by core sales declines in Europe and Asia Pacific. The Latin America core sales growth was driven by volume and price increases in the Writing segment and new product launches and increased distribution in the Tools segment. The North America core sales increase was driven primarily by the Baby & Parenting segment. Continued macroeconomic challenges in Western Europe were the primary driver of a 3.3% core sales decline in the Europe, Middle East, and Africa region, and weak Fine Writing results in China were the primary driver of a 2.4% core sales decline in Asia Pacific. • Gross margin was 38.3%. Productivity was offset by inflation and unfavorable mix. The unfavorable mix impact was attributable to core sales growth being driven by segments and regions with gross margins that are lower than the Company's average. • The composition of the Company's selling, general and administrative ("SG&A") expenses continued to shift to strategic from structural costs, with increased investment in advertising and promotion and enhanced capabilities to drive sales, enhance the new product pipeline, develop growth platforms and expand geographically. During 2013, the Company's spend for strategic brand-building and consumer demand creation and commercialization activities included spend for the following: • a television advertising campaign in support of Paper Mate® InkJoy®; • a new line of premium Sharpie® markers called Sharpie® Neon; • a new line of Paper Mate mechanical pencils, with exceptional design; • targeted merchandising and marketing programs in Rubbermaid® Consumer; • the extension of Rubbermaid LunchBloxTM food containers and a new line of beverage containers; • new retail distribution in Calphalon® and Goody®; • hilmorTM, a new brand of professional tools that revolutionizes the heating, ventilation and air conditioning/refrigeration (HVAC/R) tool category with 150 tools featuring intuitive functionality and durable designs to make HVAC/R technicians' jobs easier and more efficient; • significant expansion of the hand tool product offering in Brazil; • the launch of Irwin® DuplaTM, a new double-sided hacksaw blade, in Brazil; • marketing programs and television advertising in Irwin in support of National Tradesmen Day; • new Rubbermaid Commercial Products® Executive Series line of cleaning products for luxury hotels around the world; • a new Graco® travel system called Graco ModesTM in North America, 3 strollers in 1 with ten riding options from infant to toddler; and • support for the continued expansion of sales forces in the Tools, Writing and Commercial Products segments to drive greater sales penetration, enhance the availability of products and to support geographic expansion for these Win Bigger businesses. • Continued execution of Project Renewal to simplify the business, reduce structural costs and increase investment in the most significant growth platforms within the business resulting in the realization of over $100 million in annualized savings in 2013 related to Project Renewal. In 2013, the Company took significant steps in implementing the 23-------------------------------------------------------------------------------- Table of Contents Organizational Simplification, EMEA Simplification and Best Cost Finance workstreams, requiring $111 million of restructuring costs. • Realized an $11 million foreign exchange loss in 2013 due to the devaluation of the Venezuelan Bolivar because of highly inflationary accounting for the Company's Venezuelan operations, which is included in other expense (income). • Reported a 22.5% effective tax rate in 2013 compared to 29.3% in 2012 primarily due to the geographical mix in earnings, net tax benefits that are discrete to 2013, and net tax expenses that are discrete to 2012. • Sold the Hardware and Teach businesses, primarily included in the former Specialty segment, during 2013. The Company recorded a net gain of $59 million, net of tax, which included a net gain from the sale of the Hardware business partially offset by a net loss associated with the sale of the Teach business. The results of operations of the Hardware and Teach businesses as well as the net gain on sale are presented in discontinued operations in the statements of operations. • Continued the $300.0 million three-year share repurchase plan, pursuant to which the Company repurchased and retired an additional 4.7 million shares of common stock for $119.5 million during 2013. • Effected an accelerated stock buyback ("ASB") of the Company's common stock, under which the Company paid an initial purchase price of $350.0 million and the Company received 9,430,785 shares of common stock, representing a substantial majority of the shares expected to be delivered under the ASB. The number of shares ultimately purchased under the ASB will be determined by a formula tied to the volume-weighted average share price of the Company's stock during the term of the program, expected to be completed no later than April 2014. Key Initiatives Project Renewal In October 2011, the Company launched Project Renewal, a program designed to reduce complexity in the organization and increase investment in the most significant growth platforms within the business, funded by a reduction in structural SG&A costs. Project Renewal is designed to simplify and align the business around two key activities - Brand & Category Development and Market Execution & Delivery. Project Renewal encompasses projects centered around five workstreams: • Organizational Simplification: The Company has de-layered its top structure and further consolidated its businesses from nine GBUs to five business segments. • EMEA Simplification: The Company will focus its resources on fewer products and countries, while simplifying go-to-market, delivery and back office support structures. • Best Cost Finance: The Company will deliver a simplified approach to decision support, transaction processing and information management by leveraging SAP and the streamlined business segments to align resources with the Growth Game Plan. • Best Cost Back Office: The Company will drive "One Newell Rubbermaid" efficiencies in customer and consumer services and sourcing functions. • Supply Chain Footprint: The Company will further optimize manufacturing and distribution facilities across its global supply chain. The total costs of Project Renewal through 2015 are expected to be $340 million to $375 million, with $300 million to $340 million representing cash costs. Approximately 75% of the cash costs consist of employee-related costs, including severance, retirement and other termination benefits and costs, as approximately 2,250 employees are expected to be impacted as a result of the implementation of the Project Renewal initiatives. Project Renewal is expected to be fully implemented by mid-2015 and generate annualized savings of $270 million to $325 million. The majority of these savings will be reinvested in the business to strengthen brand building and selling capabilities. Through December 31, 2013, the Company had incurred $182 million and $35 million of restructuring and restructuring-related costs, respectively. Restructuring-related costs represent certain organizational change implementation costs and incremental cost of products sold and SG&A expenses associated with the implementation of Project Renewal. The majority of the restructuring costs represent employee-related cash costs, including severance, retirement and other termination benefits and costs, and through December 31, 2013, the Company's total headcount has been reduced by approximately 1,800 employees as a result of Project Renewal initiatives. The Company has realized approximately $200 million of annualized savings to date. 24-------------------------------------------------------------------------------- Table of Contents The following table summarizes the estimated costs, savings and employee headcount impacts of Project Renewal, as well as the actual results through 2013 (amounts in millions, except Headcount): Total Project Through December 31, 2013 Remaining through mid-2015 Cost $340 - $375 $217 $123 - $158 Savings $270 - $325 $200 $70 - $125 Headcount 2,250 1,800 450 In 2013, the Company initiated the following activities as part of Project Renewal: • The restructuring of the Development organization as part of the Organizational Simplification workstream, which includes the consolidation and relocation of its design and innovation capabilities into a new center of excellence - a design center in Kalamazoo, Michigan, which is expected to open by early 2014; the creation of a larger, independent consumer marketing research organization; the consolidation of the marketing function into a global center of excellence; and the staffing of the Company's global e-commerce initiative. • The implementation of the EMEA Simplification workstream, initiating projects aimed at refocusing the region on profitable growth, including the closure, consolidation and/or relocation of certain manufacturing facilities, distribution centers, customer support and sales and administrative offices. The Company has also begun exiting certain markets and product lines to reduce complexity and infrastructure in EMEA and improve margins, including initiating the following actions: • Exiting direct sales in over 50 of the 120 countries and territories that the EMEA region serves; • Discontinuing the Baby & Parenting business in about 19 countries; • Discontinuing several lines of Baby & Parenting products; and • Exiting the custom-logo Fine Writing business. • The implementation of the Best Cost Finance workstream by consolidating and realigning its shared services and decision support capabilities. • The refocusing of its channel marketing team and realignment of its distributor and field sales organizations in the Delivery organization to enable cost savings to be reinvested into new capabilities. • The rollout of a new Global Supply Chain organization in the Delivery organization to strengthen capabilities across all five supply chain disciplines of Plan, Source, Make, Deliver and Serve. • The initiation of projects to streamline the three business partnering functions, Human Resources, Finance/IT and Legal, and to align these functions with the new operating structure. • The closure of its U.S. manufacturing facility in Lowell, Indiana related to its Hardware business (included in discontinued operations). Over the past two years, the Company reduced structural overhead by eliminating the operating groups, consolidating its 13 GBUs into five business segments and consolidating its sales organization into the newly formed Customer Development Organization. The Company also completed the consolidation of its Greenville, Texas operations into its existing operations in Kansas and Ohio. One Newell Rubbermaid The Company strives to leverage common business activities and best practices to build functional capabilities and to build one common culture of shared values with a focus on collaboration and teamwork. Through this initiative, the Company has established regional shared services centers to leverage nonmarket-facing functional capabilities to reduce costs. In addition, the Company is expanding its focus on leveraging common business activities and best practices by reorganizing the business around two of the critical elements of the Growth Game Plan - Brand & Category Development and Market Execution & Delivery, enhancing its newly created Customer Development Organization, creating a new Global Supply Chain organization and creating new centers of excellence for design and innovation capabilities and marketing capabilities. The Company is also migrating multiple legacy systems and users to a common SAP global information platform in a phased, multi-year rollout. SAP is expected to enable the Company to integrate and manage its worldwide business and reporting processes more efficiently. During 2013, certain operations within the Company's Hardware business and the Company's Brazil operations 25-------------------------------------------------------------------------------- Table of Contents went live on SAP. As of December 31, 2013, substantially all of the North American, European and Brazilian operations of the Company's five reportable business segments have successfully gone live on SAP. Foreign Currency - Venezuela The Company accounts for its Venezuelan operations using highly inflationary accounting, and therefore, the Company remeasures assets, liabilities, sales and expenses denominated in Bolivar Fuertes into U.S. Dollars using the applicable exchange rate, and the resulting translation adjustments are included in earnings. In February 2013, the exchange rate for Bolivar Fuertes declined to 6.3 Bolivar Fuertes to U.S. Dollar. Previously, the Company remeasured its operations denominated in Bolivar Fuertes at the rate of exchange used by the Transaction System for Foreign Currency Denominated Securities (SITME) of 5.3 Bolivar Fuertes to U.S. Dollar. As a result, the Company recorded a charge of $11 million in the first quarter of 2013, based on the decline in value of the net monetary assets of its Venezuelan operations that are denominated in Bolivar Fuertes. As of December 31, 2013, the Company's Venezuelan subsidiary had approximately $87.3 million of net monetary assets denominated in Bolivar Fuertes at the rate of 6.3 Bolivar Fuertes to U.S. Dollar, and as a result, a 10% increase (decrease) in the applicable exchange rate would result in an estimated pretax charge (benefit) of $9 million. On an ongoing basis, excluding the impacts of any actions management might otherwise take in response to a change in exchange rates, such as raising or decreasing prices, a 10% increase (decrease) in the exchange rate would unfavorably (favorably) impact annual net sales and operating income by an estimated $8 million and $4 million, respectively. CONSOLIDATED RESULTS OF OPERATIONS The Company believes the selected data and the percentage relationship between net sales and major categories in the Consolidated Statements of Operations are important in evaluating the Company's operations. The following table sets forth items from the Consolidated Statements of Operations as reported and as a percentage of net sales for the years ended December 31, (in millions, except percentages): 2013 2012 2011 Net sales $ 5,692.5 100.0 % $ 5,579.9 100.0 % $ 5,511.7 100.0 % Cost of products sold 3,514.3 61.7 3,443.8 61.7 3,410.6 61.9 Gross margin 2,178.2 38.3 2,136.1 38.3 2,101.1 38.1 Selling, general and administrative expenses 1,446.1 25.4 1,443.2 25.9 1,422.3 25.8 Impairment charges - - - - 317.9 5.8 Restructuring costs 111.1 2.0 52.9 0.9 47.9 0.9 Operating income 621.0 10.9 640.0 11.5 313.0 5.7 Nonoperating expenses: Interest expense, net 60.3 1.1 76.1 1.4 86.2 1.6 Losses