Whirlpool Corporation
WHIRLPOOL CORP /DE/ (Form: 10-Q, Received: 11/08/2006 17:09:44)

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2006

 

 

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-3932

WHIRLPOOL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 

38-1490038

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

2000 M-63

 

49022-2692

Benton Harbor, Michigan

 

(Zip Code)

(Address of principal executive offices)

 

 

 

(269) 923-5000

Registrant’s telephone number, including area code

 

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 o

Indicate by check mark whether the registrant is a large accelerated filer, or an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act. (check one)

Large Accelerated Filer  x             Accelerated Filer  o             Non-Accelerated Filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o     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 October 31, 2006

 

Common stock, par value $1 per share

 

78,381,222

 

 




QUARTERLY REPORT ON FORM 10-Q

WHIRLPOOL CORPORATION

Quarter Ended September 30, 2006

INDEX OF INFORMATION INCLUDED IN REPORT

 

 

Page

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Operations

3

 

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets

4

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows

5

 

 

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

6

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

 

 

 

Item 3 .

 

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

 

 

 

Item 4 .

 

Controls and Procedures

41

 

 

 

 

 

 

PART II - OTHER INFORMATION

42

 

 

 

 

 

 

 

Item 1 .

 

Legal Proceedings

42

 

 

 

 

 

 

Item 1A .

 

Risk Factors

42

 

 

 

 

 

 

Item 6.

 

Exhibits

42

 

 

 

 

 

 

 

 

Signatures

43

 

 

 

2




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

WHIRLPOOL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE PERIODS ENDED SEPTEMBER 30

(millions of dollars except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

2006

 

2005

 

2006

 

2005

 

Net sales

 

$

4,843

 

$

3,599

 

$

13,126

 

$

10,363

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Cost of products sold

 

4,139

 

3,046

 

11,161

 

8,806

 

Selling, general and administrative

 

462

 

339

 

1,272

 

956

 

Intangible amortization

 

10

 

 

20

 

1

 

Restructuring costs

 

7

 

12

 

40

 

26

 

 

 

4,618

 

3,397

 

12,493

 

9,789

 

OPERATING PROFIT

 

225

 

202

 

633

 

574

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest and sundry income (expense)

 

24

 

1

 

5

 

(29

)

Interest expense

 

(67

)

(32

)

(152

)

(101

)

 

 

 

 

 

 

 

 

 

 

EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS

 

182

 

171

 

486

 

444

 

Income taxes

 

46

 

56

 

128

 

142

 

 

 

 

 

 

 

 

 

 

 

EARNINGS FROM CONTINUING OPERATIONS BEFORE EQUITY EARNINGS AND MINORITY INTERESTS

 

136

 

115

 

358

 

302

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (loss) of affiliated companies

 

 

 

1

 

1

 

Minority interests

 

(2

)

(1

)

(6

)

(7

)

 

 

 

 

 

 

 

 

 

 

EARNINGS FROM CONTINUING OPERATIONS

 

134

 

114

 

353

 

296

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(17

)

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

117

 

$

114

 

$

324

 

$

296

 

 

 

 

 

 

 

 

 

 

 

Per share of common stock:

 

 

 

 

 

 

 

 

 

Basic earnings from continuing operations

 

$

1.71

 

$

1.70

 

$

4.76

 

$

4.42

 

Discontinued operations, net of tax

 

(0.22

)

 

(0.39

)

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings

 

$

1.49

 

$

1.70

 

$

4.37

 

$

4.42

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings from continuing operations

 

$

1.68

 

$

1.66

 

$

4.68

 

$

4.35

 

Discontinued operations, net of tax

 

(0.21

)

 

(0.38

)

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings

 

$

1.47

 

$

1.66

 

$

4.30

 

$

4.35

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

$

.43

 

$

.43

 

$

1.29

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding (millions):

 

 

 

 

 

 

 

 

 

Basic

 

78.3

 

67.0

 

74.1

 

66.9

 

Diluted

 

79.6

 

68.3

 

75.5

 

68.1

 

 

See notes to consolidated condensed financial statements

 

 

3




WHIRLPOOL CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(millions of dollars)

 

 

(Unaudited)

 

 

 

 

 

September 30

 

December 31

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and equivalents

 

$

109

 

$

524

 

Trade receivables, less allowances (2006: $124; 2005: $76)

 

2,669

 

2,081

 

Inventories

 

2,585

 

1,591

 

Prepaid expenses

 

178

 

148

 

Deferred income taxes

 

270

 

134

 

Other current assets

 

335

 

285

 

Assets of discontinued operations

 

665

 

 

Total Current Assets

 

6,811

 

4,763

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Investment in affiliated companies

 

26

 

28

 

Goodwill, net

 

1,678

 

169

 

Other intangibles, net

 

1,601

 

115

 

Deferred income taxes

 

480

 

472

 

Other assets

 

222

 

243

 

 

 

4,007

 

1,027

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land

 

89

 

80

 

Buildings

 

1,181

 

1,033

 

Machinery and equipment

 

6,919

 

6,108

 

Accumulated depreciation

 

(5,061

)

(4,710

)

 

 

3,128

 

2,511

 

Total Assets

 

$

13,946

 

$

8,301

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Notes payable

 

$

628

 

$

131

 

Accounts payable

 

2,913

 

2,330

 

Employee compensation

 

405

 

352

 

Deferred income taxes

 

47

 

61

 

Accrued expenses

 

1,110

 

933

 

Restructuring costs

 

233

 

19

 

Income taxes

 

88

 

18

 

