NEWELL BRANDS INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with "Financial Statements and Supplementary Data" included in Part II, Item 8 of this 2020 Annual Report and the Company's audited Consolidated Financial Statements and Notes thereto included elsewhere in this 2020 Annual Report. The following "Business Strategy" and "Recent Developments" sections below is a brief presentation of our business and certain significant items addressed in this section or elsewhere in this 2020 Annual Report. This section should be read along with the relevant portions of this 2020 Annual Report for a complete discussion of the events and items summarized below. OverviewNewell Brands is a leading global consumer goods company with a strong portfolio of well-known brands, including Rubbermaid®, Paper Mate®, Sharpie®, Dymo®, EXPO®, Parker®, Elmer's®, Coleman®, Marmot®, Oster®, Sunbeam®, FoodSaver®, Mr. Coffee®, Rubbermaid Commercial Products®, Graco®, Baby Jogger®, NUK®, Calphalon®, Contigo®, First Alert®, Mapa®, Spontex® and Yankee Candle®.Newell Brands is committed to enhancing the lives of consumers around the world with planet-friendly, innovative and attractive products that create moments of joy and provide peace of mind. The Company sells its products in nearly 200 countries around the world and has operations on the ground in over 40 of these countries, excluding third-party distributors. Business Strategy The Company is continuing to execute on its turnaround strategy of building a global, next generation consumer products company that can unleash the full potential of its brands in a fast moving omni-channel environment. The strategy, developed in 2019, is designed to drive sustainable top line growth, improve operating margins, accelerate cash conversion cycle and strengthen the portfolio, organizational capabilities and employee engagement, while addressing key challenges facing the Company. These challenges include: shifting consumer preferences and behaviors; a highly competitive operating environment; a rapidly changing retail landscape, including the growth in e-commerce; continued macroeconomic and political volatility; and an evolving regulatory landscape. The coronavirus (COVID-19) pandemic and its impact to the Company's business resulted in the acceleration of these initiatives in many respects. 25 --------------------------------------------------------------------------------
The Company has made significant progress on the following imperatives it previously identified as part of its turnaround strategy:
•Strengthening the portfolio by investing in attractive categories aligned with its capabilities and strategy; •Driving sustainable profitable growth by focusing on innovation, as well as growth in digital marketing, e-commerce and its international businesses; •Improving margins by driving productivity and overhead savings, while reinvesting into the business; •Enhancing cash efficiency by improving key working capital metrics, resulting in a lower cash conversion cycle; and •Building a winning team through engagement and focusing the best people on the right things.
Continued execution of these strategic imperatives will better position the Company for long-term sustainable growth. Organizational Structure
The Company's five primary operating segments are as follows: Segment
Key Brands Description of Primary Products Appliances and Cookware Calphalon®, Crock-Pot®, Mr.
Coffee®, Household products, including kitchen appliances,
Oster® and Sunbeam® gourmet cookware, bakeware and cutlery
Commercial Solutions BRK®, First Alert®, Mapa®, Quickie®, Commercial cleaning and maintenance solutions;
Rubbermaid®, Rubbermaid Commercial closet and garage organization; hygiene systems
Products®, and Spontex® and material handling solutions; connected home
and security and smoke and carbon monoxide alarms
Home Solutions Ball® (1), Chesapeake Bay Candle®, Food and home storage products; fresh preserving
FoodSaver®, Rubbermaid®, Sistema®, products, vacuum sealing products and home
WoodWick® and Yankee Candle® fragrance products
Learning and Development Aprica®, Baby Jogger®, Dymo®, Baby gear and infant care products; writing
Elmer's®, EXPO®, Graco®, Mr. Sketch®, instruments, including markers and highlighters,
NUK®, Paper Mate®, Parker®, pens and pencils; art products; activity-based
Prismacolor®, Sharpie®, Tigex® adhesive and cutting products and labeling
Waterman® and X-Acto® solutions
Outdoor and Recreation Coleman®, Contigo®, ExOfficio®, Products for outdoor and outdoor-related
Marmot® activities
(1) [[Image Removed: nwl-20201231_g1.gif]] and Ball®,
This structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. The Company also provides general corporate services to its segments which is reported as a non-operating segment, Corporate. See Footnote 17 of the Notes to the Consolidated Financial Statements for further information. Recent Developments Coronavirus (COVID-19) Beginning late in the fourth quarter of 2019 through 2020 and into 2021, COVID-19 emerged and subsequently spread globally, ultimately being declared a pandemic by theWorld Health Organization . The pandemic resulted in various federal, state and local governments, as well as private entities, mandating restrictions on travel and public gatherings, closure of non-essential commerce, stay at home orders and quarantining of people to limit exposure to the virus. The Company's global operations, similar to those of many large, multi-national corporations, experienced significant COVID-19 related disruption to its business in three primary areas: •Supply chain. While the majority of the Company's factories are considered essential in their applicable jurisdictions and have remained operational, the Company experienced disruption at certain of its facilities. Of its 135 manufacturing and distribution facilities, approximately 20 were temporarily closed at the end of the first quarter of 2020, the most significant of which were itsSouth Deerfield, MA , Home Fragrance plant, itsMexicali, Mexico and India Writing facilities and itsJuarez, Mexico Connected Home and Security facility, all of which were closed in accordance with state government guidelines. By the end of the third quarter of 2020, substantially all of the Company's manufacturing and distribution facilities reopened and were operating at or near capacity. Since then, the Company's facilities have replenished most of the inventory levels that were depleted by lost production during the temporary closure period. The Company does, however, 26 -------------------------------------------------------------------------------- continue to face intermittent supply and labor shortages, capacity constraints, and transportation and logistical challenges and expects this to persist until the current economic and public health conditions improve globally. •Retail. While the Company's largest retail customers experienced a surge in sales as their stores remained open, a number of secondary customers, primarily in the specialty and department store channels, temporarily closed their brick and mortar doors inMarch 2020 , and began to reopen in certain regions where conditions improved towards the end of the second quarter of 2020. These dynamics, in combination with some retailers' prioritization of essential items, have had a meaningful impact on the Company's traditional order patterns. In addition, the Company temporarily closed itsYankee Candle retail stores inNorth America as of mid-March. All of these stores reopened by the end of the third quarter and have remained open since. •Consumer demand patterns. During the quarantine phase of the pandemic, consumer purchasing behavior strongly shifted to certain focused categories. While certain of the Company's product categories in the Food, Commercial and Appliances and Cookware business benefited from this shift, others, particularly the Writing business, experienced significant slowing. Changes in consumer purchasing patterns, temporary office closures, as well as the shift to remote learning for schools and other higher education programs in the Fall semester of 2020 adversely impacted the performance of the Writing business during 2020. In response to the COVID-19 pandemic, the Company focused on protecting the health and well-being of its employees; maintaining financial viability and business continuity; and keeping manufacturing facilities and distribution centers operating, where permitted and deemed prudent, to provide products to our consumers. The Company put in place internal protocols including the establishment of a COVID-19 task force to monitor the situation, as well as communications and guidance issued by foreign, federal, state and local governments. The Company instituted mandatory work-from-home policies for employees able to work from home in various locations around the world and implemented a number of precautionary measures at its manufacturing plants, warehouses, distribution centers and R&D centers to reduce person-to-person contact and improve the personal safety for our front-line employees. Furthermore, the Company temporarily closed all of the world-wideYankee Candle retail stores. By the end of the third quarter of 2020, all of the Company's temporarily closed manufacturing and distribution sites reopened and were operating at or near capacity. In addition, most of the Company's office locations have reopened on a limited basis. The Company continues to monitor developments, including government requirements and recommendations at the national, state, and local level to evaluate possible cessation or extensions to all or part of such COVID-19 precautionary initiatives. As part of the Company's efforts to contain costs and maintain financial liquidity and flexibility, it instituted a hiring freeze for non-essential roles, furloughed all field-based and most corporate retail employees inNorth America , fromApril 1, 2020 through the third quarter of 2020, tightened discretionary spending, reduced non-essential travel and optimized advertising and promotional expenses. In addition, the Company announced a restructuring program during the second quarter of 2020 to reduce overhead costs, streamline certain underperforming operations and improve future profitability. While the negative effects from the COVID-19 global pandemic in the first half of 2020 were material to the Company's operating results, the Company saw positive momentum, which included sales growth during the second half of the year and strong liquidity with over$1.4 billion in operating cash flow for the year endedDecember 31, 2020 . The Company believes, however, the extent of the impact of the COVID-19 pandemic to its businesses, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the pandemic, the impact of new strains and variants of the coronavirus, the pandemic's impact on theU.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental plans to administer vaccines to the general public, especially in areas where conditions have recently worsened and lockdowns or travel bans have been reinstituted. Those primary drivers are beyond the Company's knowledge and control, and as a result, at this time it is difficult to predict the cumulative impact, both in terms of severity and duration, COVID-19 will have on its future sales, operating results, cash flows and financial condition. Furthermore, the impact to the Company's businesses, operating results, cash flows, liquidity and financial condition may be further adversely impacted if the COVID-19 global pandemic continues to exist or worsens for a prolonged period of time or if plans to administer vaccines are delayed.
See Results of Operations, Critical Accounting Estimates and Footnotes 1 and 7 of the Notes to Consolidated Financial Statements for further information.
