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NEWELL RUBBERMAID INC - 10-Q - 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 condensed 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®. Business Strategy 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. The Growth Game Plan encompasses the following aspects: Business Model • A growing brand-led business with a strong home in the United States and global ambition. • Consumer brands that win at the point of decision through excellence in performance, design and innovation. • Professional brands that win the loyalty of the chooser by improving the productivity and performance of the user. • Collaboration with our partners across the total enterprise in a shared commitment to growth and creating value. • Delivering competitive returns to shareholders through consistent, sustainable and profitable growth. Where To Play • Win Bigger - Deploying resources to businesses and regions with higher growth opportunities through investments in innovation and geographic expansion. • Win Where We Are - Optimizing the performance of businesses and brands in existing markets by investing in innovation to increase market share and reducing structural spend within the existing geographic footprint. • Incubate For Growth - Investing in businesses that have unique opportunities for growth, with a primary focus on businesses that are in the early stages of the business cycle. 5 Ways To Win • Make Our Brands Really Matter - Sharpening brand strategies on the highest impact growth levers and partnering to win with customers and suppliers. • Build An Execution Powerhouse - Realigning the customer development organization and developing joint business plans for new channel penetration and broader distribution. • Unlock Trapped Capacity For Growth - Delivering savings from ongoing restructuring projects, working capital reductions and simplification of business processes. • Develop The Team For Growth - Driving a performance culture aligned to the business strategy and building a more global perspective and talent base. • Extend Beyond Our Borders - Accelerating investments and growth in emerging markets. In implementing the tenets of its strategy, the Company is focused on Every Day Great Execution, or EDGE, to capitalize on and maximize the benefits of investment and growth opportunities and to optimize the cost structure of the business. Organizational Structure The Company is driving the Growth Game Plan into action and simplifying its structure through the execution of Project Renewal, making sharper portfolio choices and investing in new marketing and innovation to accelerate performance. In the Growth Game 24-------------------------------------------------------------------------------- Table of Contents 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 business 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; Dymo® Industrial, industrial bandsaw blades; tools for pipes hilmor™ and HVAC systems; label makers 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 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 Company's results for the first three months of 2014 were impacted by the following factors: • Core sales, which exclude the impact of changes in foreign currency, increased 0.7% in 2014 compared to the same period last year. Core sales growth of 10.0% and 0.9% in Latin America and North America, respectively, were partially offset by declines of 5.1% and 0.3% in Europe and Asia Pacific, respectively. The decline in Europe was due primarily to exiting select product lines and geographies in the European region, primarily in the Baby & Parenting and Fine Writing categories. Core sales is determined by applying a fixed exchange rate, calculated as the 12-month average in 2013, 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 increased 8.0% in the Writing segment, with strong sales in the Latin America region, driven by the Ink Joy® advertising campaign in Mexico, the Caribbean and Colombia, a new distribution model in Brazil, as well as volume increases and pricing in the region, coupled with strong sales performance in North America. Core sales grew 2.4% in the Tools segment driven by pricing and volume growth in North America. Core sales increased 0.2% in the Commercial Products segment, primarily driven by increased volume in Europe, partially offset by a sales decline in North America compared to a record quarter last year in Rubbermaid® Healthcare. Core sales decreased 4.5% in the Home Solutions segment as a result of softness in North America, which was largely attributable to severe weather conditions, and the negative effect on volume of less merchandising on certain low margin Rubbermaid Consumer product lines. Baby & Parenting's core sales decreased 4.4%, primarily due to decreased volume in North America, attributable to the impact of the U.S. recall of harness buckles on select car seats, and the exit of certain product lines in Europe. • Gross margin was 38.1%. Favorable pricing, product mix and productivity offset the effects of input cost inflation, unfavorable transactional currency impacts and costs associated with the recall of harness buckles on select