Other current liabilities

 

186

 

145

 

Current maturities of long-term debt

 

210

 

365

 

Liabilities of discontinued operations

 

498

 

 

Total Current Liabilities

 

6,318

 

4,354

 

 

 

 

 

 

 

OTHER LIABILITIES

 

 

 

 

 

Deferred income taxes

 

426

 

167

 

Pension benefits

 

880

 

467

 

Postemployment benefits

 

954

 

511

 

Other liabilities

 

408

 

220

 

Long-term debt

 

1,799

 

745

 

 

 

4,467

 

2,110

 

 

 

 

 

 

 

MINORITY INTERESTS

 

53

 

92

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $1 par value:

 

 

 

 

 

Shares authorized - 250 million

 

102

 

92

 

Shares issued -102 million (2006); 92 million (2005)

 

 

 

 

 

Shares outstanding - 78 million (2006); 68 million (2005)

 

 

 

 

 

Paid-in capital

 

1,839

 

863

 

Retained earnings

 

3,130

 

2,902

 

Accumulated other comprehensive income (loss)

 

(713

)

(862

)

Treasury stock - 24 million (2006); 24 million (2005)

 

(1,250

)

(1,250

)

Total Stockholders’ Equity

 

3,108

 

1,745

 

Total Liabilities and Stockholders’ Equity

 

$

13,946

 

$

8,301

 

 

See notes to consolidated condensed financial statements

4




WHIRLPOOL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30

(millions of dollars)

 

 

2006

 

2005

 

 

 

 

 

 

 

OPERATING ACTIVITIES OF CONTINUING OPERATIONS

 

 

 

 

 

Net earnings

 

$

324

 

$

296

 

Loss from discontinued operations

 

29

 

 

Earnings from continuing operations

 

353

 

296

 

Adjustments to reconcile net earnings to net cash flows (used in) provided by operating activities:

 

 

 

 

 

Gain on disposition of assets

 

(2

)

(10

)

Gain on sale of businesses

 

(32

)

(9

)

Depreciation and amortization

 

389

 

334

 

Changes in assets and liabilities:

 

 

 

 

 

Trade receivables

 

15

 

(121

)

Inventories

 

(379

)

(102

)

Accounts payable

 

3

 

(152

)

Restructuring charges, net of cash paid

 

(49

)

3

 

Taxes deferred and payable, net

 

(56

)

(22

)

Accrued pension

 

41

 

30

 

Accrued payroll and other compensation

 

34

 

11

 

Other - net

 

(21

)

11

 

Cash Provided By Continuing Operating Activities

 

$

296

 

$

269

 

 

 

 

 

 

 

INVESTING ACTIVITIES OF CONTINUING OPERATIONS

 

 

 

 

 

Capital expenditures

 

$

(360

)

$

(295

)

Proceeds from sale of assets

 

25

 

22

 

Proceeds from sale of businesses

 

36

 

48

 

Proceeds from sale of Maytag adjacent business

 

49

 

 

Purchase of minority interest shares

 

(53

)

 

Acquisition of businesses, net of cash acquired

 

(796

)

(45

)

Cash Used In Investing Activities of Continuing Operations

 

$

(1,099

)

$

(270

)

 

 

 

 

 

 

FINANCING ACTIVITIES OF CONTINUING OPERATIONS

 

 

 

 

 

Proceeds of short-term borrowings, net

 

$

492

 

$

30

 

Proceeds from borrowing of long-term debt

 

748

 

 

Repayments of long-term debt

 

(844

)

(7

)

Dividends paid

 

(96

)

(86

)

Purchase of treasury stock

 

 

(34

)

Common stock issued under stock plans

 

47

 

68

 

Other

 

31

 

17

 

Cash Provided By (Used For) Financing Activities of Continuing Operations

 

$

378

 

$

(12

)

Cash Used In Discontinued Operations

 

 

 

 

 

Operating Activities

 

$

(5

)

$

 

Investing Activities

 

(3

)

 

Cash Used In Discontinued Operations

 

$

(8

)

$

 

Effect of Exchange Rate Changes on Cash and Equivalents

 

18

 

(2

)

Decrease in Cash and Equivalents

 

$

(415

)

$

(15

)

Cash and Equivalents at Beginning of Period

 

524

 

243

 

Cash and Equivalents at End of Period

 

$

109

 

$

228

 

 

See notes to consolidated condensed financial statements

 

5




WHIRLPOOL CORPORATION
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, 2006 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 2005 Annual Report on Form 10-K, both of which are available through the Internet at www.whirlpoolcorp.com.

The Company completed the acquisition of Maytag Corporation (“Maytag”) on March 31, 2006, the last day of the first quarter.  The results of Maytag’s operations have been included in the Consolidated Condensed Financial Statements beginning April 1, 2006.  Further discussion of this transaction can be found under “Maytag Acquisition” in Management’s Discussion and Analysis and in Note C to the Consolidated Condensed Financial Statements.

Basic and diluted net earnings per share from continuing operations were calculated as follows:

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

(millions of dollars and shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings per share - Earnings from continuing operations

 

$

134

 

$

114

 

$

353

 

$

296

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - weighted-average shares

 

78.3

 

67.0

 

74.1

 

66.9

 

Effect of dilutive securities - stock-based compensation

 

1.3

 

1.3

 

1.4

 

1.2

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per share - adjusted weighted-average shares

 

79.6

 

68.3

 

75.5

 

68.1

 

 

Diluted net earnings per share of common stock includes the dilutive effect of stock options and stock-based compensation.  For the three months ended September 30, 2006 and 2005, approximately 2,088,000 and 6,000 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, 2006 and 2005, approximately 2,087,000 and 615,000 stock options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices rendered them anti-dilutive.