In conjunction with the Company's annual impairment testing of goodwill and indefinite-lived intangible assets during the fourth quarter (onDecember 1 ), the Company recorded a non-cash impairment charge of$20 million associated with a tradename in the Learning and Development segment, as its carrying value exceeded its fair value. The impairment reflected a downward revision of forecasted results due to the impact of the delayed and limited re-opening of schools and offices as a result of the COVID-19 global pandemic, as well as the continued deterioration in sales for slime-related adhesive products. 27 -------------------------------------------------------------------------------- During the third quarter of 2020, the Company concluded that a triggering event had occurred for an indefinite-lived intangible asset in the Learning and Development segment. Pursuant to the authoritative literature the Company performed an impairment test and determined that an indefinite-lived intangible asset was impaired. During the three months endedSeptember 30, 2020 , the Company recorded a non-cash charge of$2 million to reflect impairment of this indefinite-lived tradename as its carrying value exceeded its fair value. During the first quarter of 2020, the Company concluded that a triggering event had occurred for all of its reporting units as a result of the COVID-19 global pandemic. Pursuant to the authoritative literature the Company performed an impairment test and determined that certain of its indefinite-lived intangible assets in the Appliances and Cookware, Home and Outdoor Living and Learning and Development segments were impaired. During the three months endedMarch 31, 2020 , the Company recorded an aggregate non-cash charge of$1.3 billion to reflect impairment of these indefinite-lived tradenames as their carrying values exceeded their fair values. In addition, the Company determined that its goodwill associated with its Appliances and Cookware segment was fully impaired. During, the three months endedMarch 31, 2020 , the Company recorded a non-cash charge of$212 million to reflect the impairment of its goodwill as its carrying value exceeded its fair value.
See Results of Operations, Critical Accounting Estimates and Footnotes 1 and 7 of the Notes to Consolidated Financial Statements for further information.
Impacts of Tariffs
The United States Trade Representative ("USTR") imposed increased tariffs on
some Chinese goods imported into the United States , resulting in increased costs
for the Company. In 2020, the Company was successful at securing from the USTR
exemptions and exclusions for some of its products, with the most notable
exemptions being for certain of its baby gear products, which represents a
substantial portion of the Company's tariff exposure. The Company has largely
mitigated its tariff exposure, in part through pricing, productivity and, in
some cases, relocation. The Phase 1 agreement signed on January 15, 2020 with
China reduced tariffs under List 4a from 15% to 7.5%, effective February 14,
2020 , and suspended 301 tariffs under List 4b, which went into effect on
December 15, 2019 . The terms of the agreement significantly reduced the
estimated impact on tariffs for 2020. In spite of the agreement, a full year of
previously implemented tariffs had a material impact on the Company's operating
results and cash flows, with gross impact of approximately $91 million in 2020,
primarily relating to its Appliances and Cookware, Commercial Solutions, and
Outdoor and Recreation businesses. The Company will continue to monitor the
impact, if any, of new trade policy under the new U.S. Presidential
administration and deploy mitigation efforts to offset the gross exposure.
However, there can be no assurance that the Company will be successful in its
mitigation efforts.
U.S. Treasury Regulations
On June 18, 2019 , the U.S. Treasury and the Internal Revenue Service ("IRS")
released temporary regulations under IRC Section 245A ("Section 245A") as
enacted by the 2017 U.S. Tax Reform Legislation ("2017 Tax Reform") and IRC
Section 954(c)(6) (the "Temporary Regulations") to apply retroactively to the
date the 2017 Tax Reform was enacted. On August 21, 2020 , the U.S. Treasury and
IRS released finalized versions of the Temporary Regulations (collectively with
the Temporary Regulations, the "Regulations"). The Regulations seek to limit the
100% dividends received deduction permitted by Section 245A for certain
dividends received from controlled foreign corporations and to limit the
applicability of the look-through exception to foreign personal holding company
income for certain dividends received from controlled foreign corporations.
Before the retroactive application of the Regulations, the Company benefited in
2018 from both the 100% dividends received deduction and the look-through
exception to foreign personal holding company income. The Company analyzed the
Regulations and concluded the relevant Regulations were not validly issued.
Therefore, the Company has not accounted for the effects of the Regulations in
its Consolidated Financial Statements for the period ending December 31, 2020 .
The Company believes it has strong arguments in favor of its position and
believes it has met the more likely than not recognition threshold that its
position will be sustained. However, due to the inherent uncertainty involved in
challenging the validity of regulations as well as a potential litigation
process, there can be no assurances that the relevant Regulations will be
invalidated or that a court of law will rule in favor of the Company. If the
Company's position on the Regulations is not sustained, the Company would be
required to recognize an income tax expense of approximately $180 million to
$220 million related to an income tax benefit from fiscal year 2018 that was
recorded based on regulations in existence at the time. In addition, the Company
may be required to pay any applicable interest and penalties. The Company
intends to vigorously defend its position.
Debt Redemption
InNovember 2020 , the Company repurchased$300 million of the 3.85% Senior Notes due 2023 with available cash on hand. The total consideration, excluding accrued interest, was approximately$318 million . The Company recorded a loss on extinguishment of 28 -------------------------------------------------------------------------------- debt of$20 million as a result of the partial debt repayment. See Footnote 9 in Notes to Consolidated Financial Statements for further information. Results of Operations Consolidated Operating Results 2020 vs. 2019 Years Ended December 31, (in millions, except per share data) 2020 2019 $ Change % Change Net sales$ 9,385 $ 9,715 $ (330) (3.4)% Gross profit 3,079 3,219 (140) (4.3)% Gross margin 32.8 % 33.1 % Operating loss (634) (482) (152) (31.5)% Operating margin (6.8) % (5.0) % Interest expense, net 274 303 (29) (9.6)% Loss on extinguishment of debt 20 28 (8) (28.6)% Other expense, net 78 39 39 100.0% Loss before income taxes (1,006) (852) (154) (18.1)% Income tax benefit (236) (1,038) 802 77.3% Income tax rate 23.5 % 121.9 % Diluted earnings (loss) per share - continuing operations$ (1.82) $
0.44
Diluted earnings (loss) per share - discontinued operations -
(0.19)
Diluted earnings (loss) per share - attributable
Net sales for 2020 decreased 3%, due to a decline in sales within Learning and Development andOutdoor and Recreation segments. The Learning and Development segment was impacted by changes in consumer purchasing patterns as well as delays and limited opening of schools and offices caused by the COVID-19 pandemic. Net sales in theOutdoor and Recreation segment were impacted by lower overall demand. The net sales decline was partially offset by growth in the Appliances and Cookware, Commercial Solutions and Home Solutions segments due to an increase in demand, notably through online channels. Changes in foreign currency unfavorably impacted net sales by$108 million , or 1%. Gross profit for 2020 decreased 4% and gross profit margin declined to 32.8% as compared with 33.1% in the prior year period. The gross margin decline was driven by higher costs associated with lower sales volume and certain temporary manufacturing closures, primarily during the first half of the year, as well as business unit mix and inflation related to input costs. The decline in gross margin also reflected increased costs across most of its business units related to the COVID-19 pandemic, including increased employee costs, such as expanded benefits and frontline incentives, and other costs, such as procurement of personal protective equipment. The gross profit decline was partially offset by the cumulative depreciation expense recorded during the prior year, as a result of the Company's decision to retain the Commercial Business, as well as gross productivity and lower product recall costs. Changes in foreign currency exchange rates unfavorably impacted gross profit by$25 million , or 1%. All of the Company's manufacturing and distribution facilities are operating at or near capacity and its facilities have replenished most of the inventory levels that were depleted by lost production during the temporary closure period, however, the Company does continue to face intermittent supply and labor shortages, capacity constraints, and transportation and logistical challenges, which have negatively impacted net sales growth, and expects this to persist until the conditions improve globally. While the negative effects from the COVID-19 pandemic in the first half of 2020 were material to the Company's operating results, the Company saw positive momentum during the second half of the year. At this time, the Company is unable to predict any further impact, both in terms of severity and duration, that the COVID-19 global pandemic will have on its businesses, customers and suppliers. While the Company has deployed cost containment initiatives to mitigate the impact of the pandemic, such actions may not be sufficient to mitigate the entire impact. The Company will continue to monitor developments, including government requirements and recommendations to evaluate possible further cessation or extensions of its operations.
See Recent Developments, Critical Accounting Estimates and Footnote 1 in the Notes to Consolidated Financial Statements for further information.
29
--------------------------------------------------------------------------------Notable items impacting operating loss for 2020 and 2019 are as follows:
Years Ended December 31,
(in millions) 2020 2019 $ Change
Impairment of goodwill and intangible assets (See Footnote 7)
$ 1,491 $ 1,213 $ 278 Restructuring and restructuring related (See Footnote 4) (a) 44 82 (38)
Held for sale depreciation and amortization catch-up adjustments (See Footnotes 6 and 7)
- 57 (57)
Product recall costs (See Footnote 18) 2 20 (18)
Transactions and related costs 4 30 (26)
(a)Restructuring-related costs reported in cost of products sold and selling,
general and administrative expenses ("SG&A") for 2020 were $4 million and $19
million , respectively, and primarily relate to facility closures.
Restructuring-related costs reported in cost of products sold and SG&A for 2019
were $16 million and $39 million , respectively, and primarily relate to
accelerated depreciation associated with restructuring activities.
Operating loss increased to $634 million in 2020 as compared to $482 million in
2019. Operating loss included non-cash impairment charges of goodwill and
certain indefinite-lived intangible assets of $1.5 billion recorded in 2020 as
compared to $1.2 billion of non-cash impairment charges of goodwill and certain
indefinite-lived intangible assets recorded in 2019, which included non-cash
impairment charges of goodwill for businesses previously classified as held for
sale. This performance was partially offset by productivity improvement from
various initiatives, lower restructuring and restructuring-related charges,
lower overhead costs and discretionary spending, including advertising and
promotional costs, cumulative depreciation expense recorded during the prior
year, as a result of the Company's decision to retain the Commercial Business,
lower transaction and related costs associated with the completion of the
Accelerated Transformation Plan ("ATP") in the prior year and lower costs
associated with a 2019 product recall in the Outdoor and Recreation segment. See
Footnotes 7 and 18 of the Notes to Consolidated Financial Statements for further
information.