car seats. Gross margin for the first three months of 2014 was adversely impacted by $8.6 million, or 70 basis points, due to the costs of the recall. • During the first three months of 2014, the Company's investments for brand-building and consumer demand creation and commercialization activities included the following: • a New Distributor Model, building a structure that assigns relationship owners to key distributors, removing redundancies and simplifying the approach with distributors to sell a broader assortment of the Company's products; • a new line of Sharpie® highlighters called Sharpie® Clear View highlighters which have a unique, see-through tip for moreprecise highlighting; 25-------------------------------------------------------------------------------- Table of Contents •continued investment in InkJoy® advertising in the U.S., Latin America and Asia markets; and • working media in the Baby & Parenting business to support new product development in Japan, along with the Parker "Dreams Cannot be Rushed" campaign in Japan. During 2014, the Company plans to accelerate planned brand investment spending from the fourth quarter into the second and third quarters to generate incremental growth earlier in the year. • Continued the execution of Project Renewal to simplify the business, reduce structural costs and increase investment in the most significant growth platforms within the business by taking significant steps in implementing activities centered around Project Renewal's five workstreams, resulting in $12.0 million of restructuring costs in the first three months of 2014. • Realized a $38.7 million foreign exchange loss in the first three months of 2014 due to the adoption of the SICAD I rate for the Company's Venezuelan operations. • Reported a $1.3 million income tax benefit in 2014 compared to $6.4 million of income tax expense in 2013, primarily due to the income tax rate applicable to the $38.7 million foreign exchange loss associated with Venezuela being higher than the Company's overall effective tax rate. In addition, during 2014, the Company recognized discrete income tax benefits of $8.0 million related to the resolution of certain tax contingencies. During 2013, the Company recognized $13.1 million of tax benefits, including $8.3 million of net tax benefits associated with the recognition of incremental deferred taxes and $4.8 million associated with the resolution of certain tax contingencies. • Expanded and extended the Company's share repurchase plan (the "SRP"), allowing for total repurchases of $300.0 million between February 2014 and the end of 2016. During the first three months of 2014, the Company repurchased and retired an additional 1.5 million shares of common stock for $44.4 million, leaving $255.6 million available under the SRP for future repurchases. Projects and 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. 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. 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 March 31, 2014, the Company incurred $196 million and $43 million of restructuring and restructuring-related charges, respectively, the majority of which were employee-related cash costs, including severance, retirement and other termination benefits and costs. Restructuring-related charges represent certain organizational change implementation costs and incremental cost of products sold and SG&A expenses associated with the implementation of Project Renewal. In the first three months of 2014, the Company has continued to execute existing projects as well as initiate new activities relating to Project Renewal as follows: • Completed 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, and the consolidation of the marketing function into a global center of excellence. 26-------------------------------------------------------------------------------- Table of Contents • The ongoing implementation of the EMEA Simplification workstream, which includes 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. As part of the EMEA Simplification workstream, the Company has exited certain markets and product lines, as follows: • Exit direct sales in over 50 of the 120 countries and territories that the EMEA region serves; • Discontinue the Baby & Parenting business in about 19 countries; • Discontinue several lines of Baby & Parenting products; and • Exit the custom-logo Fine Writing business. The Company expects sales for the year ending December 31, 2014 to be adversely impacted by $25 million compared to the year ended December 31, 2013 due to these geographic and product line exits. • The implementation of the Best Cost Finance workstream by consolidating and realigning its shared services and decision support capabilities. • The continued execution 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 ongoing reconfiguration and consolidation of the Company's manufacturing footprint and distribution centers to reduce overhead, improve operational efficiencies and better utilize existing assets, including initiating projects to close a distribution center and a manufacturing facility in North America. 