6




Effective January 1, 2006, the Company reclassified freight and warehousing costs from the selling, general and administrative expense line to the cost of products sold line in the Consolidated Condensed Statements of Operations.  For the three and nine months ended September 30, 2005, amounts reclassified were $215 million and $631 million, respectively. This change was adopted to better reflect these costs being directly tied to product sales.  There was no change to net earnings as a result of this reclassification. Calculated percentages of gross margin and selling, general and administrative costs as a percent of sales reflect this reclassification.

Certain reclassifications have been made to prior year data to conform to the current year presentation which had no effect on net earnings reported for any period.

NOTE B — NEW ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements.  The expanded disclosures in this statement about the use of fair value to measure assets and liabilities should provide users of financial statements with better information about the extent to which fair value is used to measure recognized assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.   The Company is in the process of analyzing the potential effects SFAS No. 157 will have on its results of operations and financial position.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)”.  This statement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS No. 158 is effective for fiscal years that begin after December 15, 2006.  The Company is in the process of analyzing the impact to its financial position.

In June 2006, FASB issued Interpretation No. (“FIN”) 48, “Accounting for Uncertainty of Income Taxes,” which addresses the uncertainty of income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for fiscal years that begin after December 15, 2006.  The Company is in the process of analyzing the potential effects FIN 48 will have on its results of operations and financial position.

7




NOTE C — MAYTAG ACQUISITION

On March 31, 2006, the Company completed its acquisition of Maytag.  Maytag had consolidated net sales for the year ended December 31, 2005, of approximately $4.9 billion.  With the acquisition, the Company adds an array of home appliance brands including Maytag , Jenn-Air and Amana .  The Company expects to realize cost savings from all areas across the value chain including product manufacturing and marketing, global procurement, logistics, infrastructure and support areas, product research and development and asset utilization.

The aggregate purchase price for Maytag was approximately $1.9 billion, including approximately $848 million of cash and approximately 9.7 million shares of Company common stock.  The purchase price also included the adjustment of outstanding Maytag options to become exercisable, in aggregate, for an additional 1.8 million shares of Company common stock and the settlement of Maytag restricted stock and performance units for cash.  The combined value of the above share-based consideration was approximately $920 million.  The value of the approximately 9.7 million shares of Company common stock was determined using the average market price of the Company’s common shares for the two days prior to, through the two days after, March 29, 2006, the date the reference period for the exchange ratio was established.  In addition, the Company assumed Maytag’s existing debt of approximately $978 million.  The Company incurred approximately $102 million in acquisition-related expenses, which are included in the purchase price above.  Initially, the Company borrowed amounts required to fund the cash portion of the purchase price through issuances in the U.S. commercial paper market and in June 2006 refinanced a portion of this commercial paper through the issuance of long-term bonds.

The Company is in the process of finalizing independent appraisals for the purpose of allocating the purchase price to the individual assets acquired and liabilities assumed. This is expected to result in adjustments to the carrying values of Maytag’s recorded assets and liabilities, refinement of amounts recorded for certain intangible assets, revisions of the useful lives of intangible assets, some of which will have indefinite lives not subject to amortization, and the determination of any residual amount that will be allocated to goodwill. The preliminary allocation of the purchase price included in the current period balance sheet is based on the best estimates of management and is subject to revision based on final determination of asset fair values and useful lives. The related depreciation and amortization expense from the acquired assets is also subject to such revisions on a prospective basis.

8




The following table presents the preliminary allocation of purchase price related to the Maytag business as of March 31, 2006, the date of acquisition:

(millions of dollars)

 

 

 

Current assets

 

$

1,330

 

Assets of discontinued operations

 

756

 

Property, plant and equipment

 

609

 

Goodwill

 

1,507

 

Intangible assets

 

1,503

 

Other non-current assets

 

27

 

 

 

 

 

Total assets acquired

 

5,732

 

 

 

 

 

Current liabilities

 

1,544

 

Liabilities of discontinued operations

 

519

 

Non-current liabilities

 

1,799

 

 

 

 

 

Total liabilities assumed

 

3,862

 

 

 

 

 

Net assets acquired

 

$

1,870

 

 

Goodwill, which is not deductible for tax purposes, has been preliminarily allocated to the North America operating segment on the basis that the cost efficiencies identified will primarily benefit this segment of the business.  Any subsequent allocation of goodwill amounts to other segments of the business is not expected to be material.

During the third quarter of fiscal 2006, the Company sold Amana commercial to Aga Foodservice Group for approximately $49 million.  Amana commercial revenues and costs were originally classified as a component of discontinued operations during the second quarter of 2006.  Due to the Company’s continuing involvement with Amana commercial during a transition period that is expected to extend beyond one year, the Company reclassified the operating results related to Amana commercial into continuing operations for the three and nine months ended September 30, 2006.  This reclassification did not have a material impact on earnings from continuing operations or net earnings.

 

9




The Company has preliminarily estimated the fair value of Maytag’s identifiable intangible assets as $1,503 million.  The preliminary allocation of identifiable intangible assets is as follows:

 

 

 

Average

 

 

 

Estimated 

 

Remaining

 

(millions of dollars)

 

Fair Value

 

Useful Life

 

Asset class:

 

 

 

 

 

 

 

 

 

 

 

Brand intangibles - indefinite lived

 

$

1,110

 

 

 

Customer relationships

 

295

 

18 years

 

Technology and contractual agreements

 

98

 

1 to 7 years

 

 

 

$

1,503

 

 

 

 

The majority of the intangible valuation relates to brand intangibles.  The Company’s preliminary assessment as to brand intangibles having an indefinite life was based on a number of factors, including competitive environment, market share, brand history and product life cycles.  The customer relationship intangibles have an average remaining useful life of 18 years based on the very low historical and projected customer attrition rates among major retailers.

