SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2005
OR
Commission file number 1-3932
WHIRLPOOL CORPORATION
(Exact name of registrant as specified in its charter)
2000 M-63
Benton Harbor, Michigan
Registrant’s telephone number, including area code 269/923-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class of common stock
Shares outstanding at November 2, 2005
QUARTERLY REPORT ON FORM 10-Q
Quarter Ended September 30, 2005
INDEX OF INFORMATION INCLUDED IN REPORT
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Condensed Statements of Operations
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Changes in Stockholders’ Equity
Consolidated Condensed Statements of Cash Flows
Notes to Consolidated Condensed Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 6.
Exhibits
Signatures
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30
(millions of dollars except per share data)
Net sales
EXPENSES:
Cost of products sold
Selling, general and administrative
Restructuring costs
OPERATING PROFIT
OTHER INCOME (EXPENSE):
Interest and sundry income (expense)
Interest expense
EARNINGS BEFORE INCOME TAXES AND OTHER ITEMS
Income taxes
EARNINGS BEFORE EQUITY EARNINGS AND MINORITY INTERESTS
Equity in earnings (loss) of affiliated companies
Minority interests
NET EARNINGS
Per share of common stock:
Basic net earnings
Diluted net earnings
Dividends declared
Weighted-average shares outstanding (millions):
Basic
Diluted
See notes to consolidated condensed financial statements
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CONSOLIDATED CONDENSED BALANCE SHEETS
(millions of dollars)
ASSETS
CURRENT ASSETS
Cash and equivalents
Trade receivables, less allowances (2005: $95; 2004: $107)
Inventories
Prepaid expenses
Deferred income taxes
Other current assets
Total Current Assets
OTHER ASSETS
Investment in affiliated companies
Goodwill, net
Other intangibles, net
Prepaid pension costs
Other assets
PROPERTY, PLANT AND EQUIPMENT
Land
Buildings
Machinery and equipment
Accumulated depreciation
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable
Accounts payable
Employee compensation
Accrued expenses
Other current liabilities
Current maturities of long-term debt
Total Current Liabilities
OTHER LIABILITIES
Pension benefits
Postemployment benefits
Other liabilities
Long-term debt
MINORITY INTERESTS
STOCKHOLDERS’ EQUITY
Common stock, $1 par value:
Shares authorized - 250 million
Shares issued - 91 million (2005); 90 million (2004)
Shares outstanding - 67 million (2005); 67 million (2004)
Paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock - 24 million (2005); 23 million (2004)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
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CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Accumulated
OtherComprehensiveIncome (Loss)
Beginning balance
Comprehensive income
Net earnings
Unrealized loss on derivative instruments
Other, principally foreign currency items
Common stock issued
Common stock repurchased
Dividends declared on common stock
Ending balance, September 30, 2004
Unrealized gain on derivative instruments
Ending balance, September 30, 2005
Minimum pension liability adjustment
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
OPERATING ACTIVITIES
Adjustments to reconcile net earnings to net cash flows (used in) provided by operating activities:
(Gain) loss on disposition of assets
Gain on disposition of business
Depreciation and amortization
Changes in assets and liabilities:
Trade receivables
Restructuring charges, net of cash paid
Taxes deferred and payable, net
Accrued pension
Other - net
Cash Provided By Operating Activities
INVESTING ACTIVITIES
Capital expenditures
Proceeds from sale of assets
Proceeds from sale of business
Acquisition of business
Cash Used In Investing Activities
FINANCING ACTIVITIES
Proceeds of short-term borrowings, net
Repayments of long-term debt
Dividends paid
Purchase of treasury stock
Common stock issued under stock plans
Other
Cash Used For Financing Activities
Effect of Exchange Rate Changes on Cash and Equivalents
Decrease in Cash and Equivalents
Cash and Equivalents at Beginning of Period
Cash and Equivalents at End of Period
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – BASIS OF PRESENTATION AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
The accompanying unaudited consolidated condensed financial statements present information in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements. Management believes the financial statements include all normal recurring accrual adjustments necessary for a fair presentation. Operating results for the three and nine months ended September 30, 2005 do not necessarily indicate the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Financial Supplement to the Company’s Proxy Statement and in the Financial Supplement to the 2004 Annual Report on Form 10-K, both of which are available through the Internet at www.whirlpoolcorp.com.
Stock option and incentive plans are accounted for under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Had the Company elected to adopt the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” pro forma net earnings and net earnings per share would be as follows:
(millions of dollars, except per share data)
Compensation cost included in earnings as reported (net of tax benefits)
Pro forma total fair value compensation cost (net of tax benefits)
As reported
Pro forma
Basic net earnings per share
Diluted net earnings per share
Diluted net earnings per share of common stock include the dilutive effect of stock options and other stock-based compensation. For the three months ended September 30, 2005 and 2004, approximately 6,000 and 2,262,000 stock options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices rendered them anti-dilutive. For the nine months ended September 30, 2005 and 2004, approximately 615,000 and 1,822,000 stock options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices rendered them anti-dilutive.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)
Basic and diluted net earnings per share were calculated as follows:
(in millions)
Numerator for basic and diluted earnings per share - net earnings
Denominator for basic earnings per share - weighted-average shares
Effect of dilutive securities:
Stock-based compensation
Denominator for diluted earnings per share - adjusted weighted-average shares
Certain reclassifications have been made to the prior year data to conform to the current year presentation which had no effect on net income reported for any period.