Interest expense, net for 2020 decreased primarily due to lower debt levels,
slightly offset by the higher rate as a result of previously disclosed debt
ratings downgrades. See Footnote 9 of the Notes to Consolidated Financial
Statements for further information. The weighted average interest rate for 2020
and 2019 was approximately 4.6% and 4.4%, respectively.
The loss on the extinguishment of debt of $20 million and $28 million for 2020
and 2019, respectively, are related to the Company's tender offer of certain of
its senior notes and debt redemptions. See Footnote 9 of the Notes to the
Consolidated Financial Statements for further information.
Other expense, net, for 2020 and 2019 include the following items:
Years Ended December 31,
(in millions) 2020 2019
Pension settlement and non-service costs, net (See Footnote 11)
$ 53 $ 1
Foreign exchange losses, net (See Footnote 10) 17 13
Fair value equity adjustments (See Footnote 16) - 21
Loss on disposition of businesses, net 9 -
Other (1) 4
$ 78 $ 39
Income tax benefit for 2020 was $236 million as compared to $1.0 billion in
2019. The effective tax rate for 2020 was 23.5% as compared to 121.9% in 2019.
The income tax benefit for 2020 primarily relates to the impact of goodwill
impairment charges, discrete tax benefits associated with the execution of
certain tax planning strategies, $53 million for a reduction in valuation
allowance related to integration of certain U.S. operations, partially offset by
$54 million for a reduction of an uncertain tax position due to a statute of
limitation expiration, $47 million deferred tax effects associated with certain
outside basis differences and tax expense of $27 million related to a change in
the tax status of certain entities upon Internal Revenue Service approval. The
income tax benefit for 2019 primarily relates to a benefit of $522 million
related to the deferred tax effects associated with the internal realignment of
certain intellectual property rights, a benefit of $227 million associated with
a taxable loss related to the impairment of certain assets and the pre-tax net
loss for the year. See Footnote 12 of the Notes to Consolidated Financial
Statements for information.
30
--------------------------------------------------------------------------------Business Segment Operating Results 2020 vs. 2019
Appliances and Cookware
Years Ended December 31,
(in millions) 2020 2019 $ Change % Change
Net sales $ 1,706 $ 1,692 $ 14 0.8 %
Operating loss (217) (535) 318 59.4 %
Operating margin (12.7) % (31.6) %
Notable items impacting operating loss
comparability:
Impairment of goodwill and other intangible assets
(See Footnote 7) $ 299 $ 600 $ (301)
Appliances and Cookware net sales for 2020 increased 1%, which reflects strong
sales growth driven by category growth at stay at home products including
cooking appliances, most notably in Latin America , the U.K. and Australia . This
performance was partially offset by continued loss in domestic market share in
North America for certain appliance categories driven by the success of newly
launched competitor products. Changes in foreign currency unfavorably impacted
net sales by $77 million , or 4%.
Operating loss for 2020 decreased to $217 million as compared to $535 million in
2019. The improvement in operating results is primarily due to lower non-cash
impairment charges of goodwill and certain indefinite-lived intangible assets as
well as productivity improvements and lower discretionary spending including
advertising and promotional costs, partially offset by transactional foreign
exchange losses in Latin America .
Commercial Solutions
Years Ended December 31,
(in millions) 2020 2019 $ Change % Change
Net sales $ 1,859 $ 1,779 $ 80 4.5%
Operating loss (85) (136) 51 37.5%
Operating margin (4.6) % (7.6) %
Notable items impacting operating loss
comparability:
Impairment of goodwill and other intangible $ 320 $ 310 $ 10
assets (See Footnote 7)
Held for sale depreciation and amortization
catch-up adjustment - 57 (57)
(See Footnotes 6 and 7)
Commercial Solutions net sales for 2020 increased 4% which reflected sales growth in the Commercial business, partially offset by decline in the Connected Home and Security business unit. The Commercial business unit performance reflected increased demand in consumable washroom, refuse, hand protection, and outdoor and laundry categories, partially offset by weakness in food service and hospitality vertical channels as a result of the ongoing COVID-19 pandemic. The decline in net sales in the Connected Home and Security business unit was primarily due to the ongoing COVID-19 pandemic, which shifted consumer purchasing patterns and caused supply chain constraints, impacting sales to its retail and contractor channels. Changes in foreign currency unfavorably impacted net sales by$18 million , or 1%. Operating loss for 2020 decreased to$85 million as compared to$136 million in 2019. The improvement in operating results is primarily due to the cumulative depreciation and amortization expense adjustment in the prior year, as a result of the Company's decision to retain the Commercial Business. The improvement in the operating results also reflects cost containment initiatives to mitigate the impact of the COVID-19 pandemic while facilities were closed, including employee furloughs, gross productivity and lower discretionary spending, including advertising and promotional costs. This operating performance was partially offset by the higher costs in Connected Home and Security associated with lower sales volumes and the temporary closure of its key manufacturing facility inMexico during the first half of the year, as well as higher non-cash impairment charges of goodwill and certain indefinite-lived intangible assets. 31 --------------------------------------------------------------------------------
Home Solutions
Years Ended December 31,
(in millions) 2020 2019 $ Change % Change
Net sales $ 1,971 $ 1,875 $ 96 5.1%
Operating loss (12) (17) 5 29.4%
Operating margin (0.6) % (0.9) %
Notable items impacting operating loss
comparability:
Impairment of goodwill and other intangible assets
(See Footnote 7) 290 158 132
Home Solutions net sales for 2020 increased 5%, as strong sales performance in
the Food business unit was partially offset by sales declines in the Home
Fragrance business unit. The increase in Food business unit sales reflected
increased demand across the vacuum sealing, fresh preserving and Rubbermaid Food
Storage categories, as a result of the ongoing COVID-19 pandemic, partially
offset by supply chain disruption related to the temporary closure of the since
re-opened Sistema manufacturing facility in New Zealand , as well as supply and
capacity constraints negatively affecting the fresh preserving and vacuum
sealing categories. The decrease in Home Fragrance sales was primarily due to
the temporary closure of all of its North American Yankee Candle retail stores,
supply chain disruptions resulting from the temporary closure of its key
manufacturing facility in Massachusetts and the temporary closure of certain
third-party retail stores in the first half of 2020 as a result of the ongoing
COVID-19 global pandemic. Yankee Candle retail stores re-opened during the third
quarter. The decrease in Home Fragrance sales also reflected the exit of 77
underperforming Yankee Candle retail stores as well as the exiting of its
fundraising business in third quarter of 2020. Changes in foreign currency
favorably impacted net sales by $4 million .
Operating loss for 2020 decreased to $12 million as compared to $17 million in
2019. The decrease in operating loss reflects higher sales volume in the Food
business unit, cost containment initiatives to mitigate the impact while Yankee
Candle retail stores and operating facilities were temporarily closed, including
employee furloughs, lower discretionary spending, including promotional costs,
and gross productivity. This performance was partially offset by non-cash
impairment charges of certain indefinite-lived intangible assets of $290 million
recorded in 2020 as compared to $158 million of non-cash impairment charges of
goodwill and certain indefinite-lived intangible assets recorded in 2019.
Operating loss was also unfavorably impacted by higher costs associated with
lower sales volume in the Home Fragrance business unit and the temporary closure
of their key manufacturing facility in Massachusetts , during the first half of
2020, and non-cash impairment charges of $8 million primarily related to
operating leases of its Yankee Candle retail store business.
Learning and Development
Years Ended December 31,
(in millions) 2020 2019 $ Change % Change
Net sales $ 2,557 $ 2,956 $ (399) (13.5)%
Operating income 362 588 (226) (38.4)%
Operating margin 14.2 % 19.9 %
Notable items impacting operating income
comparability:
Impairment of goodwill and other intangible assets
(See Footnote 7) $ 100 $ 25 $ 75
Learning and Development net sales for 2020 decreased 13% primarily due to the
shift in consumer purchasing patterns, third-party retail store closures and
supply chain disruptions affecting the Writing and Baby and Parenting business
units as a result of the ongoing COVID-19 global pandemic, including the impact
of the delayed re-opening of schools and offices. In particular, the ongoing
COVID-19 global pandemic negatively impacted consumption patterns of markers,
pens and dry erase products. In addition, the net sales decline also reflected
softening trends related to sales of slime-related adhesive products, which is
expected to continue in 2021, as well as the exiting of the North American
distribution of Uniball® products in the prior year. Net sales for the Baby and
Parenting business were relatively flat for 2020. Changes in foreign currency
unfavorably impacted net sales by $5 million .
32
--------------------------------------------------------------------------------
Operating income for 2020 decreased to $362 million as compared to $588 million
in the prior year period. Operating income was unfavorably impacted by lower
sales as mentioned above, higher costs associated with lower sales volume and
certain temporary manufacturing closures, higher non-cash impairment charges and
increased costs associated with the COVID-19 global pandemic, partially offset
by lower overhead, productivity improvements and discretionary spending,
including advertising and promotional costs.
Outdoor and Recreation
Years Ended December 31,
(in millions) 2020 2019 $ Change % Change
Net sales $ 1,292 $ 1,413 $ (121) (8.6)%
Operating loss (418) (64) (354) NM
Operating margin (32.4) % (4.5) %
Notable items impacting operating loss
comparability:
Impairment of goodwill and other intangible assets
(See Footnote 7) $ 482 $ 120 $ 362
Product recall costs (See Footnote 18) 2 20 (18)
NM - Not meaningful
Outdoor and Recreation segment net sales for 2020 decreased 9% primarily due to
a shift in consumer purchasing patterns, as a result of the ongoing COVID-19
pandemic, which negatively impacted performance during the first half of the
year. During the second half of the year, demand for outdoor products and
coolers, primarily in North America and Asia improved, partially offset by
decreased demand in apparel and beverage products. Changes in foreign currency
unfavorably impacted net sales by $12 million , or 1%.
