SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000.
Commission file number 1-3932
WHIRLPOOL CORPORATION (Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code 616/923-5000
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, and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
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QUARTERLY REPORT ON FORM 10-Q WHIRLPOOL CORPORATION Quarter Ended June 30, 2000
INDEX OF INFORMATION INCLUDED IN REPORT
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CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
WHIRLPOOL CORPORATION
FOR THE PERIOD ENDED JUNE 30
(millions of dollars except share and dividend data)
See notes to consolidated condensed financial statements.
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CONSOLIDATED CONDENSED BALANCE SHEETS
(millions of dollars)
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CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY WHIRLPOOL CORPORATION FOR THE PERIOD ENDED JUNE 30 (millions of dollars)
See notes to consolidated condensed financial statements
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR SIX MONTHS ENDED JUNE 30,
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WHIRLPOOL CORPORATION AND SUBSIDIARIES
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 six months ended June 30, 2000 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 company's annual report for the year ended December 31, 1999.
The following table provides the computation of basic and diluted earnings per share:
NOTE B—BUSINESS ACQUISITIONS & DISPOSITIONS
On January 7, 2000, the company completed its tender offer for the outstanding publicly traded shares in Brazil of its subsidiaries Brasmotor S.A. (Brasmotor) and Multibras S.A. Eletrodomesticos (Multibras). In completing the offer, the company purchased additional shares of Brasmotor and Multibras for $283 million. With this additional investment, the company's equity interest in its Brazilian subsidiaries increased from approximately 55% to approximately 87%.
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NOTE C—INVENTORIES
Inventories consist of the following:
NOTE D—RESTRUCTURING CHARGES
During 1997, the company incurred restructuring costs of $343 million ($244 million cash costs and $99 million noncash costs) to better align the company's cost structure within the global home-appliance marketplace. Substantially all of the cash costs have been paid to date and approximately 7,600 positions have been eliminated.
NOTE E—BRAZILIAN CURRENCY DEVALUATION
The Brazilian real declined from 1.21 to 1.72 per USD from mid-January 1999, when the Brazilian government changed its foreign exchange policy to a floating exchange rate, to March 31, 1999. Because the Brazilian operations maintained significant USD denominated debt on their books at that time, the currency devaluation resulted in a $146 million pre-tax charge to earnings (Whirlpool's share after-tax and minority interest was $53 million). Also included in other income and expense was a $12 million pre-tax mark-to-market charge ($7 million after-tax) related to short term forward contracts purchased to hedge movement in Brazil's currency.
NOTE F—CONTINGENCIES
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.
The company is a party to certain financial instruments with off-balance-sheet risk which are entered into in the normal course of business. These instruments consist of financial guarantees, repurchase agreements and letters of credit. The company's exposure to credit loss in the event of nonperformance by the debtors is the contractual amount of the financial instruments. The company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral or other security is generally required to support financial instruments with off-balance-sheet risk.
At June 30, 2000, the company had $141 million in receivables subject to recourse provisions and $125 million in guarantees of customer lines of credit at commercial banks.
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NOTE G—GEOGRAPHIC SEGMENTS
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The statements of earnings summarize operating results for the three and six month periods ended June 30, 2000 and 1999. This section of Management's Discussion highlights the main factors affecting the changes in operating results.
Net Sales
Net sales were $2.6 billion for the second quarter, down 1% from a year ago, and $5.2 billion for the first half of 2000, up 1% over the comparable 1999 period. Excluding the impact of currency fluctuations around the world, sales would have increased 1% and 4% over the prior year's quarter and year-to-date periods, respectively.
North American unit volumes were up 3% in the second quarter and 8% in the first half of the year over 1999. North American sales were up 1% and 4% for the second quarter and year-to-date periods, reflecting the competitive pricing environment. Whirlpool North American unit shipments are currently expected to slow from the beginning of the year, but grow 3% for the full year. European sales in U.S. dollars were down 10% in the second quarter and 8% in the first half, due primarily to the negative impact of currency fluctuations and pricing pressures offsetting 3% and 5% increases in units sold for the quarter and year-to-date comparisons. Excluding the impact of currency fluctuations, European sales were flat for the quarter and increased 2% year-to-date. Whirlpool European unit shipments are currently expected to increase 4% to 5% for the full year. Latin American unit shipments increased 7% and 11% over the comparable 1999 periods reflecting an improving economic environment within the region and the impact from the 1999 Brazilian devaluation on prior year results. Net sales were down 2% for the quarterly comparison, but increased 5% year-to-date. Asia's unit volumes increased 20% and 12% and net sales increased 16% and 12% for the quarter and year-to-date comparisons, respectively, as economic conditions in the region continue to strengthen.