NOTE B – NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (R), “Share-Based Payments.” SFAS No. 123 (R) requires the Company to measure all employee stock-based compensation awards using a fair-value method and record such expense in its consolidated financial statements. SFAS No. 123 (R) was originally effective for periods beginning after June 15, 2005; however, in April 2005, the Securities and Exchange Commission (“SEC”) changed the effective date of SFAS No. 123 (R) to fiscal years beginning after June 15, 2005 for non-small business issuers. SFAS No. 123 (R) provides alternative methods of adoption, which include a modified prospective application and a modified retroactive application. The Company plans to adopt the provisions of SFAS No. 123(R) effective January 1, 2006. The Company does not expect the adoption to have a material impact on its results of operations or financial position.
In November 2004, FASB issued SFAS No. 151 “Inventory Costs, an Amendment of ARB No. 43 Chapter 4.” SFAS No. 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling be recognized as current-period charges rather than being included in inventory, regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. SFAS No. 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt this standard beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its results of operations or financial position as such costs have historically been expensed as incurred.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets — an Amendment of APB Opinion No. 29,” which addresses the measurement of exchanges of non-monetary assets. SFAS No. 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a
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result of the exchange. SFAS No. 153 is effective for fiscal periods after June 15, 2005. The implementation of SFAS No. 153 did not have a material impact on its results of operations or financial position.
In March 2005, the FASB issued Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143”. FIN 47 clarifies that SFAS No. 143, “Accounting for Asset Retirement Obligations,” requires that an entity recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material impact on its results of operations or financial position.
In June 2005, the FASB issued FASB Staff Position (“FSP”) No. 143-1, “Accounting for Electronic Equipment Waste Obligations.” The FSP addresses accounting by commercial users and producers of electrical and electronic equipment, in connection with Directive 2002/96/EC on Waste Electrical and Electronic Equipment (“WEEE”) issued by the European Union (“EU”) on February 13, 2003. This Directive requires EU-member countries to adopt legislation to regulate the collection, treatment, recovery, and environmentally sound disposal of electrical and electronic waste equipment, and sets forth certain obligations relating to covering the cost of disposal of such equipment by commercial users. Producers will also be required to cover the cost of disposal of such equipment under the WEEE legislation if they are participating in the market as of August 13, 2005. As of November 2005, while many EU-member states have enacted legislation, several major EU-member states were still in the drafting process. As a result, final estimates regarding the financial impact from WEEE legislation on the Company cannot be performed at this time. The Company continues to evaluate the impact of the WEEE legislation as member states implement guidance.
NOTE C – GOODWILL AND OTHER INTANGIBLES
As of September 30, 2005 and December 31, 2004, the operating segments’ goodwill carrying amounts were as follows: North America $164 million and $164 million, respectively, and Latin America $4 million and $4 million, respectively.
The Company’s other intangible assets were comprised of the following:
Trademarks (indefinite-lived)
Patents and non-compete agreements
Pension related
Total other intangible assets, net
The decline in trademarks and pension related intangible assets is due to currency fluctuations.
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Accumulated amortization totaled $4 million at September 30, 2005 and $3 million at December 31, 2004.
NOTE D – INVENTORIES
Inventories consist of the following:
Finished products
Raw materials and work in process
Less excess of FIFO cost over LIFO cost
NOTE E – RESTRUCTURING CHARGES
The following represents a reconciliation of the changes in restructuring reserves through September 30, 2005:
Restructuring
Termination costs
Non-employee exit costs
Total
Restructuring Charges
Under Whirlpool’s ongoing global operating platform initiatives, the Company implemented certain restructuring initiatives to enhance Whirlpool’s brand position in the global appliance industry. The Company plans to continue its comprehensive worldwide effort to optimize its regional manufacturing facilities, supply base, product platforms and technology resources to better support its global brands and customers.
In addition to the global operating platform initiatives, the Company began to implement organizational initiatives designed to increase efficiencies in support functions throughout the Company.
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The Company incurred pre-tax restructuring charges of $12 million and $26 million during the three and nine months ended September 30, 2005, respectively. These charges are included in the restructuring costs line in the Company’s Consolidated Condensed Statements of Operations and primarily consist of severance costs. These charges relate primarily to salary workforce reorganization throughout Europe and shifting dishwasher and compressor capacity to lower cost regions. The Company expects to spend approximately $30 million during the last three months of 2005. The Company expects that it may eliminate up to 1,800 employees as a result of these initiatives. Approximately 750 individuals have left the Company since inception of these projects through September 30, 2005.
On a segment level, for the three and nine months ended September 30, 2005, respectively, the European region incurred pre-tax restructuring charges of approximately $11 million and $21 million, the North American region incurred zero and approximately $1 million, and the Latin America region incurred approximately $1 million and $4 million. For the three and nine months ended September 30, 2004 the European region incurred pre-tax restructuring charges of approximately $3 million and $4 million, the North America region incurred net pre-tax charges of $1 million and $1 million and the Latin America region incurred $1 million and $1 million.
Other Related Charges
There were no significant restructuring related charges incurred during the three and nine months ended September 30, 2005. The Company incurred zero and $5 million of restructuring related charges (all of which were recorded in the North American region) during the three and nine months ended September 30, 2004. These charges are included in the cost of products sold line item on the Company’s Consolidated Condensed Statements of Operations, and relate to the restructuring initiatives announced in December 2000.
