UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20062009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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 North M-63, Benton Harbor, Michigan | 49022-2692 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (269) 923-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common stock, par value $1.00 per share | Chicago Stock Exchange and New York Stock Exchange | |
| ||
7 3/4% Debentures due 2016 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yesx No¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes¨ Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes¨ No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, or an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (check(Check one)
Large Accelerated Filerx | Accelerated Filer¨ | |||
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
The aggregate market value of the voting stock of the registrant held by stockholders not including voting stock held by directors and executive officers of the registrant and certain employee plans of the registrant (the exclusion of such shares shall not be deemed an admission by the registrant that any such person is an affiliate of the registrant) at the close of business on June 30, 20062009 (the last business day of the registrant’s most recently completed second fiscal quarter) was $6,318,461,454.
$3,019,566,403.
On February 22, 2007,12, 2010, the registrant had 78,697,78774,805,277 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated:
Document | Part of Form 10-K into which incorporated | |
The registrant’s proxy statement for the | Part III |
PART I
ITEM 1. BusinessBusiness..
Whirlpool Corporation, the world’s leading manufacturer and marketer of major home appliances, was incorporated in 1955 under the laws of Delaware as the successor to a business that traces its origin to 1898. Whirlpool manufactures products in 12 countries under 1413 principal brand names and markets products in nearly every country around the world. Whirlpool’s geographic segments consist of North America, Europe, Latin America, and Asia. As of December 31, 2006,2009, we had approximately 73,00067,000 employees.
As used herein, and except where the context otherwise requires, “Whirlpool,” “we,” “us,” and “our” refer to Whirlpool Corporation and its consolidated subsidiaries.
Products and Markets
Whirlpool manufactures and markets a full line of major appliances and related products, primarily for home use. Our principal products are laundry appliances, refrigerators, and freezers, cooking appliances, dishwashers, room air-conditioning equipment, and mixers and other small household appliances. We also produce hermetic compressors for refrigeration systems.
For each class of products which accounted for 10% or more of our consolidated net sales over the last three years, the following table lists the total net sales of each class.
Percent in 2006 | Year ended December 31 (millions of dollars) | ||||||||||
Class of Similar Products | 2006 | 2005 | 2004 | ||||||||
Home Laundry Appliances | 30% | $ | 5,474 | $ | 4,425 | $ | 4,070 | ||||
Home Refrigerators and Freezers | 30% | $ | 5,341 | $ | 4,506 | $ | 3,879 | ||||
Home Cooking Appliances | 16% | $ | 2,909 | $ | 2,186 | $ | 2,021 | ||||
Other | 24% | $ | 4,356 | $ | 3,200 | $ | 3,250 | ||||
Net Sales | 100% | $ | 18,080 | $ | 14,317 | $ | 13,220 | ||||
Percent in 2009 | Year ended December 31 (millions of dollars) | ||||||||||
Class of Similar Products | 2009 | 2008 | 2007 | ||||||||
Home Laundry Appliances | 31% | $ | 5,345 | $ | 5,760 | $ | 5,678 | ||||
Home Refrigerators and Freezers | 30% | 5,200 | 5,825 | 5,833 | |||||||
Home Cooking Appliances | 17% | 2,809 | 3,128 | 2,995 | |||||||
Other | 22% | 3,745 | 4,194 | 4,902 | |||||||
Net Sales | 100% | $ | 17,099 | $ | 18,907 | $ | 19,408 | ||||
In North America, Whirlpool markets and distributes major home appliances and portable appliances under a variety of brand names. In the United States, we market and distribute products primarily under theWhirlpool,Maytag,KitchenAid,Jenn-Air,Roper,Estate,Admiral,Magic Chef,Amana, andInglis brand names primarily to retailers, distributors, and builders. In Canada, we market and distribute major home appliances primarily under theInglis,Admiral,Whirlpool,Maytag,Jenn-Air,Magic Chef,Amana,Roper, Estate, andKitchenAid brand names. In Mexico, we market and distribute major home appliances primarily under theWhirlpool,Maytag,Jenn-Air,Acros,KitchenAid,Estate,Roper, andSupermaticbrand names. We sell some products to other manufacturers, distributors, and retailers for resale in North America under those manufacturers’ and retailers’ respective brand names. We have manufacturing facilities in the United States and Mexico.
Whirlpool is a major supplier to Sears of laundry, refrigerator, dishwasher, and trash compactor home appliances. Sears markets some of the products that we supply to them under itsKenmore brand name. Sears is also a major outlet for ourWhirlpool,Maytag,KitchenAid, Jenn-Air,and Amanabrand products. In 2006,2009, 2008 and 2007, approximately 14%10%, 11% and 12%, respectively, of our consolidated net sales were attributable to sales to Sears. More information regarding Whirlpool’s relationship with Sears can be found under the caption “Forward-Looking Perspective” in the “Management’s Discussion and Analysis” contained in the Financial Supplement to this Report.
In Whirlpool’s European region,Europe, we market and distribute our major home appliances primarily under theWhirlpool,Maytag,Amana,Bauknecht,Ignis,Laden, andPolar brand names, and major and portable appliances under theKitchenAid brand name. In addition to our extensive operations in Western Europe, we have sales subsidiaries in
2
Russia, Ukraine, Hungary, Poland, the Czech Republic, Slovakia, Greece, Romania, Bulgaria, Latvia, Estonia, Lithuania, Croatia, Morocco, and Turkey, with representative offices in Ukraine, Kazakhstan, Slovenia, and Serbia and Montenegro. Whirlpool markets a full line of products under theWhirlpool,KIC, andIgnis brand names in South Africa.
Africa. Whirlpool’s European operations also sell products carrying theWhirlpool,Bauknecht, andIgnis brand names to distributors and dealers in Africa and the Middle East. Whirlpool has manufacturing facilities in France, Germany, Italy, Poland, Slovakia, South Africa, and Sweden.
In Latin America, we market and distribute our major home appliances primarily under theWhirlpool,Maytag,KitchenAid,Brastemp,Consul, andEslabon de Lujo brand names. We manage appliance sales and distribution in Brazil, Argentina, Chile, and Peru through our Brazilian subsidiary, and in Bolivia, Paraguay, and Uruguay through our distributors. We manage appliance sales and distribution in Central American countries, the Caribbean, Venezuela, Colombia, Guatemala, and Ecuador through Whirlpool’s North America southern regionour Brazilian subsidiary and through distributors. In Latin America, Whirlpool has manufacturing facilities in Brazil.
In Asia, Whirlpool haswe have organized the marketing and distribution of itsour major home appliances into five operating groups: (1) China, which includes mainland China; (2) Hong Kong and Taiwan; (3) India, which includes Bangladesh, Sri Lanka, Nepal, and Nepal;Pakistan; (4) Oceania, which includes Australia, New Zealand, and Pacific Islands; and (5) Southeast Asia, which includes Thailand, Singapore, Malaysia, Indonesia, Vietnam, the Philippines, Korea, and Japan. We market and sell our products in Asia primarily under theWhirlpool,Maytag,KitchenAid,Bauknecht,Amana,andIgnisJenn-Airbrand names by a combination of direct sales to appliance retailers and chain stores and through full-service distributors to a large network of retail stores. In Asia, Whirlpool haswe have manufacturing facilities in China and India.
Competition
Competition in the home appliance industry is intense. In addition to traditional competitors such as Electrolux, GE,General Electric, and Kenmore, there are new and expanding foreign competitors such as LG, Bosch Siemens, 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. In most major markets throughout the world, 20062009 was a challenging year for the industry with continued risinghigh costs in the areas of metals and oil-based materials, such as resins,resins. In addition, in 2008 and transportation.2009 we experienced significant macroeconomic challenges including instability in the financial markets. These challenges have impacted the global economy, the capital markets and global demand for our products. Competition in our markets is based upon a wide variety of factors, including cost, selling price, distribution, performance, innovation, product features, energy efficiency, quality, and other financial incentives. These financial incentives include cooperative advertising, co-marketing funds, sales personsalesperson incentives, volume rebates, and terms. We believe that we can best compete in the current environment by increasing productivity, improving quality, lowering costs, focusing on research and development including introducing new products through innovation, building strong brands, enhancing trade customer and consumer value with our product offerings, continuing to expand our global footprint, expanding trade distribution channels, and taking other efficiency-enhancing measures.
Other Information
Whirlpool isWe are generally not dependent upon any one source for raw materials or purchased components essential to itsour business. In areas where a single supplier is used, alternative sources are generally available and can be developed within the normal manufacturing environment. Some unanticipated costs may be incurred in transitioning to a new supplier if a prior single supplier relationship was abruptly interrupted or terminated. There has been continued significant cost pressure in some areas, such as metals and oil-based materials, and significant demand for certain components.during most of the year. In the later part of the year, costs in most of these areas started to show signs of relief, but remain at elevated levels. We believe such raw materials and components will be available in adequate quantities to meet anticipated production schedules.
3
The patents we presently own are considered, in the aggregate, to be valuable. Also, Whirlpool is the owner of a number of trademarks in the U.S. and foreign countries. The most important trademarks that we own in North America areWhirlpool,Maytag,KitchenAid,Estate,Roper,Admiral,Amana,Jenn-Air,Magic Chef, andAcros. The most important trademarks that we own in Europe areWhirlpool,Bauknecht, andIgnis. In Latin America, the most important trademarks that we own areWhirlpool,Brastemp, andConsul. The most important trademark that we own in Asia isWhirlpool. Whirlpool also receivesWe receive royalties from licensing itsour trademarks to
third parties to sell and service certain products bearing theWhirlpool, Maytag, KitchenAid, Jenn-Air, Admiral, Amana,and Magic Chefbrand names.
Expenditures for Whirlpool-sponsored research and development relating to new products and the improvement of existing products were approximately $428$455 million in 2006, $3392009, $436 million in 2005,2008, and $315$421 million in 2004.2007.
Whirlpool’sOur manufacturing facilities are subject to numerous laws and regulations designed to protect or enhance the environment, many of which require federal, state, or other governmental licenses and permits with regard to wastewater discharges, air emissions, and hazardous waste management. Our policy is to comply with all such laws and regulations. Where laws and regulations are less restrictive, we have established and are following our own standards consistent with our commitment to environmental responsibility.
We believe that we are in compliance in all material respects with all presently applicable federal, state, local, and other governmental provisions relating to environmental protection in the countries in which we have manufacturing operations. Compliance with these environmental laws and regulations has not had a material effect on capital expenditures, earnings, or our competitive position. Capital expenditures and expenses for manufacturing operations directly attributable to compliance with these environmental provisions worldwide amounted to approximately $33$29 million in 2006, $282009, $31 million in 2005,2008 and $28 million in 2004.2007. We estimate that in 2007,2010, environmental capital expenditures and expenses for manufacturing operations will be approximately $27$29 million. Capital expenditures and expenses for product related environmental activities were not material in any of the past three years and are not expected to be material in 2007.
2010.
The entire major home appliance industry, including Whirlpool, must contend with the adoption of stricter governmental energy and environmental standards. These standards will be phased in over the next several years and include the general phase-out of ozone depleting chemicals used in refrigeration, energy standards rulemakings for selected major appliances, regulatory restrictions on the materials content specified for use in our products by some jurisdictions, and mandated recycling of our products at the end of their useful lives. Compliance with these various standards, as they become effective, will require some product redesign. However, we believe, based on our understanding of the current state of proposed regulations, that we shouldwill be able to develop, manufacture, and market products that comply with these regulations.
Additionally, on February 13, 2003, the Waste Electrical and Electronic Equipment Directive (“WEEE”) became law in the European Union. Among other provisions, WEEE stipulates that “producers” be responsible for the cost of collection, disposal, and recycling of waste 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. In states that have adopted legislation, we have complied with all requirements. The net impact of compliance with this directive did not have a material effect on our results of operations for the year ended December 31, 2006.
State and federal environmental protection agencies have notified us of our possible involvement in a number of “Superfund” sites in the United States. However, based upon our evaluation of the facts and circumstances relating to these sites along with the evaluation of our technical consultants, we do not presently anticipate any material adverse effect upon our earnings, financial condition, or competitive position arising out of the resolution of these matters or the resolution of any other known governmental proceeding regarding environmental protection matters.
For information about the challenges and risks associated with our foreign operations, see “Risks Relating to ourOur Business” under Item 1A below.
For certain other financial information concerning our business segments and foreign and domestic operations, see Notes 1 and 17 to the Consolidated Financial Statements contained in the Financial Supplement to this report.
For information on our global restructuring plans, see Note 13 to the Consolidated Financial Statements contained in the Financial Supplement to this report.
