| • FORM 10-Q • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A • CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One)
For the quarterly period ended June 30, 2012 or
For the transition period from to Commission File Number: 001-13665 Jarden Corporation (Exact name of registrant as specified in its charter)
(914) 967-9400 (Registrant’s telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Table of ContentsQuarterly Report on Form 10-Q For the three and six months ended June 30, 2012 INDEX
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In millions, except per share amounts)
See accompanying notes to condensed consolidated financial statements.
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In millions, except per share amounts)
See accompanying notes to condensed consolidated financial statements.
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Table of ContentsCONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except per share amounts)
See accompanying notes to condensed consolidated financial statements.
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions)
See accompanying notes to condensed consolidated financial statements.
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Table of ContentsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share data and unless otherwise indicated) (Unaudited) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated interim financial statements of Jarden Corporation and its subsidiaries (hereinafter referred to as the “Company” or “Jarden”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all adjustments that are, in the opinion of management, normal and recurring and necessary for a fair presentation of the results for the interim period. The Condensed Consolidated Balance Sheet at December 31, 2011 has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Certain reclassifications have been made in the Company’s financial statements of the prior year to conform to the current year presentation. These reclassifications have no impact on previously reported net income. Supplemental Information Stock-based compensation costs, which are included in selling, general and administrative expenses (“SG&A”), were $5.5 and $3.3 for the three months ended June 30, 2012 and 2011, respectively, and $24.6 and $18.9 for the six months ended June 30, 2012 and 2011, respectively. Interest expense is net of interest income of $1.4 for the three months ended June 30, 2012 and 2011, respectively, and $3.1 and $2.6, for the six months ended June 30, 2012 and 2011, respectively. New Accounting Guidance In December 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments and requires companies to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those companies that prepare their financial statements in accordance with GAAP and those companies that prepare their financial statements in accordance with International Financial Reporting Standards. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. Since ASU 2011-11 requires only additional disclosures, the adoption of ASU 2011-11 will not affect the consolidated financial position, results of operations or cash flows of the Company. Adoption of New Accounting Guidance In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 requires companies to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions of ASU 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Since ASU 2011-05 amends the disclosure requirements concerning comprehensive income, the adoption of ASU 2011-05 did not affect the consolidated financial position, results of operations or cash flows of the Company. In December 2011, the FASB deferred indefinitely certain provisions of ASU 2011-05 that would require companies to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements.
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Table of Contents2. Inventories Inventories are comprised of the following at June 30, 2012 and December 31, 2011:
3. Property, Plant and Equipment Property, plant and equipment, net, consist of the following at June 30, 2012 and December 31, 2011:
Depreciation of property, plant and equipment was $31.3 and $36.6 for the three months ended June 30, 2012 and 2011, respectively, and $62.6 and $72.0 for the six months ended June 30, 2012 and 2011, respectively. 4. Goodwill and Intangibles Goodwill activity for the six months ended June 30, 2012 is as follows:
Intangibles activity for the six months ended June 30, 2012 is as follows:
Amortization of intangibles was $4.0 and $4.7 for the three months ended June 30, 2012 and 2011, respectively, and $8.6 and $9.4 for the six months ended June 30, 2012 and 2011, respectively.
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Table of Contents5. Warranty Reserve The warranty reserve activity for the six months ended June 30, 2012 is as follows:
6. Debt Debt is comprised of the following at June 30, 2012 and December 31, 2011:
In February 2012, the Company entered into an amendment to and borrowed $300 under its senior secured credit facility (the “Facility”), which is comprised of $150 under the existing senior secured term loan A facility that matures in March 2016 and bears interest at LIBOR plus a spread of 225 basis points; and $150 under the existing senior secured term loan B facility that matures in January 2017 and bears interest at LIBOR plus a spread of 300 basis points. The proceeds were used, in part, to repurchase shares of the Company’s common stock under the Company’s accelerated stock repurchase program (see Note 10). In February 2012, the Company entered into an amendment to its securitization facility that, in part, increased maximum borrowings from $300 to $400 and extended the maturity date from May 2014 until February 2015. Following the renewal, the borrowing rate margin is 0.90% and the unused line fee is 0.45% per annum. At June 30, 2012 and December 31, 2011, the carrying value of total debt approximates fair market value. The fair market value (Level 1 measurement) of the Company’s Senior Notes and Senior Subordinated Notes are based upon quoted market prices. The fair market value (Level 2 measurement) of the Company’s other long-term debt is estimated using interest rates currently available to the Company for debt with similar terms and maturities. 7. Derivative and Other Hedging Financial Instruments Interest Rate Contracts The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company uses fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps are used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps are used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision.