The Company is also in the process of completing its analysis of integration plans, pursuant to which the Company will incur costs primarily related to the elimination of duplicative manufacturing facilities and selling, general and administrative overlap.  The Company has established reserves for certain severance and exit costs relating to the closure of Maytag facilities including manufacturing plants, the former headquarters location and other administrative offices.  Costs associated with these actions will not impact current earnings and have been recognized as a component of purchase accounting, resulting in adjustments to goodwill.  A $252 million reserve for certain actions, including the previously announced closure of Maytag’s facilities in Galesburg, Illinois and Florence, South Carolina, along with the closure of the Maytag facilities mentioned above, has been recognized as a liability at the date of acquisition.

The following table provides pro forma results of operations for the three months ended September 30, 2005 and nine months ended September 30, 2006 and 2005 as if Maytag had been acquired as of the beginning of each period presented. The pro forma results include certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on acquired tangible and intangible assets as well as interest expense on borrowings used to finance the integration. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Maytag. Accordingly, such amounts are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the dates indicated or that may result in the future.

10




 

 

 

Three Months

 

 

 

 

 

 

 

Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(millions of dollars, except diluted earnings per share)

 

2005

 

2006

 

2005

 

Net sales

 

$

4,653

 

$

14,143

 

$

13,388

 

Earnings from continuing operations

 

$

87

 

$

341

 

$

255

 

 

 

 

 

 

 

 

 

Net earnings

 

$

77

 

$

312

 

$

232

 

 

 

 

 

 

 

 

 

Diluted net earnings per share:

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

1.12

 

$

4.29

 

$

3.28

 

Loss from discontinued operations

 

$

(0.13

)

$

(0.37

)

$

(0.30

)

Net earnings

 

$

0.99

 

$

3.92

 

$

2.98

 

 

Certain non-recurring acquisition charges of $52 million recorded by Maytag prior to March 31, 2006, directly related to the acquisition, including $27 million of accelerated stock compensation expense triggered by certain change in control provisions and approximately $25 million of direct transaction costs have been eliminated from the pro forma information presented above.

NOTE D — DISCONTINUED OPERATIONS

On May 23, 2006, the Company announced its intention to sell the Hoover floor-care, Dixie-Narco vending systems, Amana commercial microwave and Jade commercial products appliance businesses and reported these businesses as discontinued operations during the second quarter. During the third quarter, the Company completed the sale of the Amana commercial microwave business.  Proceeds related to the sale amounted to $49 million, and the excess of proceeds over the net book value of Amana assets reduced the goodwill amount recorded in connection with the acquisition of Maytag.  Accordingly, there was no gain or loss related to the Amana commercial sale.  On October 23, 2006, the Company sold the Dixie-Narco vending systems business (see Note N — Subsequent Events).  The Hoover, Dixie-Narco, and Jade commercial businesses continue to be reported as discontinued operations. Due to the nature of the Company’s involvement in the Amana commercial microwave business as an OEM supplier subsequent to the sale, Amana commercial microwave was no longer considered part of discontinued operations, and accordingly, has been reclassified from discontinued operations into continuing operations. This reclassification did not have a material impact on earnings from continuing operations or net earnings.

The associated results of operations, financial position and cash flows related to the discontinued operations have been separately reported as of and for the periods ended September 30, 2006.

11




The following table includes certain summary income statement information related to the results of the Hoover, Dixie-Narco, and Jade businesses for the:

 

Three Months Ended

 

Nine Months Ended

 

(millions of dollars)

 

September 30, 2006

 

September 30, 2006

 

Net sales

 

$

153

 

$

322

 

 

 

 

 

 

 

Loss before income taxes

 

(26

)

(46

)

Income tax benefit

 

9

 

17

 

Loss from discontinued operations, net of tax

 

$

(17

)

$

(29

)

 

Additionally, the Consolidated Condensed Balance Sheets include the assets and liabilities of the Hoover, Dixie-Narco, and Jade businesses presented as discontinued operations.  As of September 30, 2006, the assets and liabilities of discontinued operations were as follows:

(millions of dollars)

 

September 30,    2006

 

Assets

 

 

 

 

 

 

 

Net receivables

 

$

108

 

Inventories

 

156

 

Net intangibles

 

114

 

Deferred income taxes

 

101

 

Net property plant and equipment

 

178

 

Other assets

 

8

 

Total assets of discontinued operations

 

$

665

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

44

 

Pension benefits

 

163

 

Postemployment benefits

 

251

 

Other liabilities

 

40

 

Total liabilities of discontinued operations

 

$

498

 

 

12




NOTE E — ADOPTION OF SFAS NO. 123(R)

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payments”, using the modified-prospective-transition method. Under that transition method, compensation cost includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).  Results for prior periods have not been restated.

The Company sponsors several share-based employee incentive plans.  Pre-tax amortization of compensation costs for stock option grants awarded under these plans recognized during the three and nine months ended September 30, 2006 was approximately $2 million and $5 million, respectively. Compensation expense related to restricted stock units (“RSU”) for the three and nine months ended September 30, 2006 was $6 million and $20 million, respectively.