Operating loss for 2020 was $418 million as compared to $64 million in the prior
year period. This performance was primarily due to higher non-cash impairment
charges of certain indefinite-lived intangibles assets, lower sales volume as
noted above, unfavorable product mix, partially offset by lower overhead costs
and lower discretionary spending, including advertising and promotional costs,
as well as lower costs associated with a product recall in the prior year, and
productivity improvements.
33
--------------------------------------------------------------------------------Consolidated Operating Results 2019 vs. 2018
Years Ended December 31,
(in millions, except per share data) 2019 2018 $ Change % Change
Net sales $ 9,715 $ 10,154 $ (439) (4.3)%
Gross profit 3,219 3,518 (299) (8.5)%
Gross margin 33.1 % 34.6 %
Operating loss (482) (7,554) 7,072 93.6%
Operating margin (5.0) % (74.4) %
Interest expense, net 303 446 (143) (32.1)%
Loss on extinguishment of debt 28 4 24 NM
Other (income) expense, net 39 (12) 51 NM
Loss before income taxes (852) (7,992) 7,140 89.3%
Income tax benefit (1,038) (1,359) 321 23.6%
Income tax rate 121.9 % 17.0 %
Diluted earnings (loss) per share - continuing
operations $ 0.44 $ (14.00)
Diluted loss per share - discontinued operations (0.19) (0.65)
Diluted earnings (loss) per share - attributable to common shareholders$ 0.25 $ (14.65) NM - Not meaningful
Net sales for 2019 decreased 4%, with declines across all segments, primarily
within the Appliances and Cookware, Commercial Solutions, and
Gross profit for 2019 decreased 8% and gross profit margin declined to 33.1% in 2019 as compared with 34.6% in 2018. This performance was primarily due to lower net sales, product mix, inflation related to input costs and tariffs. Gross profit and margin in 2019 were also unfavorably impacted by a cumulative catch-up adjustment for depreciation expense of$48 million related to the Company's decision to retain the Commercial Business. Approximately$27 million of this depreciation expense related to the amounts that would have been recorded in the prior year had the Commercial Business been continuously classified as held and used. See Footnote 6 of the Notes to the Consolidated Financial Statements for further information. In addition, gross profit and margin in 2019 were unfavorably impacted by approximately$20 million of costs associated with a product recall in theOutdoor and Recreation segment. See Footnote 18 of the Notes to the Consolidated Financial Statements for further information. The gross profit decrease was partially offset by productivity improvement in 2019 from various initiatives. Changes in foreign currency exchange rates unfavorably impacted gross profit by$56 million , or 2%.
Notable items impacting operating loss for 2019 and 2018 are as follows:
Years Ended December 31,
(in millions) 2019 2018 $ Change
Impairment of intangible assets (See Footnote 7) $ 1,213 $ 8,296 $ (7,083)
Restructuring and restructuring related
(See Footnote 4) (a) 82 98 (16)
Held for sale depreciation and amortization catch-up adjustments (See Footnotes 6 and 7) (b)
57 - 57
Product recall costs (See Footnote 18) 20 - 20
Bad debt write-off for large customer - 26 (26)
(a)Restructuring-related costs reported in cost of products sold and SG&A for
2019 were $16 million and $39 million , respectively, and primarily relate to
accelerated depreciation associated with restructuring activities.
Restructuring-related costs of $11 million for 2018 were reported in SG&A.
Restructuring costs for 2019 and 2018 were $27 million and $87 million ,
respectively, and primarily represent costs associated with the ATP, which was
completed at the end of 2019.
34
--------------------------------------------------------------------------------
(b)Amounts reported in cost of products sold and SG&A for 2019 were
Operating loss decreased to$482 million in 2019 as compared to$7.6 billion in 2018. Operating loss included non-cash impairment charges of goodwill and certain indefinite-lived intangible assets of$1.2 billion recorded in 2019 as compared to$8.3 billion of non-cash impairment charges of goodwill and certain indefinite-lived intangible assets recorded in 2018. This performance also included overhead reduction driven by various initiatives, lower restructuring and restructuring-related charges in 2019 primarily related to the now completed ATP, and the lapping of a bad debt write off of$26 million from a large customer in the prior year. These decreases in operating loss and operating margin were partially offset by the cumulative catch-up adjustment for depreciation and amortization expense of$57 million recorded in 2019 as a result of the Company's decision to retain the Commercial Business. Approximately$33 million of this depreciation and amortization expense in 2019 related to the amounts that would have been recorded in the prior year had the Commercial Business been continuously classified as held and used. In addition, operating loss and operating margin in 2019 were unfavorably impacted by$20 million of costs associated with a product recall in theOutdoor and Recreation segment. Interest expense, net for 2019 decreased primarily due to lower debt levels. The weighted average interest rates for 2019 and 2018 were approximately 4.4% and 4.2%, respectively. The loss on the extinguishment of debt of$28 million and$4 million for 2019 and 2018, respectively, were related to the Company's tender offer of certain of its senior notes and debt redemptions. See Footnote 9 of the Notes to the Consolidated Financial Statements for further information.
Other (income) expense, net for 2019 and 2018 include the following items:
Years Ended December 31,
(in millions) 2019 2018
Foreign exchange losses, net (See Footnote 10) $ 13 $ 8
Fair value equity adjustments (See Footnote 16) 21 1
Pension-related non-service costs, net (See Footnote 11) 1 (6)
Gain on legacy Jarden investment - (11)
Gain on disposition of businesses, net - (2)
Other 4 (2)
$ 39 $ (12)
Income tax benefit for 2019 was $1.0 billion as compared to $1.4 billion in
2018. The effective tax rate for 2019 was 121.9% as compared to 17.0% in 2018.
The income tax benefit for 2019 primarily relates to a benefit of $522 million
related to the deferred tax effects associated with the internal realignment of
certain intellectual property rights, a benefit of $227 million associated with
a taxable loss related to the impairment of certain assets and the pre-tax net
loss for the year. See Footnote 12 of the Notes to Consolidated Financial
Statements for information. The income tax benefit for 2018 primarily relates to
the pre-tax net loss for the year, partially offset by the impact of goodwill
impairment charges which were not tax effected.
Business Segment Operating Results 2019 vs. 2018
Appliances and Cookware
Years Ended December 31,
(in millions) 2019 2018 $ Change % Change
Net sales $ 1,692 $ 1,819 $ (127) (7.0)%
Operating loss (535) (1,596) 1,061 66.5%
Operating margin (31.6) % (87.7) %
Notable items impacting operating loss
comparability:
Impairment of goodwill and other intangible assets
(See Footnote 7) 600 1,712 (1,112)
35-------------------------------------------------------------------------------- Appliances and Cookware net sales for 2019 decreased 7% primarily due to a loss in domestic market share inNorth America for certain appliance categories driven by the success of newly launched competitive products. The net sales decline inNorth America was partially offset by sales growth inLatin America primarily due to higher volume. Changes in foreign currency exchange rates unfavorably impacted net sales by$35 million , or 2%. Operating loss decreased to$535 million in 2019 as compared to$1.6 billion in 2018. Operating loss included non-cash impairment charges of goodwill and certain indefinite-lived intangible assets of$600 million recorded in 2019 as compared to$1.7 billion of non-cash impairment charges of goodwill and certain indefinite-lived intangible assets recorded in 2018. This decrease in operating loss and operating margin was partially offset by the unfavorable impact of lower sales and inflation related to input costs and tariffs. Commercial Solutions Years Ended December 31, (in millions) 2019 2018 $ Change % Change Net sales$ 1,779 $ 1,900 $ (121) (6.4)% Operating loss (136) (134) (2) (1.5)% Operating margin (7.6) % (7.1) % Notable items impacting operating loss comparability: Impairment of goodwill and other intangible assets (See Footnote 7)$ 310 $ 410 $ (100) Held for sale depreciation and amortization catch-up adjustment (See Footnotes 6 and 7) 57 - 57 Commercial Solutions net sales for 2019 decreased 6% primarily due to lower sales in the Commercial business unit, in part due to volume declines at certain major retailers, and softness in the cleaning and outdoor organization categories, partially offset by effective net pricing in certain categories. Changes in foreign currency exchange rates unfavorably impacted net sales by$42 million , or 2%. Operating loss was$136 million in 2019 as compared to$134 million in 2018. Operating loss included non-cash impairment charges of goodwill and certain indefinite-lived intangible assets of$310 million recorded in 2019 as compared to$410 million of non-cash impairment charges of goodwill and certain indefinite-lived intangible assets recorded in 2018. This decrease in operating loss and operating margin also reflected productivity improvement in 2019 from various initiatives, partially offset by the unfavorable impact of lower sales and inflation. In addition, operating loss was unfavorably impacted by the cumulative catch-up adjustment for depreciation and amortization expense of$57 million recorded in 2019 as a result of the Company's decision to retain the Commercial Business. Approximately$33 million of this depreciation and amortization expense in 2019 related to the amounts that would have been recorded in the prior year had the Commercial Business been continuously classified as held and used. See Footnotes 2, 6 and 7 of the Notes to the Consolidated Financial Statements for further information. Home Solutions Years Ended December 31, (in millions) 2019 2018 $ Change % Change Net sales$ 1,875 $ 1,935 $ (60) (3.1)% Operating loss (17) (4,270) 4,253 99.6% Operating margin (0.9) % (220.7) % Notable items impacting operating loss comparability: Impairment of goodwill and other intangible assets (See Footnote 7)$ 158 $
4,406
Home Solutions net sales for 2019 decreased 3% primarily due to decline in the Food business unit, in part due to volume declines at certain major retailers and softness in the fresh preserving and food storage categories, partially offset by growth in sales from Sistema products. Net sales declined in the Home Fragrance business unit due to the exit of 75 underperformingYankee Candle 36 --------------------------------------------------------------------------------
retail stores, partially offset by growth in
Operating loss for 2019 was
Learning and Development
Years Ended December 31,
(in millions) 2019 2018 $ Change % Change
Net sales $ 2,956 $ 2,982 $ (26) (0.9) %
Operating income 588 238 350 NM
Operating margin 19.9 % 8.0 %
Notable items impacting operating income
comparability:
Impairment of goodwill and other intangible assets
(See Footnote 7) $ 25 $ 351 $ (326)
Fire-related losses, net of insurance recoveries - (11) 11
Bad debt write off for large customer - 26 (26)
NM - Not meaningful
Learning and Development net sales for 2019 decreased 1%. Changes in foreign
currency exchange rates unfavorably impacted net sales by $43 million or 1%. The
decrease in net sales was also driven by softening trends in the Writing
business related to sales of slime-related adhesive products, partially offset
by international net sales growth in the Writing business.