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Table of ContentsCash Flow Hedges At June 30, 2012, the Company had $750 notional amount outstanding in swap agreements, which included $350 notional amount of forward-starting swaps that will become effective commencing December 31, 2013, that exchange variable rates of interest (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments and have maturity dates through December 2015. At June 30, 2012, the weighted average fixed rate of interest on these swaps, excluding the forward-starting swaps, was approximately 1.6%. The effective portion of the after-tax fair value gains or losses on these swaps is included as a component of accumulated other comprehensive income (loss) (“AOCI”). Forward Foreign Currency Contracts The Company uses foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales and have maturity dates through March 2014. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCI and is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At June 30, 2012, the Company had approximately $418 notional amount of foreign currency contracts outstanding that are designated as cash flow hedges of forecasted inventory purchases and sales. At June 30, 2012, the Company had outstanding approximately $209 notional amount of foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through December 2013. Fair market value gains or losses are included in the results of operations and are classified in SG&A. Commodity Contracts The Company enters into commodity-based derivatives in order to mitigate the risk that the rising price of these commodities could have on the cost of certain of the Company’s raw materials. These commodity-based derivatives provide the Company with cost certainty, and in certain instances, allow the Company to benefit should the cost of the commodity fall below certain dollar thresholds. At June 30, 2012, the Company had outstanding approximately $12 notional amount of commodity-based derivatives that are not designated as effective hedges for accounting purposes and have maturity dates through March 2014. Fair market value gains or losses are included in the results of operations and are classified in SG&A. The following table presents the fair value of derivative financial instruments as of June 30, 2012 and December 31, 2011:
Asset: Other current and non-current assets Liability: Other non-current liabilities
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Table of ContentsThe following table presents gain and loss activity (on a pretax basis) for the three and six months ended June 30, 2012 and 2011 related to derivative financial instruments designated as effective hedges:
At June 30, 2012, deferred net gains of approximately $9 within AOCI are expected to be reclassified to earnings over the next twelve months. The following table presents gain and loss activity (on a pretax basis) for the three and six months ended June 30, 2012 and 2011 related to derivative financial instruments not designated as effective hedges:
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Table of ContentsNet Investment Hedge The Company designated its Euro-denominated 7 1/2% senior subordinated notes due 2020, with an aggregate principal balance of €150 (the “Hedging Instrument”), as a net investment hedge of the foreign currency exposure of its net investment in certain Euro-denominated subsidiaries. Foreign currency gains and losses on the Hedging Instrument are included as a component of AOCI. At June 30, 2012, $3.6 of deferred gains have been recorded in AOCI. 8. Fair Value Measurements The following table summarizes assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:
Derivative assets and liabilities relate to interest rate swaps, foreign currency contracts and commodity contracts. Fair values are determined by the Company using market prices obtained from independent brokers or determined using valuation models that use as their basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers and market transactions. Available-for-sale securities include inflation protected bonds and are valued based on quoted market prices in a non-actively traded market. 9. Contingencies The Company is involved in various legal disputes and other legal proceedings that arise from time to time in the ordinary course of business. In addition, the Company or certain of its subsidiaries have been identified by the United States Environmental Protection Agency (“EPA”) or a state environmental agency as a Potentially Responsible Party (“PRP”) pursuant to the federal Superfund Act and/or state Superfund laws comparable to the federal law at various sites. Based on currently available information, the Company does not believe that the disposition of any of the legal or environmental disputes the Company or its subsidiaries are currently involved in will have a material adverse effect upon the consolidated financial condition, results of operations or cash flows of the Company. It is possible that, as additional information becomes available, the impact on the Company of an adverse determination could have a different effect. Environmental The Company’s operations are subject to certain federal, state, local and foreign environmental laws and regulations in addition to laws and regulations regarding labeling and packaging of products and the sales of products containing certain environmentally sensitive materials. In addition to ongoing environmental compliance at its operations, the Company also is actively engaged in environmental remediation activities, the majority of which relates to divested operations and sites. Various of the Company’s subsidiaries have been identified by the EPA or a state environmental agency as a PRP pursuant to the federal Superfund Act and/or state Superfund laws comparable to the federal law at various sites (collectively, the “Environmental Sites”). The Company has established reserves to cover the anticipated probable costs of investigation and remediation based upon periodic reviews of all sites for which they have, or may have, remediation responsibility. The Company accrues environmental investigation and remediation costs when it is probable that a liability has been incurred, the amount of the liability can be reasonably estimated and their responsibility for the liability is established. Generally, the timing of these accruals coincides with the earlier of a formal commitment to an investigation plan, completion of a feasibility study or a commitment to a formal plan of action. The Company accrues its best estimate of investigation and remediation costs based upon facts known at such dates, and because of the inherent difficulties in estimating the ultimate amount of environmental costs, which are further described below, these estimates may materially change in the future as a result of the uncertainties described below. Estimated costs, which are based upon experience with similar sites and technical evaluations, are judgmental in nature and are recorded at discounted amounts without considering the impact of inflation and are adjusted periodically to reflect changes in applicable laws or regulations, changes in available technologies and receipt by the Company of new information. It is difficult to estimate the ultimate level of future environmental expenditures due to a number of uncertainties surrounding environmental liabilities. These uncertainties include the applicability of laws and regulations, changes in environmental remediation requirements, the enactment of additional regulations, uncertainties surrounding remediation procedures including the development of new technology, the identification of new sites for which various of the Company’s subsidiaries could be a PRP, information relating
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Table of Contentsto the exact nature and extent of the contamination at each Environmental Site and the extent of required cleanup efforts, the uncertainties with respect to the ultimate outcome of issues which may be actively contested and the varying costs of alternative remediation strategies. Due to the uncertainties described above, the Company’s ultimate future liability with respect to sites at which remediation has not been completed may vary from the amounts reserved as of June 30, 2012. The Company believes that the costs of completing environmental remediation of all sites for which the Company has a remediation responsibility have been adequately reserved and that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. Litigation The Company and/or its subsidiaries are involved in various lawsuits arising from time to time that the Company considers ordinary routine litigation incidental to its business. Amounts accrued for litigation matters represent the anticipated costs (damages and/or settlement amounts) in connection with pending litigation and claims and related anticipated legal fees for defending such actions. The costs are accrued when it is both probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are based upon the Company’s assessment, after consultation with counsel (if deemed appropriate), of probable loss based on the facts and circumstances of each case, the legal issues involved, the nature of the claim made, the nature of the damages sought and any relevant information about the plaintiffs and other significant factors that vary by case. When it is not possible to estimate a specific expected cost to be incurred, the Company evaluates the range of probable loss and records the minimum end of the range. The Company believes that anticipated probable costs of litigation matters have been adequately reserved to the extent determinable. Based on current information, the Company believes that the ultimate conclusion of the various pending litigation of the Company, in the aggregate, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. Product Liability As a consumer goods manufacturer and distributor, the Company and/or its subsidiaries face the risk of product liability and related lawsuits involving claims for substantial money damages, product recall actions and higher than anticipated rates of warranty returns or other returns of goods. The Company and/or its subsidiaries are therefore party to various personal injury and property damage lawsuits relating to their products and incidental to their business. Annually, the Company sets its product liability insurance program which is an occurrence-based program based on the Company and its subsidiaries’ current and historical claims experience and the availability and cost of insurance. The Company’s product liability insurance program generally includes a self-insurance retention per occurrence. Cumulative amounts estimated to be payable by the Company with respect to pending and potential claims for all years in which the Company is liable under its self-insurance retention have been accrued as liabilities. Such accrued liabilities are based on estimates (which include actuarial determinations made by an independent actuarial consultant as to liability exposure, taking into account prior experience, number of claims and other relevant factors); thus, the Company’s ultimate liability may exceed or be less than the amounts accrued. The methods of making such estimates and establishing the resulting liability are reviewed on a regular basis and any adjustments resulting therefrom are reflected in current operating results. Based on current information, the Company believes that the ultimate conclusion of the various pending product liability claims and lawsuits of the Company, in the aggregate, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 10. Stockholders’ Equity In January 2012, the Company commenced a “modified Dutch auction” self-tender offer (the “Offer”) to purchase up to $500 in value of its common stock. In March 2012, pursuant to the terms of the Offer, the Company repurchased approximately12.1 million shares of its common stock for a total purchase price of approximately $435 or $36.00 per share. The repurchase of shares of common stock under the Offer was made pursuant to the Company’s existing stock repurchase program, pursuant to which the Company is authorized to repurchase up to $500 aggregate amount of outstanding shares of common stock at prevailing market prices or in privately-negotiated transactions. There were no shares of common stock repurchased during the six months ended June 30, 2012, other than those repurchased under the Offer.