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 service 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 Customer Development and Global Supply Chain organizations, and consolidating activities into 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. Substantially all of the North American, European and Brazilian operations of the Company's five segments have successfully gone live with their SAP implementation efforts, and the Company anticipates additional countries in the Latin America region will go-live later in 2014. Foreign Currency - Venezuela The Company began accounting for its Venezuelan operations using highly inflationary accounting in January 2010. Under highly inflationary accounting, the Company remeasures assets, liabilities, sales and expenses denominated in Bolivar Fuertes ("Bolivars") into U.S. Dollars using the applicable exchange rate, and the resulting translation adjustments are included in earnings. Beginning in July 2013, the Venezuelan government authorized certain companies that operate in designated industry sectors to exchange a limited volume of Bolivars for U.S. Dollars at a bid rate established via weekly auctions under a system referred to as "SICAD I." During the first quarter of 2014, the government expanded the types of transactions that may be subject to the weekly SICAD I auction rate while retaining the official rate of 6.3 Bolivars per U.S. Dollar and introduced another currency exchange mechanism ("SICAD II"). The official exchange rate for settling certain transactions through the National Center of Foreign Trade ("CENCOEX"), including imports of essential goods, remains at 6.3 Bolivars per U.S. Dollar. As of March 31, 2014, the SICAD I auction rate was 10.7 Bolivars per U.S. Dollar, and the SICAD II rate was 49.8 Bolivars per U.S. Dollar. The Company continues to believe that transactions for imports of essential goods, such as certain raw materials and finished goods (primarily in the Writing segment), will be settled at the official exchange rate of 6.3 Bolivars per U.S. Dollar, and the Company has continued to receive authorizations to import at this rate. The Company analyzed the multiple rates currently available and the Company's estimates of the applicable rate at which future transactions could be settled, including the payment of dividends. Based on this analysis, the Company determined that the SICAD I rate is the most appropriate rate to use for remeasurement. As a result, the Company recorded a charge of $38.7 million in the first quarter of 2014, based on the decline in value of the net monetary assets of its Venezuelan operations that are denominated in Bolivars. In addition, the Company's 2014 reported net sales and operating income are expected to be adversely impacted by an estimated $32 million and $21 million, respectively, due solely 27-------------------------------------------------------------------------------- Table of Contents to the use of the SICAD I rate for the remainder of 2014, which includes the adverse impact on gross margins attributable to the first turn of inventory after the change to the SICAD I rate and the increased costs of importing raw materials. As of March 31, 2014, the Company's Venezuelan subsidiary had approximately $56.1 million of net monetary assets denominated in Bolivars at the rate of 10.7 Bolivars per 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 approximately $6 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 $6 million and $4 million, respectively. As part of the changes implemented in the first quarter of 2014, the Venezuelan government also issued a new Law on Fair Pricing, establishing a maximum profit margin of 30%. At this time, it is unclear based on the current regulations how this new law may affect the Company's Venezuelan operations and its current pricing structure and, as a result, its impact is not included in the estimated ongoing impacts outlined above. However, price controls generally may affect products the Company markets and sells in Venezuela, and may restrict the Company's ability to implement price increases. Price increases have been one of the key mechanisms the Company has used to offset the effects of continuing high inflation and the impact of currency devaluations. Results of Operations The following table sets forth for the periods indicated items from the Condensed Consolidated Statements of Operations as reported and as a percentage of net sales (in millions, except percentages): Three Months Ended March 31, 2014 2013 Net sales $ 1,232.2 100.0 % $ 1,240.8 100.0 % Cost of products sold 762.9 61.9 767.2 61.8 Gross margin 469.3 38.1 473.6 38.2 Selling, general and administrative expenses 352.1 28.6 341.4 27.5 Restructuring costs 12.0 1.0 34.4 2.8 Operating income 105.2 8.5 97.8 7.9 Nonoperating expenses: Interest expense, net 14.4 1.2 14.6 1.2 Other expense, net 40.0 3.2 13.0 1.0 Net nonoperating expenses 54.4 4.4 27.6 2.2 Income before income taxes 50.8 4.1 70.2 5.7 Income tax (benefit) expense (1.3 ) (0.1 ) 6.4 0.5 Income from continuing operations 52.1 4.2 63.8 5.1 Income (loss) from discontinued operations 0.8 0.1 (9.6 ) (0.8 ) Net income $ 52.9 4.3 % $ 54.2 4.4 % Three Months Ended March 31, 2014 vs. Three Months Ended March 31, 2013 Consolidated Operating Results: Net sales for