NOTE F – STOCKHOLDERS’ EQUITY
On June 15, 2004, the Company’s Board of Directors authorized a share repurchase program of up to $500 million. The share repurchases will be made from time to time on the open market as conditions warrant. There were no shares repurchased in the third quarter of 2005. For the nine months ended September 30, 2005, the Company repurchased 530,100 shares of Whirlpool common stock in the open market at an aggregate purchase price of $34 million. During the quarter ended September 30, 2004, the Company repurchased 20,000 shares of Whirlpool common stock in the open market at an aggregate purchase price of approximately $1 million.
During the nine months ended September 30, 2004, the Company concluded the $1 billion share repurchase program approved by the Company’s Board of Directors during March 1999 and February 2000, and repurchased 3.7 million shares of Whirlpool common stock in the open market at an aggregate purchase price of $250 million.
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NOTE G – GUARANTEES, COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has guarantee arrangements in place in a Brazilian subsidiary. As a standard business practice in Brazil, the subsidiary guarantees customer lines of credit at commercial banks following its normal credit policies. In the event that a customer were to default on its line of credit with the bank, the subsidiary would be required to satisfy the obligation with the bank, and the receivable would revert back to the subsidiary. As of September 30, 2005 and December 31, 2004, these amounts totaled $146 million and $184 million, respectively. The Company’s primary recourse related to these agreements would be legal or administrative collection efforts directed against the customers.
The Company provides guarantees of indebtedness and lines of credit for various consolidated subsidiaries. The maximum amount of credit facilities under guarantee for consolidated subsidiaries totaled $1.4 billion at both September 30, 2005 and December 31, 2004, respectively. Outstanding bank indebtedness on credit facilities under guarantee totaled $154 million and $148 million at September 30, 2005 and December 31, 2004, respectively.
Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized. The amounts of those reserves are based on established terms and the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.
The following represents a reconciliation of the changes in product warranty reserves for the period presented:
Balance at January 1, 2005
Warranties issued
Settlements made
Other changes
Balance at September 30, 2005
Current portion (included in other current liabilities)
Non-current portion (included in other liabilities)
Other changes consist of currency fluctuations and revisions to estimated costs associated with previously announced recall liabilities.
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Commitments and Contingencies
The Company is currently a defendant in 10 purported class action lawsuits in eight states related to its Calypso clothes washing machine. Three of the original purported class actions have been dismissed and the remaining 10 cases are in various stages of discovery. The complaints in these lawsuits generally allege violations of state consumer fraud acts, unjust enrichment, and breach of warranty based on the allegations that the washing machines have various defects. There are no allegations of any personal injury, catastrophic property damage, or safety risk. The complaints generally seek unspecified compensatory, consequential and punitive damages. The Company believes these suits are without merit and intends to vigorously defend these actions. At this point, the Company cannot reasonably estimate a possible range of loss, if any.
Whirlpool is currently investigating a supplier-related quality and potential product safety problem that may affect up to 3.5 million appliances manufactured between 2000 and 2002. Whirlpool currently estimates that its potential cost from this matter ranges from zero to $235 million, depending upon whether it is determined that some or all of the appliances must be repaired or replaced, whether the cost of any such corrective action is borne initially by Whirlpool or the supplier, and, if initially borne by Whirlpool, whether Whirlpool will be successful in recovering its costs from the supplier. In addition, Whirlpool could incur other costs arising out of this matter, which cannot currently be estimated but could be material.
The Company is involved in various legal actions arising in the normal course of business. Management, after taking into consideration legal counsel’s evaluation of such actions, is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
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NOTE H – PENSION AND POSTRETIREMENT MEDICAL BENEFIT PLANS
The components of net periodic pension cost and the cost of other postretirement benefits for the three and nine months ended September 30, 2005 and 2004 were:
Components of Net Periodic Benefit Cost - Three months ended September 30
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of net loss
Settlements
Net periodic cost
Components of Net Periodic Benefit Cost - Nine months ended September 30
The expected rate of return on pension plan assets is 8.75% in 2005 and 2004.
The Company measured the effects of the Medicare Modernization Act of 2003 (the “Act”) following the guidance in FASB Staff Position No. FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The Company has reflected the estimated federal subsidy under the Act as an actuarial gain, which reduced the existing unrecognized net loss. Net gains or losses are amortized over the participants’ future service periods. These changes caused the accumulated other postretirement benefit obligation to decrease by $103.7 million, and reduced the cost recognized by approximately $4 and $11 million for the three and nine months ended September 30, 2004, respectively. Consolidated results were also
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impacted by accelerated recognition of $9 million in deferred pension expenses during the third quarter of 2004 which were triggered based on benefit disbursements from one of the Company’s smaller pension plans.
Changes Since Year End 2004 Disclosure
In January 2005, the Company amended the Whirlpool Employees Pension Plan (the “WEPP”). The Company remeasured the net periodic cost and funded status of the WEPP at January 1, 2005 to reflect the amendment. The amendment reduced the projected benefit obligation (“PBO”) by $80 million. The accumulated benefit obligation (“ABO”) was not affected by the amendment. The interest rate used for this remeasurement was 5.85%, the same as at year-end 2004.
Employer Contributions
The Company’s funding policy is to contribute to its U.S. pension plans amounts sufficient to meet the minimum funding requirement as defined by employee benefit and tax laws, plus additional amounts which the Company may determine to be appropriate. In certain countries other than the U.S., the funding of pension plans is not common practice. The Company has several unfunded non-U.S. pension plans.