4
For information on product recalls,our global restructuring plans, and the impact of these plans on our operating segments, see Note 14Notes 10 and 13 to the Consolidated Financial Statements contained in the Financial Supplement to this report.
For information on product recalls, see Note 6 to the Consolidated Financial Statements contained in the Financial Supplement to this report.
Maytag Acquisition
On March 31, 2006, we completed our acquisition of Maytag. The aggregate purchase price for Maytag was approximately $1.9 billion, including approximately $848 million of cash and approximately 9.7 million shares of Whirlpool common stock. Maytag had consolidated net sales for the year ended December 31, 2005 of approximately $4.9 billion. With the acquisition, Whirlpool addsadded an array of home appliance brands includingMaytag,,Jenn-Air, Admiral,Amana, Magic Chef,andAmanaAdmiral. We are realizing 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 Whirlpool common stock. The purchase price also included the exchange of fully-vested Whirlpool options for fully-vested Maytag options to become exercisable, in aggregate, for an additional 1.8 million shares of Whirlpool 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 Whirlpool common stock was determined using the average market price of the Whirlpool 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, we assumed Maytag’s existing debt of approximately $973 million. We incurred approximately $102 million in acquisition-related expenses, which are included in the purchase price above. Initially, we 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.
On May 23, 2006, we announced our intention to sell the Hoover floor-care, Dixie-Narco vending systems, Amana commercial microwave ovens, and Jade commercial and residential products businesses.
On September 6, 2006,2007, we completed the sale of the Amana commercial microwave oven business to Aga Foodservice Inc. for approximately $49 million. Asall Maytag adjacent businesses which were not part of the sale, we retained certain liabilities, including liabilities associated with pension plans for both active and retired employees accrued to the date of the sale.core appliance business.
On October 23, 2006, we completed the sale of the Dixie-Narco vending systems business to Crane Co. for approximately $46 million. As part of the sale of Dixie-Narco, we retained certain liabilities, including environmental liabilities and liabilities associated with pension plans for both active and retired employees accrued to the date of the sale.
On December 6, 2006, we entered into a definitive agreement to sell the Hoover floor-care business to Techtronic Industries Co. Ltd. (TTI) for approximately $107 million. The sale closed on January 31, 2007. As part of the sale, we retained certain liabilities, including liabilities associated with pension plans for pension benefits for both active and retired employees accrued to the date of the sale and postretirement medical benefits for currently retired Hoover employees.
On February 17, 2007, we entered into a definitive agreement to sell the Jade commercial and residential products businesses to Middleby Corporation. The sale is expected to be completed in the second quarter of 2007.
Executive Officers of the Registrant
The following table sets forth the names and ages of our executive officers on December 31, 2006,February 10, 2010, the positions and offices they held on that date, and the year they first became executive officers:
Name | Office | First Became an Executive | Age | |||
Jeff M. Fettig | Director, Chairman of the Board and Chief Executive Officer | 1994 | 49 | |||
David L. Swift | Director and President, Whirlpool North America | 2001 | 48 | |||
Michael A. Todman | Director and President, Whirlpool International | 2001 | 49 | |||
Marc R. Bitzer | Executive Vice President and President, Whirlpool Europe | 2006 | 41 | |||
Mark K. Hu | Executive Vice President and President, Whirlpool Asia | 2005 | 53 | |||
Paulo F. M. Periquito | Executive Vice President and President, Whirlpool Latin America | 1997 | 60 | |||
Roy W. Templin | Executive Vice President and Chief Financial Officer | 2004 | 46 | |||
Michael D. Thieneman | Executive Vice President and Chief Technology Officer | 1997 | 58 | |||
W. Timothy Yaggi | Executive Vice President, Market Operations, North America | 2006 | 46 |
Name | Office | First Became an Executive Officer | Age | |||
Jeff M. Fettig | Director, Chairman of the Board and Chief Executive Officer | 1994 | 52 | |||
Michael A. Todman | Director and President, Whirlpool International | 2001 | 52 | |||
Marc R. Bitzer | President, Whirlpool North America | 2006 | 45 | |||
Bracken Darrell | Executive Vice President and President, Whirlpool Europe | 2009 | 47 | |||
Jose A. Drummond | Executive Vice President and President, Whirlpool S.A. | 2008 | 45 | |||
David T. Szczupak | Executive Vice President, Global Product Organization | 2008 | 54 | |||
Roy W. Templin | Executive Vice President and Chief Financial Officer | 2004 | 49 |
Each of the executive officers named above was elected to serve in the office indicated until the first meeting of the Board of Directors following the annual meeting of stockholders in 20072010 and until his successor is chosen and qualified or until his earlier resignation or removal. Each of our executive officers has held the position set forth in the table above or has served Whirlpool in various executive or administrative capacities for at least the past five years, except for (a) Mr. Templin, who,Szczupak and Mr. Darrell. Prior to joining Whirlpool in July of 2008, Mr. Szczupak for the previous two years served as Chief Operating Officer of Dura Automotive Systems, Inc. and before joining Dura in 2006, worked for Ford Motor Company for 22 years in various leadership roles. Mr. Darrell, prior to joining Whirlpool in July 2003,September 2008, for the previous 12six years held various financial and executive positions with Kimball International, Inc. (office furniture),The Procter & Gamble Company, the most recent being Vice President Finance and Chief Accounting Officer, and (b) Mr. Hu, who, prior to joining Whirlpool in January 2004, for the previous seven years held various executive or administrative positions with Philips Electronics N.V., the most recent being Senior Vice President and General Manager, Philips Lighting East Asia.of Braun, a Procter & Gamble division.
5
Available Information
Financial results and investor information (including Whirlpool’s Form 10-K, 10-Q, and 8-K reports) are accessible at Whirlpool’s website:www.whirlpoolcorp.com—click on the “Investors” tab and then click on “SEC Filings.” Copies of Whirlpool’sour Form 10-K, 10-Q, and 8-K reports, as well as amendments to them, are available free of charge through Whirlpool’sour website on the same day they are filed with, or furnished to, the Securities and Exchange Commission.
ITEM 1A.1A. Risk Factors.
This report contains statements referring to Whirlpool that are not historical facts and are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, are based on current projections about operations, industry conditions, financial condition liquidity, and the impact of the acquisition of Maytag.liquidity. Words that identify forward-looking statements include words such as “may,” “will,” “should,” “plan,” “predict,” “potential,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “believe,” “may impact,” “on track,” and words and terms of similar substance used in
connection with any discussion of future operating or financial performance, a merger, or our businesses. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Those statements are not guarantees and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
Risks Relating to Our Business
Changes in economic conditions could adversely affect demand for our products. A number of economic factors, including, but not limited to, gross domestic product, availability of consumer credit, interest rates, consumer confidence and debt levels, retail trends, housing starts, sales of existing homes, the level of mortgage refinancing and defaults, and foreign currency exchange rates, generally affect demand for our products. Higher unemployment rates, higher fuel and other energy costs, and higher tax rates adversely affect demand. The decline in economic activity and conditions in the United States and the other markets in which we operate has, and may continue to, adversely affect our financial condition and results of operations for the foreseeable future.
The global financial crisis could adversely affect our business and financial performance.The ongoing global financial crisis has tightened credit markets and lowered liquidity levels. Lower credit availability may increase borrowing costs. Some of our suppliers are experiencing serious financial problems due to reduced access to credit and lower revenues. Financial duress may prompt some of our suppliers to seek to renegotiate supply terms with us, reduce production or file for bankruptcy protection. Our customers may be unable to obtain financing to purchase products and meet their payment obligations to us. In addition, the financial crisis could result in the insolvency of one or more of our customers. The occurrence of any or all of these events may adversely affect our operations, earnings, cash flows and/or financial position.
The loss of or substantial decline in sales to any of our key trade customers, which include Sears, Lowe’s, Home Depot, Casas Bahia, Best Buy, Ikea, major buying groups, and builders, could adversely affect our financial performance. We sell to a sophisticated customer base of large trade customers that have significant leverage as buyers over their suppliers. Most of our products are not sold through long-term contracts, which facilitates the trade customers’ ability to change volume among suppliers. As the trade customers continue to become larger, they may seek to use their position to improve their profitability by various means, including improved efficiency, lower pricing, and increased promotional programs. If we are unable to meet their requirements, our volume growth and financial results could be negatively affected. The loss of, or substantial
6
decline in volume of, sales to Sears, Lowe’s, Home Depot, Casas Bahia, Best Buy, Ikea, major buying groups or builders, or any other trade customers to which we sell a significant amount of products, could adversely affect our financial performance. Additionally, if these trade customers lose market share, this loss could negatively impact our financial performance.
We face intense competition in the home appliance industry and failure to successfully compete may negatively affect our business and financial performance. Each of our businessoperating segments operates in a highly competitive business environment and faces intense competition from a growing number of competitors, many of which have strong consumer brand equity. Several of these competitors, such as Electrolux, LG, Samsung, and Bosch Siemens and General Electric are large, well-established companies that rank among the Global Fortune 150 and have demonstrated a commitment to success in the global market. Competition in the global market is based on a number of factors including performance, innovation, product features and design, energy efficiency, quality, cost, selling price, distribution, and financial incentives, such as cooperative advertising, co-marketing funds, sales person incentives, volume rebates, and terms. In the past, our competitors, especially global competitors with low-cost sources of supply outside the United States, have aggressively priced their products and/or introduced new products in order to increase market share. If we are unable to successfully compete in this highly competitive environment, our business and financial performance could be negatively affected.
The loss of or decline in sales to any of our key trade customers, which include Sears, Lowe’s, Home Depot, and Best Buy, could adverselyForeign currency fluctuations may affect our financial performance. We sell togenerate a sophisticated customer base of powerful trade customers that have significant leverage as buyers over their suppliers. Mostportion of our products are sold through purchase ordersrevenue and not through long-term contracts, which facilitates the trade customers’ ability to change volume among suppliers to obtain competitive terms. As the trade customers continue to consolidate and become larger, our trade customers may seek to use their position to improve their profitability by various means, including, improved efficiency, lower pricing, and increased promotional programs. If we are unable to respond and meet their requirements, our profitability or volume growth could be negatively affected. We have beenincur a principal supplier of home appliances to Sears for many years. In 2006, approximately 14%significant portion of our consolidated net salesexpenses in currencies other than the U.S. dollar. Changes in the exchange rates of $18 billion were attributable to sales to Sears. Although no other customers accounted for greater than 10%functional currencies of consolidated net sales in 2006, other customers may account for more than 10%those operations affect the U.S. dollar value of our consolidated net salesrevenue and earnings from our foreign operations. Recent extreme volatility in future periods. The loss of, or decline in volume of, salesthe foreign exchange markets has increased our risk. We use currency forwards and options to Sears, Lowe’s, Home Depot, Best Buy or any other trade customersmanage our foreign currency transaction exposures. We cannot completely eliminate our exposure to foreign currency fluctuations, which we sell a significant amount of products couldmay adversely affect our financial performance. Additionally,In addition, because our consolidated financial results are reported in dollars, if these trade customers lose market sharewe generate sales or earnings in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings.
Product liability or product recall costs could adversely affect our business and financial performance. We are subject to the risk of exposure to product liability and product recall claims if any of our products are alleged to have resulted in injury to persons or damage to property. In the event that any of our products prove to be defective, we may need to recall and/or redesign such products. In addition, any claim or product recall that results in significant adverse publicity may negatively affect our business, financial condition, or results of operations. We do maintain product liability insurance, but this lossinsurance may not be adequate to cover losses related to product liability claims brought against us. We may also be involved in certain class action litigation, for which no insurance is available. Product liability insurance could negativelybecome more expensive and difficult to maintain and may not be available on commercially reasonable terms, if at all. In addition, we do not maintain any product recall insurance, so any product recall we are required to initiate could have a significant impact on our financial position, results of operations and/or cash flows.
We regularly engage in investigations of potential quality and safety issues as part of our ongoing effort to deliver quality products to our customers. We are currently investigating a limited number of potential quality and safety issues, and as necessary, we undertake to effect repair or replacement of appliances. Actual costs of these issues and any future issues depend upon several factors, including the number of consumers who respond to a particular recall, repair and administrative costs, whether the cost of any corrective action is borne initially by Whirlpool or the supplier, and, if initially borne by Whirlpool, whether we will be successful in recovering our costs from the supplier. The actual costs incurred as a result of these issues and any future issues could have a material adverse effect on our business, financial condition or results of operations.