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Table of Contents11. Earnings Per Share The computations of the weighted average shares outstanding for the three and six months ended June 30, 2012 and 2011 are as follows:
Stock options and warrants to purchase 2.2 million shares of the Company’s common stock at June 30, 2011 had exercise prices that exceeded the average market price of the Company’s common stock for the three months ended June 30, 2011. As such, these share-based awards did not affect the computation of diluted earnings per share. 12. Employee Benefit Plans The components of pension and postretirement benefit expense for the three and six months ended June 30, 2012 and 2011 are as follows:
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Table of Contents13. Reorganization Costs The Company did not incur any reorganization costs for both the three and six months ended June 30, 2012 and 2011. Accrued Reorganization Costs Details and the activity related to accrued reorganization costs as of and for the six months ended June 30, 2012 are as follows:
14. Segment Information The Company reports four business segments: Outdoor Solutions, Consumer Solutions, Branded Consumables and Process Solutions. The Company’s sales are principally within the United States. The Company’s international operations are mainly based in Asia, Canada, Europe and Latin America. The Company and its chief operating decision maker use “segment earnings” to measure segment operating performance. The Outdoor Solutions segment manufactures or sources, markets and distributes global consumer active lifestyle products for outdoor and outdoor-related activities. For general outdoor activities, Coleman® is a leading brand for active lifestyle products, offering an array of products that include camping and outdoor equipment such as air beds, camping stoves, coolers, foldable furniture, gas grills, lanterns and flashlights, sleeping bags, tents and water recreation products such as inflatable boats, kayaks and tow-behinds. The Outdoor Solutions segment is also a leading provider of fishing equipment under brand names such as Abu Garcia®, All Star®, Berkley®, Fenwick®, Gulp!®, JRC™, Mitchell®, Penn®, Pflueger®, Sebile®, Sevenstrand®, Shakespeare®, Spiderwire®, Stren®, Trilene®, Ugly Stik® and Xtools®. Team sports equipment for baseball, softball, football, basketball, field hockey and lacrosse products are sold under brand names such as deBeer®, Gait®, Miken®, Rawlings® and Worth®. Alpine and nordic skiing, snowboarding, snowshoeing and in-line skating products are sold under brand names such as Atlas®, Full Tilt®, K2®, Line®, Little Bear®, Madshus®, Marker®, Morrow®, Ride®, Tubbs®, Völkl® and 5150 Snowboards®. Water sports equipment, personal flotation devices and all-terrain vehicle gear are sold under brand names such as Helium®, Hodgman®, Mad Dog Gear®, Sevylor®, Sospenders® and Stearns®. The Company also sells high performance technical and outdoor apparel and equipment under brand names such as CAPP3L®, Ex Officio®, K2®, Marker®, Marmot®, Planet Earth®, Ride®, Völkl® and Zoot®, and premium air beds under brand names including Aero®, Aerobed® and Aero Sport®. The Consumer Solutions segment manufactures or sources, markets, and distributes a diverse line of household products, including kitchen appliances and home environment products. This segment maintains a strong portfolio of globally-recognized brands including Bionaire®, Crock-Pot®, FoodSaver®, Health o meter®, Holmes®, Mr. Coffee®, Oster®, Patton®, Rival®, Seal-a-Meal®, Sunbeam®, skybar® and Villaware®. The principal products in this segment include: clippers and trimmers for professional use in the beauty and barber and animal categories; electric blankets, mattress pads and throws; household kitchen appliances, such as blenders, coffeemakers, irons, mixers, slow cookers, toasters, toaster ovens and vacuum packaging machines; home environment products, such as air purifiers, fans, heaters and humidifiers; products for the hospitality industry; and scales for consumer use. The Branded Consumables segment manufactures or sources, markets and distributes a broad line of branded consumer products, many of which are affordable, consumable and fundamental household staples, including arts and crafts paint brushes, brooms, brushes, buckets, children’s card games, clothespins, collectible tins, condoms, cord, rope and twine, dusters, dust pans, feeding bottles, fencing, fire extinguishing products, firelogs and firestarters, home canning jars and accessories, kitchen matches, mops, other craft items, pacifiers, plastic cutlery, playing cards and accessories, rubber gloves and related cleaning products, safes, security cameras, security doors, smoke and carbon monoxide alarms, soothers, sponges, storage organizers and workshop accessories, teats, toothpicks, window guards and other accessories. This segment markets our products under the Aviator®, Ball®, Bee®, Bernardin®, Bicycle®, Billy Boy®, BRK®, Crawford®, Diamond®, Dicon®, Fiona®, First Alert®, First Essentials®, Hoyle®, Java-Log®, KEM®, Kerr®, Lehigh®, Lillo®, Loew-Cornell®, Mapa®, NUK®, Pine Mountain®, Quickie Green Cleaning®, Quickie Home-Pro®, Quickie Microban®, Quickie Original®, Quickie Professional®, Spontex®, Tigex® and Wellington® brand names, among others. The Process Solutions segment manufactures, markets and distributes a wide variety of plastic products including closures, contact lens packaging, medical disposables, plastic cutlery and rigid packaging. Many of these products are consumable in nature or represent components of consumer products. This segment’s materials business produces specialty nylon polymers, conductive fibers and monofilament used in various products, including woven mats used by paper producers and weed trimmer cutting line, as well as
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Table of Contentsfiberglass radio antennas for marine, citizen band and military applications. This segment is also the largest North American producer of niche products fabricated from solid zinc strip and is the sole source supplier of copper-plated zinc penny blanks to the United States Mint and a major supplier to the Royal Canadian Mint, as well as a supplier of brass, bronze and nickel-plated finishes on steel and zinc for coinage to other international markets. In addition, the Company manufactures a line of industrial zinc products marketed globally for use in the architectural, automotive, construction, electrical component and plumbing markets. Segment information as of and for the three and six months ended June 30, 2012 and 2011 is as follows:
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Table of Contents15. Condensed Consolidating Financial Data The Company’s Senior Notes and Senior Subordinated Notes (see Note 6) are fully guaranteed, jointly and severally, by certain of the Company’s domestic subsidiaries (“Guarantor Subsidiaries”). The guarantees of the Guarantor Subsidiaries are subject to release only in certain limited circumstances. The Company’s non-United States subsidiaries and those domestic subsidiaries who are not guarantors (“Non-Guarantor Subsidiaries”) are not guaranteeing these notes. Presented below is the condensed consolidating financial data of the Company (“Parent”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011. Condensed Consolidating Results of Operations
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Condensed Consolidating Balance Sheets
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Table of ContentsCondensed Consolidating Statements of Cash Flows
The amounts reflected as proceeds (payments) from (to) intercompany transactions represent cash flows originating from transactions conducted between Guarantor Subsidiaries, Non-Guarantor Subsidiaries and Parent in the normal course of business operations.