related to extinguishments of debt - - 10.9 0.2 4.8 0.1 Other expense (income), net 18.5 0.3 (1.3 ) - 13.5 0.2 Net nonoperating expenses 78.8 1.4 85.7 1.5 104.5 1.9 Income before income taxes 542.2 9.5 554.3 9.9 208.5 3.8 Income tax expense 122.1 2.1 162.3 2.9 21.3 0.4 Income from continuing operations 420.1 7.4 392.0 7.0 187.2 3.4 Income (loss) from discontinued operations 54.5 1.0 9.3 0.2 (62.0 ) (1.1 ) Net income $ 474.6 8.3 % $ 401.3 7.2 % $ 125.2 2.3 % 26-------------------------------------------------------------------------------- Table of Contents Results of Operations - 2013 vs. 2012 Net sales for 2013 were $5,692.5 million, representing an increase of $112.6 million, or 2.0%, from $5,579.9 million for 2012. The following table sets forth an analysis of changes in consolidated net sales for 2013 as compared to 2012 (in millions, except percentages): Core sales $ 179.0 3.2 % Foreign currency (66.4 ) (1.2 ) Total change in net sales $ 112.6 2.0 % Core sales increased 3.2% compared to the prior year, as core sales increased in every segment. Geographically, the core sales growth was driven by double-digit core sales growth in the Latin America region and single-digit core sales growth in the North America region. The growth in these markets was partially offset by declines in Europe and in the Asia Pacific region. Core sales in the Company's North American and international businesses increased 3.0% and 3.6%, respectively. In North America, the 3.0% core sales growth was driven by growth in the Baby & Parenting and Home Solutions segments. Core sales in the Company's Latin America businesses increased 26.6%, including a core sales increase in the Writing segment driven by increased volumes and price increases implemented in response to the devaluation of the Venezuelan Bolivar, as well as a core sales increase in the Tools segment driven by growth in Mexico and Brazil. Core sales in Europe declined 3.3%, reflecting the ongoing macroeconomic challenges in Western Europe. In the Asia Pacific region, core sales declined 2.4% driven by a decline in Fine Writing due to the transitioning of the distribution model in China to better align inventory levels with consumer level point-of-sale and an overall slowdown in the category. Foreign currency had the impact of reducing net sales by 1.2%. Gross margin, as a percentage of net sales, for 2013 was 38.3%, or $2,178.2 million. Productivity was offset by inflation and unfavorable mix for the year. The unfavorable mix resulted from core sales growth being driven by segments and regions with gross margins that are lower than the Company's average gross margin. SG&A expenses for 2013 were 25.4% of net sales, or $1,446.1 million, versus 25.9% of net sales, or $1,443.2 million, for 2012. During 2013, the Company invested an incremental $15.5 million in brand-building activities, including advertising and promotion, to support new products, marketing initiatives, new market entries and global expansion. The increase in SG&A costs associated with brand-building activities was offset by the impacts of structural cost savings initiatives and ongoing restructuring projects, foreign currency and lower restructuring-related costs. In 2013, restructuring-related and organizational change implementation costs associated with Project Renewal were $23.8 million, which compared to restructuring-related costs for Project Renewal and the European Transformation Plan of $31.9 million in 2012. The Company recorded restructuring costs of $111.1 million and $52.9 million for 2013 and 2012, respectively. The year-over-year increase in restructuring costs is primarily due to the implementation of restructuring plans and initiatives under Project Renewal in Europe in 2013 as part of the EMEA Simplification workstream. The restructuring costs in 2013 primarily relate to Project Renewal and consisted of $4.9 million for facility and other exits, including asset impairment costs; $89.4 million of employee severance, termination benefits and employee relocation costs; and $16.8 million of exited contractual commitments and other restructuring costs. The restructuring costs in 2012 relate to Project Renewal and the European Transformation Plan and consisted of a net benefit of $(0.7) million for facility and other exits, including asset impairment costs; $41.9 million of employee severance, termination benefits and employee relocation costs; and $11.7 million of exited contractual commitments and other restructuring costs. See Footnote 4 of the Notes to Consolidated Financial Statements for further information. Operating income for 2013 was 10.9% of net sales, or $621.0 million, versus 11.5% of net sales, or $640.0 million for 2012. The decrease in operating margin was primarily due to the increase in restructuring costs. Net nonoperating expenses for 2013 were $78.8 million versus $85.7 million for 2012. Interest expense for 2013 was $60.3 million, a decrease of $15.8 million from $76.1 million for 2012, due to lower average debt levels and lower average interest rates. In February 2013, the exchange rate for Venezuelan Bolivar Fuertes declined to 6.3 Bolivar Fuertes to U.S. Dollar, and as a result, the Company recorded a foreign currency exchange loss of $11.1 million to reduce the value of the net monetary assets of its Venezuelan operations that are denominated in Bolivar Fuertes. During 2013, the Company recognized foreign exchange transactional losses of $9.9 million, excluding the impact of the devaluation of the Venezuelan Bolivar Fuertes, compared to foreign exchange gains of $2.6 million for 2012, as certain of the Company's primary currencies generally depreciated against the U.S. Dollar during 2013 compared to appreciating in 2012. Losses related to extinguishments of debt of $10.9 million in 2012 represent the costs associated with the early retirement of the junior convertible subordinated debentures underlying the quarterly income preferred securities and the 5.5% Senior Notes due April 2013 (the "2013 Notes"). The Company's effective income tax rate was 22.5% and 29.3% for 2013 and 2012, respectively, resulting in $122.1 million and $162.3 million of expense for 2013 and 2012, respectively. The tax rate for 2013 was impacted by the geographical mix in earnings and $7.9 million of tax benefits related to the resolution of various income tax contingencies and the expiration of various statutes 27-------------------------------------------------------------------------------- Table of Contents of limitation. Additionally, the 2013 tax rate was impacted by $19.5 million of net tax benefits associated with the recognition of incremental deferred tax assets. The tax rate for 2012 was adversely impacted by $23.1 million of income tax expense associated with incremental tax contingencies and the expiration of various statutes of limitation. The income from discontinued operations was $54.5 million for 2013 compared to $9.3 million for 2012. Income from discontinued operations during 2013 and 2012 primarily relates to the Company's Hardware and Teach businesses, which were sold during 2013. (Loss) income from discontinued operations was $(5.0) million and $7.6 million for 2013 and 2012, respectively. The sale of the Hardware and Teach businesses resulted in a net gain (including impairment charges) of $59.5 million in 2013, and the settlement of the sale of the hand torch and solder business resulted in a net gain of $1.7 million in 2012. See Footnote 2 of the Notes to Consolidated Financial Statements for further information. Results of Operations - 2012 vs. 2011 Net sales for 2012 were $5,579.9 million, representing an increase of $68.2 million, or 1.2%, from $5,511.7 million for 2011. The following table sets forth an analysis of changes in consolidated net sales for 2012 as compared to 2011 (in millions, except percentages): Core sales $ 159.2 2.9 % Foreign currency (91.0 ) (1.7 ) Total change in net sales $ 68.2 1.2 % Core sales increased 2.9% compared to the prior year, driven by growth in the Company's international businesses, particularly in emerging markets, with double-digit core sales growth in the Latin America and Asia Pacific regions. The growth in emerging markets was partially offset by a decline in the Company's European business due to a challenging macroeconomic environment. Core sales increased 2.6% and 3.5% at the Company's North American and international businesses, respectively. All segments except Home Solutions reported core sales growth. Foreign currency had the impact of reducing net sales by 1.7%. Gross margin, as a percentage of net sales, for 2012 was 38.3%, or $2,136.1 million, versus 38.1% of net sales, or $2,101.1 million, for 2011. Pricing and productivity were partially offset by input cost inflation. SG&A expenses for 2012 were 25.9% of net sales, or $1,443.2 million, versus 25.8% of net sales, or $1,422.3 million, for 2011. SG&A expenses increased $20.9 million primarily due to $20.3 million of incremental investments in strategic SG&A activities to support new products, marketing initiatives, new market entries and global expansion, and a $12.4 million increase in structural SG&A due to increased annual incentive compensation, offset by savings from structural cost savings initiatives and ongoing restructuring projects. Total restructuring-related costs decreased $5.5 million. Restructuring-related costs associated with the European Transformation Plan decreased $13.1 million to $24.3 million, as the project neared completion toward the end of 2012. In 2012, the Company incurred $7.6 million of restructuring-related costs associated with Project Renewal. Lastly, $6.3 million of incremental costs in 2011 associated with the Company's Chief Executive Officer transition did not recur in 2012. The Company recorded non-cash impairment charges of $317.9 million during 2011, principally relating to the impairment of goodwill in the Company's Baby & Parenting segment. There were no similar charges recorded during 2012. The Company recorded restructuring costs of $52.9 million and $47.9 million for 2012 and 2011, respectively. The restructuring costs in 2012 and 2011 relate to Project Renewal and the European Transformation Plan. Restructuring costs in 2012 consisted of a net benefit of $(0.7) million for facility and other exit costs, including asset impairment costs; $41.9 million of employee severance, termination benefits and employee relocation costs; and $11.7 million of exited contractual commitments and other restructuring costs. The restructuring costs for 2011 consisted of $7.9 million of facility and other exit costs, including asset impairment costs; $31.6 million of employee severance, termination benefits and employee relocation costs; and $8.4 million of exited contractual commitments and other restructuring costs. See Footnote 4 of the Notes to Consolidated Financial Statements for further information. Operating income for 2012 was 11.5% of net sales, or $640.0 million, versus 5.7% of net sales, or $313.0 million for 2011. Excluding the impact of the $317.9 million of impairment charges, which were 5.8% of net sales, operating income for 2011 would be $630.9 million, or 11.4% of net sales for 2011. Net nonoperating expenses for 2012 were $85.7 million versus $104.5 million for 2011. Interest expense for 2012 was $76.1 million, a decrease of $10.1 million from $86.2 million for 2011, due to lower average debt levels in 2012. Losses related to extinguishments of debt were $10.9 million for 2012 compared to $4.8 million in 2011. During 2012, the Company recognized 28-------------------------------------------------------------------------------- Table of Contents foreign exchange transactional gains of $2.6 million compared to foreign exchange losses of $14.5 million for 2011, as currencies generally appreciated against the U.S. Dollar during 2012 compared to depreciating in 2011. The Company's effective income tax rate was 29.3% and 10.2% for 2012 and 2011, respectively, resulting in tax expense of $162.3 million and $21.3 million for 2012 and 2011, respectively. The increase in income tax expense is primarily attributable to increased pretax income in 2012 and a change in the geographical mix in earnings, as well as $23.1 million of income tax expense attributable to charges resulting from incremental tax contingencies and the expiration of various statutes of limitation. The income tax expense in 2011 is net of a $72.4 million tax benefit the Company was able to record associated with the $317.9 million of impairment charges. Additionally, the 2011 income tax expense is net of the favorable impact of $49.0 million of benefits due to the reversal of accruals for certain tax contingencies, including interest and penalties, upon the expiration of various worldwide statutes of limitation. The net income from discontinued operations was $9.3 million for 2012 compared to net loss from discontinued operations of $(62.0) million for 2011. Income (loss) from discontinued operations during 2012 and 2011 relate to the Company's hand torch and solder business, which was sold on July 1, 2011, and the Hardware and Teach businesses sold in the third quarter of 2013. Income (loss) from discontinued operations was $7.6 million and $(46.8) million for 2012 and 2011, respectively. The loss from discontinued operations for 2011 includes $60.9 million of goodwill impairment, net of tax, associated with the Hardware business. The sale of the hand torch and solder business in 2011 resulted in a loss on sale of $(15.2) million, and the settlement of the sale of the hand torch and solder business resulted in a net gain of $1.7 million in 2012. See Footnote 2 of the Notes to Consolidated Financial Statements for further information. Business Segment Operating Results: 2013 vs. 2012 Business Segment Operating Results Net sales by segment were as follows for the years ended December 31, (in millions, except percentages): 2013 2012 % Change Writing $ 1,706.1 $ 1,724.2 (1.0 )% Home Solutions 1,593.3 1,553.8 2.5 Tools 817.9 806.1 1.5 Commercial Products 785.9 759.7 3.4 Baby & Parenting 789.3 736.1 7.2 Total net sales $ 5,692.5 $ 5,579.9 2.0 % The following table sets forth an analysis of changes in net sales in each segment for 2013 as compared to 2012: Commercial Writing Home Solutions Tools Products Baby & Parenting Core sales 0.1 % 2.9 % 3.4 % 3.9 % 10.2 % Foreign currency (1.1 ) (0.4 ) (1.9 ) (0.5 ) (3.0 ) Total change in net sales (1.0 )% 2.5 % 1.5 % 3.4 % 7.2 % 29-------------------------------------------------------------------------------- Table of Contents Operating income (loss) by segment was as follows for the years ended December 31, (in millions, except percentages): 2013 2012 % Change Writing(1),(2) $ 389.9 $ 334.9 16.4 % Home Solutions(2) 212.1 197.3 7.5 Tools 68.3 109.8 (37.8 ) Commercial