Unfavorable results of legal proceedings could materially adversely affect our business and financial performance. We are subject to a variety of litigation and legal compliance risks, including litigation concerning product defects, intellectual property rights, taxes, environmental matters, commercial matters and compliance
Whirlpool7
with competition laws and sales and trading practices. Results of legal proceedings cannot be predicted with certainty. Regardless of merit, litigation may be unableboth time-consuming and disruptive to successfully integrateour operations and cause significant expense and diversion of management attention. We estimate loss contingencies and establish reserves as required by generally accepted accounting principles based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the business of Maytagfacts and circumstances known to us at a particular point in a timely manner whichtime. Subsequent developments in legal proceedings may affect our ability to realize the full anticipated benefitsassessment and estimates of the merger. The recent acquisition of Maytag involves the integration of two companies that have previously operated independently. As with every merger, there are potential difficulties of combining the companies’ businesses. These difficulties may include the integration of Maytag’s salesloss contingency recorded and marketing, distribution, manufacturing, engineering, finance, and administrative operations, both domestic and international, with and into our operations. Our process of integrating operations could cause an interruption of, or loss of momentumresult in the activities of one or more of the combined businesses and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on our business, results of operations financial condition, or prospects after the merger.
We expect to generate pre-tax annualized cost savings of between $350-400 million, the majority of which is expected to be realized in 2007 with the remainder expected to be realized in 2008. We expect cost efficiencies from all areas of the value chain, including product engineering, manufacturing and marketing, infrastructure and
support areas, global procurement, and logistics. We expect to incur approximately $410 million in pre-tax, one-time costs to realize the annualized savings estimates. Approximately $150 million of these costs are expected to impact earnings between 2006 through 2008, with the remainder included as part of purchase accounting. Achieving these benefits will depend upon how and when our business is integrated with Maytag and whether we incur any additional costs in connection with the integration. If the anticipated benefits are not realized fully, or not realized in a timely manner, or if there are significant additional costs, these occurrences could adversely affect our financial results.
Changes in economic conditions could adversely affect our business. A number of economic factors, including, but not limited to, gross domestic product, consumer interest rates, consumer confidence, retail trends, housing starts, sales of existing homes, and the level of mortgage refinancing, generally affect demand for our products. A decline in economic activity in the United States and any other marketsperiod in which we operate could adversely affecta liability would be recognized or cash flows for the period in which amounts would be paid. Actual results may significantly vary from our financial condition and results of operation.
estimates.
An inability to effectively execute and manage our business objectives could adversely affect our financial performance. The highly competitive nature of our industry requires that we effectively execute and manage our business including our global operating platform initiative. ThisOur global operating platform initiative aims to reduce costs, drive productivity and quality improvements, and accelerate our rate of innovation. Our inability to effectively control costs and drive productivity improvements could affect our profits. In addition, our failure to provide high-quality, innovative products could adversely affect our ability to maintain or increase our sales. If we failed in this way, it could negatively affect our revenues and overall financial performance. Additionally, our success is dependent on anticipating changes in customer preferences and on successful new product and process development and product relaunches in response to such changes. Our future results and our ability to maintain or improve our competitive position will depend on our capacity to gauge the direction of our key markets and upon our ability to successfully and timely identify, develop, manufacture, market, and sell new or improved products in these changing markets.
We face inventory and other asset risk. We record a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value. We also review our long-lived assets for impairment whenever events or changed circumstances indicate the carrying amount of an asset may not be recoverable. If we determine that impairment has occurred, we record a write-down equal to the amount by which the carrying value of the asset exceeds its fair market value. Although we believe our inventory and other asset related provisions are currently adequate, no assurance can be given that, given the unpredictable pace of product obsolescence, we will not incur additional inventory or asset related charges. Such charges could materially adversely affect our financial condition and operating results.
Fluctuations and volatility in the cost of raw materials and purchased components could adversely affect our profits. The primary materials used to produce and manufacture our products are steel, oil, plastic resins, and base metals, such as aluminum, copper, zinc, and zinc.nickel. On a global and regional basis, the sources and prices of those materials and components are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate, and other unforeseen circumstances. Prices for materials areMaterial cost inflation is expected to increase bybe approximately $400$200 to $300 million in 2007,2010, largely driven by increases in base metals, such as copper, aluminum, zinc and nickel, as well as component parts and steel. Continued significant increases in these and other costs in the future could materially affect our profits.
The ability of suppliers to deliver parts, components and manufacturing equipment to our manufacturing facilities, including our ability to manufacture without disruption, could affect our global business performance. We use a wide range of materials and components in the global production of our products and use numerous suppliers to provide materials and components. WeBecause we generally do not have guaranteed supply arrangements with our suppliers and some key parts may be available only from a single supplier or a limited group of suppliers, we are subject to supply and pricing risks. In addition, certain proprietary component parts used in some of our products are provided by single-source unaffiliated third-party suppliers. We would be unable to obtain these proprietary component parts for an indeterminate period of time if these single-source suppliers were to cease or interrupt production or otherwise fail to supply these components to us, which could adversely affect our product sales and operating results. Our operations and operations at suppliers’ facilities are
8
subject to disruption for a variety of reasons, including, but not limited to, work stoppages, fire, earthquake, flooding, or other natural disasters. Such disruption could interrupt our ability to manufacture certain products. Any significant disruption could negatively impact our revenue and earnings performance.
Significant differences between actual results and estimates of the amount of future funding for our pension plans and postretirement health care benefit programs, and significant changes in funding assumptions or significant increases in funding obligations due to regulatory changes, could adversely affect our financial results. We have both funded and unfunded noncontributory defined benefit pension plans that cover substantially allmost of our North American employees and certain foreign employees. We also have unfunded
postretirement health care benefit plans for eligible retired employees. The Employee Retirement Income Security Act of 1974 (ERISA) governs, the Pension Protection Act and the Internal Revenue Code govern the funding obligations for our U.S. pension plans, which are our principal pension plans.
Our U.S. defined benefit plans were frozen as of December 31, 2006 for substantially all participants. For 2007 and beyond, Whirlpool employees may participate in an enhanced defined contribution plan.
As of December 31, 2006,2009, our projected benefit obligations under our pension plans and postretirement health care benefit programs exceeded the fair value of plan assets by an aggregate of approximately $2.19 billion$2,329 million ($8501,568 million of which was attributable to pension plans and $1.34 billion$761 million of which was attributable to postretirement health care benefits). Estimates for the amount and timing of the future funding obligations of these pension plans and postretirement health care benefit plans are based on various assumptions. These assumptions include the discount rates, expected long-term rate of return on plan assets, and health care cost trend rates. These assumptions are subject to change based on changes in interest rates on high quality bonds, stock and bond market returns, and health care cost trend rates. Significant differences in results or significant changes in assumptions may materially affect our postretirement obligations and related future expense.
Environmentalcontributions and health and safety laws and regulations may adversely affect Whirlpool. We are subject to various laws and regulations relating to the protection of the environment and human health and safety. We incur and will continue to incur capital and other expenditures to comply with these regulations. Complying with recently passed and enacted regulations in Europe, such as the WEEE and ROHS (Restriction of Hazardous Substances) directives, may increase our costs and adversely affect our ability to sell certain products in Europe. These types of costs could negatively affect our financial performance. Additionally, we could be subjected to future liabilities, fines or penalties or the suspension of product production for failing to comply with environmental regulations. Cleanup obligations that might arise at any of our manufacturing sites or the imposition of more stringent environmental laws in the future could adversely affect us.
Product liability claims may adversely affect us. We face an inherent business risk of exposure to product liability claims in the event that the use of any of our products results in personal injury or property damage. In the event that any of our products proves to be defective, we may need to recall or redesign such products. There can be no guarantee that our insurance coverage against certain product liability claims will continue to be available on acceptable terms or that such coverage will be adequate for liabilities we incur. We also face certain class action litigation regarding allegedly defective products that insurance does not cover. A successful claim in excess of, or outside of, our available insurance coverage may have a material adverse effect on our financial performance. In addition, any claim or product recall that results in significant adverse publicity may negatively affect our business, financial condition, or results of operations.
A deterioration in labor relations could negatively impact our global business. As of December 31, 2006, we had approximately 73,000 employees. Of those employees, various labor unions with separate collective bargaining agreements represent approximately 60%. Our current collective bargaining agreements generally have three year terms. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We cannot be assured that at some point we will not be subject to employee work stoppages and, if such events were to occur, that there would not be a material adverse effect on our business, financial condition, or results of operations. Further, we cannot be assured that we will be able to renew the various collective bargaining agreements on the same or similar terms, or at all, which could also affect our business, financial condition, or results of operation.
expenses.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brands. We consider our intellectual property rights, including patents, trademarks, trade secrets, and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third party nondisclosure and assignment agreements. Our failure to obtain or adequately protect our trademarks, products, new features of our products, or our processes may diminish our competitiveness.
We have applied for patent protection in the United States and other jurisdictions with respect to certain innovations and new products, product features, and processes. We cannot be assured that the U.S. Patent and Trademark Office or any other jurisdiction will approve any of our patent applications. Additionally, the patents we own could be challenged, invalidated, or others could design around our patents and the patents may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, the laws of certain foreign countries in which we do business or contemplate doing business in the future do not recognize intellectual property rights or protect them to the same extent as United States law. As a result, these factors could weaken our competitive advantage with respect to our products, services, and brands in foreign jurisdictions, which could adversely affect our financial performance.
Moreover, while we do not believe that any of our products infringe on the valid intellectual property rights of third parties, weothers may be unaware of others’assert intellectual property rights that may cover some of our technology, brands, products, or services. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.
Future changesWe may be subject to information technology system failures, network disruptions and breaches in financial accounting standards or practices or existing taxation rules or practicesdata security, which may cause adverse unexpected revenue fluctuations and affect our reported results of operations.A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practices have occurred and may occur in the future. In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,” or FIN 48, which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. Based on our evaluation, as of December 31, 2006, we do not believe that FIN 48 will have a material impact on our financial statements. Changes to existing rules or the questioning of current practices maymaterially adversely affect our reportedoperations, financial results orcondition and operating results.We depend on information technology as an enabler to improve the way we conducteffectiveness of our business.operations and to interface
Foreign currency fluctuations9
with our customers, as well as to maintain financial accuracy and efficiency. Information technology system failures could disrupt our operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, the loss of customers, impediments to the manufacture or shipment of products, other business disruptions, or the loss of or damage to intellectual property through security breach.
In addition, we have outsourced certain information technology support services and administrative functions, such as payroll processing and benefit plan administration, to third-party service providers and may affect our financial performance. We generate a significant portion of our revenue and incur a significant portion of our expenses in currenciesoutsource other than the U.S. dollar. Changesfunctions in the functional currenciesfuture to achieve cost savings and efficiencies. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies or the loss of those operations affect the value ofor damage to intellectual property through security breach, or harm employee morale.
Our information systems could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt our revenuebusiness and earnings from our foreign operations. We use currency forwards and options to manage our foreign currency transaction exposures. We cannot completely eliminate our exposure to foreign currency fluctuations, which may adversely affect our financial performance. In addition, because our consolidated financial results are reported in dollars, if we generate sales or earnings in other currencies the translation of those results into dollars cancould result in a significant increase or decrease in the amountloss of those sales or earnings.
assets.
If we cannot manage the additional challenges ofRisks associated with our international operations may decrease our financial performance may suffer.revenues and increase our costs. For the year ended December 31, 2006,2009, we derived approximately 34%45% of our net sales from outside of North America (which includes Canada and Mexico), including 22% in Latin America, 19% in Europe 13% in Latin America, and 2%4% in Asia. We expect that international sales will continue to account for a significant percentage of our net sales in the foreseeable future. Accordingly, we face numerous risks associated with conducting international operations, any of which could negatively affect our financial performance. These risks include the following:
Changeschanges in foreign country regulatory requirements;
Variousvarious import/export restrictions and the availability of required import/export licenses;
Impositionimposition of foreign tariffs and other trade barriers;
Political,political, legal, and economic instability;
Foreignforeign currency exchange rate fluctuations;
Inflation;changes in foreign country tax rules, regulations and other requirements, such as changes in tax rates and statutory and judicial interpretations of tax laws;
Workinflation;
work stoppages and disruptions in the shipping of imported and exported products;
Governmentgovernment price controls;
Extendedextended payment terms and the abilityinability to collect accounts receivable; and
The abilitythe inability to repatriate cash.
Additionally, as a U.S. corporation, we are subject to the Foreign Corrupt Practices Act, which may place us at a competitive disadvantage to foreign companies that are not subject to similar regulations.
Additionally, any determination that we have violated the Foreign Corrupt Practices Act could have a material adverse effect on us.
Terrorist attacks, armed conflicts, natural disasters, and epidemics could affect our domestic and international sales, disrupt our supply chain, and impair our ability to produce and deliver our products. Such events could directly impact our physical facilities or those of our suppliers or customers, both in the United States and elsewhere.