At September 30, 2006, unrecognized compensation cost related to non-vested stock option and RSU awards totaled $61 million.  The cost of these non-vested awards is expected to be recognized over the requisite vesting period.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s earnings from continuing operations before income taxes and other items and net earnings for the three months ended September 30, 2006 are $2 million and $1 million lower, respectively, than if it had continued to account for share-based compensation under Accounting Principles Board (“APB”) Opinion No.  25.  For the nine months ended September 30, 2006, the Company’s earnings from continuing operations before income taxes and other items and net earnings are $5 million and $3 million lower, respectively, than if it had continued to account for share-based compensation under APB Opinion No. 25.

Basic and diluted net earnings per share for the three months ended September 30, 2006 are $.01 lower than if the Company had continued to account for share-based compensation under APB Opinion No. 25. Basic and diluted net earnings per share for the nine months ended September 30, 2006 are $.04 lower than if the Company had continued to account for share-based compensation under APB Opinion No. 25.

The following table illustrates the effect on net earnings and earnings per share for the three and nine months ended September 30, 2005, if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plans.  For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing model with share-based awards amortized over the vesting periods.

13




Share-Based Compensation - Pro Forma Net Income and Earnings

 

 

Three Months Ended

 

Nine Months Ended

 

(millions of dollars, except per share data)

 

September 30, 2005

 

September 30, 2005

 

 

 

 

 

 

 

Net earnings as reported

 

$

114

 

$

296

 

 

 

 

 

 

 

Add: Share-based employee compensation expense included in reported net earnings, net of related tax effects

 

2

 

7

 

 

 

 

 

 

 

Deduct: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

 

(3

)

(10

)

 

 

 

 

 

 

Pro forma net earnings

 

$

113

 

$

293

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic — as reported

 

$

1.70

 

$

4.42

 

Basic — pro forma

 

$

1.69

 

$

4.37

 

 

 

 

 

 

 

Diluted — as reported

 

$

1.66

 

$

4.35

 

Diluted — pro forma

 

$

1.65

 

$

4.30

 

 

Share-Based Employee Incentive Plans

The Company sponsors several share-based employee incentive plans with similar features providing for the issuance of stock options, performance stock units and performance shares, and restricted stock and restricted stock equivalents for periods of up to ten years to eligible employees. On December 31, 2005, the Whirlpool Corporation 1996 Omnibus Stock and Incentive Plan (“OSIP”) expired following the completion of its 10-year term; as a result there can be no new grants under this plan.

The following table summarizes the plans:

(millions of shares)

 

September 30, 2006

 

 

 

1996

 

1998

 

2000

 

2002

 

 

 

OSIP

 

OSIP

 

OSIP

 

OSIP

 

Share-based awards granted

 

3.4

 

3.6

 

2.6

 

2.0

 

Unvested awards

 

0.8

 

1.2

 

1.1

 

1.3

 

Converted to freely transferable stock

 

2.6

 

2.4

 

1.5

 

0.7

 

 

Stock Options

Eligible employees receive stock options as a portion of their total compensation.  Such options generally become exercisable over a three-year period and expire 10 years from the date of grant, generally subject to forfeiture upon termination of employment.

14




 

The Company uses the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. Stock options granted have exercise prices equal to the market price of Whirlpool common stock on the grant date. The principal variable assumptions utilized in valuing options and the methodology for estimating such model inputs include: (1) risk-free interest rate — an estimate based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the option; (2) expected volatility — an estimate based on the historical volatility of Whirlpool common stock for a period equal to the expected life of the option, and (3) expected option life — an estimate based on historical experience including the effect of employee terminations. Based on the results of the model, the weighted-average fair value of stock options granted during the nine months ended September 30, 2006 was $22.07 using the following assumptions:

Weighted Average Black-Scholes Assumptions

 

 

 

 

 

 

 

Risk-free interest rate

 

4.56%

 

Expected volatility

 

25.6%

 

Expected dividend yield

 

2.09%

 

Expected option life

 

5 years

 

 

The following table summarizes stock option activity during the nine months ended September 30, 2006. During this period, the Company granted 2,244,000 stock options of which 1,778,000 related to stock options granted to former Maytag employees.

Stock Option Activity

 

 

Options

 

Weighted-Average
Exercise Price

 

Expiration Dates

 

(thousands of shares)

 

 

 

 

 

 

 

Outstanding, December 31, 2005

 

3,733

 

$

60.37

 

June 2006 - November 2015

 

Granted

 

2,244

 

91.00

 

 

 

Exercised

 

(746

)

65.00

 

 

 

Canceled or expired

 

(65

)

77.14

 

 

 

 

 

 

 

 

 

 

 

Outstanding, September 30, 2006

 

5,166

 

$

72.80

 

April 2007- July 2016

 

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2006 was $18 million for which tax benefits totaled approximately $7 million. Cash received from the exercise of stock options during the nine months ended September 30, 2006 totaled $47 million.

 

15




 

The table below provides additional information related to stock options outstanding at September 30, 2006:

 

 

Outstanding Net
of Expected
Forfeitures

 

Options
Exercisable

 

(options in thousands / dollars 
in millions, except share data)

 

 

 

Number of options

 

4,875

 

4,216

 

Weighted-average exercise price

 

$

72.06

 

$

69.69

 

Aggregate intrinsic value

 

$

74

 

$

72

 

Weighted-average remaining contractual term, in years

 

6.3

 

5.8

 

 

Restricted Stock Units

Eligible employees receive RSUs as a portion of their total compensation. RSU awards vest over various time periods depending upon the program, but generally vest from two years to seven years and convert to unrestricted common stock at the conclusion of the vesting period. All or a portion of an award may be canceled if employment is terminated before the end of the relevant vesting period. The Company accrues dividend equivalents on outstanding RSUs (in the form of additional RSUs), based on dividends declared on Whirlpool common stock.