Products 82.5 92.9 (11.2 ) Baby & Parenting(1) 91.2 72.7 25.4 Restructuring costs (111.1 ) (52.9 ) (110.0 ) Corporate(3) (111.9 ) (114.7 ) 2.4Total operating income $ 621.0 $ 640.0 (3.0 )% (1) For 2013, includes restructuring-related costs associated with Project Renewal of $0.3 million and $0.8 million for the Writing and Baby & Parenting segments, respectively. (2) For 2012, includes restructuring-related costs associated with Project Renewal of $1.2 million and $4.9 million attributable to the Writing and Home Solutions segments, respectively. (3) Includes organizational change implementation and restructuring-related costs of $23.8 million and $4.1 million for 2013 and 2012, respectively, associated with Project Renewal. Includes restructuring-related costs of $24.3 million for 2012 associated with the European Transformation Plan. Writing Net sales for 2013 were $1,706.1 million, a decrease of $18.1 million, or 1.0%, from $1,724.2 million for 2012. Core sales increased 0.1%, driven by a strong back-to-school season in North America and double-digit core sales growth in Latin America due to the rollout of new products, strong back-to-school sell-in, and price increases implemented in response to the devaluation of the Venezuelan Bolivar, partially offset by a challenging macroeconomic environment in Western Europe, declines in Fine Writing in Asia due to the transitioning of the distribution model in China and an overall slowdown in the category in that region, and declines in the office superstore channel in the U.S. Excluding the impacts of currency, the segment's North American businesses reported a core sales decline of 2.1% while the segment's international businesses reported core sales increase of 2.8%. Foreign currency had an unfavorable impact of 1.1% on net sales. Operating income for 2013 was $389.9 million, or 22.9% of net sales, an increase of $55.0 million, or 16.4%, from $334.9 million, or 19.4% of net sales, for 2012. The 350 basis point increase in operating margin is primarily attributable to gross margin expansion, as net pricing and productivity more than offset input cost inflation. SG&A costs as a percentage of net sales decreased 40 basis points, as the Company invested additional amounts in strategic SG&A in the prior year to support the launches of Paper Mate® InkJoy® and the Parker® Ingenuity Collection. Home Solutions Net sales for 2013 were $1,593.3 million, an increase of $39.5 million, or 2.5%, from $1,553.8 million for 2012. Core sales increased 2.9%, led by mid-single-digit growth in the Rubbermaid Consumer business due to focused merchandising activities, successful new product launches from Levolor, and distribution gains from Calphalon. Excluding the impacts of currency, sales at the segment's North American and international businesses increased 2.9% and 6.2%, respectively. Foreign currency had an unfavorable impact of 0.4% on net sales. Operating income for 2013 was $212.1 million, or 13.3% of net sales, an increase of $14.8 million, or 7.5%, from $197.3 million, or 12.7% of net sales, for 2012. The 60 basis point operating margin improvement is primarily attributable to a 120 basis point reduction in SG&A costs as a percentage of net sales due to lower strategic spend in 2013, leverage of fixed costs with an increase in net sales, and Project Renewal driven structural SG&A cost reductions. The improvement in SG&A as a percentage of net sales was slightly offset by less favorable mix and inflation. Tools Net sales for 2013 were $817.9 million, an increase of $11.8 million, or 1.5%, from $806.1 million for 2012. Core sales increased 3.4% mainly driven by double-digit growth in Latin America attributable to the success of the expanded product offering in Brazil and continued investment in selling capabilities. Excluding the impacts of foreign currency, core sales declines of 1.3% at the segment's North American businesses were more than offset by a 10.2% core sales increase in the segment's international businesses. Foreign currency had an unfavorable impact of 1.9% on net sales. Operating income for 2013 was $68.3 million, or 8.4% of net sales, a decrease of $41.5 million, or 37.8%, from $109.8 million, or 13.6% of net sales, for 2012. The 520 basis point decrease in operating margin is primarily attributable to a 380 basis point 30-------------------------------------------------------------------------------- Table of Contents increase in SG&A costs as a percentage of net sales due to higher brand-building investments, including increased advertising and promotion expenses, and sustained investments in selling and marketing capabilities in certain regions and businesses. Commercial Products Net sales for 2013 were $785.9 million, an increase of $26.2 million, or 3.4%, from $759.7 million for 2012. Core sales increased 3.9%, primarily driven by strong volume growth in both North America and Latin America attributable to programming and new product offerings. Excluding the impacts of foreign currency, sales at the segment's North American and international businesses increased 3.3% and 8.2%, respectively. Foreign currency had an unfavorable impact of 0.5% on net sales. Operating income for 2013 was $82.5 million, or 10.5% of net sales, a decrease of $10.4 million, or 11.2%, from $92.9 million, or 12.2% of net sales, for 2012. The 170 basis point decrease in operating margin is attributable to higher promotional activity and increased brand investments, as SG&A increased 150 basis points as a percentage of net sales. Baby & Parenting Net sales for 2013 were $789.3 million, an increase of $53.2 million, or 7.2%, from $736.1 million for 2012. Core sales increased 10.2%, primarily attributable to market share gains, increased distribution and innovative new products in North America. Excluding the impacts of foreign currency, sales at the segment's North American businesses increased 19.2%, while sales at the segment's international businesses decreased 3.7%. Foreign currency had an unfavorable impact of 3.0% on net sales. Operating income for 2013 was $91.2 million, or 11.6% of net sales, an increase of $18.5 million, or 25.4%, from $72.7 million, or 9.9% of net sales, for 2012. The 170 basis point increase in operating margin is largely attributable to Project Renewal cost savings and increased leverage, as SG&A decreased 410 basis points as a percentage of net sales. The improvement in operating margin was slightly offset by unfavorable mix and transactional foreign currency. 2012 vs. 2011 Business Segment Operating Results Net sales by segment were as follows for the years ended December 31, (in millions, except percentages): 2012 2011 % Change Writing $ 1,724.2 $ 1,708.2 0.9 % Home Solutions 1,553.8 1,602.0 (3.0 ) Tools 806.1 779.6 3.4 Commercial Products 759.7 741.5 2.5 Baby & Parenting 736.1 680.4 8.2 Total net sales $ 5,579.9 $ 5,511.7 1.2 % The following table sets forth an analysis of changes in net sales in each segment for 2012 as compared to 2011: Commercial Writing Home Solutions Tools Products Baby & Parenting Core sales 3.2 % (2.7 )% 7.1 % 3.6 % 9.8 % Foreign currency (2.3 ) (0.3 ) (3.7 ) (1.1 ) (1.6 ) Total change in net sales 0.9 % (3.0 )% 3.4 % 2.5 % 8.2 % 31-------------------------------------------------------------------------------- Table of Contents Operating income (loss) by segment was as follows for the years ended December 31, (in millions, except percentages): 2012 2011 % Change Writing(1) $ 334.9 $ 322.4 3.9 % Home Solutions(1) 197.3 202.2 (2.4 ) Tools 109.8 119.1 (7.8 ) Commercial Products 92.9 108.3 (14.2 ) Baby & Parenting 72.7 51.6 40.9 Impairment charges - (317.9 ) NMF Restructuring costs (52.9 ) (47.9 ) (10.4 ) Corporate(2) (114.7 ) (124.8 ) 8.1 Total operating income $ 640.0 $ 313.0 104.5 % NMF - Not meaningful figure (1) For 2012, includes restructuring-related costs associated with Project Renewal of $1.2 million and $4.9 million attributable to the Writing and Home Solutions segments, respectively. (2) Includes restructuring-related costs of $24.3 million and $37.4 million for 2012 and 2011, respectively, associated with the European Transformation Plan and $4.1 million of restructuring-related costs associated with Project Renewal for 2012. The 2011 operating income also includes $6.3 million of incremental costs associated with the Company's Chief Executive Officer transition in 2011. Writing Net sales for 2012 were $1,724.2 million, an increase of $16.0 million, or 0.9%, from $1,708.2 million for 2011. Core sales increased 3.2%, driven by a strong back-to-school season and double-digit core sales growth in the Latin American markets due to the rollout of new products, partially offset by a challenging macroeconomic environment in Western Europe which adversely impacted the fine writing business. Excluding the impacts of currency, sales at the segment's North American and international businesses increased 4.0% and 2.2%, respectively. Foreign currency had an unfavorable impact of 2.3% on net sales. Operating income for 2012 was $334.9 million, or 19.4% of net sales, an increase of $12.5 million, or 3.9%, from $322.4 million or 18.9% of net sales, for 2011. The 50 basis point increase in operating margin is primarily attributable to a 50 basis point decline in SG&A costs as a percentage of net sales. SG&A costs as a percentage of net sales decreased due to cost savings realized from Project Renewal and European Transformation plan initiatives, and the cost savings were partially offset by higher brand building and ongoing strategic SG&A spending to support the continued rollout of Paper Mate® InkJoy®. Home Solutions Net sales for 2012 were $1,553.8 million, a decrease of $48.2 million, or 3.0%, from $1,602.0 million for 2011. Core sales declined 2.7%, primarily due to continuing challenges in the Décor business and also due to a change in merchandising strategy by a significant retail customer in North America, which impacted the Décor and Culinary businesses. Excluding the impacts of currency, sales at the segment's North American and international businesses decreased 2.7% and 1.3%, respectively. Foreign currency had an unfavorable impact of 0.3% on net sales. Operating income for 2012 was $197.3 million, or 12.7% of net sales, a decrease of $4.9 million, or 2.4%, from $202.2 million, or 12.6% of net sales, for 2011. The 10 basis point increase in operating margin is attributable to a 20 basis point decrease in SG&A costs as a percentage of net sales due to savings realized from Project Renewal. Tools Net sales for 2012 were $806.1 million, an increase of $26.5 million, or 3.4%, from $779.6 million for 2011. Core sales increased 7.1%, driven by the introduction of new products in North America and continued investment in sales forces in international markets. Excluding the impacts of currency, sales at the segment's North American and international businesses increased 6.6% and 7.8%, respectively. Foreign currency had an unfavorable impact of 3.7% on net sales. Operating income for 2012 was $109.8 million, or 13.6% of net sales, a decrease of $9.3 million, or 7.8%, from $119.1 million, or 15.3% of net sales, for 2011. The 170 basis point decrease in operating margin is partially attributable to input cost inflation and unfavorable mix, partially offset by pricing and productivity. The decrease was also the result of a 110 basis point increase in SG&A costs as a percentage of net sales due to higher brand building and ongoing strategic SG&A spending, structural SG&A to support geographic expansion, and sustained investment in selling and marketing resources in certain businesses. 32-------------------------------------------------------------------------------- Table of Contents Commercial Products Net sales for 2012 were $759.7 million, an increase of $18.2 million, or 2.5%, from $741.5 million for 2011. Core sales increased 3.6%. Excluding the impacts of currency, sales at the segment's North American businesses increased 6.2% while sales declined 10.1% at international businesses, primarily due to softness in the European markets. Foreign currency had an unfavorable impact of 1.1% on net sales. Operating income for 2012 was $92.9 million, or 12.2% of net sales, a decrease of $15.4 million, or 14.2%, from $108.3 million, or 14.6% of net sales, for 2011. The 240 basis point decrease in operating margin is primarily attributable to a 280 basis point increase in SG&A costs as a percentage of net sales due to higher brand building and ongoing strategic SG&A spending, structural SG&A to support geographic expansion primarily in Latin America, and sustained investments in selling and marketing resources, partially offset by gross margin expansion. Baby & Parenting Net sales for 2012 were $736.1 million, an increase of $55.7 million, or 8.2%, from $680.4 million for 2011. Core sales increased 9.8%, which was primarily attributable to improvements in sales at the retail level in North America and sustained growth momentum in the Asia Pacific markets attributable to new products. Excluding the impacts of currency, sales at the segment's North American and international businesses increased 10.5% and 8.9%, respectively. Foreign currency had an unfavorable impact of 1.6% on net sales. Operating income for 2012 was $72.7 million, or 9.9% of net sales, an increase of $21.1 million, or 40.9%, from $51.6 million, or 7.6% of net sales, for 2011. The 230 basis point increase in operating margin is attributable to productivity, favorable mix and better leverage of SG&A costs on the net sales increase, partially offset by input cost inflation. Non-GAAP Financial Measures The Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K contains non-GAAP financial measures. The Company uses certain non-GAAP financial measures in explaining its results and in its internal evaluation and management of its businesses. The Company's management believes these non-GAAP financial measures are useful since these measures (a) permit users of the financial information to view the Company's performance using the same tools that management uses to evaluate the Company's past performance, reportable business segments and prospects for future performance and (b) determine certain elements of management's incentive compensation. The Company's management believes that core sales is useful because it demonstrates the effect of foreign currency on reported sales. Core sales is determined by applying a fixed exchange rate, calculated as the 12-month average in the prior year, to the current and prior year local currency sales amounts, with the difference equal to changes in core sales, and the difference between the changes in reported sales and the changes in core sales being attributable to currency. The Company uses core sales as one of the three performance criteria in its management cash bonus plan. While the Company