Employer Contributions – Millions of dollars
2005 (expected)
The Company expects to contribute $15 million to the U.S. pension plans during 2005 which represents the sum of $2 million of expected benefit payments from corporate cash for the unfunded pension plans and $13 million of voluntary contributions to its funded pension plans made in September 2005. The Company expects no minimum required contributions to its funded pension plans in 2005.
NOTE I - INCOME TAXES
Energy Policy Act of 2005
In August 2005, President Bush signed into law the Energy Policy Act of 2005 (the “2005 Energy Act”). The 2005 Energy Act includes a wide-range of energy efficient provisions that will ensure that conservation and efficiency are a central component to the United States energy strategy. Among the many provisions of this legislation are manufacturers’ tax credits in 2006 and 2007 for the accelerated production of super-efficient washers, refrigerators and dishwashers to meet 2007 Energy Star standards. Whirlpool has historically, and will continue to, invest in innovative and energy efficient products for its customers. The manufacturers’ tax credit applies to U.S. produced appliances, a provision added by the Congress to promote domestic manufacturing. The Company anticipates that it will utilize the maximum allowable $75 million in tax credits over the two-year period.
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The American Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 (the “Act”) was signed into law on October 22, 2004. The Company has considered the implications of the Act on repatriation of foreign earnings, which reduces the federal income tax rate on dividends from non-U.S. subsidiaries. The FASB issued FSP 109-2 in December 2004, which requires the recording of tax expense if and when an entity decides to repatriate foreign earnings subject to the Act. As of September 30, 2005 the company is evaluating whether to utilize IRC Sec. 965. However, the tax impact of any distributions pursuant to “the Act” would be immaterial.
NOTE J – GEOGRAPHIC SEGMENTS
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.
The Company identifies operating segments based upon geographical regions of operations because each operating segment manufactures home appliances and related components, but serves strategically different markets.
The Company’s chief operating decision maker reviews each operating segment’s performance based upon operating income, which is defined as income before interest income and sundry, interest expense, taxes and minority interests, and before certain other excluded charges described below. Total assets by segment are those assets directly associated with the respective operating activities. TheOther and (Eliminations) column primarily includes corporate expenses, assets and eliminations, as well as certain excluded charges described below. Intersegment sales are eliminated within each region with the exception of compressor sales out of Latin America, which are included in Other and (Eliminations). Restructuring related charges are included in operating profit on a consolidated basis and included in the Other and (Eliminations) column in the table below.
There were no material restructuring related charges incurred during the three and nine months ended September 30, 2005. For the three months ended September 30, 2004 there were no material restructuring related charges. For the nine months ended September 30, 2004, the North America operating segment recorded total restructuring related charges of $5 million.
The Company incurred pre-tax restructuring charges of $12 million and $26 million during the three and nine months ended September 30, 2005, respectively. For the three and nine months ended September 30, 2004 the European region incurred pre-tax restructuring charges of approximately $3 million and $4 million, the North America region incurred net pre-tax charges of $1 million and $1 million and the Latin America region incurred $1 million and $1 million.
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Three Months
Ended September 30
2005
2004
Intersegment sales
Operating profit (loss)
Total assets
September 30, 2005
December 31, 2004
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Nine Months
NOTE K - WAREHOUSE FIRE
On July 4, 2005, one of the Company’s leased warehouse facilities in Kent, England was destroyed by fire. The fire destroyed the building, as well as finished goods inventory and property, plant and equipment contained therein and had a negative impact on the product availability and mix. The fire negatively impacted the third quarter ended September 30, 2005 by approximately $6 million, net of insurance proceeds. The net impact of recognized losses and related insurance proceeds is primarily reflected in the cost of goods sold line item in the Consolidated Condensed Statements of Operations.
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NOTE L – SALE OF BUSINESS
The Company completed the sale of its 93% interest in Multibras da Amazonia S.A., an injection molding subsidiary located in Manaus, Brazil, to Flextronics Plasticos Ltda, in September 2005. Proceeds from the sale were $48 million. Included in the interest and sundry income line of the Company’s 2005 third quarter Consolidated Condensed Statement of Operations is a $9 million pre-tax gain on the sale of the interest. Whirlpool will continue to purchase certain products from Multibras da Amazonia S.A. The entity was not a significant subsidiary, and accordingly, pro forma results of operations have not been provided.
NOTE M – PENDING MAYTAG ACQUISITION
On August 22, 2005, Whirlpool entered into a definitive merger agreement with Maytag to acquire all outstanding shares of Maytag common stock. The aggregate transaction value, including the payment to Maytag stockholders of approximately $850 million in cash and between 9.2 million and 11.3 million shares of Whirlpool common stock and assumption of approximately $974 million of Maytag debt, reported as of September 30, 2005, is approximately $2.7 billion. The number of shares of Whirlpool common stock to be issued will depend on the volume weighted average trading prices of Whirlpool common stock during a twenty trading day period ending shortly before completion of the merger.
Whirlpool has sufficient resources to finance the acquisition and has received strong support from the banking sector. Whirlpool currently has a $1.2 billion, five-year committed credit facility, scheduled to mature in 2009. There have been no borrowings under this agreement. The acquisition and upcoming debt maturities of the combined company are expected to be financed through debt supported by current bank agreements and with new committed bank facilities.