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Forward-Looking Information From time to time, the Company may make or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. Such statements are necessarily estimates reflecting management’s best judgment based on current information. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Such statements are usually identified by the use of words or phrases such as “believes”, “anticipates”, “expects”, “estimates”, “planned”, “outlook” and “goal”. Because forward-looking statements involve risks and uncertainties, the Company’s actual results could differ materially. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in forward-looking statements. All statements addressing trends, events, developments, operating performance, potential acquisitions or liquidity that the Company anticipates or expects will occur in the future are forward-looking statements. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in the Company’s Forms 10-K, 10-Q and 8-K reports to the United States Securities and Exchange Commission (“SEC”). Please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for a list of factors which could cause the Company’s actual results to differ materially from those projected in the Company’s forward-looking statements and certain risks and uncertainties that may affect the operations, performance and results of the Company’s businesses. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. The following “Overview” section is a brief summary of the significant items addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). Investors should read the relevant sections of this MD&A for a complete discussion of the items summarized below. Overview The Company is a leading provider of a broad range of consumer products. The Company reports four business segments: Outdoor Solutions, Consumer Solutions, Branded Consumables and Process Solutions. The Company’s sales are principally within the United States. The Company’s international operations are mainly based in Asia, Canada, Europe and Latin America. The Company distributes its products globally, primarily through club stores; craft stores; direct-to-consumer channels, primarily consisting of infomercials; department stores; drugstores; grocery retailers; home improvement stores; mass merchandisers; on-line; specialty retailers and wholesalers. The markets in which the Company’s businesses operate are generally highly competitive, based primarily on product quality, product innovation, price and customer service and support, although the degree and nature of such competition vary by location and product line. Since the Company operates primarily in the consumer products markets, it is generally affected, by among other factors, overall economic conditions and the related impact on consumer confidence. The Outdoor Solutions segment manufactures or sources, markets and distributes global consumer active lifestyle products for outdoor and outdoor-related activities. For general outdoor activities, Coleman® is a leading brand for active lifestyle products, offering an array of products that include camping and outdoor equipment such as air beds, camping stoves, coolers, foldable furniture, gas grills, lanterns and flashlights, sleeping bags, tents and water recreation products such as inflatable boats, kayaks and tow-behinds. The Outdoor Solutions segment is also a leading provider of fishing equipment under brand names such as Abu Garcia®, All Star®, Berkley®, Fenwick®, Gulp!®, JRC™, Mitchell®, Penn®, Pflueger®, Sebile®, Sevenstrand®, Shakespeare®, Spiderwire®, Stren®, Trilene®, Ugly Stik® and Xtools®. Team sports equipment for baseball, softball, football, basketball, field hockey and lacrosse products are sold under brand names such as deBeer®, Gait®, Miken®, Rawlings® and Worth®. Alpine and nordic skiing, snowboarding, snowshoeing and in-line skating products are sold under brand names such as Atlas®, Full Tilt®, K2®, Line®, Little Bear®, Madshus®, Marker®, Morrow®, Ride®, Tubbs®, Völkl® and 5150 Snowboards®. Water sports equipment, personal flotation devices and all-terrain vehicle gear are sold under brand names such as Helium®, Hodgman®, Mad Dog Gear®, Sevylor®, Sospenders® and Stearns®. The Company also sells high performance technical and outdoor apparel and equipment under brand names such as CAPP3L®, Ex Officio®, K2®, Marker®, Marmot®, Planet Earth®, Ride®, Völkl® and Zoot®, and premium air beds under brand names including Aero®, Aerobed® and Aero Sport®.