Gross Margin
Gross margin percentage on products sold to net sales declined by 0.5 percentage points for the second quarter comparison with 1999 and 0.2 percentage points for the year-to-date comparison. The gross margin percentage included a pension credit of $6 million for the quarter and $12 million year-to-date caused by favorable returns of pension fund investments. These credits were offset by pricing pressures in North America and Europe, increasing material costs particularly in Europe and a reclassification within North America of certain sales allowances from selling, general and administrative expenses into net sales, to be consistent with the treatment of similar sales program costs in other areas of the company.
Selling, General and Administrative
Appliance selling and administrative expenses, which included pension credits of $9 million for the quarter and $18 million year-to-date, as a percent of net sales decreased by 1.7 percentage points for the second quarter comparison with 1999 and 1.5 percentage points for the year-to-date comparison. Quarter-over-quarter and year-over-year improvements in every region contributed to this improvement. Within North America, the reclassification of sales allowances and the pension credits more than offset additional advertising costs and costs to implement Enterprise Resource Planning, which is an SAP based enterprise-wide business software. Europe's expense ratio improved 1.7 percentage points for the quarter due to the realization of restructuring benefits while Brazil's ratio improved 2.0 percentage points due to lower bad debt accruals and the positive impact of ongoing cost reduction efforts.
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Other Income and Expense
Interest and sundry income (expense) was $10 million unfavorable quarter-over-quarter, but $136 million favorable in the year-to-date comparison. The unfavorable quarterly performance was due to a $17 million increase in net interest expense related to the company restructuring its Brazilian short term financing and increased interest expense on long term debt, partially offset by $5 million of Brazilian debt hedge costs in the 1999 quarter. Net interest expense was also higher year-to-date related to the same issues, but was offset by $158 million of charges in the first quarter of 1999 due to the Brazilian currency devaluation.
Income Taxes
The consolidated effective income tax rate was 35% for the quarter and 37% year-to-date versus rates of 37% and 38%, respectively, for the year ago periods. Various tax strategies in place during 2000 are reducing the effective rate below the U.S. statutory tax rate. These strategies are currently expected to impact the full year effective tax rate.
Net Earnings
Second quarter net earnings were $121 million or $1.66 per diluted share compared to $99 million or $1.30 per diluted share in 1999. Year-to-date earnings from continuing operations were $233 million, or $3.18 per diluted share, versus earnings of $127 million, or $1.66 per diluted share, in the first half of 1999. Excluding the first quarter impact of the Brazilian currency devaluation, year-to-date earnings from continuing operations were $187 million, or $2.45 per diluted share.
CASH FLOWS
The statements of cash flows reflect the changes in cash and equivalents for the six months ended June 30, 2000 and 1999 by classifying transactions into three major categories: operating, investing and financing activities.
Operating Activities
The company's main source of liquidity is cash from operating activities consisting of net earnings from operations adjusted for non-cash operating items such as depreciation and changes in operating assets and liabilities such as receivables, inventories and payables.
Cash used by operating activities in the first six months of 2000 was $81 million compared to $115 million used in 1999, reflecting the first quarter impact in 1999 of the Brazilian currency devaluation partially offset higher inventory and operating asset levels.
Investing Activities
The principal recurring investing activities are property additions. Net property additions for the first half were $162 million in 2000 down from $172 million in the 1999 period. These expenditures are primarily for equipment and tooling related to product improvements, more efficient production methods and replacement for normal wear and tear.
Refer to Note B to the accompanying consolidated financial statements for a discussion of business dispositions and acquisitions.
Financing Activities
Dividends to shareholders totaled $50 million for the first half of 2000 versus $53 million in 1999. The company's borrowings, net of short term investments and adjusted for currency fluctuations, increased
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$668 million from year end due primarily to the purchase of additional shares in its Brazilian subsidiaries and seasonal working capital needs. The net increase included the issuance on May 5, 2000 of $325 million of 8.6% debentures maturing in 2010, partially offset by the maturity on June 15, 2000 of $200 million in 9.5% debentures.
FINANCIAL CONDITION AND OTHER MATTERS
The financial position of the company remains strong as evidenced by the June 30, 2000 balance sheet. The company's total assets were $7.0 billion and stockholders' equity is $1.9 billion versus the June 1999 totals of $7.1 billion and $1.8 billion, respectively.
On February 15, 2000, the company announced that its Board of Directors approved an extension of the company's stock repurchase program to $1 billion. The additional $750 million share repurchase authorization extends the previously authorized $250 million repurchase program which was announced March 1, 1999. The shares are to be purchased in the open market and through privately negotiated sales as the company deems appropriate and it is currently expected to be completed over an eighteen-month period. The company has purchased 6.5 million shares at a cost of $394 million through June 30, 2000, of which 3.9 million shares or $227 million occurred since year-end.