The merger is subject to the approval of Maytag stockholders, clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and other customary closing conditions.
On September 29, 2005, Whirlpool filed a registration on Form S-4, including a preliminary prospectus/proxy statement, with the Securities and Exchange Commission. Maytag stockholders are expected to vote on the transaction on December 16, 2005. On October 8, 2005, Whirlpool and Maytag announced that the Antitrust Division of the Department of Justice had issued a request for additional information regarding the merger. Whirlpool and Maytag continue to expect the transaction to close as early as the first quarter of 2006, following approval from Maytag stockholders and regulatory clearance.
On August 22, 2005, Whirlpool paid Maytag $40 million to reimburse Maytag for its payment of a fee to terminate its prior merger agreement with Triton Acquisition Holding Inc. This fee will be capitalized as part of the direct acquisition costs of Maytag. Whirlpool has agreed to pay up to $15 million to assist Maytag in retaining key employees while the merger is pending. Whirlpool also has agreed to pay Maytag a “reverse break-up fee” of $120 million under certain circumstances if the transaction cannot be closed due to an inability to obtain regulatory clearance.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE LEVEL OVERVIEW
Whirlpool Corporation is a global manufacturer of major appliances worldwide with 2004 revenues of $13.2 billion and net earnings of $406 million. The Company’s four reportable segments are based on geography and consist of North America (61% of net sales), Europe (23% of net sales), Latin America (13% of net sales), and Asia (3% of net sales). The Company is the market-leading producer in North America and Latin America and has significant sales in Europe, India and China. Whirlpool’s brands and operations worldwide received recognition for accomplishments in a variety of business and social efforts, including energy efficiency leadership, community involvement, support of women’s issues, and excellence in design.
The Company’s growth strategy over the past several years has been to introduce innovative new products, enhance customer loyalty for its brands, continue to expand its global footprint, expand distribution channels and, where appropriate, make strategic acquisitions which enhance the Company’s innovative global product offering and efficiency.
Competition in the home appliance industry is intense. In addition to traditional competitors such as Electrolux, GE and Kenmore, there are new and expanding foreign competitors such as LG, Bosch, Samsung, Fisher & Paykel, and Haier. Moreover, the U.S. customer base is characterized by large, sophisticated trade customers who have many choices and demand competitive products, services and prices. On August 22, 2005, as discussed below, Whirlpool entered into an agreement to acquire Maytag. The transaction is subject to certain conditions. Whirlpool believes that its combination with Maytag will enhance its ability to respond to these competitive conditions, and will benefit trade customers and consumers of the combined company by generating significant cost savings that will enable it to continue to offer competitive prices across a wide array of products as well as increased quality and innovation.
The Company monitors country specific economic factors such as gross domestic product, consumer interest rates, consumer confidence, housing starts, sales of existing homes and mortgage refinancing as key indicators of industry demand. Management also focuses on country, brand, product and channel sales, average sales values, and profitability when assessing and forecasting financial results. The Company intends to utilize its global manufacturing, procurement and technology footprint to strengthen Whirlpool’s brand leadership position in the global appliance industry.
RESULTS OF OPERATIONS
The Consolidated Condensed Statements of Operations summarize operating results for the three and nine months ended September 30, 2005 and 2004. All comparisons are to 2004, unless otherwise noted. This section of Management’s Discussion and Analysis highlights the main factors affecting the changes in operating results.
Net Sales
Total units sold increased 1.9% for the quarter and remained relatively unchanged for the year to date period. Net sales increased 8.5% for the quarter, or approximately 6% excluding currency fluctuations, and 8.1% year to date, or approximately 5% excluding currency fluctuations.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)
Net Sales:
North America
Europe
Latin America
Asia
Other/eliminations
Consolidated
Significant regional trends were as follows:
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For the full year 2005, appliance industry shipments are expected to increase approximately 1% to 2% in North America and to be flat to down 1% in Europe. The Company currently forecasts Latin America demand in the appliance industry to be flat versus last year’s level. Appliance industry shipments in the Asia region are expected to increase 3% to 5%.
Gross Margin
The Company’s gross margin percentage declined in the quarter and year to date periods driven by increased material costs, particularly in steel and resins, as well as unfavorable currency fluctuations, increased incentive compensation expense and planned manufacturing downtime, as well as the fire in the U.K. warehouse. The increased costs were largely mitigated by price increases, productivity improvements and cost control initiatives. Material prices have increased approximately $110 million from last year’s third quarter and $480 million on a year to date basis. Within North America, material cost increases were mitigated by productivity improvements and price increases. Europe offset higher costs with strong productivity improvements, strength within the built-in appliance category and a favorable product mix. Latin America operations partially offset higher steel and oil related costs through increased pricing, productivity improvements and aggressive cost reductions. The Asia results benefited from price increases and favorable product mix which helped offset increased material costs. In addition, the results were improved due to the absence of the previously disclosed trade management strategy implemented in India in 2004. The Company continues to experience material cost pressures and expects this to continue throughout the remainder of 2005; however, the impact of the global price increases and productivity improvements is projected to exceed material cost increases in the fourth quarter 2005.