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Table of ContentsThe Consumer Solutions segment manufactures or sources, markets, and distributes a diverse line of household products, including kitchen appliances and home environment products. This segment maintains a strong portfolio of globally-recognized brands including Bionaire®, Crock-Pot®, FoodSaver®, Health o meter®, Holmes®, Mr. Coffee®, Oster®, Patton®, Rival®, Seal-a-Meal®, Sunbeam®, skybar® and Villaware®. The principal products in this segment include: clippers and trimmers for professional use in the beauty and barber and animal categories; electric blankets, mattress pads and throws; household kitchen appliances, such as blenders, coffeemakers, irons, mixers, slow cookers, toasters, toaster ovens and vacuum packaging machines; home environment products, such as air purifiers, fans, heaters and humidifiers; products for the hospitality industry; and scales for consumer use. The Branded Consumables segment manufactures or sources, markets and distributes a broad line of branded consumer products, many of which are affordable, consumable and fundamental household staples, including arts and crafts paint brushes, brooms, brushes, buckets, children’s card games, clothespins, collectible tins, condoms, cord, rope and twine, dusters, dust pans, feeding bottles, fencing, fire extinguishing products, firelogs and firestarters, home canning jars and accessories, kitchen matches, mops, other craft items, pacifiers, plastic cutlery, playing cards and accessories, rubber gloves and related cleaning products, safes, security cameras, security doors, smoke and carbon monoxide alarms, soothers, sponges, storage organizers and workshop accessories, teats, toothpicks, window guards and other accessories. This segment markets our products under the Aviator®, Ball®, Bee®, Bernardin®, Bicycle®, Billy Boy®, BRK®, Crawford®, Diamond®, Dicon®, Fiona®, First Alert®, First Essentials®, Hoyle®, Java-Log®, KEM®, Kerr®, Lehigh®, Lillo®, Loew-Cornell®, Mapa®, NUK®, Pine Mountain®, Quickie Green Cleaning®, Quickie Home-Pro®, Quickie Microban®, Quickie Original®, Quickie Professional®, Spontex®, Tigex® and Wellington® brand names, among others. The Process Solutions segment manufactures, markets and distributes a wide variety of plastic products including closures, contact lens packaging, medical disposables, plastic cutlery and rigid packaging. Many of these products are consumable in nature or represent components of consumer products. This segment’s materials business produces specialty nylon polymers, conductive fibers and monofilament used in various products, including woven mats used by paper producers and weed trimmer cutting line, as well as fiberglass radio antennas for marine, citizen band and military applications. This segment is also the largest North American producer of niche products fabricated from solid zinc strip and is the sole source supplier of copper-plated zinc penny blanks to the United States Mint and a major supplier to the Royal Canadian Mint, as well as a supplier of brass, bronze and nickel-plated finishes on steel and zinc for coinage to other international markets. In addition, the Company manufactures a line of industrial zinc products marketed globally for use in the architectural, automotive, construction, electrical component and plumbing markets. Summary of Significant 2012 Activities
Acquisitions Consistent with the Company’s historical acquisition strategy, to the extent the Company pursues future acquisitions, the Company intends to focus on businesses with product offerings that provide geographic or product diversification, or expansion into related categories that can be marketed through the Company’s existing distribution channels or provide us with new distribution channels for its existing products, thereby increasing marketing and distribution efficiencies. Furthermore, the Company expects that acquisition candidates would demonstrate a combination of attractive margins, strong cash flow characteristics, category leading positions and products that generate recurring revenue. The Company anticipates that the fragmented nature of the consumer products market will continue to provide opportunities for growth through strategic acquisitions of complementary businesses. However, there can be no assurance that the Company will complete an acquisition in any given year or that any such acquisition will be significant or successful. The Company will only pursue a candidate when it is deemed to be fiscally prudent and meets the Company’s acquisition criteria. The Company anticipates that any future acquisitions would be financed through any combination of cash on hand, operating cash flow, availability under its existing credit facilities and new capital market offerings. 2012 and 2011 Activity During 2012 and 2011, the Company did not complete any significant acquisitions.
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Table of ContentsVenezuela Operations The Company’s subsidiaries operating in Venezuela are considered under generally accepted accounting principles in the United States of America (“GAAP”) to be operating in a highly inflationary economy. As such, the Company’s financial statements of its subsidiaries operating in Venezuela are remeasured as if their functional currency were the U.S. dollar and gains and losses resulting from the remeasurement of monetary assets and liabilities are reflected in current earnings. The financial statements of the Company’s subsidiaries operating in Venezuela are remeasured at and are reflected in the Company’s consolidated financial statements at the official exchange rate of 4.30 Bolivars per U.S. dollar, which is the Company’s expected settlement rate. The transfers of funds out of Venezuela are subject to restrictions, and historically, payments for certain imported goods and services have been required to be transacted by exchanging Bolivars for U.S. dollars through government-regulated markets at exchange rates that are more unfavorable than the official exchange rate of 4.30 Bolivars per U.S. dollar. The current foreign currency exchange system is the System of Transactions in Foreign Currency Denominated Securities (“SITME”) market. Historically, the majority of the Company’s purchases have qualified for the official exchange rate. As such, the Company has been able to convert Bolivars at the official exchange rate and, based upon this ability, the Company does not expect changes in the SITME market to have a material impact on the consolidated financial position, results of operations or cash flows of the Company. While the timing of government approval for settlement of payables at the official exchange rate varies, the Company believes these payables will ultimately be approved and settled at the official exchange rate based on past experience. However, if in the future, further restrictions require the Company’s subsidiaries operating in Venezuela to convert an increasing amount of the Bolivar cash balances into U.S. dollars using the more unfavorable exchange rate, it could result in currency exchange losses that may be material to the Company’s results of operations. At June 30, 2012, the Company’s subsidiaries operating in Venezuela have approximately $15 million in cash denominated in U.S. dollars and cash of approximately $48 million denominated in Bolivars converted at the official exchange rate. Results of Operations – Comparing 2012 to 2011
Note: Changes in net sales on a currency neutral basis that are presented hereafter are provided to enhance visibility of the underlying operations by excluding the impact of foreign currency translation. Three Months Ended June 30, 2012 versus the Three Months Ended June 30, 2011 Net sales for three months ended June 30, 2012 increased $1.8 million, or 0.1%, to $1.7 billion versus the same period in the prior year. Excluding the impact of exiting certain product categories, net sales on a currency neutral basis increased 3.7%, primarily due to increased sell-through in certain categories and expanded product offerings, partially offset by weakness in certain product categories. Unfavorable foreign currency translation and the exiting of certain product categories accounted for a decrease in net sales of approximately 2% and 1%, respectively. Net sales in the Outdoor Solutions segment decreased $25.5 million, or 3.3%. Excluding the impact of exiting certain product categories, net sales on a currency neutral basis increased approximately 1%, primarily due to increased sales in the fishing business, expanded product offerings, increased point of sale and the absence of the floods experienced in the second quarter of 2011 in North America, and a net increase in sales on a currency neutral basis in all the other business units within Outdoor Solutions except the camping and related businesses which experienced a decrease in sales, primarily due to the exiting of certain product categories, weakness in certain product categories and decreased demand in Europe due to unfavorable economic conditions and the absence of higher tsunami-related sales recorded in the second quarter of 2011. Unfavorable foreign currency translation and the exiting of certain product categories each accounted for an approximate 2% decrease in net sales for a combined approximate 4% decrease in net sales. Net sales in the Consumer Solutions segment increased $13.8 million, or 3.6%. On a currency neutral basis net sales increased by approximately 5%. The increase is primarily due to increased demand internationally, primarily in Latin America, primarily due to