Operating income increased to $588 million in 2019 as compared to $238 million
in 2018. Operating income and operating margins
improved primarily due to lower non-cash impairment charges of certain
indefinite-lived intangible assets of $25 million recorded in 2019 as compared
to $351 million of non-cash impairment charges of goodwill and certain
indefinite-lived intangible assets recorded in 2018. The increase in operating
income also included overhead reduction driven by various initiatives in the
current year and the lapping of a bad debt write off from a large customer in
the prior year, partially offset by higher advertising and promotion costs in
the current year and net insurance recoveries from a fire-related loss in the
prior year.
Outdoor and Recreation
Years Ended December 31,
(in millions) 2019 2018 $ Change % Change
Net sales $ 1,413 $ 1,515 $ (102) (6.7)%
Operating loss (64) (1,293) 1,229 95.1%
Operating margin (4.5) % (85.3) %
Notable items impacting operating loss
comparability:
Impairment of goodwill and other intangible
assets (See Footnote 7) $ 120 $ 1,417 $ (1,297)
Product recall costs (See Footnote 18) $ 20 $
-
Outdoor and Recreation segment net sales for 2019 decreased 7% reflecting lost distribution in certain product categories and unfavorable weather conditions affecting the Coleman business, partially offset by increased sales in airbeds and outdoor cooking categories. Changes in foreign currency exchange rates unfavorably impacted net sales by$23 million , or 2%. Operating loss decreased to$64 million in 2019 as compared to$1.3 billion in 2018. Operating loss included non-cash impairment charges of goodwill and certain indefinite-lived intangible assets of$120 million recorded in 2019 as compared to$1.4 billion of non-cash impairment charges of certain indefinite-lived intangible assets recorded in 2018. The decrease in operating loss was also due to overhead reduction driven by various initiatives. These decreases in operating loss were partially offset by the unfavorable impact of lower sales, cost of goods inflation and$20 million of costs associated with a product recall. 37 --------------------------------------------------------------------------------
Liquidity and Capital Resources
At the onset of the COVID-19 global pandemic, in light of uncertainty in the global economy as well as equity and bond markets, the Company undertook several actions to further strengthen its financial position and balance sheet, and maintain financial liquidity and flexibility, including, issuing debt, evaluating supply purchases, enhancing customer credit review processes, reviewing operating expenses, prioritizing capital expenditures, as well as extending payment terms for goods and services. While the Company has the ability to continue to take more of these actions, if needed, it also has the ability to borrow under its existing Accounts Receivable Securitization Facility (the "Securitization Facility") and$1.25 billion revolving credit facility that matures inDecember 2023 (the "Credit Revolver"). AtDecember 31, 2020 , the Company had no outstanding drawings against the Securitization Facility and Credit Revolver. The Company currently believes its capital structure and cash resources can continue to support the funding of future dividends and will continue to evaluate all actions to strengthen its financial position and balance sheet, and to maintain its financial liquidity, flexibility and capital allocation strategy. AtDecember 31, 2020 , the Company had cash and cash equivalents of approximately$981 million , of which approximately$505 million was held by the Company's non-U.S. subsidiaries. Overall, the Company believes that available cash and cash equivalents, cash flows generated from future operating activities and borrowing capacity, along with the actions noted above, provide the Company with continued financial viability and adequate liquidity to fund its operations, support its growth platforms, pay down debt and debt maturities as they come due and complete its ongoing turnaround initiatives. The Company's cash requirements are subject to change as business conditions warrant. As the COVID-19 global pandemic is complex and rapidly evolving, the Company's plans as described above may change. Although the Company saw positive momentum and strong cash generated from operating activities over the second half of 2020, the Company is still unable to predict the duration and severity of this pandemic, which could have a material adverse impact on the Company's future sales, results of operations, financial position and cash flows, particularly if the global pandemic continues to exist or worsens for a prolonged period of time, or if plans to administer vaccines are delayed. Any such material adverse impacts could result in the Company's inability to satisfy financial maintenance covenants and could limit the ability to make future borrowings under existing debt instruments. Cash, cash equivalents and restricted cash changed as follows for 2020, 2019 and 2018 (in millions): Increase (Decrease) Continuing Operations 2020 2019 2018 2020 2019
Cash provided by operating activities
$ 557 $ 342 $ 533 Cash used in investing activities (228) (242) (208) 14 (34) Cash used in financing activities (559) (972) (321) 413 (651) Discontinued Operations Cash provided by (used in) operating activities $ -$ (46) $ 123 $ 46 $ (169) Cash provided by investing activities - 978 5,015 (978) (4,037) Cash used in financing activities - (932) (5,133) 932 4,201Total Company Cash provided by operating activities$ 1,432 $ 1,044 $ 680 $ 388 $ 364 Cash provided by (used in) investing activities (228) 736 4,807 (964) (4,071) Cash used in financing activities (559) (1,904) (5,454) 1,345 3,550 Exchange rate effect on cash, cash equivalents and restricted cash 5 (1) (23) 6 22 Increase (decrease) in cash, cash equivalents and restricted cash$ 650 $ (125) $ 10 $ 775 $ (135) The Company tends to generate the majority of its operating cash flow in third and fourth quarters of the year due to seasonal variations in operating results, the timing of annual performance-based compensation payments, working capital requirements and credit terms provided to customers.
Factors Affecting Liquidity
As a result of the debt ratings downgrades by Moody's Corporation ("Moody's")
and S&P Global Inc. ("S&P") described in Footnote 9 of the Notes to Consolidated
Financial Statements, the Company's ability to borrow from the commercial paper
market on terms it deems acceptable or favorable was eliminated. Previously, the
Company was able to issue commercial paper up to a maximum of $800 million
provided there was a sufficient amount available for borrowing under the Credit
Revolver. The Company's ability to borrow under the Credit Revolver was not
affected by the downgrades. As such, the Company does not expect any change in
its ability to access liquidity in the short term as a result of the downgrades.
The interest rate for borrowings under the
38
--------------------------------------------------------------------------------
Credit Revolver is the borrowing period referenced LIBOR rate plus 127.5 basis
points. On April 15, 2020 , Fitch Ratings ("Fitch") downgraded the Company's debt
rating to "BB" as they believed the Company would fail to meet Fitch's target
debt level for 2020.
The Credit Revolver requires the maintenance of certain financial covenants. A
failure by the Company to maintain its financial covenants would impair its
ability to borrow under the Credit Revolver. At the time of filing this Annual
Report on Form 10-K, the Company is in compliance with all of its financial
covenants.
In addition, certain of the Company's Senior Notes aggregating to approximately
$4.3 billion in principal amount outstanding are subject to an interest rate
adjustment of 25 basis points as a result of the downgrades from S&P and
Moody's, for a total of 50 basis points. This increase to the interest rates of
each series of the Company's senior notes subject to adjustment increased the
Company's interest expense for 2020 by approximately $17 million and
approximately $21 million thereafter, on an annualized basis. The Fitch
downgrade did not impact the interest rates on any of the Company's senior
notes.
Furthermore, the Company may be required to pay a higher interest rate in future financings, and its potential pool of investors and funding sources could decrease as a result of the downgrades.
Cash Flows from Operating Activities
The change in net cash provided by operating activities is primarily due to successful working capital initiatives, which included: the extension of payment terms for goods and services with vendors, enhanced customer credit review and collections processes and evaluating supply purchases and focused inventory management. In addition, net cash from operating activities benefited from higher accounts receivable sold under the Customer Receivables Purchase Agreement and a timing benefit from higher payables due to inventory build to support demand, which is expected to partially reverse in 2021. The change in net cash was partially offset by higher annual incentive compensation payments in the current year. The change in net cash provided by operating activities from continuing operations for 2019 is primarily due to favorable working capital management as a result of the Company's continued focus on improving its working capital. Accounts receivable decreased in 2019 due to better terms compliance as a result of improvements in the Company's dispute resolution process and accounts receivable sold under the Customer Receivables Purchase Agreement. Operating cash flow also benefited from a decrease in cash paid for interest and income taxes of approximately$154 million and$136 million , respectively.
See Capital Resources for further information.
Cash Flows from Investing Activities
The change in cash used in investing activities for 2020 was primarily due to higher proceeds from the sale of divested businesses in the prior year, partially offset by lower capital expenditures.
The change in cash used in investing activities for 2019 was primarily due to higher proceeds from the sale of divested businesses in 2018, cash received by the Company in 2018 for insurance claims, which include a claim from fire-related losses and settlement of a note receivable related to a legacy Jarden investment, partially offset by lower capital expenditures.