Selling, General and Administrative
Selling, general and administrative expenses as a percent of net sales improved in the quarter and year to date periods. The Company’s overall results were affected by increased freight and warehousing costs, primarily in North America and increased incentive compensation expense, which were more than offset by strong cost controls. In 2004, the results were negatively impacted by higher transportation costs in all regions, the previously disclosed trade management strategy implemented in India and increased regional support costs. Consolidated results were also impacted by accelerated recognition of $9 million in deferred pension expenses during the third quarter of 2004 which were triggered based on benefit disbursements from one of the Company’s smaller pension plans. These expenses were partially offset by cost controls and productivity within North America, Europe and Latin America as well as lower stock based and incentive compensation expense.
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Selling, General & Administrative Expenses
Corporate/Other
Restructuring Costs
Restructuring charges of $12 million and $26 million were recorded in the current and year to date period, respectively, and consists of severance costs. These charges relate primarily to salary workforce reorganization throughout Europe and shifting dishwasher and compressor capacity to lower cost regions. Restructuring charges of $5 million and $6 million were recorded in the year ago quarter and year to date period, respectively. The increase in restructuring spending relates to the Company’s ongoing global operating platform initiatives.
Interest and Sundry Income (Expense)
Interest income and sundry income (expense) was $3 million favorable for the quarter and was $12 million unfavorable for the year to date period. A $9 million gain from the sale of a business in the Latin America region occurred in September affecting both the quarter and year to date figures. Also impacting the changes were; the absence of prior year interest received on foreign tax audit settlements and non-income based tax expense in Europe, offset by higher foreign currency losses on balance sheet positions on a year to date basis. Interest expense remained flat in the quarter and increased $6 million in the year to date periods, respectively. The increase is primarily due to higher interest rates and a shift in global borrowing positions. The primary impact was in Brazil which experienced both increased borrowing levels and higher interest rates on a year over year basis.
Income Taxes
The effective income tax rate was 32.5 percent for the quarter and 32.0 percent in the year to date period versus 32.2 percent and 35.5 percent in the year ago quarter and year to date period, respectively. The improvement to the effective tax rate versus last year is due primarily to global tax audit settlements combined with tax planning initiatives.
Net Earnings
Net earnings for the current quarter were $114 million, or $1.66 per diluted share, versus $101 million, or $1.50 per diluted share in the year ago quarter. Net earnings for the year to date period were $296 million, or $4.35 per diluted share, versus $309 million, or $4.46 per diluted share in the prior year to date period. Performance was driven by price increases, productivity improvements and administrative cost controls offset by higher materials costs, particularly steel and resins, unfavorable currency fluctuations, increased incentive compensation expense and higher restructuring spending.
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CASH FLOWS
The statements of cash flows reflect the changes in cash and cash equivalents for the nine months ended September 30, 2005 and 2004 by classifying transactions into three major categories: operating, investing and financing activities.
Operating Activities
The Company’s main source of liquidity is cash generated from operating activities consisting of net earnings adjusted for non-cash operating items, such as depreciation, and changes in operating assets and liabilities such as receivables, inventories and payables.
Cash provided by operating activities in the first nine months of 2005 was $269 million compared to $305 million in 2004. The decrease in cash provided by operations is primarily due to a decline in payables as a result of lower production levels, particularly in Latin America, which triggered a corresponding reduction in procurement activity, offset by improvements in inventory and receivable figures over prior year. Also contributing to the decrease in cash provided by operating activities in the 2005 period was an increase in cash taxes paid.
Investing Activities
The principal recurring investing activities are property additions. Net property additions for the nine months ended September 30, 2005 were $295 million compared to $222 million in the prior year period. These expenditures are primarily for equipment and tooling driven by customer focused brand strategy, more efficient production methods, and replacement for normal wear and tear. The increase in capital expenditures in the 2005 period as compared to 2004 is due mainly to expenditures to support the Company’s global operating platform initiatives and innovation to support future growth. In 2005 and 2004, proceeds from the sale of fixed assets resulted primarily from the sale and leaseback of a building in the North America region and a building within the Europe region, respectively. Proceeds from the sale of a business of $48 million resulted from the sale of a non-core business in Latin America during the third quarter of 2005. See Note L to the Consolidated Condensed Financial Statements for additional information. Cash paid during the third quarter of 2005 in connection with the proposed Maytag acquisition totaled $45 million, primarily consisting of $40 million to reimburse Maytag for its payment of a fee to terminate its prior merger agreement with Triton Acquisition Holding Inc.
Financing Activities
Cash used for financing activities was $12 million in 2005 compared to cash used for financing activities of $140 million in 2004. The change was driven primarily by a reduction of stock repurchases in the current year. Net borrowings increased $23 million from year-end due, in part, to seasonal working capital needs. Dividends paid to shareholders totaled $86 million and $87 million for the nine months ended September 30, 2005 and 2004, respectively. Under its stock
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repurchase plan approved by the Board of Directors, the Company used $34 million (530,100 shares) and $251 million (3.7 million shares) to purchase common stock during the nine months ended September 30, 2005 and 2004, respectively. See Part II, Item 2 for a table summarizing stock repurchases in the current quarter, and the approximate dollar value of shares that may be repurchased under the program. Partially offsetting these cash outflows were $68 million in proceeds from the exercise of Company stock options compared to $55 million at September 30, 2004.