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Table of Contentsincreased point of sale, expanded distribution and new product offerings. Domestic net sales were essentially flat on a period-over-period basis as increased appliance sales were mostly offset by weakness in certain personal care and wellness categories. Unfavorable foreign currency translation accounted for a decrease of approximately 2% in net sales. Net sales in the Branded Consumables segment increased $5.0 million, or 1.2%. Increased sales on a currency neutral basis in the baby care, home care and leisure and entertainment, provided an increase in net sales of approximately 6%, in part due to increased sales in certain product categories, especially the food preservation category, primarily due to increased point of sale, favorable weather conditions and expanded distribution, partially offset by softness in firelog sales, which were negatively affected by unfavorable weather conditions. Unfavorable foreign currency translation accounted for a decrease of approximately 5% in net sales. Net sales in the Process Solutions segment increased 11.9% on a period-over-period basis, primarily due to increased sales within in each of its business units. Cost of Sales Cost of sales decreased $17.1 million, or 1.4%, to $1.2 billion for three months ended June 30, 2012 versus the same prior year period. The decrease is primarily due to foreign currency translation (approximately $30 million), partially offset by approximately $12 million related to the net impact on cost of sales of higher sales and improved margins, in part due to declines in certain commodity and distribution costs. Cost of sales as a percentage of net sales for the three months ended June 30, 2012 and 2011 was 70.4% and 71.5%, respectively. Selling, General And Administrative Costs Selling, general and administrative costs (“SG&A”) increased $7.5 million, or 2.4%, to $320 million for the three months ended June 30, 2012 versus the same prior year period. The change is primarily due to an increase in marketing and product development costs (approximately $8 million) related to the Company’s investment in brand equity, partially offset by other items. Operating Earnings Operating earnings for the three months ended June 30, 2012 in the Outdoor Solutions segment decreased $18.3 million, or 17.7%, versus the same prior year period, primarily due to a gross profit decrease (approximately $6 million), primarily due to the gross margin impact of lower sales and an increase in SG&A (approximately $12 million). Operating earnings for the three months ended June 30, 2012 in the Consumer Solutions segment increased $1.3 million, or 3.0%, versus the same prior year period, primarily due to a gross profit increase (approximately $10 million), primarily due to increased margins and the gross margin impact of higher sales, partially offset by an increase in SG&A (approximately $9 million). Operating earnings for the three months ended June 30, 2012 in the Branded Consumables segment increased $12.0 million, or 26.7%, versus the same prior year period, primarily due to a gross profit increase (approximately $10 million), primarily due to increased margins and the gross margin impact of higher sales and a decrease in SG&A (approximately $2 million). Operating earnings in the Process Solutions segment for the three months ended June 30, 2012 increased $4.1 million, or 62%, versus the same prior year period, primarily due to an increase in gross profit (approximately $4 million), primarily due to improved margins and the gross margin impact of higher sales. Interest Expense Net interest decreased by $1.0 million to $45.0 million for the three months ended June 30, 2012 versus the same prior year period primarily due to a decrease in the weighted average interest rate for 2012 to 5.2% from 5.4% in 2011, partially offset by higher average debt levels. Income Taxes The Company’s reported tax rate for the three months ended June 30, 2012 and 2011 was 36.6 % and 37.8%, respectively. The increase from the statutory tax rate to the reported tax rate for the three months ended June 30, 2012 results principally from U.S. tax expense related to the taxation of foreign income. The increase from the statutory tax rate to the reported tax rate for the three months ended June 30, 2011 results principally from U.S. tax expense related to the taxation of foreign income and the establishment of a foreign valuation allowance. Net Income Net income for the three months ended June 30, 2012 increased $9.3 million to $83.2 million versus the same prior year period. For the three months ended June 30, 2012 and 2011, earnings per diluted share were $1.08 and $0.83, respectively. The increase in net income was primarily due to a gross profit increase (approximately $19 million), primarily due to increased margins and higher sales, partially offset by the aforementioned increase in SG&A. On a period-over-period basis, the diluted weighted average shares outstanding decreased approximately 14%, primarily due to the Company’s accelerated stock repurchase program (see “Capital Resources”).
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Table of ContentsSix Months Ended June 30, 2012 versus the Six Months Ended June 30, 2011
Note: Changes in net sales on a currency neutral basis that are presented hereafter are provided to enhance visibility of the underlying operations by excluding the impact of foreign currency translation. Net sales for six months ended June 30, 2012 increased $13.8 million, or 0.4%, to $3.2 billion versus the same period in the prior year. Excluding the impact of exiting certain product categories, net sales on a currency neutral basis increased 3.3%, primarily due to increased sell-through in certain other categories and expanded product offerings, partially offset by weakness in certain product categories. Unfavorable foreign currency translation and the exiting of certain product categories accounted for a decrease in net sales of approximately 2% and 1%, respectively. Net sales in the Outdoor Solutions segment decreased $32.9 million, or 2.3%. Excluding the impact of exiting certain product categories, net sales on a currency neutral basis increased approximately 1%, primarily due to increased sales on a currency neutral basis in the fishing and technical apparel businesses, which provided an increase in net sales of approximately 3%, largely related to expanded product offerings, increased point of sale and favorable weather conditions in North America. This increase was more than offset by an approximate 4% decrease in net sales on a currency neutral basis in the camping and outdoor, team sports and winter sports businesses, primarily due to the exiting of certain product categories, weakness in certain product categories and decreased demand in Europe due to unfavorable economic conditions and the absence of higher tsunami-related sales recorded in the second quarter of 2011, combined with softness in the winter sports business, which was negatively affected by unfavorable winter weather conditions. Unfavorable foreign currency translation and the exiting of certain product categories accounted for a decrease in net sales of approximately 1% and 2%, respectively. Net sales in the Consumer Solutions segment increased $14.9 million, or 2.0%. On a currency neutral basis net sales increased by approximately 3%. The increase is primarily due to increased demand internationally, primarily in Latin America, accounted for an increase in net sales of approximately 3%, primarily due to increased point of sale, expanded distribution and new product offerings. Domestic net sales were essentially flat on a period-over-period basis as increased appliance sales were mostly offset by weakness in certain personal care and wellness categories. Unfavorable foreign currency translation accounted for a decrease of approximately 1% in net sales. Net sales in the Branded Consumables segment increased $21.6 million, or 2.6%. Increased sales on a currency neutral basis in the baby care, home care, leisure and entertainment and safety and security businesses provided an increase in net sales of approximately 6%, in part due to increased sales in certain product categories, especially the food preservation category, primarily due to increased point of sale, favorable weather conditions and expanded distribution, partially offset by softness in firelog sales, which were negatively affected by unfavorable weather conditions. Unfavorable foreign currency translation accounted for a decrease of approximately 3% in net sales. Net sales in the Process Solutions segment increased 7.6% on a period-over-period basis, primarily due to increased sales within in each of its business units. Cost of Sales Cost of sales decreased $22.9 million, or 1.0%, to $2.3 billion for six months ended June 30, 2012 versus the same prior year period. The decrease is primarily due to foreign currency translation (approximately $40 million), partially offset by approximately $20 million related to the net impact on cost of sales of higher sales and improved margins, in part due to declines in certain commodity and distribution costs. Cost of sales as a percentage of net sales for the six months ended June 30, 2012 and 2011 was 71.1% and 72.2%, respectively.