We are subject to, and could be further subject to, governmental investigations or actions by other third parties.We are subject to various federal, foreign and state laws, including antitrust laws, violations of which can involve civil or criminal sanctions. Government regulators in various jurisdictions are currently investigating
10
alleged pricing practices in the global compressor industry, including our compressor business headquartered in Brazil. These investigations, as well as additional investigations by other governmental agencies, could result in civil or criminal charges against Whirlpool and its employees, and the imposition of fines and penalties. In addition, we have been named as a defendant in numerous related class action lawsuits in various jurisdictions, which seek damages in connection with the pricing of compressors, and additional lawsuits may be filed. The impact of these investigations and lawsuits could have a material adverse effect on our financial position, liquidity and results of operations.
A deterioration in labor relations could adversely impact our global business. As of December 31, 2009, we had approximately 67,000 employees. Of those employees, various labor unions with separate collective bargaining agreements represent approximately 60%. Our current collective bargaining agreements generally have three year terms. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We may be subject to employee work stoppages that, if such events were to occur, may have a material adverse effect on our business, financial condition, or results of operations. Further, we cannot be assured that we will be able to renew collective bargaining agreements on the same or similar terms, or at all, which may also have a material adverse effect on our business, financial condition, or results of operations.
Our ability to attract, develop and retain executives and other qualified employees is crucial to our results of operations and future growth. We depend upon the continued services and performance of our key executives, senior management and skilled personnel, particularly our professionals with experience in our business and operations and the home appliance industry. We cannot be sure that any of these individuals will continue to be employed by us. A lengthy period of time is required to hire and develop replacement personnel when skilled personnel depart Whirlpool. An inability to hire, develop and retain a sufficient number of qualified employees could materially hinder our business by, for example, delaying our ability to bring new products to market or impairing the success of our operations.
Changes in the legal and regulatory environment could limit our business activities, increase our operating costs, reduce demand for our products or result in litigation. The conduct of our businesses, and the production, distribution, sale, advertising, safety, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets in which we operate. These laws and regulations may change, sometimes dramatically, as a result of political, economic or social events. Changes in laws, regulations or governmental policy and the related interpretations may alter the environment in which we do business and, therefore, may impact our results or increase our costs or liabilities. In addition, we incur and will continue to incur capital and other expenditures to comply with various laws and regulations, especially relating to the protection of the environment and human health and safety. These types of costs could adversely affect our financial performance. Additionally, we could be subjected to future liabilities, fines or penalties or the suspension of product production for failing to comply with various laws and regulations, including environmental regulations. Cleanup obligations that might arise at any of our manufacturing sites or the imposition of more stringent environmental laws in the future could adversely affect us.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2.2. Properties.
Our principal executive offices are located in Benton Harbor, Michigan. On December 31, 2006,2009, our principal manufacturing operations were carried on at 5037 locations worldwide, 3226 of which are located in 11 countries outside the United States, primarily in the EuropeanEurope region, and to a lesser extent in Asia, Latin America, and Mexico. Whirlpool occupied a total of approximately 78.765.2 million square feet devoted to manufacturing,
11
service, sales and administrative offices, warehouse distribution, and salesdistribution space. Over 41.233.8 million square feet of such space is occupied under lease. In general, all facilities are well maintained, suitably equipped, and in good operating condition.
ITEM 3.3. Legal Proceedings.
Information with respect to legal proceedings can be found under the heading “Legal Contingencies” in Note 96 to the Consolidated Financial Statements contained in the Financial Supplement to this report.
ITEM 4.4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders in the fourth quarter of 2006.2009.
12
PART II
ITEM 5.5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Whirlpool’s common stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. As of February 22, 2007,12, 2010, the number of holders of record of Whirlpool common stock was approximately 15,201.
14,821.
High, low, and closing sales prices (as reported on the New York Stock Exchange composite tape) for Whirlpool’s common stock for each quarter during the years 20062009 and 20052008 are set forth below:
Market Price | High | Low | Close | ||||||
4Q2006 | $ | 90.68 | $ | 80.80 | $ | 83.02 | |||
3Q2006 | $ | 89.64 | $ | 74.07 | $ | 84.11 | |||
2Q2006 | $ | 94.12 | $ | 78.12 | $ | 82.65 | |||
1Q2006 | $ | 96.00 | $ | 79.75 | $ | 91.47 | |||
4Q 2005 | $ | 86.52 | $ | 67.89 | $ | 83.76 | |||
3Q 2005 | $ | 85.70 | $ | 69.01 | $ | 75.77 | |||
2Q 2005 | $ | 74.05 | $ | 60.78 | $ | 70.11 | |||
1Q 2005 | $ | 71.25 | $ | 61.53 | $ | 67.73 |
Market Price | High | Low | Close | ||||||
4Q2009 | $ | 85.01 | $ | 65.37 | $ | 80.66 | |||
3Q2009 | 73.84 | 41.34 | 69.96 | ||||||
2Q2009 | 49.96 | 28.44 | 42.56 | ||||||
1Q2009 | 49.08 | 19.19 | 29.59 | ||||||
4Q2008 | $ | 83.05 | $ | 30.19 | $ | 41.35 | |||
3Q2008 | 91.87 | 58.22 | 79.29 | ||||||
2Q2008 | 92.59 | 61.73 | 61.73 | ||||||
1Q2008 | 98.00 | 67.19 | 86.78 |
Cash dividends declared on Whirlpool common stock for each quarter during the years 20062009 and 20052008 are set forth in Note 1814 to the Consolidated Financial Statements contained in the Financial Supplement to this report.
During the March 2008 quarter, Whirlpool purchased approximately 1.1 million shares of Whirlpool common stock under a $500 million share repurchase program authorized by our Board of Directors on June 15, 2004. At March 31, 2008, there were no remaining funds authorized under this program.
On April 23, 2008, our Board of Directors authorized a new share repurchase program of up to $500 million. Share repurchases are made from time to time on the open market as conditions warrant. During 2008, we repurchased 1.9 million shares at an aggregate purchase price of $150 million under this program. There were no repurchases during 2009. At December 31, 2009, there were $350 million of Whirlpool stock by Whirlpool or any affiliated purchaser in the fourth quarter of 2006.
remaining funds authorized under this program.
ITEM 6.6. Selected Financial Data.
The selected financial data for the five years ended December 31, 20062009 with respect to the following line items are shown under the “Eleven“Five Year Consolidated Statistical Review”Selected Financial Data” contained in the Financial Supplement to this report: Totaltotal net sales, earnings from continuing operations, earnings from continuing operations per share of common stock, dividends declared per share of common stock, total assets, and long-term debt. See the material incorporated herein by reference in response to Item 7 of this report for a discussion of the effects on such data of any business combinations and other acquisitions, disposition and restructuring activity, restructuring costs, accounting changes, earnings of foreign affiliates, and other significant activity impacting or affecting the comparability of reported amounts.
ITEM 7.7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
See “Management’s Discussion and Analysis” contained in the Financial Supplement to this report.
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk.
Information with respect to market risk can be found under the caption “Market Risk” in “Management’s Discussion and Analysis” contained in the Financial Supplement to this report.
13
ITEM 8.8. Financial Statements and Supplementary Data.
Whirlpool’s Consolidated Financial Statements are contained in the Financial Supplement to this report. Supplementary financial information regarding quarterly results of operations (unaudited) for the years ended
December 31, 20062009 and 20052008 is set forth in Note 1814 to the Consolidated Financial Statements. For a list of financial statements and schedules filed as part of this report, see the Table of Contents to the Financial Supplement to this report on page F-1.
ITEM 9.9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.9A. Controls and Procedures.
Disclosure controls and procedures.Whirlpool maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our filings under the Securities Exchange Act is recorded, processed, summarized, and reported within the periods specified in the rules and forms of the SECSecurities and Exchange Commission and that such information is accumulated and communicated to Whirlpool’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Prior to filing this report, we completed an evaluation under the supervision and with the participation of Whirlpool management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006.2009. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2006.
2009.
Management’s report on internal control over financial reporting. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, Whirlpoolwe included a report of management’s assessment of the effectiveness of its internal control over financial reporting as part of this report. Whirlpool’s independent registered public accounting firm also attested to, and reported on, management’s assessment of the effectiveness of internal control over financial reporting. Management’s report and the independent registered public accounting firm’s attestation report areis included in Whirlpool’sthe Consolidated Financial Statements contained in the Financial Supplement to this report under the captionscaption entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” and areis incorporated herein by reference.
Changes in internal control over financial reporting. On March 31, 2006, we completed our acquisition of Maytag, at which time Maytag became a subsidiary of Whirlpool. We are in the process of integrating Maytag operations and consider Maytag material to the Consolidated Condensed Financial Statements and believe that the internal controls and procedures have a material effect on our internal control over financial reporting. Whirlpool has extended its Section 404 compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations under such Act to include Maytag.
There were no other changes in our internal control over financial reporting that occurred during the fourth quarter of 20062009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.9B. Other Information.
There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 20062009 that was not previously reported.
14
PART III
ITEM 10.10. Directors, and Executive Officers and Corporate Governance.
Information regarding our executive officers is included in Item 1 of Part I of this report.
Information regarding the background of the directors, matters related to the Audit Committee, and Section 16(a) compliance can be found under the captions “Directors and Nominees for Election as Directors,” “Board of Directors and Corporate Governance—Audit Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement, which is incorporated herein by reference.
There have been no material changes to the procedures through which stockholders may recommend nominees to our Board of Directors since March 24, 2006,2, 2009, which is the date of our last proxy statement.
We have adopted a code of ethics that applies to all of our employees, officers and directors, including our principal executive officer, principal financial officer and principal accounting officer (controller). The text of our code of ethics is posted on our website:www.whirlpoolcorp.com—click onscroll over the “Governance” tab“Responsibility” dropdown menu and then click on “Code of Ethics.” Whirlpool intends to disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive officers and directors on the website within four business days following the date of such amendment or waiver. Stockholders may request a free copy of the code of ethics from:
Larry M. VenturelliGreg Fritz
Investor Relations
Whirlpool Corporation
2000 North M-63
Mail Drop 2800
Benton Harbor, MI 49022-2692
Telephone: (269) 923-4678
923-2641
Whirlpool has also adopted Corporate Governance Guidelines and written charters for its Audit, Finance, Human Resources and Corporate Governance and Nominating Committees, all of which are posted on our website:www.whirlpoolcorp.com—scroll over the “Responsibility” dropdown menu and then over “Governance,” click on the “Governance” tab,“Board of Directors,” and then click on “Board of Directors” and then click on “CommitteeDirectors Committee Charters.” Stockholders may request a free copy of the charters and guidelines from the address or telephone number set forth above.
ITEM 11.11. Executive Compensation.
Information with respect to compensation of our executive officers and directors can be found under the captions “Nonemployee Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation Tables,” and “Human Resources Committee Interlocks and Insider Participation,” and “Executive Compensation Tables”Participation” in the Proxy Statement, which is incorporated herein by reference. See also the information under the caption “Human Resources Committee Report” in the Proxy Statement, which is incorporated herein by reference; however, such information is only “furnished” hereunder and not deemed “soliciting material” or “filed” with the SECSecurities and Exchange Commission or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Securities Exchange Act of 1934.
ITEM 12.12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to the security ownership of any person that we know to beneficially own more than 5% of Whirlpool stock and by each Whirlpool director, each Whirlpool named executive officer, and all
15
directors and executive officers as a group, can be found under the captions “Security Ownership” and “Beneficial Ownership” in the Proxy Statement, which is incorporated herein by reference.
Information relating to securities authorized under equity compensation plans can be found under the caption “Equity Compensation Plan Information” in the Proxy Statement, which is incorporated herein by reference.
ITEM 13.13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions can be found under the caption “Related Person Transactions” in the Proxy Statement, which is incorporated herein by reference.
ITEM 14.14. Principal Accounting Fees and Services.
Information relating to our auditors and the Audit Committee’s pre-approval policies can be found under the caption “Matters Relating to Independent Registered Public Accounting Firm” in the Proxy Statement, which is incorporated herein by reference. The “Audit Committee Report” is not incorporated herein by reference.
PART IV
ITEM 15.15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of this report: |
1. The financial statements and related notes, and reports of management and the independent registered public accounting firm, listed in the Table of Contents to the Financial Supplement to this report. Individual financial statements of the registrant’s affiliated foreign companies, accounted for by the equity method, have been omitted since no such company individually constitutes a significant subsidiary.