Cash Flows from Financing Activities
The change in net cash used in financing activities was primarily due to higher payments of long-term debt in the prior year, as well as current-year proceeds from the issuance of theJune 2025 Notes (defined below). See Footnote 9 of the Notes to Consolidated Financial Statements for further information. The change in financing activities for 2019 was primarily due to the year-over-year change in debt (approximately$2.2 billion ) and a decrease in shares repurchased (approximately$1.5 billion ), partially offset by payments to dissenting shareholders in 2019 (approximately$171 million ) in connection with the Jarden acquisition. See Footnote 18 of the Notes to Consolidated Financial Statements for further information. 39 --------------------------------------------------------------------------------
Capital Resources
In
InMay 2020 , the Company completed a registered public offering of$500 million in aggregate principal amount of 4.875% senior notes that mature inJune 2025 (the "June 2025 Notes") and received proceeds of approximately$491 million , net of fees and expenses paid. TheJune 2025 Notes are subject to similar restrictive and financial covenants as the Company's existing senior notes, however, they are not subject to the interest rate adjustment or coupon step up provisions of certain other notes described below. TheJune 2025 Notes are redeemable in whole or in part, at the option of the Company (1) at any time prior to one month before the stated maturity at a redemption price equal to the greater of (a) 100% of the principal amount or (b) the discounted present value of principal and interest at the Treasury Rate plus 50 basis points, plus accrued interest to but excluding the redemption date; or (2) at any time on or after one month prior to the stated maturity at a price equal to 100% of the principal amount being redeemed, plus accrued interest to but excluding the redemption date. The Company used the net proceeds from theJune 2025 Notes for general corporate purposes, including repayment of outstanding borrowings under the Credit Revolver and accounts receivable securitization facility, and the redemption of the outstanding 4.70% Senior Notes due inAugust 2020 at maturity. InNovember 2020 , the Company repurchased$300 million of the 3.85% Senior Notes due 2023 with available cash on hand. The total consideration, excluding accrued interest, was approximately$318 million . The Company recorded a loss on extinguishment of debt of$20 million as a result of the partial debt repayment. OnJanuary 25, 2021 , the Company delivered a notice of redemption to the holders of the 3.150% senior notes that will mature inApril 2021 (the "April 2021 Notes") that the Company will redeem theApril 2021 Notes onMarch 1, 2021 (the "Redemption Date") for a redemption price equal to 100% of the current outstanding aggregate principal amount of the notes, plus accrued and unpaid interest to the Redemption Date. Under the Company's$1.25 billion Credit Revolver that matures inDecember 2023 , the Company may borrow funds on a variety of interest rate terms. Prior to the Moody's and S&P downgrades discussed above, the Credit Revolver provided the committed backup liquidity required to issue commercial paper. As a result of the S&P and Moody's downgrades, the Company could no longer borrow from the commercial paper market on terms it deems acceptable or favorable. Previously, the Company was able to issue commercial paper up to a maximum of$800 million provided there was a sufficient amount available for borrowing under the Credit Revolver. The Credit Revolver also provides for the issuance of up to$100 million of letters of credit, so long as there is a sufficient amount available for borrowing under the Credit Revolver. During the second quarter of 2020, the Company drew down$125 million on the Credit Revolver and used a portion of the proceeds to repay the outstanding commercial paper of$40 million outstanding atMarch 31, 2020 . AtDecember 31, 2020 , there were no commercial paper balance borrowings. In addition, there were approximately$20 million of outstanding standby letters of credit issued against the Credit Revolver and there were no borrowings outstanding under the Credit Revolver. AtDecember 31, 2020 , the net availability under the Credit Revolver was approximately$1.2 billion . The Company maintains an Accounts Receivable Securitization Facility. The aggregate commitment under the Securitization Facility is$600 million . The Securitization Facility matures inOctober 2022 and bears interest at a margin over a variable interest rate. The maximum availability under the Securitization Facility fluctuates based on eligible accounts receivable balances. InMarch 2020 , the Company amended its Securitization Facility with respect to certain customer receivables and to remove an originator from the Securitization Facility. AtDecember 31, 2020 , the Company did not have any amounts outstanding under the Securitization Facility. During the first quarter of 2020, the Company amended its existing factoring agreement (the "Customer Receivables Purchase Agreement") to increase the amount of certain customer receivables that may be sold. The balance of factored receivables atDecember 31, 2020 was approximately$350 million . Transactions under this agreement continue to be accounted for as sales of accounts receivable, and the receivables sold are removed from the Condensed Consolidated Balance Sheet at the time of the sales transaction. The Company classifies the proceeds received from the sales of accounts receivable as an operating cash flow in Consolidated Statement of Cash Flows. The Company records the discount as other (income) expense, net in the Consolidated Statement of Operations and collections of accounts receivables not yet submitted to the financial institution as a financing cash flow.
The Company was in compliance with all of its debt covenants at
40
--------------------------------------------------------------------------------Risk Management
From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.
Interest Rate Contracts
The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company may use 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 would be used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps would be 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 from the debt funding decision. The cash paid and received from the settlement of interest rate swaps is included in interest expense.
Fair Value Hedges
AtDecember 31, 2020 , the Company had approximately$100 million notional of interest rate swaps that exchange a fixed rate of interest for variable rate (LIBOR) of interest plus a weighted average spread. These floating rate swaps are designated as fair value hedges against$100 million of principal on the 4.00% senior notes due 2024 for the remaining life of the note. The effective portion of the fair value gains or losses on these swaps is offset by fair value adjustments in the underlying debt. OnAugust 15, 2020 , a$277 million notional interest rate swap matured concurrently with the maturity of the 4.70% senior notes which were repaid during the third quarter.
Cross-Currency Contracts
The Company uses cross-currency swaps to hedge foreign currency risk on certain financing arrangements. During the first quarter of 2020, the Company entered into two cross-currency swaps with an aggregate notional amount of$900 million , which were designated as net investment hedges of the Company's foreign currency exposure of its net investment in certain Euro-functional currency subsidiaries with Euro-denominated net assets. With these cross-currency swaps, which mature in January andFebruary 2025 , the Company pays a fixed rate of Euro-based interest and receives a fixed rate ofU.S. dollar interest. The Company has elected the spot method for assessing the effectiveness of these contracts. During the year endedDecember 31, 2020 , the Company recognized income of$14 million in interest expense, net, related to the portion of cross-currency swaps excluded from hedge effectiveness testing. The Company had no cross-currency swaps used as hedging instruments in 2019.
Foreign Currency Contracts
The Company uses forward 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 throughDecember 2021 . 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 accumulated other comprehensive income (loss) ("AOCL") 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. AtDecember 31, 2020 , the Company had approximately$509 million notional amount outstanding of forward foreign currency contracts that are designated as cash flow hedges of forecasted inventory purchases and sales. The Company also uses foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain other foreign currency transactions. AtDecember 31, 2020 , the Company had approximately$994 million notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates throughDecember 2021 . Fair market value gains or losses are included in the results of operations and are classified in other (income) expense, net. Commodity Contracts To a lesser extent, the Company also 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. AtDecember 31, 2020 , the Company had no notional amount outstanding of commodity-based derivatives that are designated as effective hedges for accounting purposes. Fair market value gains or losses are included in the results of operations and are classified in cost of products sold. 41 --------------------------------------------------------------------------------
The following table presents the fair value of derivative financial instruments
at
Asset
(Liability)
Derivatives designated as effective hedges:
Cash flow hedges:
Foreign currency contracts $ (18)
Fair value hedges:
Interest rate swaps 7
Net investment hedges:
Cross-currency swaps (92)
Derivatives not designated as effective hedges:
Foreign currency contracts (7)
Total $ (110) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
The Company has outstanding debt obligations maturing at various dates through 2046. Certain other items, such as purchase commitments and other executory contracts, are not recognized as liabilities in the Company's consolidated financial statements but are required to be disclosed. Examples of items not recognized as liabilities in the Company's consolidated financial statements are commitments to purchase raw materials or inventory that has not yet been received atDecember 31, 2020 , and other non-cancelable obligations including capital assets and other licensing services. The following table summarizes the effect, that material contractual obligations and commitments are expected to have on the Company's cash flow in the indicated period atDecember 31, 2020 . Additional details regarding these obligations are provided in the Notes to Consolidated Financial Statements: After (in millions) Total 1 year 2-3 years 4-5 years 5 years Debt (1)$ 5,633 $ 465 $ 1,348 $ 748 $ 3,072 Interest on debt (2) 2,216 270 470 353 1,123 Lease obligations (3) 709 159 241 141 168 Purchase obligations (4) 347 248 74 21 4 Tax obligations (5) 107 11 33 63 - Total (6)$ 9,012 $ 1,153 $ 2,166 $ 1,326 $ 4,367 (1)Amounts represent contractual obligations based on the earliest date that the obligation may become due, excluding interest, based on borrowings outstanding atDecember 31, 2020 . For further information relating to these obligations, see Footnote 9 of the Notes to Consolidated Financial Statements. (2)Amounts represent estimated interest payable on borrowings outstanding atDecember 31, 2020 , excluding the impact of fixed to floating rate interest rate swaps. Interest on floating-rate debt was estimated using the rate in effect atDecember 31, 2020 . For further information, see Footnote 9 of the Notes to Consolidated Financial Statements. (3)Amounts represent lease liabilities on operating and financing leases atDecember 31, 2020 . See Footnote 13 of the Notes to Consolidated Financial Statements. (4)Primarily consists of purchase commitments with suppliers entered into atDecember 31, 2020 , for the purchase of materials, packaging and other components and services. These purchase commitment amounts represent only those items which are based on agreements that are legally enforceable and that specify all significant terms including minimum quantity, price and term and do not represent total anticipated purchases. (5)Represents the future cash payments related to 2017 Tax Reform, for the one-time provisional transition tax on the Company's previously untaxed foreign earnings. (6)Total does not include contractual obligations reported on theDecember 31, 2020 balance sheet as current liabilities, except for current portion of long-term debt, short-term debt and accrued interest. The Company also has liabilities for uncertain tax positions and unrecognized tax benefits. The Company is under audit from time-to-time by theIRS and other taxing authorities, and it is possible that the amount of the liability for uncertain tax positions and unrecognized tax benefits could change in the coming year. While it is possible that one or more of these examinations may be resolved in the next year, the Company is not able to reasonably estimate the timing or the amount by which the liability will be settled over time; therefore, the$452 million in unrecognized tax benefits atDecember 31, 2020 , is excluded from the preceding table. See Footnote 12 of the Notes to Consolidated Financial Statements for additional information. 42 -------------------------------------------------------------------------------- Additionally, the Company has obligations with respect to its pension and postretirement benefit plans, which are excluded from the preceding table. The timing and amounts of the funding requirements are uncertain because they are dependent on interest rates and actual returns on plan assets, among other factors. See Footnote 11 of the Notes to Consolidated Financial Statements for further information. AtDecember 31, 2020 , the Company had approximately$51 million in standby letters of credit primarily related to the Company's self-insurance programs, including workers' compensation, product liability and medical. See Footnote 18 of the Notes to Consolidated Financial Statements for further information.