the three months ended March 31, 2014 were $1,232.2 million, representing a decrease of $8.6 million, or 0.7%, from $1,240.8 million for the three months ended March 31, 2013. Core sales increased 0.7%, and foreign currency had the effect of decreasing net sales by 1.4%. The following table sets forth an analysis of changes in consolidated net sales for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 (in millions, except percentages): Core sales $ 8.2 0.7 % Foreign currency (16.8 ) (1.4 ) Total change in net sales $ (8.6 ) (0.7 )% Core sales in the Company's North American businesses increased 0.9%, while sales in the international businesses remained flat. In North America, core sales growth was led by strong growth in Writing and Tools, partially offset by declines in Baby & Parenting 28-------------------------------------------------------------------------------- Table of Contents due to the recall and declines in Home Solutions. In Europe, core sales decreased 5.1%, reflecting the ongoing macroeconomic challenges in Western Europe as well as the impacts of simplifying the European footprint, which involves exiting certain geographies and product lines in the region. Core sales in the Company's Latin America businesses increased 10.0% driven by increased volumes and pricing in the Writing segment, including price increases in Venezuela in response to inflation. In the Asia Pacific region, core sales declined 0.3% primarily due to sales declines experienced by the Baby & Parenting segment. Gross margin, as a percentage of net sales, for the three months ended March 31, 2014 was 38.1%, or $469.3 million. Favorable pricing and productivity offset the effects of input cost inflation, unfavorable transactional currency impacts and costs associated with the recall of harness buckles on select Graco car seats. In February 2014, the Company initiated a voluntary recall on the harness buckles used on approximately 4 million toddler car seats. The Company's results for the first quarter of 2014 include an $11.0 million charge, including $8.6 million included in cost of products sold and $2.4 million in selling, general & administrative expenses ("SG&A"), associated with the recall of harness buckles used on toddler car seats as well as an estimate for costs associated with harness buckles used on select infant car seats. SG&A expenses for the three months ended March 31, 2014 were 28.6% of net sales, or $352.1 million, versus 27.5% of net sales, or $341.4 million, for the three months ended March 31, 2013. SG&A expenses increased as a result of increased advertising and promotion, primarily relating to InkJoy® advertising in the U.S., Mexico and Asia, and investments in increased selling capabilities in North America and Latin America. The Company recorded restructuring costs of $12.0 million and $34.4 million for the three months ended March 31, 2014 and 2013, respectively. The year-over-year decrease in restructuring costs is primarily due to the significant costs incurred in the first quarter of 2013 associated with the implementation of restructuring plans and initiatives under Project Renewal in Europe as part of the EMEA Simplification workstream. The restructuring costs for the three months ended March 31, 2014 primarily related to Project Renewal and consisted of $1.2 million of facility and other exit costs, including impairments, $9.4 million of employee severance, termination benefits and employee relocation costs and $1.4 million of exited contractual commitments and other restructuring costs. The restructuring costs for the three months ended March 31, 2013 primarily related to Project Renewal and consisted of $26.2 million of employee severance, termination benefits and employee relocation costs and $8.2 million of exited contractual commitments and other restructuring costs. See Footnote 4 of the Notes to Condensed Consolidated Financial Statements for further information. Operating income for the three months ended March 31, 2014 was $105.2 million, or 8.5% of net sales, versus $97.8 million, or 7.9% of net sales, for the three months ended March 31, 2013. The increase in operating margin was driven by the reduction in restructuring costs, partially offset by the costs associated with the recall of harness buckles on select car seats and continued investment in brands and capabilities. Net nonoperating expenses for the three months ended March 31, 2014 were $54.4 million versus $27.6 million for the three months ended March 31, 2013. Interest expense for the three months ended March 31, 2014 was $14.4 million, a decrease of $0.2 million from $14.6 million for the three months ended March 31, 2013, due to lower average debt levels. In March 2014, the Company adopted the SICAD I exchange rate for its Venezuelan operations, and as a result, the Company recorded a foreign currency exchange loss of $38.7 million during the three months ended March 31, 2014 to reduce the value of the net monetary assets in Venezuela denominated in Bolivars. The Company recorded a foreign currency exchange loss of $11.1 million during the three months ended March 31, 2013 due to the devaluation of the Venezuela Bolivar. The Company recognized an income tax rate benefit of 2.8% for the three months ended March 31, 2014, which compared to an effective income tax rate of 9.1% for the three months ended March 31, 2013. In addition to the impact of the geographical mix of earnings, the tax rate for the three months ended March 31, 2014 was impacted by $8.0 million of tax benefits related to the resolution of certain income tax contingencies and the income tax rate applicable to the $38.7 million foreign exchange loss associated with Venezuela being higher than the Company's overall effective tax rate. The tax rate for the three months ended March 31, 2013 was impacted by the geographical mix in earnings as well as $13.1 million of net tax benefits that were discrete to the first quarter of 2013. 