FINANCIAL CONDITION AND LIQUIDITY
Apart from its main source of liquidity, cash generated from operating activities, the Company seeks to finance its business through the appropriate mix of long-term and short-term debt. By diversifying its maturity structure, the Company avoids concentrations of debt, reducing liquidity risk. Whirlpool has varying needs for short-term working capital financing as a result of the nature of its business. The volume and timing of refrigeration and air conditioning production impacts the Company’s cash flows as a result of increased production in the first half of the year to meet increased demand in the summer months. The Company finances its working capital fluctuations primarily through the commercial paper markets in the U.S., Europe and Canada, which are supported by committed bank lines. In addition, outside the U.S., short-term funding is also provided by bank borrowings on uncommitted lines. The Company has access to long-term funding in the U.S., European and other public bond markets.
The financial position of the Company remained strong at September 30, 2005. Total assets were $8.3 billion versus $8.2 billion and total stockholders’ equity at September 30, 2005 was $1.9 billion versus $1.6 billion at December 31, 2004, respectively. Total assets remain relatively unchanged versus December 31, 2004, however increases in balance sheet positions were due mainly to working capital increases, current assets and other assets increases reduced by decreases in property plant and equipment. The increase in equity is primarily attributed to net earnings retention for the nine months of $210 million for the nine months ended September 30, 2005.
On June 15, 2004, the Company announced that the Board of Directors authorized a new share repurchase program of up to $500 million. The share repurchases will be made from time to time in the open market as conditions warrant. During the nine months ended September 30, 2005 the Company repurchased 530,100 shares of Whirlpool common stock at an aggregate purchase price of $34 million. See Part II – Other Information, Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds. There were no stock repurchases during the quarter ended September 30, 2005.
The Company maintains a $1.2 billion five-year committed credit agreement, scheduled to mature in May 2009. This credit agreement supports commercial paper programs and other operating needs. Through September 30, 2005, there have not been any borrowings under this agreement. The Company is in full compliance with its bank covenants and none of its material debt agreements requires accelerated repayment in the event of a decrease in credit ratings.
The Company guarantees the indebtedness of certain customers of its Brazilian subsidiary as discussed in Note G to the consolidated condensed financial statements. The Company does not expect these guarantees to have a material effect on its financial condition or liquidity.
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The Company believes its capital resources and liquidity position at September 30, 2005 are adequate to meet anticipated business needs and to fund future growth opportunities. Currently, the Company has access to capital markets in the U.S. and internationally. See Pending Maytag Acquisition for additional information.
During the nine months ended September 30, 2004, the Company announced that it planned to invest approximately $180 million to strengthen Whirlpool’s brand leadership position in the global appliance industry. Approximately $100 million of the investment was related to initiatives at the Company’s manufacturing facilities in the United States and the remainder was related to a washer production facility in Monterrey, Mexico, and the construction of a new refrigeration facility in Ramos Arizpe, Coahuilla, Mexico. The Company plans to continue its comprehensive worldwide effort to optimize its regional manufacturing facilities, supply base, product platforms and technology resources to better support its global brands and customers.
PENDING MAYTAG ACQUISITION
On August 22, 2005, Whirlpool entered into a definitive merger agreement with Maytag Corporation (“Maytag”) to acquire all outstanding shares of Maytag common stock. The aggregate transaction value, including the payment to Maytag stockholders of approximately $850 million in cash and between 9.2 million and 11.3 million shares of Whirlpool common stock and assumption of approximately $974 million of Maytag debt reported as of September 30, 2005, is approximately $2.7 billion. The number of shares of Whirlpool common stock to be issued will depend on the volume weighted average trading prices of Whirlpool common stock during a twenty trading day period ending shortly before completion of the merger.
Whirlpool currently expects the merger with Maytag to generate approximately $300 million to $400 million of annual pre-tax cost savings by the third year following completion of the merger. Efficiencies are expected to come from all areas across the value chain, including product manufacturing and marketing, global procurement, logistics, infrastructure and support areas. Achieving these efficiencies will require one-time costs and capital investments currently estimated to be in the range of $350 million to $500 million, a majority of which currently are anticipated to be capitalized or accrued in purchase accounting. Whirlpool currently anticipates incurring these costs during the first two years following completion of the merger.
On September 29, 2005, Whirlpool filed a registration on Form S-4, including a preliminary prospectus/proxy statement, with the Securities and Exchange Commission. Maytag stockholders are expected to vote on the transaction on December 16, 2005. On October 8, 2005, Whirlpool and Maytag announced that the Antitrust Division of the Department of Justice had issued a
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request for additional information regarding the merger. Whirlpool and Maytag continue to expect the transaction to close as early as the first quarter of 2006, following approval from Maytag stockholders and regulatory clearance.
On August 22, 2005, Whirlpool paid Maytag $40 million to reimburse Maytag for its payment of a fee to terminate its prior merger agreement with Triton Acquisition Holding Inc. Whirlpool has agreed to pay up to $15 million to assist Maytag in retaining key employees while the merger is pending. Whirlpool also has agreed to pay Maytag a “reverse break-up fee” of $120 million under certain circumstances if the transaction cannot be closed due to an inability to obtain regulatory clearance.
OTHER MATTERS
On February 13, 2003 the European Union adopted the Waste Electrical and Electronic Equipment (“WEEE”) directive. Among other provisions, the directive stipulates that “producers” will be responsible for the cost of collection, disposal and recycling of waste (“recycling schemes”) for many electrical and electronic products as of August 13, 2005. The directive required all European Union member states to introduce it into national law by no later than August 2004. However, as of November 2005, while many EU-member states have enacted legislation, several major EU-member states were still in the drafting process. As a consequence many of the details concerning responsibilities, costs of the recycling schemes and ability to recover through a visible fee to the end consumer are yet to be determined. As a result, final estimates regarding the financial impact from WEEE legislation on the Company cannot be performed at this time. The Company continues to evaluate the impact of the WEEE legislation as member states implement guidance.