At
Critical Accounting Estimates
The Company's significant accounting policies are more fully described in Footnote 1 of the Notes to Consolidated Financial Statements. As disclosed in that footnote, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results will differ from those estimates, and such differences may be material to the Consolidated Financial Statements. The following sections describe the Company's critical accounting policies. Revenue Recognition The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied and are recognized at a point in time, which generally occurs either on shipment or on delivery based on contractual terms, which is also when control is transferred. The Company's primary performance obligation is the distribution and sales of its consumer and commercial products to its customers. Revenue is measured as the amount of consideration for which it expects to be entitled in exchange for transferring goods or providing services. Certain customers may receive cash and/or non-cash incentives such as cash discounts, returns, credits or reimbursements related to defective products, customer discounts (such as volume or trade discounts), cooperative advertising and other customer-related programs, which are accounted for as variable consideration. In some cases, the Company must apply judgment, including contractual rates and historical payment trends, when estimating variable consideration. In addition, the Company participates in various programs and arrangements with customers designed to increase the sale of products by these customers. Among the programs negotiated are arrangements under which allowances are earned by customers for attaining agreed-upon sales levels or for participating in specific marketing programs. Coupon programs are also developed on a customer- and territory-specific basis with the intent of increasing sales by all customers. Under customer programs and arrangements that require sales incentives to be paid in advance, the Company amortizes the amount paid over the period of benefit or contractual sales volume. When incentives are paid in arrears, the Company accrues the estimated amount to be paid based on the program's contractual terms, expected customer performance and/or estimated sales volume. These estimates are determined using historical customer experience and other factors, which sometimes require significant judgment. Due to the length of time necessary to obtain relevant data from customers, among other factors, actual amounts paid can differ from these estimates. Sales taxes and other similar taxes are excluded from revenue. The Company has elected to account for shipping and handling activities as a fulfillment cost. The Company also elected not to disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
Goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually during the fourth quarter (onDecember 1 ), or more frequently if facts and circumstances warrant. OnDecember 1, 2020 , the carrying values for total goodwill and indefinite-lived intangible assets were$3.5 billion and$2.3 billion , respectively. 43 --------------------------------------------------------------------------------
During the first quarter of 2020, the Company concluded that an impairment triggering event had occurred for all of its reporting units as the Company has experienced significant COVID-19 related disruption to its business in three primary areas: supply chain, as certain manufacturing and distribution facilities were temporarily closed in line with government guidelines; the temporary closure of secondary customer retail stores as well as the Company'sYankee Candle retail stores inNorth America ; and changes in consumer demand patterns to certain focused categories. The Company used a quantitative approach, which involves comparing the fair value of each of the reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds its fair value, an impairment loss would be calculated as the differences between these amounts, limited to the amount of reporting unit goodwill allocated to the reporting unit. The quantitative goodwill impairment testing requires significant use of judgment and assumptions, such as the identification of reporting units; the assignment of assets and liabilities to reporting units; and the estimation of future cash flows, business growth rates, terminal values, discount rates and total enterprise value. The income approach used is the discounted cash flow methodology and is based on five-year cash flow projections. The cash flows projected are analyzed on a "debt-free" basis (before cash payments to equity and interest-bearing debt investors) in order to develop an enterprise value from operations for the reporting unit. A provision is made, based on these projections, for the value of the reporting unit at the end of the forecast period, or terminal value. The present value of the finite-period cash flows and the terminal value are determined using a selected discount rate. The Company estimated the fair values of its reporting units based on discounted cash flow methodology reflecting its latest projections which included, among other things, the impact of tariffs on Chinese imports, the current expectations as to the impact of COVID-19 on its operations, as well as other inflation at the time the Company performed its impairment testing. As a result of the impairment testing performed in connection with the COVID-19 global pandemic triggering event, the Company determined that its goodwill associated with its Appliances and Cookware segment was impaired. During first quarter of 2020, the Company recorded a non-cash charge of$212 million to reflect the impairment of its goodwill as its carrying value exceeded its fair value. There was no goodwill impairment recorded in conjunction with the Company's annual impairment testing in the fourth quarter, and, as ofDecember 31, 2020 , there were no reporting units with fair values within 10% of the associated carrying values. Additionally, a hypothetical 10% reduction in forecasted earnings before interest, taxes and amortization used in the discounted cash flows to estimate the fair value of each reporting unit would not have resulted in a goodwill impairment charge.
See Footnotes 1 and 7 of the Notes to Consolidated Financial Statements for further information.
Indefinite-lived intangibles
The testing of indefinite-lived intangibles (primarily trademarks and tradenames) under established guidelines for impairment also requires significant use of judgment and assumptions (such as cash flow projections, royalty rates, terminal values and discount rates). An indefinite-lived intangible asset is impaired by the amount its carrying value exceeds its estimated fair value. For impairment testing purposes, the fair value of indefinite-lived intangibles is determined using either the relief from royalty method or the excess earnings method. The relief from royalty method estimates the value of a tradename by discounting the hypothetical avoided royalty payments to their present value over the economic life of the asset. The excess earnings method estimates the value of the intangible asset by quantifying the residual (or excess) cash flows generated by the asset and discounts those cash flows to the present. The excess earnings methodology requires the application of contributory asset charges. Contributory asset charges typically include assumed payments for the use of working capital, tangible assets and other intangible assets. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations. As a result of the impairment testing performed in connection with the COVID-19 pandemic triggering event during the first quarter of 2020, the Company determined that certain of its indefinite-lived intangible assets in the Appliances and Cookware, Commercial Solutions, Home Solutions, Learning and Development andOutdoor and Recreation segments were impaired. During the first quarter of 2020, the Company recorded impairment charges of$1.3 billion to reflect impairment of these indefinite-lived tradenames because their carrying values exceeded their fair values. During the third quarter of 2020, the Company concluded that a triggering event had occurred for an indefinite-lived intangible asset in the Learning and Development segment as a result of a product line divestiture. Pursuant to the authoritative literature, the Company performed an impairment test and determined that the indefinite-lived intangible asset was impaired as its carrying value 44 --------------------------------------------------------------------------------
exceeded its fair value. During the third quarter of 2020, the Company recorded
a non-cash charge of
During the fourth quarter of 2020, in conjunction with its annual impairment testing, the Company recorded a non-cash impairment charge of$20 million associated with a tradename in the Learning and Development segment, as its carrying value exceeded its fair value. The impairment reflected a downward revision of forecasted results due to the impact of the delayed and limited re-opening of schools and offices as a result of the COVID-19 global pandemic, as well as the continued deterioration in sales for slime-related adhesive products. An increase of 100 basis points in the discount rate used in the discounted cash flows to estimate fair values of this tradename would have resulted in an increase to the impairment charge of approximately$14 million . The remaining carrying value of this tradename is approximately$135 million . The remaining tradenames within the Company's Learning and Development segment with no impairment during the fourth quarter of 2020 impairment test had carrying values of$387 million , with$310 million of those with fair values in excess of 10% of carrying values, respectively. An increase of 100 basis points in the discount rate used in the discounted cash flows to estimate fair values of the remaining Learning and Development tradenames would have resulted in an impairment charge of approximately$5 million . There were no impairments of the Company's tradenames within the Appliances and Cookware andOutdoor and Recreation segments during the fourth quarter of 2020 impairment test. The remaining carrying value of tradenames within these segments were approximately$58 million and$119 million , respectively, with$54 million and$113 million of those tradenames with fair values in excess of 10% of the carrying values, respectively. An increase of 100 basis points in the discount rate used in the discounted cash flows to estimate fair values of the Appliances and Cookware tradenames would not have resulted in an impairment charge. An increase of 100 basis points in the discount rate used in the discounted cash flows to estimate fair values of theOutdoor and Recreation tradenames would have resulted in an impairment charge of approximately$1 million . There were no impairments of the Company's tradenames within the Commercial Solutions and Home Solutions segments during the fourth quarter of 2020 impairment test. The remaining carrying value of tradenames within these segments were approximately $$576 million and$1.0 billion , respectively, and all tradenames have fair values in excess of 10% of the carrying values. An increase of 100 basis points in the discount rate used in the discounted cash flows to estimate fair values of the Commercial Solutions tradenames would have resulted in an impairment charge of approximately$6 million . An increase of 100 basis points in the discount rate used in the discounted cash flows to estimate fair values of the Home Solutions tradenames would not have resulted in an impairment charge. The Company believes the circumstances and global disruption caused by COVID-19 may continue to affect its businesses, future operating results, cash flows and financial condition and that the scope and duration of the pandemic is highly uncertain. In addition, some of the other inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, industry growth, credit ratings, foreign exchange rates, labor inflation and tariffs. Given the uncertainty of these factors, as well as the inherent difficulty in predicting the severity and duration of the COVID-19 global pandemic and associated recovery and the uncertainties regarding the potential financial impact on the Company's business and the overall economy, there can be no assurance that the Company's estimates and assumptions made for purposes of the goodwill and indefinite-lived intangible asset impairment testing performed during the fourth quarter of 2020 will prove to be accurate predictions of the future. The Company believes it has made reasonable estimates and assumptions to calculate the fair values of the reporting units and other indefinite-lived intangible assets which were based on facts and circumstances known at this time. It is, however, possible that new events may occur or actual events may result in forecasted cash flows, revenue and earnings that differ from those that formed the basis of the Company's estimates and assumptions. Actual results could be materially different from the Company's estimates and assumptions used to calculate fair value for each of the Company's reporting units if the global pandemic caused by COVID-19 continues to persist for an extended period of time. If such a scenario were to occur, the Company may be required to recognize material impairments to goodwill and/or indefinite-lived intangible assets. The Company will continue to monitor its reporting units for any triggering events or other signs of impairment. The Company may be required to perform additional impairment testing based on further deterioration of the global economic environment, continued disruptions to the Company's business, further declines in operating results of the Company's reporting units and/or tradenames, further sustained deterioration of the Company's market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when improvements in macroeconomic conditions will occur, if consumer confidence and consumer spending decline significantly in the future or if commercial and industrial economic activity experiences a sustained deterioration from current levels, it is reasonably likely the Company will be required to record impairment charges in the future. 45 -------------------------------------------------------------------------------- AtDecember 31, 2020 , there were four indefinite-lived tradenames with fair values less than 10% of their associated carrying values within the Appliances and Cookware, Learning and Development, andOutdoor and Recreation segments. A hypothetical 10% reduction in the forecasted debt-free cash flows used in the excess earnings method to determine the fair value of certain indefinite-lived intangibles of the Company would not have resulted an impairment. A hypothetical 10% reduction in forecasted revenue used in the relief from royalty method to determine the fair value of certain indefinite-lived intangibles would have resulted in incremental impairment charges in the Company's Learning and Development andOutdoor and Recreation segments of$35 million and$1 million , respectively. See Footnote 7 of the Notes to Consolidated Financial Statements for further information. Other Long-Lived Assets The Company continuously evaluates whether impairment indicators related to its property, plant and equipment, operating leases and other long-lived assets are present. These impairment indicators may include a significant decrease in the market price of a long-lived asset or asset group, early termination of an operating lease, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If impairment indicators are present, the Company estimates the future cash flows for the asset or group of assets. The sum of the undiscounted future cash flows attributable to the asset or group of assets is compared to their carrying amount. The cash flows are estimated utilizing various assumptions regarding future sales and expenses, working capital and proceeds from asset disposals on a basis consistent with the Company's forecasts. If the carrying amount exceeds the sum of the undiscounted future cash flows, the Company discounts the future cash flows using a discount rate required for a similar investment of like risk and records an impairment charge as the difference between the fair value and the carrying value of the asset group. The Company performs its testing of the asset group at the reporting unit level, as this is the lowest level for which identifiable cash flows are available, with the exception of the Yankee Candle business, where testing is performed at the retail store level. See Footnotes 6, 7, and 13 of the Notes to Consolidated Financial Statements for further information.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized. The Company's income tax provisions are based on calculations and assumptions that are subject to examination by various worldwide tax authorities. Although the Company believes that the positions taken on previously filed tax returns are reasonable, it has established tax, interest and penalty reserves in recognition that various taxing authorities may challenge the positions taken, which could result in additional liabilities for taxes, interest and penalties. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a "more likely than not" threshold to the recognition and derecognition of tax positions. The Company's ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company's effective tax rate, as well as impact operating results. The Company's provision for income taxes is subject to volatility and could be favorably or adversely affected by earnings being higher or lower in countries that have lower tax rates and higher or lower in countries that have higher tax rates; by changes in the valuation of deferred tax assets and liabilities; by expiration of or lapses in tax-related legislation; by expiration of or lapses in tax incentives; by tax effects of nondeductible compensation; by changes in accounting principles; by liquidity needs driving repatriations of non-U.S. cash to theU.S. ; or by changes in tax laws and regulations, including possibleU.S. changes to the taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to foreign income, or the foreign tax credit rules. The Company's effective tax rate differs from the statutory rate, primarily due to the tax impact of state taxes, foreign tax rates, tax credits, the domestic manufacturing deduction, tax audit settlements and valuation allowance adjustments. Significant judgment is required in evaluating uncertain tax positions, determining valuation allowances recorded against deferred tax assets, and ultimately, the income tax provision. It is difficult to predict when resolution of income tax matters will occur and when recognition of certain income tax assets and liabilities is appropriate, and the Company's income tax expense in the future may continue to differ from the statutory rate because of the effects of similar items. For example, if items are favorably resolved or management determines a deferred tax asset is realizable that was previously reserved, the Company will recognize period tax benefits. Conversely, to the extent tax matters are 46 -------------------------------------------------------------------------------- unfavorably resolved or management determines a valuation allowance is necessary for a tax asset that was not previously reserved, the Company will recognize incremental period tax expense. These matters are expected to contribute to the tax rate differing from the statutory rate and continued volatility in the Company's effective tax rate. See Footnote 12 of the Notes to Consolidated Financial Statements for further information.
Pensions and Postretirement Benefits
The Company records annual amounts relating to its pension and postretirement plans based on calculations, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications is generally deferred and amortized over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and the input from its actuaries and investment advisors. The pension and postretirement obligations are measured atDecember 31, 2020 and 2019. The Company employs a total return investment approach for its pension and postretirement benefit plans whereby a mix of equities and fixed income investments are used to maximize the long-term return of pension plan assets. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolios contain a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across geography and market capitalization through investments inU.S. large-capitalization stocks,U.S. small-capitalization stocks and international securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions, risk and active management premiums. The target asset allocations for the Company's domestic pension plans may vary by plan, in part due to plan demographics, funded status and liability duration. In general, the Company's target asset allocations are as follows: global equities approximately 20% to 40%; fixed income approximately 50% to 70%; and cash, alternative investments and other, approximately zero to 20% atDecember 31, 2020 . Actual asset allocations may vary from the targeted allocations for various reasons, including market conditions and the timing of transactions. The Company maintains numerous international defined benefit pension plans. The asset allocations for the international investment may vary by plan and jurisdiction and are primarily based upon the plan structure and plan participant profile. AtDecember 31, 2020 , the domestic plan assets were allocated as follows: Equities: approximately 24% and Other Investments (alternative investments, fixed-income securities, cash and other): approximately 76%. Actual asset allocations may vary from the targeted allocations for various reasons, including market conditions and the timing of transactions. For 2020, 2019 and 2018, the actual return (loss) on plan assets for the Company'sU.S. pension plan assets was approximately$178 million ,$213 million and$(71) million , respectively, versus an expected return on plan assets of approximately$59 million ,$59 million and$67 million , respectively. The actual amount of future contributions will depend, in part, on long-term actual return on assets and future discount rates. Pension contributions for all the Company's pension plans for 2021 are estimated to be approximately$22 million , as compared to the 2020 contributions of approximately$25 million .
The weighted average expected return on plan assets assumption for 2020 was
approximately 4.1% for the Company's pension plans. The weighted average
discount rate at the 2020 measurement date used to measure the pension and
postretirement benefit obligations was approximately 1.9% and 1.8%,
respectively. A 25 basis points decrease in the discount rate at the 2020
measurement date would increase the pension plans' projected benefit obligation
by approximately
The healthcare cost trend rates used in valuing the Company's postretirement benefit obligation are established based upon actual healthcare cost trends and consultation with actuaries and benefit providers. At the 2020 measurement date, the current weighted average healthcare cost trend rate assumption was approximately 6.7%. The current healthcare cost trend rate is assumed to gradually decrease to an ultimate healthcare cost trend rate of 4.5%. See Footnote 11 of the Notes to Consolidated Financial Statements for further information.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is included in Footnote 1 of the Notes to Consolidated Financial Statements.
47
--------------------------------------------------------------------------------International Operations
For 2020, 2019 and 2018, the Company's non-U.S. businesses accounted for approximately 33% of net sales (see Footnote 17 of the Notes to Consolidated Financial Statements). 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. These statements generally can be identified by the use of words such as "intend," "anticipate," "believe," "estimate," "project," "target," "plan," "expect," "setting up," "beginning to," "will," "should," "would," "resume," "are confident that," "remain optimistic that" or similar statements. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results. Actual results may 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 ability to manage the demand, supply and operational challenges with the actual or perceived effects of the COVID-19 pandemic; •the Company's dependence on the strength of retail, commercial and industrial sectors of the economy in various parts of the world; •competition with other manufacturers and distributors of consumer products; •major retailers' strong bargaining power and consolidation of the Company's customers; •the Company's ability to improve productivity, reduce complexity and streamline operations; •the Company's ability to develop innovative new products, to develop, maintain and strengthen end-user brands and to realize the benefits of increased advertising and promotion spend; •the Company's ability to successfully remediate its material weakness in internal control over financial reporting and to maintain effective internal control over financial reporting; •risks related to the Company's substantial indebtedness, potential increases in interest rates or changes in the Company's credit ratings; •future events that could adversely affect the value of the Company's assets and/or stock price and require additional impairment charges; •the impact of cost associated with acquisition and divestitures; •our ability to effectively execute our turnaround plan; •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; •the impact of governmental investigation, inspections, lawsuits, legislation requests or other actions or other activities by third parties; •the risks inherent to the Company's foreign operations, including currency fluctuations, exchange controls and pricing restrictions; •a failure of one of the Company's key information technology systems, networks, processes or related controls or those of the Company's services providers; •the impact ofUnited States or foreign regulations on the Company's operations, including the impact of tariffs and environmental remediation costs; •the potential inability to attract, retain and motivate key employees; •the resolution of tax contingencies resulting in additional tax liabilities; •product liability, product recalls or related regulatory actions; •the Company's ability to protect its intellectual property rights; and •significant increases in the funding obligations related to the Company's pension plans. The information contained in this Annual Report on Form 10-K is as of the date indicated. The Company assumes no obligation to update any forward-looking statements contained in this Annual Report on Form 10-K as a result of new information or future events or developments. 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. 48
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