The Company measures compensation cost based on the market price of Whirlpool common stock at the grant date.

The following table summarizes RSU activity during the nine months ended September 30, 2006:

 

Number of RSUs

 

Weighted-Average
Grant Date Fair
Value

 

(RSUs in thousands)

 

 

 

 

 

Outstanding, December 31, 2005

 

1,499

 

$67.55

 

Granted

 

366

 

84.86

 

Canceled

 

(14

)

83.66

 

Vested and transferred to unrestricted

 

(58

)

66.11

 

Outstanding, September 30, 2006

 

1,793

 

$71.48

 

 

 

16




 

NOTE F - GOODWILL AND OTHER INTANGIBLES

The changes in the carrying amounts for goodwill and amortizable intangible assets since December 31, 2005 are due primarily to the acquisition of Maytag. Preliminary estimates of Maytag-related goodwill have been recorded in the North America operating segment. As of September 30, 2006, the operating segments’ total goodwill carrying amounts were as follows: North America - $1,674 million and Latin America - $4 million.

The Company’s other intangible assets were comprised of the following:

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

(millions of dollars)

 

 

 

Intangible assets with indefinite lives

 

$

1,163

 

$

51

 

Amortizable intangible assets with determinable lives

 

374

 

 

Pension related

 

64

 

64

 

Total other intangible assets, net

 

$

1,601

 

$

115

 

 

Included in the above balances are accumulated amortization amounts totaling $22 million at September 30, 2006.

NOTE G — INVENTORIES

Inventories consist of the following:

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

(millions of dollars)

 

 

 

 

 

Finished products

 

$

2,164

 

$

1,361

 

Raw materials and work in process

 

546

 

363

 

 

 

2,710

 

1,724

 

 

 

 

 

 

 

Less excess of FIFO cost over LIFO cost

 

125

 

133

 

 

 

$

2,585

 

$

1,591

 

 

 

17




 

NOTE H — RESTRUCTURING CHARGES

Whirlpool Restructuring

The following represents a reconciliation of the changes in restructuring reserves related to Whirlpool projects through September 30, 2006:

 

 

Balance

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

January 1,

 

Charge to

 

Cash

 

Non-Cash

 

Revision of

 

 

 

September 30,

 

 

 

2006

 

Earnings

 

Utilization

 

Utilization

 

Estimate

 

Translation

 

2006

 

(millions of dollars)

 

 

 

Termination costs

 

$

15

 

$

16

 

$

(23

)

$

 

$

 

$

1

 

$

9

 

Non-employee exit costs

 

4

 

24

 

(6

)

(18

)

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

19

 

$

40

 

$

(29

)

$

(18

)

$

 

$

1

 

$

13

 

 

Under its ongoing global operating platform initiatives, the Company has implemented certain restructuring initiatives to strengthen its leadership 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 maximize support efficiencies throughout the Company.

The Company incurred pre-tax restructuring charges of $7 million and $40 million related to these actions during the three and nine months ended September 30, 2006, 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 and impairment of fixed assets. These charges include shifting refrigeration and compressor capacity to lower cost regions, as well as salary workforce reorganization throughout Europe. The Company expects to incur additional costs, not to exceed $60 million, during the last three months of 2006 related to these initiatives.

On a segment level, for the three and nine months ended September 30, 2006, respectively, the North America region incurred approximately $0 million and $16 million, the Europe region incurred approximately $5 million and $13 million, the Latin America region incurred approximately $1 million and $5 million, and the Asia region incurred approximately $1 million and $6 million of restructuring charges, respectively.

 

18




 

Maytag Integration

Maytag integration reserves are included in the restructuring costs line in the Consolidated Condensed Balance Sheets. The following represents a reconciliation of the changes in reserves related to Maytag projects through September 30, 2006:

 

 

Balance

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

April 1,

 

Charge to

 

Cash

 

Non-Cash

 

Revision of

 

 

 

September 30,

 

 

 

2006

 

Earnings

 

Utilization

 

Utilization

 

Estimate

 

Translation

 

2006

 

(millions of dollars)

 

 

 

Termination costs

 

$

134

 

$

 

$

(30

)

$

 

$

70

 

$

 

$

174

 

Non-employee exit costs

 

35

 

 

(2

)

 

13

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

169

 

$

 

$

(32

)

$

 

$

83

 

$

 

$

220

 

 

In the second quarter of 2006, the Company announced its intention to close the Newton, Iowa, Herrin, Illinois and Searcy, Arkansas laundry manufacturing plants as well as the former headquarters and other administrative offices. The Company has established reserves for certain exit costs relating to these facilities. Costs associated with these actions will not impact current earnings and have been recognized as a component of purchase accounting, resulting in an adjustment to goodwill. At September 30, 2006, a $218 million reserve remains for certain actions, including closure of the Maytag facilities mentioned above, which were established as a purchase accounting liability. Adjustments to the reserve have been reflected in the table above and relate primarily to the communication of severance accruals.

The remaining $2 million restructuring reserve balance relates to Maytag’s previously announced closing of the refrigeration manufacturing facility in Galesburg, Illinois, the closing of Maytag’s laundry facility in Florence, South Carolina and the exiting of other ancillary lines of business. All of this reserve relates to exit costs.