In August 2005, President Bush signed into law the Energy Policy Act of 2005 (the “2005 Energy Act”). The 2005 Energy Act includes a wide-range of energy efficient provisions that will ensure that conservation and efficiency are a central component to the United States energy strategy. Whirlpool has historically, and will continue to, invest in innovative and energy efficient products for its customers. Among the many provisions of this legislation are manufacturers’ tax credits in 2006 and 2007 for the accelerated production of super-efficient washers, refrigerators and dishwashers to meet 2007 Energy Star standards. The manufacturers’ tax credit applies to U.S.
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produced appliances, a provision added by the Congress to promote domestic manufacturing. The Company anticipates that it will utilize the maximum allowable $75 million in tax credits over the two-year period.
During the quarter, the Company began implementation of a comprehensive plan with the objectives of simplifying the Company’s legal structure to better support Whirlpool’s business needs and permit tax-efficient repatriation of offshore cash. This plan will allow for the effective use of future foreign tax credits that may result in a financial statement tax benefit.
Whirlpool is currently investigating a supplier-related quality and potential product safety problem that may affect up to 3.5 million appliances manufactured between 2000 and 2002. More information is available in footnote Note G of this report.
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FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management’s Discussion and Analysis and other sections of this report may contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance.
Certain statements contained in this quarterly report and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast,” and similar words or expressions. The Company’s forward-looking statements generally relate to its growth strategies, financial results, product development, and sales efforts. These forward-looking statements should be considered with the understanding that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.
Forward-looking statements in this document include, but are not limited to, statements regarding expected earnings per share, cash flow, and material and oil-related costs for the full year 2005, as well as expectations as to the closing of the proposed merger with Maytag Corporation. Many risks and uncertainties could cause actual results to differ materially from Whirlpool’s forward-looking statements. Among these factors are: (1) intense competition in the home appliance industry reflecting the impact of both new and established global, including Asian and European, manufacturers and the strength of trade customers; (2) Whirlpool’s ability to continue its strong relationship with Sears Holding Corporation in North America (accounting for approximately 17% of Whirlpool’s 2004 consolidated net sales of $13 billion) and other significant trade customers, and the ability of these trade customers to maintain or increase market share; (3) industry demand, which reflects factors such as gross domestic product, consumer interest rates, consumer confidence, housing starts, sales of existing homes and the level of mortgage refinancing; (4) the ability of Whirlpool to achieve its business plans, including productivity improvements, cost control, leveraging of its global operating platform and acceleration of the rate of innovation; (5) fluctuations in the cost of key materials (including steel, oil, plastic resins, copper and zinc) and components and the ability of Whirlpool to offset cost increases; (6) the ability of suppliers of critical parts, components and manufacturing equipment to deliver sufficient quantities to Whirlpool in a timely and cost-effective manner; (7) changes in market conditions, health care cost trends and pending regulation that could increase future funding obligations for pension and post-retirement benefit plans; (8) the cost of compliance with environmental and health and safety regulations, including new regulations in Europe regarding appliance disposal; (9) potential exposure to product liability claims, including the outcome of Whirlpool’s previously-announced investigation of a supplier-related quality and potential product safety problem that may affect up to 3.5 million appliances manufactured between 2000 and 2002; (10) the impact of labor relations; (11) Whirlpool’s ability to obtain and protect intellectual property rights; (12) the ability of Whirlpool to manage foreign currency and its effective tax rate; (13) global, political and/or economic uncertainty and disruptions, especially in Whirlpool’s significant geographic markets, including uncertainty and disruptions arising from natural disasters, including
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possible effects of recent U.S. hurricanes, or terrorist activities; and (14) risks associated with operations outside the U.S. Other such factors relate to Whirlpool’s pending merger with Maytag Corporation, including (1) the ability of Whirlpool and Maytag to satisfy the conditions to closing (including Maytag shareholder approval and regulatory approval); (2) the effect on Maytag’s business of the pending transaction; and (3) in the event the merger is completed, Whirlpool’s ability to integrate the business of Maytag on a timely basis and realize the full anticipated benefits of the merger within the current estimate of costs.
The Company undertakes no obligation to update any forward-looking statement, and investors are advised to review disclosures in the Company’s filings with the Securities and Exchange Commission. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. Therefore, investors should not consider the foregoing factors to be an exhaustive statement of all risks, uncertainties, or factors that could potentially cause actual results to differ.
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There have been no material changes to the Company’s exposures to market risk since December 31, 2004.
The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period, have concluded that the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
WHIRLPOOL CORPORATION AND SUBSIDIARIES
The following table summarizes repurchases of the Company’s stock in the quarter ended September 30, 2005:
(millions of dollars, except shares and price per share)
Fiscal period
Average
Price Paid
per Share
July 1, 2005 through July 31, 2005
August 1, 2005 through August 31, 2005
September 1, 2005 through September 30, 2005
The Company’s Board of Directors has authorized the repurchase of up to $500 million in common stock. This repurchase plan was authorized on June 15, 2004. There were no repurchases of the Company stock in the quarter ended September 30, 2005.
Item 6. Exhibits
The following are included herein:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
By
/s/ ROY W. TEMPLIN
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 4, 2005
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