believes that non-GAAP financial measures are useful in evaluating performance, this information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Additionally, non-GAAP financial measures may differ from similar measures presented by other companies. The following table provides a reconciliation of changes in core sales to changes in reported net sales by geographic region: Year Ended December 31, 2013 Europe, Middle East North America and Africa Latin America Asia Pacific Total International Total Company Core sales 3.0 % (3.3 )% 26.6 % (2.4 )% 3.6 % 3.2 % Foreign currency (0.2 ) 2.1 (9.6 ) (8.3 ) (3.7 ) (1.2 ) Total change in net sales 2.8 % (1.2 )% 17.0 % (10.7 )% (0.1 )% 2.0 % 33-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Europe, Middle East North America and Africa Latin America Asia Pacific Total International Total Company Core sales 2.6 % (4.9 )% 14.8 % 11.0 % 3.5 % 2.9 % Foreign currency (0.1 ) (7.2 ) (8.4 ) (0.1 ) (5.5 ) (1.7 ) Total change in net sales 2.5 % (12.1 )% 6.4 % 10.9 % (2.0 )% 1.2 % Reconciliations of changes in core sales to changes in reported net sales on a consolidated basis and by segment are provided earlier in the Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources Cash Flows Cash and cash equivalents increased as follows for the years ended December 31, (in millions): 2013 2012 2011 Cash provided by operating activities $ 605.2 $ 618.5 $ 561.3 Cash provided by (used in) investing activities 53.4 (163.0 ) (206.4 ) Cash used in financing activities (613.5 ) (446.0 ) (324.6 ) Currency effect on cash and cash equivalents (2.6 ) 4.1 0.3 Increase in cash and cash equivalents $ 42.5 $ 13.6 $ 30.6 In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates and the effects of acquisitions and divestitures. Accordingly, the amounts in the cash flow statement differ from changes in the operating assets and liabilities that are presented in the balance sheets. Sources Historically, the Company's primary sources of liquidity and capital resources have included cash provided by operations, proceeds from divestitures, issuance of debt, and use of available borrowing facilities. Cash provided by operating activities for 2013 was $605.2 million compared to $618.5 million for 2012. The decline in operating cash flow was due to the impact of the following items: • a $51.3 million year-over-year increase in pension contributions to the Company's U.S. pension plan; • a $69.3 million year-over-year use of cash to build inventories to support service levels and sales growth; • a $26.3 million increase in cash paid for restructuring activities; and • a $27.0 million increase in the annual incentive compensation payout; partially offset by • improved profitability in 2013 compared to 2012; • an $82.2 million year-over-year increase in collections of accounts receivable due to the timing of sales in the fourth quarter of 2012; and • a $43.6 million year-over-year decline in cash paid for interest. Cash provided by operating activities for 2012 was $618.5 million compared to $561.3 million for 2011. The $57.2 million year-over-year increase in operating cash flow was primarily driven by the following: • improved profitability in 2012 compared to 2011; • a $61.7 million decrease in incentive compensation payments made in 2012 compared to 2011; and • a $9.2 million decrease in customer program payments during 2012 compared to 2011; partially offset by • a $41.1 million increase in contributions to the Company's defined benefit plans, including its primary U.S. defined benefit pension plan. During 2013, the Company sold its Hardware and Teach Platform businesses for aggregate net proceeds of $180.9 million. The proceeds are net of $3.9 million of transaction expenses and $2.6 million of cash included in the assets sold. In addition, cash 34-------------------------------------------------------------------------------- Table of Contents provided by operating activities includes a significant portion of the cash collected on accounts receivable, net of customer-related liabilities related to the Hardware business, which totaled approximately $27.0 million of net assets. During 2013, the Company made net payments of $35.8 million on its short-term borrowing arrangements compared to $106.0 million of net proceeds related to these borrowing arrangements in 2012. The Company's short-term borrowings, which include commercial paper and the receivables financing facility, were $174.0 million at December 31, 2013 compared to $210.7 million at December 31, 2012. Short-term borrowings outstanding at December 31, 2013 were used to fund the Company's $350.0 million accelerated stock buyback program initiated in October 2013, and short-term borrowings outstanding as of December 31, 2012 were used for the early repayment of the $500.0 million outstanding principal amount of the 5.50% notes due 2013 (the "2013 Notes") in December 2012. During 2012, the Company received net proceeds of $106.0 million from its short-term borrowing arrangements compared to $34.4 million of net payments related to these borrowing arrangements in 2011. The increase in short-term borrowings is primarily due to proceeds from short-term borrowings used for the redemption of the $436.7 million of the 5.25% Junior Convertible Subordinated Debentures (the "Debentures") in July 2012 and the repayments of an aggregate $750.0 million principal amount of medium-term notes during 2012, partially offset by proceeds from long-term debt issuances in the second and fourth quarters of 2012. In June 2012, the Company completed the offering and sale of $500.0 million of unsecured senior notes, consisting of $250.0 million aggregate principal amount of 2.0% notes due 2015 (the "2015 Notes") and $250.0 million aggregate principal amount of 4.0% notes due 2022 (the "2022 Notes" and, together with the 2015 Notes, the "Notes"). The aggregate net proceeds from the Notes were $495.1 million, which were used in July 2012 to fund the redemption of all of the $436.7 million outstanding principal amount of the Debentures that underlie the convertible preferred securities (the "Preferred Securities"), to reduce short-term borrowings and for general corporate purposes. In December 2012, the Company completed the offering and sale of $350.0 million aggregate principal amount of the 2.05% notes due 2017 (the "2017 Notes"). The net proceeds of $346.8 million from the issuance of the 2017 Notes, together with cash on hand and short-term borrowings, were used to repay the 2013 Notes. In July 2011, the Company sold its hand torch and solder business to an affiliate of Worthington Industries, Inc. ("Worthington") for cash consideration of $51.0 million, $8.0 million of which was held in escrow. The cash consideration paid to the Company also provided for settlement of all claims involving the Company's litigation with Worthington. During 2012, the conditions related to the escrow were satisfied and resolved, and the Company received $7.8 million from the escrow. During 2013, the Company received $81.0 million in connection with the exercise of employee stock options, which compares to $15.6 million received in 2012. During 2013, the Company used $29.2 million to repurchase its common stock to satisfy employees' tax withholding obligations in connection with the vesting of restricted stock units, which compares to $16.4 million used in 2012. Uses Historically, the Company's primary uses of liquidity and capital resources have included capital expenditures, payments on debt, dividend payments, share repurchases and acquisitions. Capital expenditures were $138.2 million, $177.2 million and $222.9 million for 2013, 2012 and 2011, respectively. The largest single capital project in all periods was the implementation of SAP, which represented $24.3 million, $36.2 million and $65.4 million of capital expenditures for 2013, 2012 and 2011, respectively. During 2012, the Company retired $250.0 million outstanding principal amount of 6.75% medium-term notes (the "2012 Notes") at maturity in March 2012, for which interest expense was previously recorded at a rate of approximately 2.3% after contemplating the effect of the terminated interest rate swaps related to the 2012 Notes. In July 2012, the Company redeemed $436.7 million outstanding principal amount of Debentures that underlie the Preferred Securities. During the third quarter of 2012, the Company repaid an additional $8.5 million outstanding principal amount of extant 6.11% medium-term notes due 2028 (the "2028 Notes"). In December 2012, the Company repaid $500.0 million outstanding principal amount of the 2013 Notes and paid a premium of$7.1 million due to early repayment. The Company used a combination of short-term borrowings, cash on hand, and proceeds from the Notes and the 2017 Notes to repay the 2012 Notes, the 2013 Notes, the 2028 Notes and the Debentures. During 2011, the Company repaid the remaining $150.0 million outstanding principal amount of the unsecured three-year $400.0 million term loan (the "Term Loan"). In connection with the extinguishments of $20.2 million principal amount of the Convertible Notes due 2014 (the "Convertible Notes"), the Company paid $3.1 million in cash to the holders of such Convertible Notes during 2011. Aggregate dividends paid were $174.1 million, $125.9 million and $84.9 million for 2013, 2012 and 2011, respectively. The Company's Board of Directors approved a 25% increase in the Company's quarterly dividend from $0.08 per share to $0.10 per 35-------------------------------------------------------------------------------- Table of Contents share, effective with the quarterly dividend paid in June 2012, and further increased the quarterly dividend by 50% from $0.10 per share to $0.15 per share, effective with the Company's dividend paid in December 2012. In August 2011, the Company announced a $300.0 million share repurchase program (the "SRP"). The SRP was authorized to run for a period of three years ending in August 2014. In February 2014, the SRP was expanded and extended such that the Company may repurchase up to $300 million of its own shares from February 2014 through the end of 2016. During 2013, 2012 and 2011, the Company repurchased and retired 4.7 million, 4.9 million and 3.4 million shares, respectively, pursuant to the SRP for $119.5 million, $91.5 million and $46.1 million, respectively. In October 2013, the Company effected an accelerated stock buyback ("ASB") of the Company's common stock, under which the Company paid an initial purchase price of $350.0 million and the Company received 9,430,785 shares of common stock, representing a substantial majority of the shares expected to be delivered under the ASB. The number of shares ultimately purchased under the ASB will be determined by a formula tied to the volume-weighted average share price of the Company's stock during the term of the program, expected to be completed no later than April 2014. The Company used cash on hand and borrowings to fund the initial purchase price. During 2012 and 2011, the Company paid $26.5 million and $20.0 million, respectively, in connection with acquisitions and acquisition-related activity. Cash used for restructuring activities was $74.9 million, $48.6 million and $39.5 million for 2013, 2012 and 2011, respectively, and is included in the cash provided by operating activities. These payments relate primarily to employee severance, termination benefits and relocation costs. The Company made contributions of $141.6 million, $100.8 million and $59.7 million, respectively, to its defined benefit plans for 2013, 2012 and 2011, respectively. The contributions are included in cash provided by operating activities. The Company expects to make contributions of $36.7 million to its defined benefit plans in 2014. Cash Conversion Cycle The Company defines its cash conversion cycle as the sum of inventory and accounts receivable days outstanding (based on cost of products sold and net sales, respectively, for the most recent three-month period, including discontinued operations) minus accounts payable days outstanding (based on cost of products sold for the most recent three-month period, including discontinued operations) at the end of the year. The following table depicts the Company's cash conversion cycle at December 31, (in number of days): 2013 2012 2011 Accounts receivable 68 67 61 Inventory 67 66 68 Accounts payable (55 ) (50 ) (46 ) Cash conversion cycle 80 83 83 The decrease in the cash conversion cycle from 2012 to 2013 is due to working capital management activities. For 2012, the increase in accounts receivable days from 2011 is attributable to the timing of sales in the fourth quarter of 2012 compared to the fourth quarter of 2011, and this increase was offset by the combined improvements in inventory and accounts payable days. The Company's cash conversion cycle is impacted by the seasonality of its businesses and generally tends to be longer in the first and second quarters, based on historical trends, due to inventory build-ups early in the year for seasonal sales activity and credit terms provided to customers. The Company continues to leverage the implementation of SAP in North America and EMEA to improve working capital. Financial Position The Company is committed to maintaining a strong financial position through maintaining sufficient levels of available liquidity, managing working capital and monitoring the Company's overall capitalization. • Cash and cash equivalents at December 31, 2013 were $226.3 million, and the Company had nearly $1.0 billion of borrowing capacity under the $800.0 million unsecured syndicated revolving credit facility and $350.0 million receivables financing facility. • Working capital at December 31, 2013 was $681.1 million compared to $700.3 million at December 31, 2012, and the current ratio at December 31, 2013 was 1.42:1 compared to 1.45:1 at December 31, 2012. 