29-------------------------------------------------------------------------------- Table of Contents Business Segment Operating Results: Net sales by segment were as follows for the three months ended March 31, (in millions, except percentages): 2014 2013 % Change Writing $ 361.3 $ 340.6 6.1 % Home Solutions 321.2 338.9 (5.2 ) Tools 187.8 188.6 (0.4 ) Commercial Products 182.6 183.1 (0.3 ) Baby & Parenting 179.3 189.6 (5.4 ) Total net sales $ 1,232.2 $ 1,240.8 (0.7 )% The following table sets forth an analysis of changes in net sales in each segment for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013: Writing Home Solutions Tools Commercial Products Baby & Parenting Core sales 8.0 % (4.5 )% 2.4 % 0.2 % (4.4 )% Foreign currency (1.9 ) (0.7 ) (2.8 ) (0.5 ) (1.0 ) Total change in net sales 6.1 % (5.2 )% (0.4 )% (0.3 )% (5.4 )% Operating income by segment was as follows for the three months ended March 31, (in millions, except percentages): 2014 2013 % Change Writing $ 77.1 $ 63.2 22.0 % Home Solutions 26.3 34.1 (22.9 ) Tools 21.4 18.7 14.4 Commercial Products 13.8 21.6 (36.1 ) Baby & Parenting (1) 5.4 23.9 (77.4 ) Restructuring costs (12.0 ) (34.4 ) NM Corporate (2) (26.8 ) (29.3 ) 8.5 Total operating income $ 105.2 $ 97.8 7.6 % NM - Not Meaningful (1) Results for the three months ended March 31, 2014 includes $11.0 million of charges relating to the harness buckle recall in the U.S. (2) Includes organizational change implementation and restructuring-related costs of $7.7 million and $6.6 million associated with Project Renewal for the three months ended March 31, 2014 and 2013, respectively. Writing Net sales for the three months ended March 31, 2014 were $361.3 million, an increase of $20.7 million, or 6.1%, from $340.6 million for the three months ended March 31, 2013. Core sales increased 8.0%. Latin America generated double-digit core sales growth due to the Ink Joy® advertising campaign in Mexico, the Caribbean and Colombia, a new distribution model in Brazil, as well as volume increases and pricing actions taken in Venezuela. North America generated double-digit core sales growth due to increased volumes from advertising and promotion, coupled with a weak comparison period. Europe realized a high single-digit core sales decline as a result of continued macroeconomic challenges in Western Europe and planned exits in Fine Writing. Foreign currency had an unfavorable impact of 1.9%. Operating income for the three months ended March 31, 2014 was $77.1 million, or 21.3% of net sales, an increase of $13.9 million, or 22.0%, from $63.2 million, or 18.6% of net sales, for the three months ended March 31, 2013. The 270 basis point increase in operating margin is primarily attributable to pricing, particularly in Latin America, productivity, mix and a 60 basis point decrease in SG&A as a percentage of net sales, which reflects improved leverage of the cost structure on increased sales and Project Renewal savings partially offset by increased brand support for the InkJoy® advertising campaign, input cost inflation and foreign currency impacts. Home Solutions Net sales for the three months ended March 31, 2014 were $321.2 million, a decrease of $17.7 million, or 5.2%, from $338.9 million for the three months ended March 31, 2013. Core sales decreased 4.5% primarily as a result of a decline in North America 30-------------------------------------------------------------------------------- Table of Contents sales, which was largely attributable to inclement weather conditions in the U.S. that limited consumer purchases and the negative effect on volume of less merchandising on certain Rubbermaid Consumer low margin product lines partially offset by increased distribution on Calphalon. Foreign currency had an unfavorable impact of 0.7%. Operating income for the three months ended March 31, 2014 was $26.3 million, or 8.2% of net sales, a decrease of $7.8 million, or 22.9%, from $34.1 million, or 10.1% of net sales, for the three months ended March 31, 2013. The 190 basis point decline in operating margin reflects the effects of input cost inflation and a 130 basis point increase in SG&A as a percentage of net sales attributable to the deleveraging effect on operating margins of lower sales volumes, partially offset by pricing and productivity. Tools Net sales for the three months ended March 31, 2014 were $187.8 million, a decrease of $0.8 million, or 0.4%, from $188.6 million for the three months ended March 31, 