2. “Schedule II—Valuation and Qualifying Accounts” is contained in the Financial Supplement to this report. Certain schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. The exhibits listed in the “Exhibit Index” attached to this report.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WHIRLPOOL CORPORATION (Registrant) | ||||||||
By: | / | February | ||||||
Roy W. Templin Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature | Title | |||
/s/ JEFF M. FETTIG Jeff M. Fettig | Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | |||
|
| |||
MICHAEL A. TODMAN* Michael A. Todman | Director and President, Whirlpool International | |||
/ Roy W. Templin | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||
| Vice President and Controller (Principal Accounting Officer) | |||
HERMAN CAIN* Herman Cain | Director | |||
GARY T. D Gary T. DiCamillo | Director | |||
|
| |||
KATHLEEN J. HEMPEL* Kathleen J. Hempel | Director | |||
MICHAEL F. JOHNSTON* Michael F. Johnston | Director |
|
| |||||||
WILLIAM T. KERR* William T. Kerr | Director | |||||||
|
| |||||||
MILES L. MARSH* Miles L. Marsh | Director | |||||||
WILLIAM D. PEREZ * William D. Perez | Director |
17
Signature | Title | |||
PAUL G. STERN* Paul G. Stern | Director | |||
JANICE D. STONEY* Janice D. Stoney | Director | |||
MICHAEL D. WHITE* Michael D. White | Director |
*By: | / Daniel F. Hopp | Attorney-in-Fact | February |
18
WHIRLPOOL CORPORATION
Financial Supplement
to 20062009 Annual Report on Form 10-K and
to 20072010 Proxy Statement
F-1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Whirlpool Corporation (“Whirlpool”) is the world’s leading manufacturer of major home appliances with 2006 revenues of $18.1 billion and net earnings of $433 million. Whirlpool’s four reportable segments are based on geography and consist of North America (66% of revenue), Europe (19% of revenue), Latin America (13% of revenue), and Asia (2% of revenue). Whirlpool is a leading producer of major home appliances in North America and Latin America and has a significant presence in markets throughout Europe, India and China. Whirlpool has received worldwide recognition for accomplishments in a variety of business and social efforts, including leadership, diversity, innovative product design, business ethics, social responsibility and community involvement.
Whirlpool’s growth strategy over the past several years has been to introduce innovative new products, increase customer loyalty for our brands, enhance our trade management platform, improve total cost and quality by expanding and leveraging our global operating platform and where appropriate, make strategic acquisitions.
On March 31, 2006, we completed the acquisition of Maytag Corporation (“Maytag”). The acquisition represents a major strategic event in Whirlpool’s history and is expected to result in significant efficiencies as well as future growth opportunities. During 2006, Whirlpool began integrating the manufacturing, administrative, supply chain and technology operations of Maytag. The results of Maytag’s operations have been included in the Consolidated Financial Statements beginning April 1, 2006. Further discussion of this transaction can be found under “Maytag Acquisition” and in Note 3 to the Consolidated Financial Statements.
The costs of key raw materials such as steel, plastic, copper, aluminum, zinc and nickel, as well as their impact on component parts have been, and are expected to remain, at elevated levels. We have been addressing the higher cost environment with productivity improvements and new product innovations, as well as cost-based price adjustments.
Competition in the home appliance industry is intense worldwide. In the U.S., in addition to traditional competitors such as Electrolux, GE, and Kenmore, there are new and expanding foreign competitors such as LG, Bosch Siemens, 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. Whirlpool’s acquisition of Maytag is benefiting trade customers and consumers by generating significant cost savings that enable us to invest in innovation, offer competitive prices across a wide array of products, and increase product quality and service. Competition in the global market is based on a number of factors including performance, innovation, product features, quality, cost, selling price, distribution and financial incentives, such as cooperative advertising, co-marketing funds, sales person incentives, volume rebates and terms. In the past, our competitors, especially global competitors with low-cost sources of supply outside the U.S., have aggressively priced their products and/or introduced new products in order to increase market share.
Whirlpool monitors country-specific economic factors such as gross domestic product, consumer interest rates, consumer confidence, retail trends, housing starts, sales of existing homes and mortgage refinancing as key indicators of industry demand. In addition to profitability, management also focuses on country, brand, product and channel sales, when assessing and forecasting financial results. Whirlpool intends to utilize its global manufacturing, procurement and technology footprint to enhance our position in the global appliance industry.
Management’s Discussion and Analysis discusses, among other things, the results of operations, cash flows, financial condition and liquidity, contractual obligations and forward-looking cash requirements, critical accounting policies and estimates, new accounting pronouncements, market risk, and the nature of and risk associated with forward-looking statements contained herein. In addition, Whirlpool has included comments regarding regional business unit performance, where appropriate.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
RESULTS OF OPERATIONS
The Consolidated Statements of Operations present Whirlpool’s operating results for the last three years. This section of Management’sManagement Discussion and Analysis highlights the main factors affecting changes in Whirlpool’s financial condition and results of operations and should be read alongin connection with the Consolidated Financial Statements.Statements, Notes to the Consolidated Financial Statements and Selected Financial Data included in this Financial Supplement to the Form 10-K. Also, certain references to particular information in the Notes to the Consolidated Financial Statements are made to assist readers.
EXECUTIVE OVERVIEW
Earnings from continuing operations excludeWhirlpool Corporation (“Whirlpool”) is the Hoover floor-care, Dixie-Narco vending systemsworld’s leading manufacturer of major home appliances with revenues of $17 billion and Jade commercialnet earnings available to Whirlpool common stockholders of $328 million for the year ended December 31, 2009. We are a leading producer of major home appliances in North America and residential businesses. On May 23, 2006, Whirlpool announced its intentionLatin America and have a significant presence in markets throughout Europe and India. We have received worldwide recognition for accomplishments in a variety of business and social efforts, including leadership, diversity, innovative product design, business ethics, social responsibility and community involvement. We conduct our business through four reportable segments, which we define based on geography. Our reportable segments consist of North America (55% of revenue), Europe (19% of revenue), Latin America (22% of revenue), and Asia (4% of revenue).
Our global branded consumer products strategy is to sellintroduce innovative new products, increase brand customer loyalty, expand our presence in foreign markets, enhance our trade management platform, improve total cost and quality by expanding and leveraging our global operating platform and where appropriate, make strategic acquisitions and investments.
We monitor country-specific economic factors such as gross domestic product, consumer confidence, retail trends, housing starts and completions, sales of existing homes and mortgage interest rates as key indicators of industry demand. In addition to profitability, we also focus on country, brand, product and channel sales when assessing and forecasting financial results.
During 2008 and 2009, we experienced significant macroeconomic challenges including instability in the financial markets. These challenges have impacted the global economy, the capital markets and global demand for our products. Although we have made significant progress in reducing cost in 2009 to better align with global demand, and in improving our liquidity position, we expect that we will continue to experience the effects of liquidity strain on our suppliers, continued low consumer confidence and consumer discretionary spending.
Competition in the home appliance industry is intense in all global markets we serve. In addition to our traditional competitors such as Electrolux, General Electric, and Kenmore in North America, there has been an emergence of strong global competitors such as LG, Bosch Siemens, Samsung and Haier. In each geographic region, our customer base is consolidated and characterized by large, sophisticated trade customers who have many choices and demand competitive products, services and prices. We believe that our productivity and cost controls, new innovative product introductions, and improved product price/mix will enhance our ability to respond to these businesses and subsequently reported their results as discontinued operations.competitive conditions.
FACTORS AFFECTING COMPARABILITY
During the thirdMarch 2009 quarter, we completedchanged our method of depreciation prospectively for substantially all long-lived production machinery and equipment to a modified units of production depreciation method. Under this method, we record depreciation based on units produced, unless units produced drop below a minimum threshold at which point depreciation is recorded using the salestraight-line method. Prior to 2009, all machinery and equipment was depreciated using the straight-line method. We believe depreciating machinery and equipment based on units of production is a preferable method as it best matches the usage of assets with the revenues
F-2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
derived from those assets. As a result of this change and our overall lower levels of production in 2009, our depreciation expense by operating segment decreased for 2009 as follows: North America—$46 million, Europe—$25 million, Latin America—$11 million and Asia—$1 million, for a total of $83 million. Net of amounts capitalized into ending inventories, gross margin increased for 2009 as follows: North America—$41 million, Europe—$19 million, Latin America—$11 million and Asia—$1 million, for a total of $72 million.
RESULTS OF OPERATIONS
For the year ended December 31, 2009, consolidated net sales were $17 billion. Consolidated net earnings available to Whirlpool common stockholders were $328 million, or $4.34 per diluted share, decreasing from $418 million or $5.50 per diluted share for the year ended December 31, 2008. The decrease in net sales and earnings reflects lower appliance industry demand resulting primarily from weaker economies within our North America and Europe regions and the unfavorable impact of foreign currency.
Consolidated Net Sales
The table below summarizes by region consolidated net sales and units sold:
Millions of dollars | 2009 | Change | 2008 | Change | 2007 | |||||||||||||
Consolidated Net Sales | ||||||||||||||||||
North America | $ | 9,592 | (11.0)% | $ | 10,781 | (8.1)% | $ | 11,735 | ||||||||||
Europe | 3,338 | (16.9 | ) | 4,016 | 4.4 | 3,848 | ||||||||||||
Latin America | 3,705 | — | 3,704 | 7.8 | 3,437 | |||||||||||||
Asia | 654 | 10.3 | 593 | 6.5 | 557 | |||||||||||||
Other/Eliminations | (190 | ) | — | (187 | ) | — | (169 | ) | ||||||||||
Consolidated | $ | 17,099 | (9.6 | ) | $ | 18,907 | (2.6 | ) | $ | 19,408 | ||||||||
In thousands | 2009 | Change | 2008 | Change | 2007 | |||||||||||||
Units Sold | ||||||||||||||||||
North America | 24,631 | (9.5)% | 27,210 | (10.4)% | 30,352 | |||||||||||||
Europe | 11,798 | (11.7 | ) | 13,365 | (2.0 | ) | 13,641 | |||||||||||
Latin America | 10,047 | 14.5 | 8,777 | 5.7 | 8,303 | |||||||||||||
Asia | 3,264 | 20.8 | 2,703 | 5.7 | 2,558 | |||||||||||||
Other/Eliminations | — | — | (1 | ) | — | (3 | ) | |||||||||||
Consolidated | 49,740 | (4.4 | ) | 52,054 | (5.1 | ) | 54,851 | |||||||||||
Consolidated net sales decreased 9.6% compared to 2008 primarily due to lower unit shipments and the impact of unfavorable foreign currency. Excluding the impact of foreign currency, consolidated net sales decreased 5.8% compared to 2008. Consolidated net sales for 2008 decreased 2.6% compared to 2007 primarily due to lower unit shipments, which were partially offset by the favorable impact of foreign currency. Excluding the impact of foreign currency, consolidated net sales decreased 5.1% compared to 2007.
Significant regional trends were as follows:
North America net sales decreased in 2009 by 11.0% compared to 2008 primarily due to a 9.5% decrease in units sold. The decline in units sold is due to decreased industry demand resulting from continued weak economies in the U.S., Mexico and Canada in 2009. Additionally, net sales was negatively impacted by the unfavorable impact of foreign currency, which was partially offset by improved product price/mix. Excluding the impact of foreign currency, North America net sales decreased 9.4% in 2009. North
F-3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
America net sales decreased in 2008 by 8.1% compared to 2007 primarily due to a 10.4% decrease in units sold. The decline in units sold is primarily due to decreased industry demand resulting from a weak U.S. economy in 2008. Partially offsetting the decrease in units sold was better product price/mix and higher market share in 2008 compared to 2007. Excluding the impact of foreign currency, North America net sales decreased 8.2% in 2008. |
Europe net sales decreased in 2009 by 16.9% compared to 2008, primarily due to an 11.7% decrease in units sold due to lower appliance industry demand and the unfavorable impact of foreign currency. Excluding the impact of foreign currency, Europe net sales decreased 11.2% in 2009. Net sales increased in 2008 by 4.4% compared to 2007, primarily due to favorable foreign currency and better product price/mix, partially offset by a decrease in unit volume due to lower market demand in the second half of the Amana commercial microwave businessyear. Excluding the impact of foreign currency, Europe net sales decreased 3.1% in 2008.
Latin America net sales were consistent in 2009 compared to 2008 as the unfavorable impact of foreign currency and duringlower BEFIEX credits recognized were fully offset by a 14.5% increase in units sold. The increase in units sold was a result of favorable economic conditions and the fourth quarter soldImpostos sobre Produtos (“IPI”) sales tax holiday in Brazil. The IPI sales tax holiday was the Dixie-Narco vending systems business. On December 6, 2006, Whirlpool signed a definitive agreement to sell the Hoover floor-care business and subsequently consummated the transaction on January 31, 2007. In addition, on February 17, 2007, we entered into a definitive agreement to sell the Jade commercial and residential products businesses. (See Note 19—Subsequent Events.)