36-------------------------------------------------------------------------------- Table of Contents • The Company monitors its overall capitalization by evaluating net debt to total capitalization. Net debt to total capitalization is defined as the sum of short- and long-term debt, less cash, divided by the sum of total debt and stockholders' equity, less cash. Net debt to total capitalization was 0.44:1 and 0.46:1 at December 31, 2013 and December 31, 2012, respectively. The Company has from time to time refinanced, redeemed or repurchased its debt and taken other steps to reduce its debt or lease obligations or otherwise improve its overall financial position and balance sheet. Going forward, depending on market conditions, its cash positions and other considerations, the Company may continue to take such actions. Cash and cash equivalents at December 31, 2013 includes $87.9 million subject to currency exchange controls in Venezuela, which limits the total amount of cash and cash equivalents held by the Company that can be used at any particular point in time to support its worldwide operations. Borrowing Arrangements In December 2011, the Company entered into a five-year credit agreement (the "Credit Agreement") with a syndicate of banks. As extended, the Credit Agreement provides for an unsecured syndicated revolving credit facility maturing in December 2018, and an aggregate commitment at any time outstanding of up to $800.0 million (the "Facility"). The Facility is intended to be used for general corporate purposes and, in addition, provides the committed backup liquidity for the issuance of commercial paper. Accordingly, commercial paper may be issued only up to the amount available for borrowing under the Facility. The Facility also provides for the issuance of up to $100.0 million of letters of credit, so long as there is a sufficient amount available for borrowing under the Facility. As of December 31, 2013, there were no borrowings or standby letters of credit issued or outstanding under the Facility, and the Company had commercial paper obligations outstanding of $95.0 million, resulting in $705.0 million of borrowing capacity available under the Facility. In addition to the committed portion of the Facility, the Credit Agreement provides for extensions of competitive bid loans from one or more lenders (at the lenders' discretion) of up to $500.0 million, which are not a utilization of the amount available for borrowing under the Facility. In September 2013, the Company amended its receivables financing facility to increase available borrowings to up to $350 million and extend the expiration date to September 2015. As of December 31, 2013, aggregate borrowings of $75.0 million were outstanding under the facility at a weighted-average interest rate of 0.9%. The following table presents the maximum and average daily borrowings outstanding under the Company's short-term borrowing arrangements during the years ended December 31, (in millions): 2013 2012 Short-term Borrowing Arrangement Maximum Average Maximum Average Commercial paper $ 249.6 $ 122.4 $ 392.8 $ 163.6 Receivables financing facility 200.0 171.4 200.0 128.3 The indentures governing the Company's medium-term notes contain usual and customary nonfinancial covenants. The Company's borrowing arrangements other than the medium-term notes contain usual and customary nonfinancial covenants and certain financial covenants, including minimum interest coverage and maximum debt-to-total-capitalization ratios. As defined by the agreements governing the borrowing arrangements, minimum interest coverage ratio is computed as adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") divided by adjusted interest expense for the four most recent quarterly periods. Generally, maximum debt-to-total-capitalization is calculated as the sum of short-term and long-term debt divided by the sum of (i) total debt, (ii) total stockholders' equity and (iii) $750.0 million related to impairment charges incurred by the Company. As of December 31, 2013, the Company had complied with all covenants under the indentures and its other borrowing arrangements, and the Company could access the full borrowing capacity available under the Facility and utilize the $1.0 billion available for general corporate purposes without exceeding the debt-to-total-capitalization limits in its financial covenants. A failure to maintain the financial covenants would impair the Company's ability to borrow under the Facility and the receivables facility and may result in the acceleration of the repayment of certain indebtedness. Debt The Company has varying needs for short-term working capital financing as a result of the seasonal nature of its business. The volume and timing of production impacts the Company's cash flows and has historically involved increased production in the first 37-------------------------------------------------------------------------------- Table of Contents quarter of the year to meet increased customer demand through the remainder of the year. Working capital fluctuations have historically been financed through short-term financing arrangements, such as commercial paper or borrowings under the Facility or receivables facility. Total debt was $1.8 billion and $1.9 billion as of December 31, 2013 and 2012, respectively, a decrease of $82.0 million due in part to net payments related to the Company's short-term borrowing arrangements, including its receivables financing facility and commercial paper, during 2013. As of December 31, 2013, the current portion of long-term debt and short-term debt totaled $174.8 million, including $95.0 million of commercial paper and $75.0 million of borrowings under the receivables financing facility. The following table presents the average outstanding debt and weighted-average interest rates for the years ended December 31, (in millions, except percentages): 2013 2012 2011 Average outstanding debt $ 1,980.7 $ 2,195.5 $ 2,351.3 Average interest rate(1) 3.0 % 3.5 % 3.6 % (1) The average interest rate includes the impacts of fixed-for-floating interest rate swaps. The Company's floating-rate debt, which includes medium-term notes that are subject to fixed-for-floating interest rate swaps, was 50.4% and 51.7% of total debt as of December 31, 2013 and 2012, respectively. See Footnote 9 of the Notes to Consolidated Financial Statements for further details. Pension and Other Postretirement Plan Obligations The Company has adopted and sponsors pension plans in the U.S. and in various other countries. The Company's ongoing funding requirements for its pension plans are largely dependent on the value of each of the plan's assets and the investment returns realized on plan assets, as well as prevailing market rates of interest. The Company made cash contributions of $100.0 million, $48.5 million and $20.4 million to its primary U.S. defined benefit pension plan during 2013, 2012 and 2011, respectively. The significant contribution the Company made in 2013 was not material to the Company's pretax income for 2013, considering the expected return on plan assets of 7.5% and the Company's average borrowing rate of 3.0%. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets. During 2013, the projected benefit obligations of the Company's defined benefit plans decreased approximately $170.6 million, primarily due to a 100 basis point increase in the discount rate used for the Company's U.S. defined benefit plans. The Company determines its plan asset investment mix, in part, on the duration of each plan's liabilities. To the extent each plan's assets decline in value or do not generate the returns expected by the Company or to the extent the pension liabilities increase due to declines in interest rates or otherwise, the Company may be required to make contributions to the pension plans to ensure the pension obligations are adequately funded as required by law or mandate. Dividends The Company intends to maintain dividends at a level such that operating cash flows can be used to fund growth initiatives and restructuring activities, and at the Company's discretion, to repay outstanding debt. The payment of dividends to holders of the Company's common stock remains at the discretion of the Board of Directors and will depend upon many factors, including the Company's financial condition, earnings, legal requirements, payout ratio and other factors the Board of Directors deems relevant. Share Repurchase Program In August 2011, the Company announced a $300.0 million share repurchase program (the "SRP"). Under the SRP, the Company may repurchase its own shares of common stock through a combination of a 10b5-1 automatic trading plan, discretionary market purchases or in privately negotiated transactions. The SRP was authorized for a period of three years ending in August 2014. In February 2014, the SRP was expanded and extended such that the Company may repurchase up to $300 million of its own shares from February 2014 through the end of 2016. During 2013, the Company repurchased 4.7 million shares pursuant to the SRP for $119.5 million, and such shares were immediately retired. From the commencement of the SRP in August 2011 through December 31, 2013, the Company has repurchased and retired a total of 12.9 million shares for $257.1 million, and the Company has $42.9 million of authorized repurchases remaining under the SRP as of December 31, 2013. The repurchase of additional shares will depend upon many factors, including the Company's financial condition, liquidity and legal requirements. Accelerated Share Repurchase Plan 38-------------------------------------------------------------------------------- Table of Contents In October 2013, the Company effected an accelerated stock buyback ("ASB") of the Company's common stock, under which the Company paid an initial purchase price of $350.0 million, and the Company received 9,430,785 shares of common stock, representing a substantial majority of the shares expected to be delivered under the ASB. The number of shares ultimately purchased under the ASB will be determined by a formula tied to the volume-weighted average share price of the Company's stock during the term of the program, expected to be completed no later than April 2014. The Company used cash on hand and borrowings to fund the initial purchase price. Credit Ratings The Company's credit ratings are periodically reviewed by rating agencies. The Company's current senior and short-term debt credit ratings from three credit rating agencies are listed below: Senior Debt Short-term Debt Credit Rating Credit Rating Outlook Moody's Investors Service Baa3 P-3 Stable Standard & Poor's BBB- A-3 Positive Fitch Ratings BBB F-2 Positive Outlook For the year ending December 31, 2014, the Company expects to generate cash flows from operations of $600 million to $650 million after restructuring and restructuring-related cash payments of $100 million to $120 million. The Company plans to fund capital expenditures of approximately $150 million to $175 million, which include expenditures associated with the implementation of SAP in Latin America. Overall, the Company believes that available cash and cash equivalents, cash flows generated from future operations, access to capital markets, and availability under the Facility and receivables financing facility will be adequate to support the cash needs of existing businesses. The Company plans to use available cash, borrowing capacity, cash flows from future operations and alternative financing arrangements to repay debt maturities as they come due, including short-term debt of $174.0 million, primarily representing commercial paper and borrowings under the receivables financing facility. Resolution of Income Tax Contingencies In 2013 and 2011, the Company recorded $7.9 million and $49.0 million in net income tax benefits, respectively, as a result of the favorable resolution of certain tax matters with taxing authorities and the expiration of the statute of limitations on certain tax matters. In 2012, amounts recognized as income tax benefits as a result of the favorable resolution of certain tax matters with taxing authorities and the expiration of the statute of limitations were not material. These benefits are reflected in the Company's 2013, 2012 and 2011 Consolidated Statements of Operations. The ultimate resolution of outstanding tax matters may be different from that reflected in the historical income tax provisions and accruals, which may adversely impact future operating results and cash flows. Contractual Obligations, Commitments and Off-Balance Sheet Arrangements The Company has outstanding debt obligations maturing at various dates through 2028. Certain other items, such as purchase commitments and other executory contracts, are not recognized as liabilities in the Company's consolidated financial statements but are required to be disclosed. Examples of items not recognized as liabilities in the Company's consolidated financial statements are commitments to purchase raw materials or inventory that has not yet been received as of December 31, 2013, and future minimum lease payments for the use of property and equipment under operating lease agreements. The following table summarizes the effect that lease and other material contractual obligations are expected to have on the Company's cash flow in the indicated period. In addition, the table reflects the timing of principal and interest payments on borrowings outstanding as of December 31, 2013. Additional details regarding these obligations are provided in the Notes to Consolidated Financial Statements (in millions): 39-------------------------------------------------------------------------------- Table of Contents Payments Due by Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Debt(1) $ 1,836.4 $ 174.8 $ 250.0 $ 623.2 $ 788.4 Interest on debt(2) 387.5 67.1 124.8 106.9 88.7 Operating lease obligations(3) 432.6 98.2 157.7 88.2 88.5 Purchase obligations(4) 664.7 524.6 140.1 - - Total contractual obligations(5) $ 3,321.2 $ 864.7 $ 672.6 $ 818.3 $ 965.6 (1) Amounts represent contractual obligations based on the earliest date that the obligation may become due, excluding interest, based on borrowings outstanding as of December 31, 2013. Includes $95.0 million of commercial paper that the Company intends to repay or refinance and $75.0 million in borrowings under the receivables financing facility that the Company intends to repay or refinance before maturity. For further information relating to these obligations, see Footnote 9 of the Notes to Consolidated Financial Statements. (2) Amounts represent estimated interest payable on borrowings outstanding as of December 31, 2013, excluding the impact of interest rate swaps that adjust the fixed rate to a floating rate for $750.0 million of medium-term notes. Interest on floating-rate debt was estimated using the rate in effect as of December 31, 2013. For further information, see Footnote 9 of the Notes to Consolidated Financial Statements. (3) Amounts represent contractual minimum lease obligations on operating leases as of December 31, 2013. For further information relating to these obligations, see Footnote 11 of the Notes to Consolidated Financial Statements. (4) Primarily consists of purchase commitments entered into as of December 31, 2013, for finished goods, raw materials, components and services pursuant to legally enforceable and binding obligations, which include all significant terms. (5) Total does not include contractual obligations reported on the December 31, 2013, balance sheet as current liabilities, except for current portion of long-term debt, short-term debt and accrued interest. The Company also has liabilities for uncertain tax positions and unrecognized