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Table of ContentsSelling, General And Administrative Costs SG&A increased $12.4 million, or 2.0%, to $638 million for the six months ended June 30, 2012 versus the same prior year period. The change is primarily due to an increase in marketing and product development costs (approximately $12 million) related to the Company’s investment in brand equity partially offset by other items. Operating Earnings Operating earnings for the six months ended June 30, 2012 in the Outdoor Solutions segment decreased $10.5 million, or 6.8%, versus the same prior year period, primarily due to an increase in SG&A of approximately $12 million. The negative gross margin impact of lower sales was more than offset by improved margins. Operating earnings for the six months ended June 30, 2012 in the Consumer Solutions segment decreased $1.6 million, or 1.9%, versus the same prior year period, primarily due to an increase in SG&A (approximately $8 million), partially offset a by gross profit increase (approximately $6 million), primarily due to improved margins and the gross margin impact of higher sales. Operating earnings for the six months ended June 30, 2012 in the Branded Consumables segment increased $25.2 million, or 34.8%, versus the same prior year period, primarily due to a gross profit increase (approximately $23 million), primarily due to improved margins and the gross margin impact of higher sales. Operating earnings in the Process Solutions segment for the six months ended June 30, 2012 increased $6.3 million, or 47.0%, versus the same prior year period, primarily due to an increase in gross profit, primarily due to improved margins and the gross margin impact of higher sales. Interest Expense Net interest decreased $1.4 million to $89.7 million for the six months ended June 30, 2012 versus the same prior year period primarily due to a decrease in the weighted average interest rate for 2012 to 5.3% from 5.5% in 2011, partially offset by higher average debt levels. Income Taxes The Company’s reported tax rate for the six months ended June 30, 2012 and 2011 was 37.1 % and 37.9%, respectively. The increase from the statutory tax rate to the reported tax rate for the six months ended June 30, 2012 results principally from U.S. tax expense related to the taxation of foreign income. The increase from the statutory tax rate to the reported tax rate for the six months ended June 30, 2011 results principally from U.S. tax expense related to the taxation of foreign income and the establishment of a foreign valuation allowance. Net Income Net income for the six months ended June 30, 2012 increased $25.4 million to $118 million versus the same prior year period. For the six months ended June 30, 2012 and 2011, earnings per diluted share were $1.46 and $1.04, respectively. The increase in net income was primarily due to a gross profit increase (approximately $37 million), primarily due to increased margins and higher sales; and the loss on early extinguishment of debt ($12.8 million) recorded during the six months ended June 30, 2011, partially offset by the aforementioned increase in SG&A. On a period-over-period basis, the diluted weighted average shares outstanding decreased approximately 9%, primarily due to the Company’s accelerated stock repurchase program (see “Capital Resources”). LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY At June 30, 2012, the Company had cash and cash equivalents of $590 million, of which approximately $436 million was held by the Company’s non-U.S. subsidiaries. The Company believes that its cash and cash equivalents, cash generated from operations and the availability under the Facility, the securitization facility and the credit facilities of certain foreign subsidiaries as of June 30, 2012 provide sufficient liquidity to support working capital requirements, planned capital expenditures, debt obligations, completion of current and future reorganization programs and pension plan contribution requirements for the foreseeable future. Cash Flows from Operating Activities Net cash provided (used) in operating activities was $19.8 million and ($24.7) million for the six months ended June 30, 2012 and 2011, respectively. The changes are primarily due to the timing of the purchase of comparatively lower seasonal inventory levels in certain businesses, as inventory levels at June 30, 2012 were approximately 8% lower than the comparable prior period-end. Cash Flows from Financing Activities Net cash used in financing activities was $191 million and $132 million for the six months ended June 30, 2012 and 2011,
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Table of Contentsrespectively. The change is primarily due to a $393 million increase in the payments for the issuance (repurchase) of common stock, net, partially offset by the period-over-period increase in the proceeds from the issuance of long-term debt in excess of payments on long-term debt ($238 million) and the period-over-period increase in the net change in short-term debt ($76.2 million). Cash Flows from Investing Activities Net cash used in investing activities was $43.8 million and $60.7 million for the six months ended June 30, 2012 and 2011, respectively. The change is primarily due to the favorable period-over-period change in other investing activities. For the six months ended June 30, 2012, capital expenditures were $50.1 million versus $51.1 million for the same prior year period. The Company expects to maintain capital expenditures at an annualized run-rate in the range of approximately 2.0% to 2.5% of net sales. CAPITAL RESOURCES In February 2012, the Company entered into an amendment to and borrowed $300 million under the Facility, which is comprised of $150 million under its existing senior secured term loan A facility that matures in March 2016 and bears interest at LIBOR plus a spread of 225 basis points; and $150 million under its existing senior secured term loan B facility that matures in January 2017 and bears interest at LIBOR plus a spread of 300 basis points. The proceeds were used, in part, to repurchase shares of the Company’s common stock under its accelerated stock repurchase program. At June 30 2012, there was no amount outstanding under the Company’s $250 million senior secured revolving credit facility (the “Revolver”) that matures in 2016. The Revolver bears interest at certain selected rates, including LIBOR plus a spread of 225 basis points. At June 30, 2012, commitment fee on unused balances was 0.38% per annum. The Company maintains a $400 million receivables purchase agreement (the “Securitization Facility”) that matures in February 2015. At June 30, 2012, the borrowing rate margin and the unused line fee on the Securitization Facility were 0.90% and 0.45% per annum, respectively. At June 30, 2012, the Securitization Facility had outstanding borrowings totaling $383 million. At June 30, 2012, net availability under the Revolver and the Securitization Facility was approximately $226 million, after deducting approximately $40 million of outstanding standby and commercial letters of credit. Certain foreign subsidiaries of the Company maintain working capital lines of credit with their respective local financial institutions for use in operating activities. At June 30, 2012, the aggregate amount available under these lines of credit totaled approximately $71 million. The Company was not in default of any of its debt covenants at June 30, 2012. In January 2012, the Company commenced a “modified Dutch auction” self-tender offer (the “Offer”) to purchase up to $500 million in value of its common stock. In March 2012, pursuant to the terms of the Offer, the Company repurchased 12.1 million shares of its common stock for a total purchase price of approximately $435 million or $36.00 per share. The repurchase of shares of common stock under the Offer was made pursuant to the Company’s existing stock repurchase program (the “Stock Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $500 million aggregate amount of outstanding shares of common stock at prevailing market prices or in privately-negotiated transactions. There were no shares of common stock repurchased during the six months ended June 30, 2012, other than those repurchased under the Offer. At June 30, 2012, approximately $65 million remains available under the Stock Repurchase Program. Risk Management Interest Rate Contracts The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company uses fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps are used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps are used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision. Cash Flow Hedges At June 30, 2012, the Company had $750 million notional amount outstanding in swap agreements, which included $350 million notional amount of forward-starting swaps that will become effective commencing December 31, 2013, that exchange variable rates of interest (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments and have maturity dates through December 2015. At June 30, 2012, the
