NWL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for Newell Rubbermaid Inc. (formerly Newell Co.). The filing reflects the completion of the merger with Rubbermaid Incorporated on March 24, 1999, which was accounted for as a pooling of interests. Consequently, 1998 comparative figures have been restated to include Rubbermaid's results retroactively. The company operates through three reportable segments: Household Products, Hardware & Home Furnishings, and Office Products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.4% in the quarter and 5.1% for the six-month period compared to 1998. Growth was driven by acquisitions (Panex, Gardinia, Rotring, Ateliers) and 4-5% internal growth in core businesses, partially offset by a 3-7% decline in Rubbermaid divisions due to unforecasted promotional commitments.
• Profitability Decline: Operating income dropped significantly from $228.8 million (Q2 1998) to $77.0 million (Q2 1999). The six-month operating income fell from $325.7 million to $50.2 million. This was primarily due to $186.7 million in restructuring charges recorded in the first half of 1999 related to the Rubbermaid merger.
• Restructuring Costs: The 1999 charges included $36.8 million in merger costs, $85.1 million in executive severance, and $64.8 million in exit costs (primarily impaired computer software and facility closures). In contrast, 1998 restructuring costs were $51.9 million.
• Nonoperating Items: The 1998 period included a one-time net gain of $191.5 million from the sale of Black & Decker stock and a $24.1 million gain from the sale of the decorative coverings product line. These gains were absent in 1999, contributing to the net loss for the six-month period.
• Segment Performance: The Household Products segment (including Rubbermaid) reported an operating loss of $50.7 million in Q2 1999, compared to $101.4 million income in Q2 1998. Hardware & Home Furnishings and Office Products segments remained profitable.

Guidance, Outlook, and Risks

• Integration Outlook: Management expects gross margins and SG&A percentages for the 1998 acquisitions and Rubbermaid divisions to improve as integration plans are finalized and executed.
• Liquidity: The company maintains a current ratio of 2.03:1. It has a $1.3 billion revolving credit facility (unused) and $644.5 million in commercial paper outstanding. Management believes cash from operations and borrowing facilities are adequate for current needs.
• Year 2000 Compliance: The company estimates total Y2K expenses of $14-$16 million, with $15 million already spent. IT systems in the U.S. and Canada are 90% complete; international systems are 75% complete. Management anticipates minor system malfunctions but no material financial impact.
• Environmental Contingencies: The company has reserved $20.3 million for environmental response costs, with estimated total costs ranging between $17.0 million and $22.0 million. No material adverse effect is expected beyond current reserves.
• Market Risk: Primary risks include interest rate exposure and foreign currency fluctuations. Value-at-risk modeling estimates a potential 1-day economic loss of $9.2 million for interest rates and $2.5 million for foreign exchange at a 95% confidence level.

Investor Verification Checklist

• Verify the sustainability of operating margins in the Rubbermaid divisions post-merger integration.
• Confirm the timeline and cost of remaining restructuring activities and facility closures.
• Monitor the progress of Year 2000 compliance for international non-IT systems (currently 80% complete).
• Assess the impact of the $64.8 million impairment of Rubbermaid's capitalized software on future IT spending.
• Review the status of pending litigation regarding vinyl mini-blinds containing lead stabilizers.