2013. Core sales increased 2.4% primarily due to mid-single-digit core sales growth in North America driven by the Lenox business. Core sales in the segment's Latin America and Asia regions declined modestly, while core sales in Europe increased modestly. The core sales decline in Latin America was due to an estimated $5.0 million of customer pre-buys in the first three months of 2013 in advance of the April 2013 SAP go-live in Brazil. Foreign currency had an unfavorable impact of 2.8%. Operating income for the three months ended March 31, 2014 was $21.4 million, or 11.4% of net sales, an increase of $2.7 million, or 14.4%, from $18.7 million, or 9.9% of net sales, for the three months ended March 31, 2013. The 150 basis point increase in operating margin is attributable to pricing and improved mix along with a 20 basis point decrease in SG&A costs as a percentage of net sales due to Project Renewal savings, partially offset by inflation. Commercial Products Net sales for the three months ended March 31, 2014 were $182.6 million, a decrease of $0.5 million, or 0.3%, from $183.1 million for the three months ended March 31, 2013. Core sales increased 0.2%. Favorable pricing in North America and Latin America on Rubbermaid Commercial was offset by a difficult comparison against strong healthcare results in the prior year. Core sales at the segment's North American businesses declined low single-digits, primarily due to healthcare, while core sales at the segment's international businesses increased double digits. Foreign currency had an unfavorable impact of 0.5%. Operating income for the three months ended March 31, 2014 was $13.8 million, or 7.6% of net sales, a decrease of $7.8 million, or 36.1%, from $21.6 million, or 11.8% of net sales, for the three months ended March 31, 2013. The 420 basis point decrease in operating margin is primarily attributable to input cost inflation, unfavorable mix and increased investments in selling capabilities in North America and Latin America, which resulted in SG&A increasing 270 basis points as a percentage of net sales. Baby & Parenting Net sales for the three months ended March 31, 2014 were $179.3 million, a decrease of $10.3 million, or 5.4%, from $189.6 million for the three months ended March 31, 2013. Core sales decreased 4.4% driven by geographic and select product exits in Europe along with a decline in sales in North America due primarily to the recall of harness buckles on select Graco car seats in the U.S. Core sales in North America declined low single digits, and core sales declined double digits in the segment's international businesses. Foreign currency had an unfavorable impact of 1.0%. Operating income for the three months ended March 31, 2014 was $5.4 million, or 3.0% of net sales, a decrease of $18.5 million, or 77.4%, from $23.9 million, or 12.6% of net sales, for the three months ended March 31, 2013. The 960 basis point decrease in operating margin is primarily due to the $11.0 million of costs associated with the recall of harness buckles on select car seats in the U.S., inflation and foreign currency, partially offset by pricing. Liquidity and Capital Resources Cash and cash equivalents decreased as follows for the three months ended March 31, (in millions): 2014 2013 Cash used in operating activities $ (92.1 ) $ (123.1 ) Cash used in investing activities (32.2 ) (33.9 ) Cash provided by financing activities 73.9 148.1 Currency effect on cash and cash equivalents (39.1 ) (0.7 ) Decrease in cash and cash equivalents $ (89.5 ) $ (9.6 ) 31-------------------------------------------------------------------------------- Table of Contents 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 sheet. 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 used in operating activities for the three months ended March 31, 2014 was $92.1 million compared to $123.1 million for the three months ended March 31, 2013. The year-over-year improvement in cash usage from operating activities was largely due to the impact of the following items: • a $50.2 million year-over-year increase in collections of accounts receivable due to the timing of sales and collection efforts; and • a $100.0 million contribution to the Company's primary U.S. pension plan during the first three months of 2013; partially offset by • a $61.2 million year-over-year decrease in accounts payable; • a $13.9 million increase in cash paid for restructuring activities; and • a $27.7 million increase in customer program payments. During the three months ended March 31, 2014, the Company received net proceeds of $144.9 million from short-term borrowing arrangements, which include commercial paper and the receivables financing facility, compared to net proceeds of $200.7 million from short-term borrowing arrangements during the three months ended March 31, 2013. Uses Historically, the Company's primary uses of liquidity and capital resources have included seasonal working capital investments, capital expenditures, payments on debt, dividend payments, share repurchases and acquisitions. Capital expenditures were $31.9 million and $33.6 million for the three months ended March 31, 2014 and 2013, respectively. Capital expenditures associated with