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Table of Contentsweighted average fixed rate of interest on these swaps, excluding the forward-starting swap, was approximately 1.6%. The effective portion of the after-tax fair value gains or losses on these swaps is included as a component of accumulated other comprehensive income (loss) (“AOCI”). Forward Foreign Currency Contracts The Company uses foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales and have maturity dates through March 2014. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCI and is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At June 30, 2012, the Company had approximately $418 million notional amount of foreign currency contracts outstanding that are designated as cash flow hedges of forecasted inventory purchases and sales. At June 30, 2012, the Company had outstanding approximately $209 million notional amount of foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through December 2013. Fair market value gains or losses are included in the results of operations and are classified in SG&A. Commodity Contracts The Company enters into commodity-based derivatives in order to mitigate the risk that the rising price of these commodities could have on the cost of certain of the Company’s raw materials. These commodity-based derivatives provide the Company with cost certainty, and in certain instances, allow the Company to benefit should the cost of the commodity fall below certain dollar thresholds. At June 30, 2012, the Company had outstanding approximately $12 million notional amount of commodity-based derivatives that are not designated as effective hedges for accounting purposes and have maturity dates through March 2014. Fair market value gains or losses are included in the results of operations and are classified in SG&A. The following table presents the fair value of derivative financial instruments as of June 30, 2012:
Net Investment Hedge The Company designated its Euro-denominated 7 1/2% senior subordinated notes due 2020, with an aggregate principal balance of €150 million (the “Hedging Instrument”), as a net investment hedge of the foreign currency exposure of its net investment in certain Euro-denominated subsidiaries. Foreign currency gains and losses on the Hedging Instrument are included as a component of AOCI. At June 30, 2012, $3.6 million of deferred gains have been recorded in AOCI.
Other than as discussed above, there have been no material changes from the information previously reported under Part II, Item 7A. in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of the end of the period covered by this quarterly report.
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Table of ContentsAs required by Rule 13a-15(d) under the Exchange Act, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes during the quarter covered by this quarterly report.
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The Company is involved in various legal disputes and other legal proceedings that arise from time to time in the ordinary course of business. In addition, the Company or certain of its subsidiaries have been identified by the United States Environmental Protection Agency (“EPA”) or a state environmental agency as a Potentially Responsible Party pursuant to the federal Superfund Act and/or state Superfund laws comparable to the federal law at various sites. Based on currently available information, the Company does not believe that the disposition of any of the legal or environmental disputes the Company or its subsidiaries are currently involved in will have a material adverse effect upon the consolidated financial condition, results of operations or cash flows of the Company. It is possible that, as additional information becomes available, the impact on the Company of an adverse determination could have a different effect. Litigation The Company and/or its subsidiaries are involved in various lawsuits arising from time to time that the Company considers ordinary routine litigation incidental to its business. Amounts accrued for litigation matters represent the anticipated costs (damages and/or settlement amounts) in connection with pending litigation and claims and related anticipated legal fees for defending such actions. The costs are accrued when it is both probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are based upon the Company’s assessment, after consultation with counsel (if deemed appropriate), of probable loss based on the facts and circumstances of each case, the legal issues involved, the nature of the claim made, the nature of the damages sought and any relevant information about the plaintiffs and other significant factors that vary by case. When it is not possible to estimate a specific expected cost to be incurred, the Company evaluates the range of probable loss and records the minimum end of the range. The Company believes that anticipated probable costs of litigation matters have been adequately reserved to the extent determinable. Based on current information, the Company believes that the ultimate conclusion of the various pending litigation of the Company, in the aggregate, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. Product Liability As a consumer goods manufacturer and distributor, the Company and/or its subsidiaries face the risk of product liability and related lawsuits involving claims for substantial money damages, product recall actions and higher than anticipated rates of warranty returns or other returns of goods. The Company and/or its subsidiaries are therefore party to various personal injury and property damage lawsuits relating to their products and incidental to their business. Annually, the Company sets its product liability insurance program which is an occurrence-based program based on the Company and its subsidiaries’ current and historical claims experience and the availability and cost of insurance. The Company’s product liability insurance program generally includes a self-insurance retention per occurrence. Cumulative amounts estimated to be payable by the Company with respect to pending and potential claims for all years in which the Company is liable under its self-insurance retention have been accrued as liabilities. Such accrued liabilities are based on estimates (which include actuarial determinations made by an independent actuarial consultant as to liability exposure, taking into account prior experience, number of claims and other relevant factors); thus, the Company’s ultimate liability may exceed or be less than the amounts accrued. The methods of making such estimates and establishing the resulting liability are reviewed on a regular basis and any adjustments resulting therefrom are reflected in current operating results. Based on current information, the Company believes that the ultimate conclusion of the various pending product liability claims and lawsuits of the Company, in the aggregate, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
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The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
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Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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