Under the terms and conditionsprimary driver of the Amana commercial microwave sale, Whirlpool maintains continuing involvement for a periodreduction of time as an original equipment manufacturing (“OEM”) supplier. Due to this continuing involvement, WhirlpoolBEFIEX credits monetized. This sales tax holiday was required to reclassifydeclared by the Amana commercial microwave results to continuing operations from discontinued operations, where it was originally classifiedBrazilian government on certain appliances in our Latin America region beginning in the second quarter and extended through the remainder of 2006. This reclassification did not have a material impact on reported earnings from continuing operations or net earnings.
NET SALES
2009. During this holiday, we monetized reduced amounts of BEFIEX credits because our BEFIEX credits are monetized through the offset of IPI taxes due. The total number of units, which includes major and small appliances, sold in 2006 increased 16.5% over 2005, or 4.9% excludingIPI sales tax holiday expired January 31, 2010. Excluding the impact of the Maytag acquisition. Consolidatedforeign currency, Latin America net sales increased 26.3% over 2005. Excluding currency fluctuations7.1% in 2009. Net sales increased 7.8% in 2008 as compared to 2007, primarily due to an increase in volume of 5.7% and the acquisitionfavorable impact of Maytag,foreign currency. The increase in volume was due to continued growth in the appliance industry, increased market share and favorable economic conditions throughout the region. Excluding the impact of foreign currency, Latin America net sales increased approximately 5%. Total number1.7% in 2008.
During the years ended December 31, 2009, 2008 and 2007, we monetized $69 million, $168 million and $131 million of units sold in 2005 increased 1.3% over 2004. Consolidated 2005BEFIEX credits, respectively. We expect to continue recognizing credits as they are monetized. As of December 31, 2009, $693 million of these export credits remain. Future actions by the Brazilian government could limit our ability to monetize these export credits.
Asia net sales increased 8.3% over 2004.10.3% in 2009 compared to 2008 primarily due to a 20.8% increase in units sold offset partially by the impact of unfavorable foreign currency. Excluding the impact of foreign currency, fluctuations,Asia net sales increased approximately 6%.18.4% in 2009. Net sales increased 6.5% in 2008 compared to 2007 primarily due to a 5.7% increase in units sold. The tables below present units sold andincrease in volume was due to continued growth in the appliance industry, primarily in India. Excluding the impact of foreign currency, Asia net sales increased 9.7% in 2008.
Gross Margin
The consolidated gross margin percentage increased compared to 2008 due primarily to cost reduction initiatives and productivity improvements, partially offset by region.foreign currency and lower regional tax incentives associated with BEFIEX.
The table below summarizes gross margin percentages by region:
In thousands | 2006 | Change | 2005 | Change | 2004 | |||||||||||||||||||||||||
Units Sold | ||||||||||||||||||||||||||||||
2009 | Change | 2008 | Change | 2007 | ||||||||||||||||||||||||||
North America | 33,525 | 21.6 | % | 27,572 | 0.8 | % | 27,353 | 12.9 | % | 2.9 | pts | 10.0 | % | (2.5 | )pts | 12.5 | % | |||||||||||||
Europe | 12,956 | 4.9 | 12,351 | 2.1 | 12,100 | 11.5 | (2.5 | ) | 14.0 | (2.6 | ) | 16.6 | ||||||||||||||||||
Latin America | 6,096 | 22.4 | 4,979 | 1.5 | 4,904 | 17.2 | (4.0 | ) | 21.2 | 0.4 | 20.8 | |||||||||||||||||||
Asia | 2,346 | 6.1 | 2,212 | 3.1 | 2,145 | 19.3 | 1.1 | 18.2 | 3.0 | 15.2 | ||||||||||||||||||||
Other/Eliminations | (42 | ) | — | (18 | ) | — | (17 | ) | ||||||||||||||||||||||
Consolidated | 54,881 | 16.5 | % | 47,096 | 1.3 | % | 46,485 | 14.0 | 0.7 | 13.3 | (1.6 | ) | 14.9 | |||||||||||||||||
Millions of dollars | 2006 | Change | 2005 | Change | 2004 | |||||||||||||
Net Sales | ||||||||||||||||||
North America | $ | 11,953 | 34.1 | % | $ | 8,913 | 8.0 | % | $ | 8,254 | ||||||||
Europe | 3,383 | 7.1 | 3,160 | 3.2 | 3,062 | |||||||||||||
Latin America | 2,430 | 23.9 | 1,962 | 17.2 | 1,674 | |||||||||||||
Asia | 457 | 8.3 | 422 | 10.5 | 382 | |||||||||||||
Other/Eliminations | (143 | ) | — | (140 | ) | — | (152 | ) | ||||||||||
Consolidated | $ | 18,080 | 26.3 | % | $ | 14,317 | 8.3 | % | $ | 13,220 | ||||||||
F-4
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Significant regional trends were as follows:
North America gross margin increased in 2009 compared to 2008 primarily due to continued cost reductions and improved productivity, product price/mix and a postretirement curtailment gain associated with the suspension of annual credits to retiree health savings accounts totaling $80 million. Additionally, gross margin was positively impacted by a $41 million reduction in LIFO reserves resulting from cost deflation. These gross margin improvements were partially offset by the unfavorable impacts of lower volumes, foreign currency and $35 million in charges associated with a product recall. Gross margin decreased in 2008 compared to 2007 primarily due to |
|
In 2006, Latin America unit volumes increased 22.4% versus 2005, due mainly to continued strength in the Brazilian economy and appliance market and market share gains. Net sales increased $468 million as compared to 2005, or approximately 16%, excluding currency fluctuations, due to higher volume and new product introductions. In 2005, Latin America unit volumes increased 1.5% versus 2004, due mainly to increases in the Brazilian appliance market. Net sales increased 17.2% as compared to 2004, or approximately 6% excluding currency fluctuations, to $2.0 billion, due primarily to increased unit volumes and cost-based price adjustments on compressors and appliances.
In 2006, Asia unit volumes increased 6.1% versus 2005 with a corresponding increase in net sales of 8.3%, driven by strong demand, particularly in India, along with improved pricing and favorable product mix. Excluding currency fluctuations, net sales increased approximately 10%. In 2005, Asia unit volumes increased 3.1% as compared to 2004, driven mainly by industry growth and new product introductions. Net sales improved 10.5%, or approximately 8% excluding currency fluctuations, due largely to an improved product mix and cost-based price adjustments implemented in 2005.
GROSS MARGIN
The consolidated gross margin percentage in 2006 decreased 60 basis points versus 2005. Consolidated results in 2006 were significantly impacted by higher material and oil-related costs, lower industry demand and lower productivity. Additionally, gross margin was positively impacted by certain asset sale gains totaling $31 million and postretirement curtailments totaling $15 million, which were more than offset by $42 million in higher reserves for LIFO resulting from cost increasesinflation and a $32 million charge related to product recall. These decreases were partially offset by improved product price/mix. See Notes 4, 6 and 12 of the Notes to the Consolidated Financial Statements for additional information related to LIFO, product recalls and the postretirement curtailment gains, respectively.
Europe gross margin decreased in 2009 compared to 2008 due primarily to lower volumes, unfavorable mix impact of Maytag.foreign currency fluctuations, asset sale gains and insurance proceeds totaling $14 million recognized in 2008. These higher costs and acquisition integration costsdecreases were partlypartially offset by increasedcost reductions and productivity initiatives and lower material and oil-related costs. Gross margin decreased in 2008 compared to 2007 due primarily to lower productivity and industry demand, which were partially offset by improved product price/mix. Also contributing to lower gross margin were gains from asset sales of $9 million compared with $47 million recognized in 2007. Lower gains in 2008 associated with asset sales were partially offset by gains of $5 million from insurance proceeds.
Latin America gross margin decreased in 2009 compared to 2008 due primarily to a reduction in regional tax incentives and acquisition efficiencies.
The consolidated gross margin percentage in 2005 decreased 90 basis points versus 2004. Consolidated results in 2005 were significantly impacted byassociated with BEFIEX, higher material and oil-related cost increases which were somewhat mitigatedcosts, lower price/mix and an operating tax settlement, offset by improved productivity and certain credits in the combinationamount of cost-based price adjustments$11 million related to refundable energy surcharges. See Note 6 of the Notes to the Consolidated Financial Statements for additional information related to the foreign operating tax settlement. Gross margin increased in 2008 compared to 2007 due primarily to improvements in product price/mix, productivity and productivity improvements. Consolidated gross margin also benefited from regional tax incentives associated primarily with BEFIEX, which combined to more than offset higher material and was negatively impacted by higher incentive compensation.oil-related costs.
FreightAsia gross margin increased in 2009 compared to 2008 primarily due to continued cost reductions and warehousingimproved productivity and a $3 million asset sale gain, which were partially offset by lower product price/mix. Gross margin increased in 2008 as compared to 2007 due to improvements in product price/mix, productivity, inventory transition costs previously included inand volume, which more than offset higher material and oil-related costs.
Selling, General and Administrative
The table below summarizes selling, general and administrative expenses in the statement of operations were reclassified to costas a percentage of sales effective January 1, 2006. Approximately $854 million and $723 million were reclassified in 2005 and 2004, respectively.by region:
Millions of dollars | 2009 | As a % of Sales | 2008 | As a % of Sales | 2007 | As a % of Sales | ||||||||||||
North America | $ | 653 | 6.8 | % | $ | 851 | 7.9 | % | $ | 791 | 6.7 | % | ||||||
Europe | 362 | 10.8 | 414 | 10.3 | 391 | 10.2 | ||||||||||||
Latin America | 275 | 7.4 | 306 | 8.3 | 277 | 8.1 | ||||||||||||
Asia | 97 | 14.8 | 98 | 16.5 | 91 | 16.3 | ||||||||||||
Corporate/Other | 157 | — | 129 | — | 186 | — | ||||||||||||
Consolidated | $ | 1,544 | 9.0 | % | $ | 1,798 | 9.5 | % | $ | 1,736 | 8.9 | % | ||||||
F-5
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
The table which follows outlines the gross margin percentages by region.
2006 | Change | 2005 | Change | 2004 | |||||||||||
Gross Margin | |||||||||||||||
North America | 13.4 | % | (1.9 | )pts | 15.3 | % | (1.2 | )pts | 16.5 | % | |||||
Europe | 15.9 | 0.5 | 15.4 | (2.1 | ) | 17.5 | |||||||||
Latin America | 19.1 | 3.1 | 16.0 | 2.9 | 13.1 | ||||||||||
Asia | 15.3 | 3.9 | 11.4 | 0.2 | 11.2 | ||||||||||
Consolidated(1) | 14.7 | % | (0.6 | )pts | 15.3 | % | (0.9 | )pts | 16.2 | % | |||||
Significant regional trends wereIn 2009, consolidated selling, general and administrative expenses, as follows:
The 2006 North America gross margina percent of consolidated net sales, decreased 190 basis points compared to 2005, duethe prior year, primarily to higher material costs,as a result of infrastructure cost reductions and lower industry demand, unfavorable Maytag product mix, acquisition integration and purchase accounting costs and higher merchandising costs. Margin declines were partially offset by productivity improvements and acquisition efficiencies. The 2005 North America gross margin decreased 120 basis points as compared to 2004, largely due to higher material and oil-related costs. Results in 2005 also reflect the impact of cost-based price adjustments, productivity improvements and higher incentive compensation.
brand investments. In 2006, Europe gross margin improved by 50 basis points versus 2005 as productivity improvements more than offset lower comparable model pricing and higher material and oil-related costs. European operations continue to realize savings from ongoing restructuring efforts. The 2005 Europe gross margin decreased 210 basis points as compared to 2004, largely driven by higher material and oil-related costs, partially offset by increased productivity, an improved product mix and, to a lesser extent, a gain on the sale of assets.
In 2006, Latin America gross margin increased 310 basis points versus 2005, due primarily to significantly improved volumes, productivity improvements, cost control initiatives and regional tax incentives which combined to more than offset higher material and oil-related costs and unfavorable currency exchange rates. The 2005 Latin America gross margin increased 290 basis points as compared to 2004, as the combination of cost-based price adjustments, increased productivity and regional tax incentives more than offset higher material and oil-related costs, unfavorable currency and increased incentive compensation.
The 2006 Asia gross margin increased 390 basis points as compared to 2005, due to productivity improvements, improved product mix, and cost-based price adjustments partially offset by higher material and oil-related costs. The 2005 Asia gross margin increased 20 basis points as compared to 2004, due to improved product mix, productivity improvements and cost-based price adjustments partially offset by higher material and oil-related costs.