 

19




 

NOTE I — 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, supporting purchases from the Company, following its normal credit policies. In the event 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, 2006 and December 31, 2005, these amounts totaled $203 million and $236 million, respectively. The only recourse the Company has related to these agreements would be legal or administrative collection efforts directed against the customer.

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 $1.3 billion and $1.4 billion at September 30, 2006 and December 31, 2005, respectively. The Company’s total outstanding bank indebtedness, including credit facility amounts under guarantee, totaled $146 million and $79 million at September 30, 2006 and December 31, 2005, respectively.

At September 30, 2006, approximately $21 million of undrawn stand-by letters of credit under committed lines were outstanding, of which $8 million will expire in the fourth quarter of 2006. These letters of credit were issued by Maytag and assigned to Whirlpool as part of the merger.

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 during the nine months ended September 30, 2006:

(millions of dollars)

 

 

 

Balance, December 31, 2005

 

$

149

 

Acquisition

 

113

 

Warranties issued during the period

 

317

 

Settlements made during the period

 

(349

)

Other

 

 

Balance, September 30, 2006

 

$

230

 

 

 

 

 

Current portion

 

$

147

 

Non-current portion

 

83

 

Total

 

$

230

 

 

 

20




 

Commitments and Contingencies

In April 2006, the Company reorganized its Latin America business by merging Empresa Brasileira de Compressores S.A. into Multibras S.A. Eletrodomésticos and created two independent Business Units (“Embraco’s Compressor and Cooling Solutions Business Unit” and “Home Appliances Business Unit”). The Company changed the corporate name of Multibras to Whirlpool S.A. The reorganization received shareholder and regulatory approvals. The total cost to purchase shares from minority shareholders was approximately $53 million and is shown separately as a use of cash in the Investing Activities of Continuing Operations section of the Consolidated Condensed Statements of Cash Flows. The remaining minority shareholder ownership is now under 2%.

In 1989, a Brazilian affiliate (now a subsidiary) of the Company brought an action against a financial institution in Brazil seeking a “Declaration of Non-Enforceability of Obligations” relating to loan documentation entered into without authority by a senior officer of the affiliate. In September 2000, a decision in the declaratory action adverse to the Company became final. In 2001, the financial institution began a collection action and the Company responded with a counterclaim. The lower court dismissed the counterclaim in 2002 and the Superior Court confirmed the lower court decision in December 2005. The Company provided for the potential exposure resulting from this litigation during 2005 and no significant change in the status of this action has occurred.

Two purported national class action lawsuits have been filed against the Company, one in a Missouri state court and one in an Illinois state court, each alleging breach of warranty, fraud, and violation of state consumer protection acts in selling tall tub dishwashers. There are no allegations of any personal injury or property damage and the complaint seeks unspecified compensatory damages. The Company believes these suits are without merit, intends to vigorously defend these actions, and at this point cannot reasonably estimate a possible range of loss, if any.

The Company regularly engages in investigations of potential quality and safety issues as part of its ongoing effort to deliver quality products to its customers. Whirlpool is currently investigating a limited number of potential quality and potential safety issues that, in aggregate, potentially involve significantly less than 1% of the appliances it manufactures or markets, including appliances manufactured or marketed by Maytag. As necessary, the Company undertakes to effect repair or replacement of appliances in the event that an investigation leads to the conclusion that such action is warranted. The Company currently believes that no such repair or replacement actions of a material nature are required but will continue to evaluate this activity as new information develops .

The Company is involved in various other 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.

 

21




 

NOTE J — 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, 2006 and 2005 are indicated below.  As previously disclosed, Whirlpool acquired Maytag on March 31, 2006, and the pension and postretirement net periodic cost has been reflected from that date forward.

 

 

Three months ended September 30

 

 

 

U.S. Pension Benefits

 

Foreign Plans

 

Other Benefits

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

(millions of dollars)

 

 

 

Service cost

 

$

22.1

 

$

20.9

 

$

3.2

 

$

3.1

 

$

6.0

 

$

3.8

 

Interest cost

 

56.0

 

28.2

 

4.3

 

4.3

 

21.3

 

9.0

 

Expected return on plan assets

 

(62.7

)

(38.4

)

(1.8

)

(1.8

)

 

 

Amortization of transition obligation

 

 

 

0.2

 

0.2

 

 

 

Amortization of prior service cost

 

2.2

 

2.3

 

 

0.1

 

(2.0

)

(1.8

)

Amortization of net loss

 

6.7

 

3.5

 

0.5

 

0.2

 

3.0

 

3.6

 

Curtailments

 

15.0

 

 

 

 

 

 

Net periodic cost

 

$

39.3

 

$

16.5

 

$

6.4

 

$

6.1

 

$

28.3

 

$

14.6

 

 

 

 

 

Nine months ended September 30

 

 

 

U.S. Pension Benefits

 

Foreign Plans

 

Other Benefits

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

(millions of dollars)

 

 

 

Service cost

 

$

60.3

 

$

62.7

 

$

9.5

 

$

9.3

 

$

15.6

 

$

11.4

 

Interest cost

 

141.1

 

84.5

 

12.6

 

12.8

 

52.4

 

27.0

 

Expected return on plan assets

 

(161.4

)

(115.2

)

(5.4

)

(5.2

)

 

 

Amortization of transition obligation

 

 

 

0.6

 

0.6

 

0.1

 

 

Amortization of prior service cost

 

6.6

 

6.9

 

0.2

 

0.3

 

(6.1

)

(5.4

)

Amortization of net loss

 

20.1

 

10.5

 

1.5

 

0.7

 

10.3

 

10.8

 

Curtailments

 