the implementation of SAP were $5.4 million and $7.1 million for the three months ended March 31, 2014 and 2013, respectively. Aggregate dividends paid were $42.9 million and $44.5 million for the three months ended March 31, 2014 and 2013, respectively. In February 2014, the Company announced an extension and expansion of the Company's ongoing share repurchase program (the "SRP"). As extended and expanded, the Company may repurchase up to $300.0 million of its shares from February 2014 through the end of 2016. During the three months ended March 31, 2014, the Company repurchased and retired 1.5 million shares pursuant to the SRP for $44.4 million, compared to 1.4 million shares repurchased and retired for $33.8 million during the three months ended March 31, 2013. Cash paid for restructuring activities was $30.8 million and $16.9 million for the three months ended March 31, 2014 and 2013, respectively, and is included in the net cash used in operating activities. These payments primarily relate to employee severance, termination benefits and relocation costs, and exited contractual commitments and other charges. 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 quarter. 32-------------------------------------------------------------------------------- Table of Contents The following table depicts the Company's cash conversion cycle for the periods presented (in number of days): March 31, 2014 December 31, 2013 March 31, 2013 Accounts receivable 72 68 71 Inventory 96 67 91 Accounts payable (65 ) (55 ) (64 ) Cash conversion cycle 103 80 98 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. 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 March 31, 2014 were $136.8 million, and the Company had $835.3 million of total available borrowing capacity under the $800.0 million unsecured syndicated revolving credit facility and $350.0 million receivables financing facility. • Working capital at March 31, 2014 was $678.5 million compared to $681.1 million at December 31, 2013, and the current ratio at March 31, 2014 was 1.44:1 compared to 1.42:1 at December 31, 2013. • 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 0.47:1 at March 31, 2014 and 0.44:1 at December 31, 2013, as the Company increased its short-term borrowings during the first quarter of 2014 due to seasonal inventory builds and annual cash payments for the paydown of customer accruals and annual incentive compensation. 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 March 31, 2014 includes $54.6 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 with a maturity date of December 2, 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 required to issue 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 March 31, 2014, there were no borrowings or standby letters of credit issued or outstanding under the Facility, and the Company had commercial paper obligations outstanding of $139.7 million, resulting in $660.3 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 is not a utilization of the amount available for borrowing under the Facility. The Company's receivables financing facility provides for available borrowings of up to $350.0 million and expires in September 2015. As of March 31, 2014, the Company had $175.0 million of outstanding borrowings under the receivables financing facility. 33-------------------------------------------------------------------------------- Table of Contents The following table presents the maximum and average daily borrowings outstanding under the Company's short-term borrowing arrangements during the three months ended March 31, (in millions): 2014 2013 Short-term Borrowing Arrangement Maximum Average Maximum Average Commercial paper $ 152.7 $ 82.7 $ 237.5 $ 118.1 Receivables financing facility $ 175.0 $ 103.9 200.0 200.0 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 March 31, 2014, 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 receivables financing facility, and utilize the $835.3 million for general corporate purposes without exceeding the debt-to-total-capitalization limit 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 financing 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 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 the receivables financing facility. Total debt was $2.0 billion as of March 31, 2014 and $1.8 billion as of December 31, 2013, an increase of $0.2 billion due to increased borrowings under the Company's short-term borrowing arrangements, including its receivables financing facility and commercial paper, for working capital investments and payments of customer program and annual incentive compensation liabilities. As of March 31, 2014, the current portion of long-term debt and short-term debt totaled $319.5 million, including $139.7 million of commercial paper obligations and $175.0 million of borrowings under the receivables financing facility. The following table presents the average outstanding debt and weighted average interest rates (in millions, except percentages): Three Months Ended March 31, 2014 2013 Average outstanding debt $ 1,862.6 $ 1,998.7 Average interest rate (1) 3.2 % 3.0 % (1) The average interest rate includes the impacts of outstanding 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 53.5% and 50.4% of total debt as of March 31, 2014 and December 31, 2013, respectively. The increase in floating-rate debt is primarily due to an increase of $144.7 million in short-term debt at March 31, 2014 compared to December 31, 2013. See Footnote 6 of the Notes to Condensed Consolidated Financial Statements for further information. Pension and Other 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. 