SELLING, GENERAL AND ADMINISTRATIVE
In 2006,2008, consolidated selling, general and administrative expenses, as a percent of consolidated net sales, increased 30 basis points as compared to 2005. The benefit from2007, primarily due to lower sales volume and higher sales and acquisition efficiencies were more thanbrand investment, partially offset by increased brand investment, acquisitionlower infrastructure costs and integration costs, increased expense$20 million in gains associated with asset sales. Additionally, this increase was impacted by a $12 million operating tax credit recorded by our Latin America region during 2007.
Restructuring
Restructuring initiatives resulted in charges of $126 million, $149 million and $61 million in 2009, 2008, and 2007, respectively, reflecting ongoing efforts to supportoptimize our strategyglobal operating platform. These charges are included in restructuring in our Consolidated Statements of Income and higher compensation expense, includingprimarily consist of charges to restructure the expensingcooking platform in Latin America, shift refrigeration and dishwasher capacity within Europe and North America, shift cooking capacity within North America, restructure the laundry platforms in North America, Europe and Asia and reorganize the salaried workforce throughout North America and Europe.
On October 27, 2008, management committed to a workforce reduction plan to reduce our employee base worldwide between the fourth quarter of stock options under SFAS No. 123 (R) (See2008 and the beginning of 2010.
On August 28, 2009, we announced changes to our North American manufacturing operations which will result in the closure of our manufacturing facility in Evansville, Indiana in mid-2010. We currently expect that approximately 1,100 full-time positions will be eliminated as a result of the closure.
For additional information about restructuring and the impact by operating segment, see Note 1210 and Note 13 of the Notes to the Consolidated Financial Statements). In 2005, consolidated selling, generalStatements.
Interest and administrative expenses declined 90 basis pointsSundry Income (Expense)
Interest and sundry expense for 2009 increased by $75 million from $100 million in 2008 to $175 million in 2009. The increase in expense in 2009 was primarily due to charges incurred for legal contingencies and legal defense, partially offset by the favorable impacts of foreign currency. Interest and sundry expense for 2008 increased by $37 million from $63 million in 2007 to $100 million in 2008. Higher expense in 2008 was primarily due to the impact of foreign currency and an impairment charge of $9 million in our Europe segment associated with an available for sale investment, partially offset by higher interest income. For additional information about litigation matters, see Note 6 of the Notes to the Consolidated Financial Statements.
Interest Expense
Interest expense increased for 2009 compared to 2008 primarily due to the combination of higher interest rates and higher average debt levels, offset partially by a reduction in accrued interest of $18 million as a percentageresult of consolidated net salesentering into a special program in Brazil to settle tax liabilities. Interest expense in 2008 was consistent with 2007 as comparedhigher debt levels were offset by lower interest rates.
Income Taxes
The effective income tax rate was a benefit of 20.6% in 2009 and 81.7% in 2008 and an expense of 14.5% in 2007. The reduction in tax benefit from 2008 to 2004,2009 is primarily due to an increase in profitability, changes in dispersion of global income and the unfavorable impact of audits and settlements. The reduction in tax expense in 2007 to a benefit in 2008 is primarily due to a decline in profitability, energy tax credits generated in the U.S. in 2008 from the production of certain eligible energy efficient appliances, as administrative cost reductions and scale efficiencies across all regions offset higher incentive compensation in North America and Latin America.well as a combination of certain
F-6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Freightdiscrete items recognized during the year, dispersion of global income, tax credit availability, and warehousing costs previously included in selling, general and administrative expenses intax planning activities. For additional information about our consolidated tax provision, see Note 11 of the statement of operations were reclassified to cost of sales, effective January 1, 2006. Approximately $854 million and $723 million were reclassified in 2005 and 2004, respectively.
The table below outlines the selling, general and administrative expenses as a percentage of sales by region.
Millions of dollars | 2006 | As a % of Sales | 2005 | As a % of Sales | 2004 | As a % of Sales | ||||||||||||
Selling, General & Administrative | ||||||||||||||||||
North America | $ | 823 | 6.9 | % | $ | 554 | 6.2 | % | $ | 585 | 7.1 | % | ||||||
Europe | 335 | 9.9 | 321 | 10.2 | 370 | 12.1 | ||||||||||||
Latin America | 246 | 10.1 | 187 | 9.5 | 155 | 9.3 | ||||||||||||
Asia | 72 | 15.9 | 71 | 16.7 | 67 | 17.5 | ||||||||||||
Other/Eliminations | 276 | — | 210 | — | 187 | — | ||||||||||||
Consolidated(1) | $ | 1,752 | 9.7 | % | $ | 1,343 | 9.4 | % | $ | 1,364 | 10.3 | % | ||||||
RESTRUCTURING
Restructuring initiatives resulted in charges of $55 million, $57 million and $15 million in 2006, 2005, and 2004, respectively, reflecting Whirlpool’s ongoing efforts to optimize its global operating platform. These amounts have been identified as a separate component of operating profit. Whirlpool expects to expense between $75 to $100 million for restructuring during 2007. (See Note 13Notes to the Consolidated Financial Statements for a more detailed description of these charges and Whirlpool’s restructuring program.)
Statements.
INTEREST AND SUNDRY INCOME (EXPENSE)
Interest and sundry income (expense) decreased by $63 millionEarnings from $(65) million to $(2) million versus 2005. Current year results include a $31 million dollar gain on the sale of an equity investment, while prior year results included a $21 million charge to increase our legal reserves. The combination of these two items is the primary driver of the year-over-year decline in expense. Interest and sundry income (expense) for 2005 increased by $51 million from $(14) million to $(65) million compared to 2004. The primary drivers of this increase were an increase in legal reserves of approximately $21 million, higher foreign currency losses on foreign currency denominated transactions, and a $9 million gain on the sale of a partial interest in an equity investment during 2004.
INTEREST EXPENSEContinuing Operations
Interest expense in 2006 increased $72 million as compared to 2005. The increase primarily reflects debt issued to acquire Maytag, as well as debt assumed from the acquisition. (See Note 8 to the Consolidated Financial Statements.) Interest expense in 2005 increased $2 million as compared to 2004. The increase was due primarily to higher interest rates and a shift in global borrowing positions.
INCOME TAXES
The effective income tax rate was 20.4% in 2006, 28.6% in 2005 and 33.9% in 2004. The rates were impacted by a combination of increased tax credits, global planning activities, global audit settlements and adjustments, as well as the dispersion of global income. (See the income tax rate reconciliation included in Note 15 to the Consolidated Financial Statements for a description of the significant items impacting the consolidated effective income tax rate.)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
EQUITY IN EARNINGS (LOSS) OF AFFILIATED COMPANIES AND MINORITY INTERESTS
Changes in minority interests reflect higher earnings in Latin America and India in 2006 compared to 2005.
EARNINGS FROM CONTINUING OPERATIONS
Earnings from continuing operations were $354 million in 2006 were $4862009 compared to $447 million or $6.35 per diluted share, versus $422and $669 million or $6.19 per diluted share,in 2008 and $406 million, or $5.90 per diluted share in 2005 and 2004, respectively. Earnings from continuing operations include2007, respectively, due to the operating results of Maytag, including integration costs and efficiencies, and the effect of purchase accounting adjustments.factors described above.
Millions of dollars, except per share data | 2006 | 2005 | 2004 | ||||||
Earnings from continuing operations | $ | 486 | $ | 422 | $ | 406 | |||
Diluted earnings from continuing operations per share | $ | 6.35 | $ | 6.19 | $ | 5.90 |
Millions of dollars, except per share data | 2009 | 2008 | 2007 | ||||||
Earnings from continuing operations | $ | 354 | $ | 447 | $ | 669 | |||
Diluted net earnings from continuing operations per share | 4.68 | 5.88 | 8.37 |
DISCONTINUED OPERATIONS
Net Earnings Available to Whirlpool classified the Hoover floor-care, Dixie-Narco vending systems, Amana commercial microwave and Jade commercial and residential products businesses as discontinued operations during the second quarter of 2006. The decision to divest these businesses will allow us to focus on our core appliance business.
On September 6, 2006, Whirlpool sold the Amana commercial microwave business to Aga Foodservice Inc. for approximately $49 million. Due to Whirlpool’s continuing involvement with the Amana commercial microwave business as an OEM supplier, we reclassified the operating results related to the Amana commercial microwave business into continuing operations during the third quarter of 2006.
On October 23, 2006, Whirlpool completed the sale of the Dixie-Narco vending systems business to Crane Co. for approximately $46 million.
On December 6, 2006, Whirlpool entered into a definitive agreement to sell the Hoover floor-care business to Techtronic Industries, Co., Ltd (“TTI”) for approximately $107 million. The sale closed on January 31, 2007.
On February 17, 2007, Whirlpool entered into a definitive agreement to sell the Jade commercial and residential products businesses to Middleby Corporation. The sale is expected to be completed in the second quarter of 2007.
As part of the sale of each of the above discontinued operations, we retained certain liabilities associated with pension benefits and, in the case of Hoover, postretirement medical benefits for currently retired Hoover employees. In addition, with respect to the sale of the Dixie-Narco vending systems business, Whirlpool retained certain environmental liabilities.
Further information related to these sales can be found in Note 4—Discontinued Operations in the Consolidated Financial Statements.
NET EARNINGSCommon Stockholders
Net earnings available to Whirlpool common stockholders were $433$328 million in 2006 versus $4222009 compared to $418 million and $406$640 million in 20052008 and 2004, respectively. 2006 earnings2007, respectively, due to the factors described above. Earnings were impacted by $53$7 million in losses from discontinued operations.operations for 2007.
Millions of dollars, except per share data | 2006 | 2005 | 2004 | ||||||
Net earnings | $ | 433 | $ | 422 | $ | 406 | |||
Diluted net earnings per share | $ | 5.67 | $ | 6.19 | $ | 5.90 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Millions of dollars, except per share data | 2009 | 2008 | 2007 | ||||||
Net earnings available to Whirlpool common stockholders | $ | 328 | $ | 418 | $ | 640 | |||
Diluted net earnings per share available to Whirlpool common stockholders | 4.34 | 5.50 | 8.01 |
FORWARD-LOOKING PERSPECTIVE
Global demandFor the year ended December 31, 2010, we currently estimate earnings per diluted share to be in the range of $6.50 to $7.00, and free cash flow for appliances is expectedthe year to increase approximately 2%be in 2007.the range of $400 to $500 million. Within North America we expect industry demand to decline 2-3% for the year, with the first half of the year declining approximately 5%. Industry applianceincrease 2-4% and within Europe we expect demand in Europe,to remain flat. Within Latin America and Asia are expectedwe expect demand to grow 2-3%increase 5-10% and 3-5%, 10-12% and 5-10% for the year, respectively. Functional currencies in countries where Whirlpool conducts business are expected to remain stable.
Prices for materials areMaterial cost inflation is expected to increase by approximately $400$200 to $300 million, in 2007, largely driven by increases in component parts, steel and base metals, such as copper, aluminum, zinc and nickel, as well as component parts and steel. Whirlpool expectsnickel. We expect to offset these higher costs with incremental efficiencies realized from the Maytag acquisition, productivity improvements, new product introductions, including the revitalization ofMaytag branded products, cost-based price adjustments and improved product mix.
In 2006, Whirlpool launched the largest number of new products to market in its history. Whirlpool’sprice/mix and administrative and infrastructure cost reductions. Our innovation product pipeline continues to grow and drive higher average sales values. In addition, consumer and trade response to our new product offerings has been positive, and we continue to accelerate our global branded consumer products strategy of delivering consumer-relevantrelevant innovation to markets worldwide.
CASH FLOWS
The Consolidated Statements of Cash Flows reflect the changes in cash and equivalents for the last three years by classifying transactions into three major categories: operating, investing and financing activities.
Operating Activities of Continuing Operations
Whirlpool’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.
Whirlpool’s cash provided by operating activities in 2006 decreased $4 million compared to 2005. Cash provided by operating activities benefited from higher earnings, primarily within our European and Latin American business segments. Increased inventories, which include higher laundry inventory to support the plant closures and transition of the Maytag laundry product to Whirlpool facilities, consumed additional cash during the year but was largely offset by improvements in accounts receivable collections and increases in accounts payable. Cash flow was also negatively impacted by restructuring spending of $115 million, which largely related to payments for severance and exit costs resulting from the integration of Maytag. Cash flow was negatively impacted in 2006 by a voluntary pension contribution to our U.S. pension plans of $56 million, which was $41 million higher than the 2005 contributions to our U.S. pension plans.