The overall debt to invested capital ratio of 48.7% at June 30, 2000 was up from 45.5% at June 30, 1999 and up from 37.7% at December 31, 1999. The increase from year-end is due to the increased debt mentioned above combined with lower equity driven by the share repurchase offsetting $183 million of earnings retention. The company's debt continues to be rated investment grade by Moody's Investors Service Inc., Standard and Poor's, and Duff & Phelps.
The company uses foreign currency forward contracts and options from time to time to hedge the price risk associated with firmly committed and forecasted cross-border payments and receipts related to its ongoing business and operational financing activities with their impact included in other income (expense) in the income statement. The company also previously hedged a portion of its European net assets through the use of cross currency interest rate swaps that effectively converted USD denominated debt into various European currencies. Changes in the value of these contracts due to movements in exchange rates were included in the currency translation component of stockholders' equity. On May 15, 2000, the company entered into offsetting Euro denominated currency swaps, effectively locking in an approximate $220 million positive position on the previously referenced cross currency interest rate swaps. This positive cash position will be realized as the contracts mature in 2002 and 2004.
The company has external sources of capital available and believes it has adequate financial resources and liquidity to meet anticipated business needs and to fund future growth opportunities such as new products, acquisitions and joint ventures.
In December 1996, Multibras and Embraco obtained a favorable decision with respect to additional export incentives in connection with the Befiex program. In April 1997, Multibras and Embraco submitted tax-credit claims for about 447 million reais (equivalent to US$440 million as of December 1996) relating to the favorable decision for exports from July 1988 through December 1996. This amount is affected by exchange rate fluctuations, offset by accrued interest. Based on recent favorable interpretations by outside legal and tax counsel, the company recognized $9.6 million in benefits for the quarter as a reduction of current excise taxes payable and therefore an increase in net sales.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven member nations of the European Union began the conversion to a common currency, the "Euro." The company has significant manufacturing operations and sales in these countries. The introduction of the Euro has eliminated transaction gains and losses within participating
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countries and there currently has not been any significant impact on operating results from the change over to the Euro.
Prices to customers may converge throughout the affected countries, although the company believes that in recent years competitive pressures have to some extent eliminated price differences solely caused by the lack of price transparency.
Internal computer system and business processes will need to be changed to accommodate the new currency. The company has established a cross-functional team, guided by an executive-level steering committee, to address these issues. It currently plans to make changes in two phases. In the first phase, from 1999 to 2001, the company will have the capability to bill customers and pay suppliers in Euro, but will continue to maintain its accounts in the national currencies. In 2002, all remaining operational and financial systems will be converted to the Euro. The cost of the first phase is not material; the cost of the second phase has not been estimated at this time.
Operating efficiencies should ultimately result from reduction of the complexity of doing business in multiple currencies. No estimate of these efficiencies has been made.
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 our 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.
Many factors could cause actual results to differ materially from the Company's forward-looking statements. Among these factors are: (1) competitive pressure to reduce prices; (2) the ability to gain or maintain market share in an intensely competitive global market; (3) the success of our global strategy to develop brand differentiation and brand loyalty; (4) our ability to control operating and selling costs and to maintain profit margins during industry downturns; (5) the success of our Brazilian businesses operating in a challenging and volatile environment; (6) continuation of our strong relationship with Sears, Roebuck and Co. in North America which accounted for approximately 18% of our consolidated net sales of $10.5 billion in 1999; (7) currency exchange rate fluctuations in Latin America, Europe, and Asia that could affect our consolidated balance sheet and income statement; and (8) social, economic, and political volatility in developing markets.
The company undertakes no obligation to update every forward-looking statement, and investors are advised to review disclosures by the company in our 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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PART II. OTHER INFORMATION WHIRLPOOL CORPORATION AND SUBSIDIARIES Quarter Ended June 30, 2000
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on April 18, 2000. At the meeting, the following items were voted on by shareholders:
Messrs. Fettig, Cain, Gilmour, Kilts, Marsh, Stern, and Whitwam and Ms. Stoney each have terms of office as directors that continued after the 2000 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
A Current Report on Form 8-K dated April 19, 2000 pursuant to Item 5, "Other Events," to announce the Company's earnings for the first quarter 2000.
A Current Report on Form 8-K dated April 26, 2000 pursuant to Item 5, "Other Events," concerning the registrant's filing of Compensation and Benefits Assurance Agreements that provide benefits to executive officers in the event of a change in control of the corporation.
A Current Report on Form 8-K dated April 27, 2000 pursuant to Item 5, "Other Events," to announce the retirement of H. Miguel Etchenique as President of the Board of Directors of Brasmotor and its subsidiary companies in Brazil and the election by the Brasmotor Board of Paulo Periquito as his successor.
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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.
August 12, 2000
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