tax benefits. As a large taxpayer, the Company is under audit from time-to-time by the IRS and other taxing authorities, and it is possible that the amount of the liability for uncertain tax positions and unrecognized tax benefits could change in the coming year. While it is possible that one or more of these examinations may be resolved in the next year, the Company is not able to reasonably estimate the timing or the amount by which the liability will be settled over time; therefore, the $115.0 million in unrecognized tax benefits, including interest and penalties, as of December 31, 2013, is excluded from the preceding table. See Footnote 15 of the Notes to Consolidated Financial Statements for additional information. Additionally, the Company has obligations with respect to its pension and other postretirement benefit plans, which are excluded from the preceding table. The timing and amounts of the funding requirements are uncertain because they are dependent on interest rates and actual returns on plan assets, among other factors. As of December 31, 2013, the Company had liabilities, net of plan assets, of $405.3 million related to its unfunded and underfunded pension and other postretirement benefit plans. See Footnote 12 of the Notes to Consolidated Financial Statements for further information. As of December 31, 2013, the Company had $43.7 million in standby letters of credit primarily related to the Company's self-insurance programs, including workers' compensation, product liability and medical. See Footnote 19 of the Notes to Consolidated Financial Statements for further information. As of December 31, 2013, the Company did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Critical Accounting Policies The Company's accounting policies are more fully described in Footnote 1 of the Notes to Consolidated Financial Statements. As disclosed in that footnote, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the Consolidated Financial Statements. The following sections describe the Company's critical accounting policies. Sales Recognition Sales of merchandise and freight billed to customers are recognized when title passes and all substantial risks of ownership transfer, which generally occurs either upon shipment or upon delivery based upon contractual terms. Sales are net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), cooperative advertising and other sales-related discounts. 40-------------------------------------------------------------------------------- Table of Contents Customer Programs The Company participates in various programs and arrangements with customers designed to increase the sale of products by these customers. Among the programs negotiated are arrangements under which allowances are earned by customers for attaining agreed-upon sales levels or for participating in specific marketing programs. Coupon programs are also developed on a customer- and territory- specific basis with the intent of increasing sales by all customers. The cost of all of these various programs, included as a reduction in net sales, totaled $529.9 million, $488.8 million and $443.1 million in 2013, 2012 and 2011, respectively. Under customer programs and arrangements that require sales incentives to be paid in advance, the Company amortizes the amount paid over the period of benefit or contractual sales volume. When incentives are paid in arrears, the Company accrues the estimated amount to be paid based on the program's contractual terms, expected customer performance and/or estimated sales volume. These estimates are determined using historical customer experience and other factors, which sometimes require significant judgment. As of December 31, 2013 and 2012, the Company had accrued $270.7 million and $246.4 million, respectively, for customer programs, and such amounts are included in accrued liabilities and other in the Consolidated Balance Sheets. Due to the length of time necessary to obtain relevant data from our customers, among other factors, actual amounts paid can differ from these estimates. Recovery of Accounts Receivable The Company evaluates the collectibility of accounts receivable based on a combination of factors. When aware of a specific customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position, the Company records a specific reserve for bad debt to reduce the related receivable to the amount the Company reasonably believes is collectible. The Company also records reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due and historical collection experience. Accounts are reviewed for potential write-off on a case-by-case basis. Accounts deemed uncollectible are written off, net of expected recoveries. If circumstances related to specific customers change, the Company's estimates of the recoverability of receivables could be further adjusted. Inventory Reserves The Company reduces its inventory value for estimated obsolete and slow-moving inventory in an amount equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. Net provisions for excess and obsolete inventories, including shrink reserves, totaled $20.1 million, $35.9 million and $24.5 million in 2013, 2012 and 2011, respectively, and are included in cost of products sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill The Company performs its annual impairment testing of goodwill at a reporting unit level, and all of the Company's goodwill is assigned to the Company's reporting units. Reporting units are generally one level below the operating segment level. Effective in the fourth quarter of 2012, the Company, as part of Project Renewal, implemented changes to its organizational structure that resulted in an increase in the number of reportable segments, from three to six, and reporting units, from nine to 15. Based on the Company's plans to divest the Hardware and Teach platform businesses, the goodwill of these reporting units was evaluated for impairment each reporting period subsequent to the Company committing to dispose of these businesses, which occurred in the first quarter of 2013. The Company concluded the goodwill of the Teach platform reporting unit was impaired in the first quarter of 2013, and the goodwill of the Hardware reporting unit was not impaired. Upon further reorganization in the first quarter of 2013 and excluding the Hardware and Teach platform reporting units, the number of reportable segments was reduced to five, and the number of reporting units was reduced to 13. As a result, the Company performed its annual goodwill impairment testing as of July 1, 2013, for 13 reporting units. Acquired businesses, if any, including goodwill arising from such transactions, are integrated into the Company's existing reporting units. As of July 1, 2013, the Company had 13 reporting units with total goodwill of $2.3 billion. Four of the Company's 13 reporting units accounted for over 70 percent of the Company's total goodwill. These four reporting units were as follows: Writing & Creative Expression; Commercial Products; Dymo Office; and Industrial Products & Services. The Company conducts its annual test of impairment of goodwill as of the first day of the third quarter because it generally coincides with its annual strategic planning process. The Company also tests for impairment if events and circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. For example, if macroeconomic factors, such as consumer demand and consumer confidence, deteriorate materially such that the Company's reporting units' 41-------------------------------------------------------------------------------- Table of Contents projected sales and operating income decline significantly relative to previous estimates, the Company will perform an interim test to assess whether goodwill is impaired. Other than the annual impairment test and tests of impairment of the Hardware and Teach platform reporting units in connection with the Company's plans to divest these businesses, the Company determined that no tests of impairment of goodwill were necessary during 2013. In the Company's goodwill impairment testing, if the carrying amount of a reporting unit is greater than its fair value, impairment may be present. Estimates made by management in performing its impairment testing may impact whether or not an impairment charge is necessary and the magnitude of the corresponding impairment charge to the extent one is recorded. The Company uses multiple valuation approaches in its impairment testing, each of which requires estimates to arrive at an estimate of fair value. For the Company's reporting units that are stable businesses and have a history of generating positive operating income and cash flows, the Company relies on a multiple of earnings approach to assess fair value. The material assumptions used to value a reporting unit using this approach are the reporting units' estimated financial performance for the remainder of the year and the applicable multiple to apply to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The estimated financial performance for the remainder of the year is based on the Company's internal forecasting process. To determine the EBITDA multiple, the Company obtains information from third parties on EBITDA multiples observed for recent acquisitions and other transactions in the marketplace for comparable businesses. The Company also evaluates the EBITDA multiples of publicly traded companies that are in the same industry and are comparable to each reporting unit and compares the EBITDA multiples of the publicly traded companies to the multiples used by the Company to estimate the fair value of each reporting unit. The Company evaluates the EBITDA multiples used to value the reporting units relative to the Company's market capitalization plus an equity control premium. The equity control premium is defined as the sum of the individual reporting units' estimated market values compared to the Company's market value, with the sum of the individual values typically being larger than the market value of the Company. The Company considers premiums paid by acquirers of comparable businesses to determine the reasonableness of the implied control premium. The EBITDA multiple observed in the marketplace for publicly traded companies that are comparable to the reporting units ranged from 6 to 15. In using the EBITDA multiples, the Company compared the aggregate value of all reporting units to the Company's total market value to validate the aggregate values of the reporting units resulted in a reasonable implied equity control premium. The Company considers several factors in estimating the EBITDA multiple applicable to each reporting unit, including the reporting unit's market position, brand awareness, gross and operating income margins, and prospects for growth, among other factors. After adjusting the EBITDA multiples for the reporting units, no potential goodwill impairment was indicated for reporting units for which this approach was used. Furthermore, the Company's equity market value at July 1, 2013, of approximately $7.6 billion was significantly in excess of its book value of stockholders' equity of approximately $2.0 billion. For the impairment test as of July 1, 2013, if each reporting unit's EBITDA multiple were reduced by 1.0 from the 6 to 15 multiple used for each reporting unit, all reporting units where the EBITDA multiple approach was used to value the reporting unit would have passed step 1 of the goodwill impairment test. The Company relies on a discounted cash flow approach to value reporting units in certain circumstances, such as when the reporting unit is growing at a significantly slower rate than planned, is declining at a significantly faster rate than the overall market, has experienced significant losses, is in a stage of hyper-growth, is executing significant restructuring efforts, or is in a stage of development where it has not yet fully realized the benefits of scale and operating efficiencies. The Company used the discounted cash flow approach to value the Décor reporting unit for the annual impairment test as of July 1, 2013. The material assumptions used to value a reporting unit using the discounted cash flow approach are the projected financial performance and cash flows of the reporting unit, the discount rate, long-term sales growth rate, product costs and the working capital investment required. Estimates of future financial performance include estimates of future sales growth rates, raw material and sourced product costs, currency fluctuations, and operating efficiencies to be realized. The Company determines a discount rate based on an estimate of a reasonable risk-adjusted return an investor would expect to realize on an investment in the reporting unit. In using the discounted cash flow approach to value the Décor reporting unit in 2013, the Company used an average compound long-term sales growth rate of 1%, average operating margins generally ranging from 4% to 9%, and a discount rate of 14%. The Company concluded that the Décor reporting unit passed step 1 of the goodwill impairment test based on the estimated fair value determined using the discounted cash flow approach. If the discount rate used to estimate the fair value of the Décor reporting unit increased 100 basis points, the Décor reporting unit would still have passed step 1 of the goodwill impairment test. The carrying amount of goodwill assigned to the Décor reporting unit was approximately $19 million as of July 1, 2013. The Company continues to implement specific restructuring projects and business and operational strategies to further strengthen the profitability of the Décor reporting unit as the Décor reporting unit has been adversely affected by a change in merchandising strategies at one of its key customers. The Company continues to monitor whether these initiatives are being executed as planned and are successful in improving the financial performance of the Décor reporting unit. To the extent the Company is not successful 42-------------------------------------------------------------------------------- Table of Contents in implementing these projects and strategies, it is possible the Company would record goodwill impairment charges associated with the Décor reporting unit in future periods. The Company has no reporting units with material net assets whose estimated fair values at July 1, 2013 exceeded net assets by less than 10% of the reporting unit's net assets. Indefinite-Lived Intangible Assets The Company's indefinite-lived intangible assets totaled $310.6 million as of July 1, 2013. The Company first performs a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. The Company may bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. Additionally, the Company may resume performing the qualitative assessment in any subsequent