15.0

 

 

 

 

 

 

Settlements

 

 

 

 

(2.3

)

 

 

Net periodic cost

 

$

81.7

 

$

49.4

 

$

19.0

 

$

16.2

 

$

72.3

 

$

43.8

 

 

Employer Contributions

Employer Contributions — millions of dollars

 

U.S. Pension

 

Foreign Pension

 

2006 (expected)

 

$

55

 

$

23

 

 

22




 

The Company expects to contribute a total of $55 million to the U.S. pension plans during 2006 which represents the sum of $4 million of expected benefit payments from corporate cash for the unfunded pension plans and voluntary contributions of $51 million to funded pension plans. The Company made the voluntary contribution of $51 million to Maytag’s funded pension plan during the third quarter, and has paid approximately $3 million of expected benefit payments from corporate cash to the Whirlpool unfunded pension plans in the year to date period.

There have been no changes to the previously disclosed expected contributions to the Company’s foreign pension plans.

The Company remeasured the net periodic cost and funded status of the Whirlpool Employees Pension Plan (the “WEPP”) at January 1, 2005 to reflect a plan amendment which 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 WEPP will be amended to cease benefit accruals for the majority of participants effective January 1, 2007.  For employees who are eligible to retire before January 1, 2010, the plan will be amended to continue previous plan benefit accruals through the earlier of the date of retirement or January 1, 2010.  A defined contribution plan will be provided to affected employees subsequent to the plan amendment.  As a result of this change, the Company recognized a curtailment charge for prior service costs of approximately $15 million in the third quarter of 2006.

NOTE K — INCOME TAXES

The effective income tax rate was approximately 25.2% for the quarter and 26.4% for the year to date period versus 32.5% in the year ago quarter and 32.0% in the prior year to date period.  The reduction results from a combination of the dispersion of global income, global audit settlements, increased tax credits and global planning activities.  At the end of each interim period, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and adjusts the quarterly rate, as necessary.

 

23




 

NOTE L — COMPREHENSIVE INCOME

A summary of increase (decreases) in stockholders’ equity, net of income taxes, which did not result directly from transactions with stockholders follows:

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

(millions of dollars)

 

 

 

Net earnings

 

$

117

 

$

114

 

$

324

 

$

296

 

Currency translation adjustments — net

 

24

 

37

 

111

 

13

 

Cash flow hedges — net

 

(14

)

16

 

38

 

22

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

127

 

$

167

 

$

473

 

$

331

 

 

NOTE M — 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 chief operating decision maker evaluates performance based upon each segment’s operating income, which is defined as income before interest income and sundry, interest expense, taxes and minority interests, and before one-time charges.  In 2006 and 2005, these one-time charges primarily consisted of restructuring and other related charges.  Total assets by segment are those assets directly associated with the respective operating activities.  The Company has included in its geographic information the recently acquired Maytag assets and results of operations as of and for the quarter ended September 30, 2006.  The Maytag geographic information has been included in the North America, Europe, and Asia segments.  The “Other/Eliminations” column primarily includes corporate expenses, assets and eliminations, as well as all other one-time charges and discontinued operations.  Intersegment sales are eliminated within each region with the exception of compressor sales out of Latin America, which are included in Other/Eliminations.

 

24




 

As described above, the Company’s chief operating decision maker reviews each operating segment’s performance based on operating income excluding one-time charges.  These charges are included in operating profit on a consolidated basis and included in the Other/Eliminations column in the table below.  For the three and nine months ended September 30, 2006, the North America operating segment incurred approximately $0 million and $16 million, the Europe operating segment incurred approximately $5 million and $13 million, the Latin America operating segment incurred approximately $1 million and $5 million, and the Asia operating segment incurred approximately $1 million and $6 million of restructuring charges.  For the three and nine months ended September 30, 2005, the North America operating segment incurred approximately $0 million and $1 million, the Europe operating segment incurred approximately $11 million and $21 million, and the Latin America operating segment incurred approximately $1 million and $4 million of restructuring charges, respectively.

(millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

North

 

 

 

Latin

 

 

 

Other/

 

 

 

Ended September 30

 

America

 

Europe

 

America

 

Asia

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

3,297

 

$

887

 

$

590

 

$

104

 

$

(35

)

$

4,843

 

2005

 

$

2,280

 

$

811

 

$

446

 

$

95

 

$

(33

)

$

3,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment sales

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

19

 

$

129

 

$

34

 

$

74

 

$

(256

)

$

 

2005

 

$

16

 

$

122

 

$

33

 

$

55

 

$

(226

)

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

95

 

$

27

 

$

18

 

$

4

 

$

8

 

$

152

 

2005

 

$

51

 

$

23

 

$

26

 

$

4

 

$

6

 

$

110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

195

 

$

61

 

$

51

 

$

(1

)

$

(81

)

$

225

 

2005

 

$

212

 

$

48

 

$

15

 

$

(5

)

$

(68

)

$

202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2006

 

$

8,784

 

$

2,787

 

$

1,853

 

$

575

 

$

(53

)

$

13,946

 

December 31, 2005

 

$

3,798

 

$

2,650

 

$

1,748

 

$

530

 

$

(425

)

$

8,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

73

 

$

27

 

$

18

 

$

4

 

$

6

 

$

128

 

2005

 

$

65

 

$

20

 

$

30

 

$

2

 

$

3

 

$

120

 

 

 

25




 

(millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months

 

North

 

 

 

Latin

 

 

 

Other/

 

 

 

Ended September 30

 

America

 

Europe

 

America

 

Asia

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales