Sunbeam 2008 Annual Report Download - page 21

initiatives at certain mass retailers. Net sales in the Consumer Solutions segment decreased $23.0 million or 1.2%, which was primarily due
to weakness in domestic sales, partially offset by increased demand and improved pricing internationally. Net sales in the Branded
Consumables segment decreased slightly, which is mainly due to decreased category demand, primarily at domestic home improvement
retailers and poker-related sales. The Process Solutions segment grew 14.3% on a year over year basis, primarily due to the inclusion of the
K2 monofilament business and the impact of cost increases in zinc compared to 2006.
Cost of sales increased $613 million to $3.5 billion for 2007 versus 2006, primarily due to the increase in sales volume from acquisi-
tions and the inclusion of a $119 million charge related to the purchase accounting adjustment for the elimination of manufacturer’s profit
in inventory related to the K2 and Pure Fishing acquisitions (versus $10.4 million in 2006). The fair value of the inventory acquired was valued
at the sales price of the finished inventory, less costs to complete and a reasonable profit allowance for selling effort. Cost of sales as a
percentage of net sales for both 2007 and 2006 was 75.5% (72.9% and 75.2%, respectively excluding the charges for the elimination of man-
ufacturer’s profit in inventory). The improved margins are primarily due to acquired businesses favorable product mix, price increases, the
benefit of integration related activities and improved operating efficiencies, partially offset by raw material price increases.
Selling, general and administrative expenses increased $256 million to $861 million for 2007 versus 2006. The increase was primarily
due to acquisitions of K2 and Pure Fishing ($199 million), incremental stock based compensation expense ($41.0 million) and increased
advertising, marketing and product development costs, as well as the benefits from prior year reorganization and integration initiatives.
Reorganization and acquisition-related integration costs, net, increased $12.8 million to $49.6 million for 2007 versus the same period
in the prior year primarily due to the K2 and Pure Fishing acquisitions and lease exit costs. These charges primarily relate to the ongoing inte-
gration-related activities across all segments as the Company rationalizes its manufacturing and administrative platforms principally as a
result of acquisitions in both current and prior years.
Net interest expense increased by $37.1 million for 2007 versus 2006. This increase was principally due to higher levels of outstanding
debt versus the same prior year period, partially offset by a $3.7 million increase in interest income primarily generated from our cash on
hand as a result of the February2007 debt refinancing (discussed hereafter in the “Capital Resources” section). The weighted average interest
rate for 2007 decreased to 7.0% from 7.3% in 2006.
The Company’s effective tax rate for the years ended December 31, 2007 and 2006 was 57.7% and 43.6%, respectively. The 2007
increase from the statutory tax rate to the reported rate results principally from the settlement of 2003 and 2004 IRS Audits ($4.7 million), the
tax effectof non-deductible compensation expense ($4.4 million), and the tax effect of foreign earnings that will not be permanently rein-
vested. In 2006, these increases from the statutory tax rate relate primarily to the $13.6 million tax charge recorded in 2006 in association
with the internal legal reorganization of the domestic Consumer Solution businesses.
Net income for 2007 decreased $77.9 million to $28.1 million versus 2006. For 2007, diluted earnings per share were $0.38 versus
diluted earnings per share of $1.59 for 2006. The change in net income is primarily due to the following charges recorded during 2007: incre-
mental purchase accounting adjustments for the elimination of manufacturer’s profit in inventory ($109 million); incremental stock based
compensation expense ($41.0 million) resulting primarily from the acceleration of certain awards; incremental reorganization and acquisi-
tion-related integration costs ($12.8 million), increase in interest expense ($37.1 million) and a $15.7 million loss on the early extinguishment
of debt, partially offset by 2007 incremental earnings resulting from volume increases and margin expansion due to both acquisitions and
improved gross margins, combined with the $13.6 million tax charge recorded during 2006.
Financial Condition, Liquidity and Capital Resources
LIQUIDITY
The Companybelieves that its cash and cash equivalents, cash generated from operations and the availability under the senior credit
facilityand the credit facilities of certain foreign subsidiaries as of December 31, 2008, provide sufficient liquidity to support working capital
requirements, planned capital expenditures, completion of current and future reorganization and acquisition-related integration programs,
pension plan contribution requirements and debt obligations for the foreseeable future.
Net cash provided by operating activities was $250 million and $305 million for 2008 and 2007, respectively. The favorable impact
from higher cash operating income, were more than offset by unfavorable working capital movements primarily related to inventory, which
is the result of higher inventory levels due to retailers managing their inventory to historically low levels due to the macroeconomic condi-
tions; and lower than expected sales.
Net cash provided by financing activities for 2008 and 2007 was $104.6 million and $681 million, respectively. The change is primarily
due tothe issuance of long-termdebt during 2007 ($1.4 billion), partially offset bylong-term debt payments ($793 million) in 2007, an
incremental decrease in net short-term debt borrowings in 2008 ($84.7 million); and an incremental decrease in debt issue costs in 2008
($33.7 million).
Net cash used in investing activities was $175.5 million versus $973 million for 2008 and 2007, respectively. Cash used for the acquisi-
tion of businesses for 2007 decreased approximately $867 million from 2007 due to the acquisitions of K2 and Pure Fishing. For 2008, capital
expenditures were $102 million versus $81.2 million for 2007. The Company has historically maintained capital expenditures at less than 2%
of net sales and expects that capital expenditures for 2009 will be belowthis threshold.
Management’s Discussion and Analysis
Jarden Corporation Annual Report 2008
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