period. In performing the qualitative assessment for each of the Company's indefinite-lived intangible assets, the Company considered events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset, including factors such as declines in actual or planned sales or negative or declining cash flows; input cost inflation that may have a negative effect on future cash flows; legal, regulatory, contractual, political, business or other factors; and other entity-specific events such as changes in management, key personnel, strategy or customers. Based on the qualitative assessment, if the Company was unable to assert that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the Company would proceed with the quantitative impairment test for such asset. For the quantitative impairment test, the Company estimates the fair value of its indefinite-lived intangible assets by employing a discounted cash flow model using the relief-from-royalty method, which estimates royalties to be derived in the future use of the asset were the Company to license the use of the trade name. An impairment charge for indefinite-lived intangible assets is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date. The Company completed its annual impairment test of indefinite-lived intangible assets as of July 1, 2013, and determined that none of its indefinite-lived intangible assets were impaired. The Company considers qualitative and quantitative factors in determining whether impairment testing of the trademark and trade name assets is necessary at dates other than the annual impairment testing date, such as whether the Company has plans to abandon or significantly reduce the use of a trademark or trade name. Based on consideration of these factors, the Company determined that no impairment indicators have been present, and therefore, impairment testing as of a date other than July 1, 2013 was not required during 2013. Potential for Future Impairments The Company had 13 reporting units with total goodwill of $2.4 billion as of December 31, 2013. Four of the Company's 13 reporting units accounted for approximately 72 percent of the Company's total goodwill. These four reporting units were as follows: Writing & Creative Expression; Commercial Products; Dymo Office; and Industrial Products & Services. The Company also had $312.4 million of indefinite-lived intangible assets as of December 31, 2013. The Company cannot predict the occurrence of 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 and competitive conditions, the impact of the economic environment on the Company's customer base and net sales, a material negative change in its relationships with significant customers, or sustained declines in the Company's market capitalization relative to its reported stockholders' equity. The Company periodically evaluates the impact of economic and other conditions on the Company and its reporting units to assess whether impairment indicators are present. The Company may be required to perform additional impairment tests based on changes in the economic environment and other factors, which could result in impairment charges in the future. Although management cannot predict when improvements in macroeconomic conditions will occur, if consumer confidence and consumer spending decline significantly in the future or if commercial and industrial economic activity deteriorates significantly from current levels, it is reasonably likely the Company will be required to record impairment charges in the future. Capitalized Software Costs The Company capitalizes costs associated with internal-use software during the application development stage after both the preliminary project stage has been completed and the Company's management has authorized and committed to funding for further project development. Capitalized internal-use software costs include: (i) external direct costs of materials and services consumed in developing or obtaining the software; (ii) payroll and payroll-related costs for employees who are directly associated with and who devote time directly to the project; and (iii) interest costs incurred while developing the software. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. The Company expenses as incurred research and development, general and administrative, and indirect costs associated with internal-use software. 43-------------------------------------------------------------------------------- Table of Contents In addition, the Company expenses as incurred training, maintenance and other internal-use software costs incurred during the post-implementation stage. Costs associated with upgrades and enhancements of internal-use software are capitalized only if such modifications result in additional functionality of the software. The Company capitalized $32.4 million of software costs during 2013, which primarily relate to employee, consultant and related personnel costs incurred in the rollout of SAP in Brazil, as well as the planned rollout in 2014 of SAP in the remaining countries in Latin America. Capitalized software costs net of accumulated amortization were $251.9 million at December 31, 2013. Capitalized interest costs included in capitalized software were not material as of December 31, 2013. The Company amortizes internal-use software costs using the straight-line method over the estimated useful life of the software, which typically ranges from 3 to 12 years. Capitalized software costs are evaluated annually for indicators of impairment, including but not limited to a significant change in available technology or the manner in which the software is being used. Impaired items are written down to their estimated fair values. Other Long-Lived Assets The Company continuously evaluates if impairment indicators related to its property, plant and equipment and other long-lived assets are present. These impairment indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If impairment indicators are present, the Company estimates the future cash flows for the asset or group of assets. The sum of the undiscounted future cash flows attributable to the asset or group of assets is compared to their carrying amount. The cash flows are estimated utilizing various assumptions regarding future sales and expenses, working capital, and proceeds from asset disposals on a basis consistent with the Company's strategic plan. If the carrying amount exceeds the sum of the undiscounted future cash flows, the Company discounts the future cash flows using a discount rate required for a similar investment of like risk and records an impairment charge as the difference between the fair value and the carrying value of the asset group. Generally, the Company performs its testing of the asset group at the product-line level, as this is the lowest level for which identifiable cash flows are available. Product Liability Reserves The Company has a self-insurance program for product liability that includes reserves for self-retained losses and certain excess and aggregate risk transfer insurance. The Company uses historical loss experience combined with actuarial evaluation methods, review of significant individual files and the application of risk transfer programs in determining required product liability reserves. The Company's actuarial evaluation methods take into account claims incurred but not reported when determining the Company's product liability reserve. The Company has product liability reserves of $34.4 million as of December 31, 2013. While the Company believes that it has adequately reserved for these claims, the ultimate outcome of these matters may exceed the amounts recorded by the Company, and such additional losses may be material to the Company's Consolidated Financial Statements. Legal and Environmental Reserves The Company is subject to losses resulting from extensive and evolving federal, state, local, and foreign laws and regulations, as well as contract and other disputes. The Company evaluates the potential legal and environmental losses relating to each specific case and estimates the probability and amount of loss based on historical experience and estimates of cash flows for certain environmental matters. The estimated losses take into account anticipated costs associated with investigative and remediation efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. No insurance recovery is taken into account in determining the Company's cost estimates or reserve, nor do the Company's cost estimates or reserve reflect any discounting for present value purposes, except with respect to long-term operations and maintenance, Comprehensive Environmental Response Compensation and Liability ("CERCLA") and other matters which are estimated at present value. The Company's estimate of environmental response costs associated with these matters as of December 31, 2013, ranged between $20.4 million and $23.0 million. As of December 31, 2013, the Company had a reserve of $21.0 million for such environmental response costs in the aggregate, which is included in other accrued liabilities and other noncurrent liabilities in the Consolidated Balance Sheet. Income Taxes In accordance with relevant authoritative guidance, the Company accounts for deferred income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized. No provision is made for the U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as substantially all such earnings are permanently reinvested. 44-------------------------------------------------------------------------------- Table of Contents The Company's income tax provisions are based on calculations and assumptions that are subject to examination by the IRS and other tax authorities. Although the Company believes that the positions taken on previously filed tax returns are reasonable, it has established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken, which could result in additional liabilities for taxes and interest. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a "more likely than not" threshold to the recognition and derecognition of tax positions. The Company's ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company's effective tax rate as well as impact operating results. The Company's provision for income taxes is subject to volatility and could be favorably or adversely affected by earnings being higher or lower in countries that have lower tax rates and higher or lower in countries that have higher tax rates; by changes in the valuation of deferred tax assets and liabilities; by expiration of or lapses in tax-related legislation; by expiration of or lapses in tax incentives; by tax effects of nondeductible compensation; by changes in accounting principles; or by changes in tax laws and regulations, including possible U.S. changes to the taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to foreign income, or the foreign tax credit rules. The Company's effective tax rates differ from the statutory rate, primarily due to the tax impact of state taxes, foreign operations, tax credits, the domestic manufacturing deduction, tax audit settlements, nondeductible compensation and valuation allowance adjustments. Significant judgment is required in evaluating uncertain tax positions, determining valuation allowances recorded against deferred tax assets, and ultimately, the income tax provision. It is difficult to predict when resolution of income tax matters will occur and when recognition of certain income tax assets and liabilities is appropriate, and the Company's income tax expense in the future may continue to differ from the statutory rate because of the effects of similar items. For example, if items are favorably resolved or management determines a deferred tax asset is realizable that was previously reserved, the Company will recognize period tax benefits. Conversely, to the extent tax matters are unfavorably resolved or management determines a valuation allowance is necessary for a tax asset that was not previously reserved, the Company will recognize incremental period tax expense. These matters are expected to contribute to the tax rate differing from the statutory rate and continued volatility in the Company's effective tax rate. See Footnote 15 of the Notes to Consolidated Financial Statements for further information. Pensions and Other Postretirement Benefits Pension and other postretirement benefit costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, health care cost trend rates, expected return on plan assets, mortality rates and rate of compensation increases, as discussed below: • Discount rates: The Company generally estimates the discount rate for its pension and other postretirement benefit obligations using an iterative process based on a hypothetical investment in a portfolio of high-quality bonds that approximate the estimated cash flows of the pension and other postretirement benefit obligations. The Company believes this approach permits a matching of future cash outflows related to benefit payments with future cash inflows associated with bond coupons and maturities. • Health care cost trend rate: The Company's health care cost trend rate is based on historical retiree cost data, near-term health care outlook, and industry benchmarks and surveys. • Expected return on plan assets: The Company's expected return on plan assets is derived from reviews of asset allocation strategies and historical and anticipated future long-term performance of individual asset classes. The Company's analysis gives consideration to historical returns and long-term, prospective rates of return. • Mortality rates: Mortality rates are based on actual and projected plan experience. • Rate of compensation increase: The rate of compensation increases reflects the Company's long-term actual experience and its outlook, including consideration of expected rates of inflation. 