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. 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 34-------------------------------------------------------------------------------- Table of Contents interest rates decline further, 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's Board of Directors has approved a 13% increase in the quarterly dividend from $0.15 per share to $0.17 per share, effective with the quarterly dividend expected to be paid in June 2014. 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. In February 2014, the SRP was expanded and extended such that the Company may repurchase up to $300.0 million of its own shares through the end of 2016. Prior to its expansion and extension in February 2014, the Company had repurchased and retired 12.9 million shares for $257.1 million under the SRP. During the three months ended March 31, 2014, the Company repurchased 1.5 million shares pursuant to the SRP for $44.4 million, and such shares were immediately retired. Since the inception of the SRP through March 31, 2014, the Company has repurchased and retired a total of 14.4 million shares for $301.5 million and had $255.6 million available under the SRP for future repurchases. The Company has repurchased an additional 0.3 million shares under the SRP at an aggregate cost of $9.2 million during April 2014. The repurchase of additional shares is at the Company's discretion and will depend upon many factors, including the Company's financial condition, liquidity and legal requirements. Although the SRP authorizes the Company to repurchase shares through the end of 2016, the Company may execute such repurchases at any time and from time to time and may accelerate and complete authorized repurchases under the SRP sooner than the scheduled expiration. Accelerated Share Repurchase Plan In October 2013, the Company entered into agreements with Goldman, Sachs & Co. ("Goldman Sachs") for an accelerated stock buyback of $350.0 million of the Company's common shares (the "ASB"). Under the ASB, the Company paid Goldman Sachs an initial purchase price of $350.0 million, and Goldman Sachs delivered to the Company 9.4 million shares of the Company's common stock, representing a substantial majority of the shares expected to be purchased under the ASB. Based on the average of the daily volume-weighted average share prices of the Company's common stock over the course of a calculation period, in March 2014, the ASB was completed and Goldman Sachs delivered 2.0 million shares of the Company's common stock to the Company. Such shares were immediately retired. 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 major 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 OutlookFor the year ending December 31, 2014, the Company expects to generate cash flows from operations of $600 to $650 million after restructuring and restructuring-related cash payments of $100 to $120 million. The Company plans to fund capital expenditures of approximately $150 to $175 million, which includes 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 $318.7 million, which includes the Company's outstanding commercial paper obligations and borrowings under the receivables financing facility. 35-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures The Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q 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: Three Months Ended March 31, 2014 Europe, Middle East North America and Africa Latin America Asia Pacific Total International Total Company Core sales 0.9 % (5.1 )% 10.0 % (0.3 )% - % 0.7 % Foreign currency (0.5 ) 3.4 (11.3 ) (7.7 ) (3.4 ) (1.4 ) Total change in net sales 0.4 % (1.7 )% (1.3 )% (8.0 )% (3.4 )% (0.7 )% 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. Critical Accounting Policies There have been no significant changes to the Company's critical accounting policies since the filing of its Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). 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, 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, changes in exchange rates, product recalls, 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, product recalls or regulatory actions (including the ultimate resolution of the potential recall of harness buckles on certain infant car seats); the Company's ability to expeditiously close facilities and move operations while managing foreign regulations and other impediments; a failure of one of 36-------------------------------------------------------------------------------- Table of Contents 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; 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company has no material changes to the disclosure on this matter made in its 2013 Form 10-K. |