45-------------------------------------------------------------------------------- Table of Contents In accordance with generally accepted accounting principles, actual results that differ from the assumptions are accumulated and amortized over future periods, and therefore, generally affect recognized expense in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's pension and other postretirement plan obligations and future expense. See Footnote 12 of the Notes to Consolidated Financial Statements for additional information on the assumptions used. The following tables summarize the Company's pension and other postretirement plan assets and obligations included in the Consolidated Balance Sheet as of December 31, 2013 (in millions): U.S. International Pension plan assets and obligations, net: Prepaid benefit cost $ - $ 7.0 Accrued current benefit cost (9.5 ) (4.1 ) Accrued noncurrent benefit cost (195.0 ) (84.8 ) Net liability recognized in the Consolidated Balance Sheet $ (204.5 ) $ (81.9 ) U.S. Other postretirement benefit obligations: Accrued current benefit cost $ (10.3 ) Accrued noncurrent benefit cost (101.5 ) Liability recognized in the Consolidated Balance Sheet $ (111.8 ) The following table summarizes the net pretax cost associated with pensions and other postretirement benefit obligations in the Consolidated Statement of Operations for the year ended December 31, (in millions): 2013 2012 2011 Net pension cost $ 29.0 $ 25.4 $ 19.5 Net postretirement benefit costs 5.0 7.2 8.4 Total $ 34.0 $ 32.6 $ 27.9 The Company used a weighted-average discount rate of 3.7% to determine the expenses for 2013 for the pension and postretirement plans. The Company used a weighted-average expected return on assets of 6.4% to determine the expense for the pension plans for 2013. The following table illustrates the sensitivity to a change in certain assumptions for the pension and postretirement plan expenses, holding all other assumptions constant (in millions): Impact on 2013 Expense 25 basis point decrease in discount rate $ 0.5 25 basis point increase in discount rate $ (0.6 ) 25 basis point decrease in expected return on assets $ 3.2 25 basis point increase in expected return on assets $ (3.2 ) The total projected benefit obligations of the Company's pension and postretirement plans as of December 31, 2013 were $1.65 billion and $111.8 million, respectively. The Company used a weighted-average discount rate of 4.4% to determine the projected benefit obligations for the pension and postretirement plans as of December 31, 2013. The following table illustrates the sensitivity to a change in certain assumptions for the projected benefit obligation for the pension and postretirement plans, holding all other assumptions constant (in millions): December 31, 2013 Impact on PBO 25 basis point decrease in discount rate $ 57.9 25 basis point increase in discount rate $ (55.8 ) The Company has $483.3 million (after-tax) of net unrecognized pension and other postretirement losses ($716.0 million pretax) included as a reduction to stockholders' equity at December 31, 2013. The unrecognized gains and losses primarily result from changes to life expectancies and other actuarial assumptions, changes in discount rates, as well as actual returns on plan assets 46-------------------------------------------------------------------------------- Table of Contents being more or less than expected. The unrecognized gain (loss) for each plan is amortized to expense over the life of each plan. The net amount amortized to expense totaled $33.7 million (pretax) in 2013, and amortization of unrecognized net losses is expected to continue to result in increases in pension and other postretirement plan expenses for the foreseeable future. Changes in actuarial assumptions, changes in discount rates, actual returns on plan assets and changes in the actuarially determined life of the plans impact the amount of unrecognized gain (loss) recognized as expense annually. Restructuring The Company has and expects to continue to engage in restructuring activities, which requires management to utilize significant estimates related to the timing and amount of severance and other employee separation costs for workforce reductions and other separation programs, realizable values of assets made redundant or obsolete, lease cancellation and other exit costs, including environmental and legal contingencies associated with restructuring activities. The Company accrues for severance and other employee separation costs under these activities when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experience and previously negotiated settlements. The Company accrues for future lease costs, net of management's estimate for future sublease income, when the leased property has been vacated and is no longer being used. Environmental and legal contingencies associated with restructuring activities are accrued when the liability is probable of being incurred and is estimable. The total restructuring liabilities included in accrued liabilities and other in the Consolidated Balance Sheets as of December 31, 2013 and 2012 were $76.7 million and $41.3 million, respectively. Due to the estimates required for future payments for employee separation programs, vacated leased properties, and contingencies, actual amounts paid can differ from these estimates. Recent Accounting Pronouncements See Item 8 of Part II, "Financial Statements and Supplementary Data-Footnote 1-Description of Business and Significant Accounting Policies-Recent Accounting Pronouncements." International Operations For 2013, 2012 and 2011, the Company's non-U.S. businesses accounted for approximately 32%, 33% and 34% of net sales, respectively (see Footnote 18 of the Notes to Consolidated Financial Statements). Changes in both U.S. and non-U.S. net sales are shown below for the years ended December 31, (in millions, except percentages): 2013 vs. 2012 2012 vs. 2011 2013 2012 2011 % Change % Change U.S. $ 3,867.8 $ 3,739.1 $ 3,628.9 3.4 % 3.0 % Non-U.S 1,824.7 1,840.8 1,882.8 (0.9 ) (2.2 ) $ 5,692.5 $ 5,579.9 $ 5,511.7 2.0 % 1.2 % The Company accounts for its Venezuelan operations using highly inflationary accounting. Under highly inflationary accounting, the Company remeasures assets, liabilities, sales and expenses denominated in Bolivar Fuertes into U.S. Dollars using the applicable exchange rate, and the resulting translation adjustments are included in earnings. In 2010, the Venezuelan government introduced a newly regulated foreign currency exchange system, Transaction System for Foreign Currency Denominated Securities ("SITME"). Foreign currency exchange through SITME is allowed within a specified band of 4.5 to 5.3 Bolivar Fuerte to U.S. Dollar, but most of the exchanges have been executed at the rate of 5.3 Bolivar Fuerte to U.S. Dollar. Since the introduction of SITME in June 2010, the Venezuelan government held the rate constant at 5.3 Bolivar Fuerte to U.S. Dollar until February 2013. In February 2013, the Venezuelan government announced a devaluation of the Bolivar Fuerte ("Bolivar"), resulting in the exchange rate declining from 5.3 to 6.3 Bolivars to U.S. Dollar. Because the Company considers Venezuela a highly inflationary economy, the change in the exchange rate resulted in foreign exchange losses of $11.1 million during the 12 months ended December 31, 2013. These foreign exchange losses represent the impact of the devaluation on the Bolivar-denominated net monetary assets of the Company's Venezuelan operations. As of December 31, 2013, the Company's Venezuelan operations had approximately $87.3 million in Bolivar-denominated net monetary assets. In future periods, foreign exchange gains (losses) arising due to the appreciation (depreciation) of the Bolivar versus the U.S. Dollar will result in one-time benefits (charges) based on the value of the Bolivar-denominated net monetary assets at the time when such exchange rate changes become effective. During 2013, 2012 and 2011, the Company's Venezuelan operations generated 1.4% or less of consolidated net sales. The Company is unable to predict with certainty whether future devaluations will occur because of the economic uncertainty in Venezuela; however, future devaluations would adversely impact the Company's future financial results. Any change in the rate would not impact reported changes in core sales, which exclude the impact of foreign currency. 47-------------------------------------------------------------------------------- Table of Contents Income Taxes The Company's provision for income taxes is subject to volatility and could be favorably or adversely affected by earnings being higher or lower in countries that have lower tax rates and higher or lower in countries that have higher tax rates; by changes in the valuation of deferred tax assets and liabilities; by expiration of or lapses in tax-related legislation; by expiration of or lapses in tax incentives; by tax effects of nondeductible compensation; by changes in accounting principles; or by changes in tax laws and regulations, including possible U.S. changes to the taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to foreign income, or the foreign tax credit rules. The Company's effective tax rates differ from the statutory rate, primarily due to the tax impact of state taxes, foreign operations, tax credits, the domestic manufacturing deduction, tax audit settlements, nondeductible compensation and valuation allowance adjustments. Significant judgment is required in evaluating uncertain tax positions, determining valuation allowances recorded against deferred tax assets, and ultimately, the income tax provision. It is difficult to predict when resolution of income tax matters will occur and when recognition of certain income tax assets and liabilities is appropriate, and the Company's income tax expense in the future may continue to differ from the statutory rate because of the effects of similar items. For example, if items are favorably resolved or management determines a deferred tax asset is realizable that was previously reserved, the Company will recognize period tax benefits. Conversely, to the extent tax matters are unfavorably resolved or management determines a valuation allowance is necessary for a tax asset that was not previously reserved, the Company will recognize incremental period tax expense. These matters are expected to contribute to the tax rate differing from the statutory rate and continued volatility in the Company's effective tax rate. Fair Value Measurements Fair value is a market-based measurement, not an entity-specific measurement, defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Various valuation techniques exist for measuring fair value, including the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. The authoritative accounting guidance for fair value provides a hierarchy that prioritizes these two inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: • Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. • Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3: Unobservable inputs that reflect the reporting entity's own assumptions. The Company's assets and liabilities adjusted to fair value at least annually are its money market fund investments, included in cash and cash equivalents; mutual fund investments, included in other assets; and derivative instruments, primarily included in prepaid expenses and other, other assets, other accrued liabilities and other noncurrent liabilities, and these assets and liabilities are therefore subject to the measurement and disclosure requirements outlined in the authoritative guidance. The Company determines the fair value of its money market fund investments based on the values of the underlying assets (Level 2) and its mutual fund investments based on quoted market prices (Level 1). The Company generally uses derivatives for hedging purposes, and the Company's derivatives are primarily foreign currency forward contracts and interest rate swaps. The Company determines the fair value of its derivative instruments using standard pricing models and market-based assumptions for all significant inputs, such as yield curves and quoted spot and forward exchange rates. Accordingly, the Company's derivative instruments are classified as Level 2. Forward-Looking Statements Forward-looking statements in this Report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to, but are not limited to, information or assumptions about the effects of sales (including pricing), income/(loss), earnings per share, return on equity, return on invested capital, operating income, operating margin or gross margin improvements or declines, Project Renewal, capital and other expenditures, working capital, cash flow, dividends, capital structure, debt to capitalization ratios, debt ratings, availability of financing, interest rates, restructuring, 48-------------------------------------------------------------------------------- Table of Contents restructuring-related and organizational change implementation costs, impairment and other charges, potential losses on divestitures, impacts of changes in accounting standards, pending legal proceedings and claims (including environmental matters), future economic performance, costs and cost savings, inflation or deflation with respect to raw materials and sourced products, productivity and streamlining, synergies, management's plans, goals and objectives for future operations, performance and growth or the assumptions relating to any of the forward-looking statements. These statements generally are accompanied by words such as "intend," "anticipate," "believe," "estimate," "project," "target," "plan," "expect," "will," "should," "would" or similar statements. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results. Actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the Company's dependence on the strength of retail, commercial and industrial sectors of the economy in light of the continuation or escalation of the global economic slowdown or regional sovereign debt issues; currency fluctuations; competition with other manufacturers and distributors of consumer products; major retailers' strong bargaining power; changes in the prices of raw materials and sourced products and the Company's ability to obtain raw materials and sourced products in a timely manner from suppliers; the Company's ability to develop innovative new products and to develop, maintain and strengthen its end-user brands; product liability or regulatory actions; the Company's ability to expeditiously close facilities and move operations while managing foreign regulations and other impediments; a failure of one of the Company's key information technology systems or related controls; the potential inability to attract, retain and motivate key employees; future events that could adversely affect the value of the Company's assets and require impairment charges; the Company's ability to improve productivity and streamline operations; changes to the Company's credit ratings; significant increases in the funding obligations related to the Company's pension plans due to declining asset values, declining interest rates or otherwise; the imposition of tax liabilities greater than the Company's provisions for such matters; the risks inherent in the Company's foreign operations; the Company's ability to consummate the transactions contemplated by the Accelerated Share Repurchase Plan; and those matters set forth in this Report generally and Exhibit 99.1 to this Report. In addition, there can be no assurance that the Company has correctly identified and assessed all of the factors affecting the Company or that the publicly available and other information the Company receives with respect to these factors is complete or correct. |