Whirlpool’s cash provided by operating activities in 2005 increased $90 million over 2004. Cash provided by operating activities benefited from lower inventories, reduced pension contributions and higher accrued expenses for payroll, incentive compensation, restructuring and promotional spending. Results were partially offset by higher accounts receivable balances due mainly to higher sales and lower payables primarily a result of lower inventory levels. Cash flow was also negatively impacted by a decrease in net taxes payable of $105 million, due, in part, to a reduction in tax expense. In 2004, cash provided by operating activities benefited from lower pension contributions of approximately $62 million and lower restructuring spending of approximately $43 million. In 2004, cash flow was negatively impacted by higher working capital requirements of about $70 million, driven largely by material cost increases and higher inventory levels to support higher volumes and increased trans-regional shipments.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Whirlpool’s free cash flow was $426 million versus $531 million for the years ended December 31, 2006 and 2005, respectively.
The table below reconciles projected 2010 cash provided by operating activitiesoperations determined in accordance with generally accepted accounting principles generally accepted(GAAP) in the U.S. (“GAAP”)United States to free cash flow, a non-GAAP measure. Management believes that free cash flow provides both management and shareholders with a relevant measure of liquidity and a useful basis for assessing Whirlpool’s ability to fund ourits activities and obligations. There are limitations to using non-GAAP financial measures, including the difficulty associated with comparing companies that use similarly named non-GAAP measures but whose calculations may differ from Whirlpool’sour calculations. As defined by Whirlpool,We define free cash flow isas cash provided by operating activitiescontinuing operations after capital expenditures and proceeds from the sale of business/assets, excluding the sale of the Maytag adjacent assets/businesses. The following is a reconciliation of cash provided by operating activities to free cash flow.
Year ended December 31, | ||||||||
Millions of dollars | 2006 | 2005 | ||||||
Cash Provided by Operating Activities | $ | 880 | $ | 884 | ||||
Capital expenditures | (576 | ) | (494 | ) | ||||
Proceeds from sale of businesses/assets | 122 | 141 | ||||||
Free cash flow | $ | 426 | $ | 531 | ||||
Investing Activities of Continuing Operations
The principal recurring investing activities are property additions, which were $576 million, $494 million and $511 million in 2006, 2005 and 2004, respectively. These expenditures are primarily for equipment and tooling, driven by product innovation initiatives, more efficient production methods, and replacement for normal wear and tear. Expenditures were also made to support Whirlpool’s global operating platform footprint initiatives to lower-cost locations as well as replacement, regulatory and infrastructure changes. During 2006, Whirlpool also increased capital spending to support the integration of Maytag’s laundry production into our existing Whirlpool manufacturing facilities.
In each of 2006, 2005 and 2004, Whirlpool entered into separate sale-leaseback transactions whereby we sold and leased back certain of our owned properties. In 2006, proceeds related to the sale-leaseback of four properties, net of related fees, were approximately $43 million. Proceeds related to the sale-leaseback of four properties in 2005, net of related fees, were approximately $67 million. In 2004, proceeds related to sale-leasebacks of six properties, net of related fees, were approximately $66 million.
Cash proceeds from sale of businesses of $36 million during 2006 resulted from the sale of an equity investment and non-core business in Brazil. Cash proceeds from sale of businesses of $48 million in 2005 resulted from the sale of a non-core business in Latin America.
During 2006, Whirlpool repurchased $53 million of minority shares related to our operations in Latin America.
In 2006, Whirlpool also received cash proceeds, in total, of $110 million related to the sale of the Amana commercial microwave, Dixie-Narco vending systems and Hoover floor-care businesses. Proceeds related to the sale of the Hoover floor care business do not reflect the full proceeds to be received, as the sale was completed on January 31, 2007.F-7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Cash disbursed in 2006 forThe projections shown here are based upon many estimates and are inherently subject to change based on future decisions made by management and the Maytag acquisition, netboard of cash acquired, amounted to $797 million. Cash paid in 2005 associateddirectors of Whirlpool, and significant economic, competitive and other uncertainties and contingencies.
Millions of dollars | 2010 Outlook | |||||||||
Cash provided by operating activities | $ | 925 | – | $ | 1,025 | |||||
Capital expenditures | (525 | ) | – | (575 | ) | |||||
Proceeds from sale of assets/businesses | — | – | 50 | |||||||
Free cash flow | $ | 400 | – | $ | 500 | |||||
Agreements with the Maytag acquisition totaled $77 million, primarily consisting of $40 million to reimburse Maytag for its payment of a fee to terminate its prior merger agreementtrade customers
We enter into agreements with Triton Acquisition Holding Co. and $37 million of professional fees incurred in connection with the proposed acquisition. These costs were capitalized and recognizedour trade customers in the other asset line within Whirlpool’s Consolidated Balance Sheet asordinary course of December 31, 2005.business. Most of our products are not sold through long-term agreements. Most trade customers have the ability to change volume among suppliers.
Financing ActivitiesWe regularly negotiate with major trade customers and manufacturers regarding supply arrangements for future periods beyond the current year. Sears is a major trade customer for both our OEM and Whirlpool branded products, which accounted for approximately 10%, 11% and 12% of Continuing Operations
Total borrowings (repayments)our consolidated net sales for 2009, 2008 and 2007, respectively. The products and volumes we supply and the revenues we obtain may be significantly different in the future than those which currently exist. Based on current supply arrangements, we anticipate maintaining a significant, but reduced, level of short-term and long-term debt, net of new borrowings, were $92 million, $(131) million and $(58) millionOEM volume beginning in 2006, 2005 and 2004, respectively.
During 2006, Whirlpool used available cash and issued commercial paper to repay2010. In the Maytag 6.875% $200 million principal notes, the 7.875% public interest notespast, when faced with a principal amountpotential volume reduction from any one particular segment of $250 millionour trade distribution network, we generally have been able to offset the decline through increased sales throughout our broad distribution network. We expect to continue to grow our own brand sales, supported by significant innovation, through our full distribution trade network and execution of our Euro-denominated Eurobonds with a principal amount of 300 million.brand-focused value creation strategy.
On June 19, 2006, Whirlpool received proceeds of $750 million aggregate principal amount of senior notes to replace commercial paper borrowings used to initially finance the Maytag acquisition.
Dividends paid to stockholders totaled $130 million, $116 million and $116 million in 2006, 2005 and 2004, respectively.
Under its stock repurchase programs in 2005 and 2004, Whirlpool used $34 million and $251 million to purchase approximately 0.5 million and 3.7 million shares of common stock, respectively. No such purchases were made during 2006. (See Note 11 to the Consolidated Financial Statements for additional detail on Whirlpool’s stock repurchase program.)
Whirlpool received proceeds of $54 million in 2006, $102 million in 2005 and $64 million in 2004 related to the exercise of company stock options. (Whirlpool’s stock option program is discussed in Note 12 to the Consolidated Financial Statements.)
FINANCIAL CONDITION AND LIQUIDITY
Whirlpool’sOur objective is to finance itsour business through operating cash flow and the appropriate mix of long-term and short-term debt. By diversifying itsthe maturity structure, we avoid concentrations of debt, reducing liquidity risk. Whirlpool hasWe have varying needs for short-term working capital financing as a result of the nature of itsour business. The volume and timing of refrigeration and air conditioning production impacts our cash flows and consists of increased production in the first half of the year to meet increased demand in the summer months. Whirlpool finances its
The funding markets have been volatile during the majority of 2008 and 2009 and we have experienced negative global economic trends. To succeed in this environment we have aggressively taken steps to further reduce all areas of cost, production capacity and working capital fluctuations primarily throughcapital. As a result of the global volatility and challenging economic trends, we decided to exit the commercial paper markets inmarket during the U.S., EuropeDecember 2008 quarter and Canada, which are supported byinitiated borrowing under our committed bank lines. In addition, outsideline of credit (“Credit Agreement”), provided by a syndicate of highly-rated banks. Outside the U.S., short-term funding is also provided by bank borrowings on uncommitted lines. Whirlpool has accesslines of credit.
On February 27, 2009, we entered into an Amendment (the “First Amendment”) to long-term fundingthe Credit Agreement to assure flexibility in future credit availability. The First Amendment increased the U.S.spread over LIBOR to 3%, Europethe spread over prime to 2% and other public bond markets.the utilization fee to be paid, if amounts borrowed exceed $1.1 billion, to 1% and replaced the facility fee with an unused commitment fee of 0.50%.
Whirlpool’s financial position is supported by strong cash provided by continuing operating activities and borrowing capacity under long-term committed credit facilities. At December 31, 2006 and 2005, our total assets were $13.9 and $8.3 billion, respectively. Stockholders’ equity increased from $1.7 billion at the end of 2005 to $3.3 billion at the end of 2006. The increase in equity is primarily attributed to the issuance of common shares to acquire Maytag and current year earnings. No shares were repurchased during 2006.
On December 31, 2006, the Maytag 6.875% $200 million principal notes matured and were repaid with available cash and issuance of commercial paper.F-8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
DuringOn August 13, 2009, we entered into a second Amendment to our Credit Agreement (the “Second Amendment”) to further assure flexibility in future credit availability. The Second Amendment divides and reduces the third quarter of 2006,existing $2.2 billion credit facility into a $1.35 billion tranche maturing on August 13, 2012 (the “Extending Tranche”) and a $522 million tranche maturing December 1, 2010 (the “Non-Extending Tranche”). For the 7.875% Public Interest Notes (PINES) due August 1, 2031 were redeemed. Whirlpool exercised its optionExtending Tranche, the Second Amendment provides a utilization fee to call 100%be paid, if amounts borrowed exceed 50% of the PINES, which had a principal amountfacility, of $250 million, at par, plus accrued interest.0.50%, and for the Non-Extending Tranche, the utilization fee to be paid, if amounts borrowed exceed 50% of the facility, is 1%. The redemptioninterest margin over LIBOR charged will be based on Whirlpool’s credit rating.
As of December 31, 2009, there was financed through a combination of available cash and the issuance of commercial paper.
Whirlpool’s Eurobonds of EUR 300 million principal matured in July 2006 and were repaid with available cash and the issuance of commercial paper in the U.S.
no balance outstanding under our credit facility.
On June 19, 2006, WhirlpoolMay 4, 2009, we completed ana debt offering comprised of $750(1) $350 million aggregate principal amount of senior notes consisting of (a) $2008.000% Notes due 2012 and (2) $500 million aggregate principal amount of floating rate8.600% Notes due 2014. The proceeds from the notes due 2009 which bear interest at a floating rate equal to three-month USD London Interbank Offered Rate (“LIBOR”) plus 0.50% per annum; (b) $300 million aggregate principal amount of 6.125% senior notes due 2011; and (c) $250 million aggregate principal amount of 6.500% senior notes due 2016. Initially, Whirlpool borrowed amounts required to fund the cash portion of the Maytag 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.
On December 2, 2005, Whirlpool entered into an Amended and Restated Long Term Five-Year Credit Agreement (the “Amended and Restated Credit Agreement”), which amends and restates the Amended and Restated Long Term Credit Agreement dated May 28, 2004. On December 2, 2005, the parties to the Amended and Restated Credit Agreement also entered into a 364-Day Credit Agreement (the “364-Day Credit Agreement” and together with the Amended and Restated Credit Agreement, the “Credit Facilities”).
The Credit Facilities provide for a $2.2 billion 5-year credit facility, which includes a $200 million letter of credit subfacility, and a $500 million 364-Day credit facility, which may be converted into a term loan. Borrowing capacity of $1.2 billion under the Amended and Restated Credit Agreement became available on December 2, 2005. Borrowing capacity of $500 million under the 364-Day Credit Agreement and the remaining $1.0 billion under the Amended and Restated Credit Agreement became available on March 29, 2006. The $500 million 364-Day credit facility matured on November 30, 2006 and is no longer outstanding. Borrowings under the Amended and Restated Credit Agreement will be available to Whirlpool and designated subsidiarieswere used for general corporate purposes, including commercial paper support. Subsidiary borrowings underpurposes.
For additional information about our financing arrangements, see Note 5 of the facilities, if any, are guaranteed by Whirlpool. Interest underNotes to the Amended and Restated Credit Agreement accrues at a variable annual rate based on the LIBOR plus a margin dependent onConsolidated Financial Statements.
We believe that our credit rating at that time. The Amended and Restated Credit Agreement requires Whirlpooloperating cash flow, together with access to sufficient sources of liquidity, will be adequate to meet certain financial tests and contain specific covenants. Undrawn stand-by letters of credit issued under the letter of credit subfacility of $17 million reduce the availability of these committed lines.
Whirlpool wasour ongoing funding requirements. We are in compliance with the financial covenants under thesein our credit agreementsfacility for all periods presented.
Pension and Postretirement Benefit Plans
Defined Benefit Plans
On August 28, 2009, we announced the closure of our manufacturing facility in Evansville, Indiana in mid-2010. The announcement triggered a curtailment in our pension plan for Evansville hourly employees, resulting in a one-time curtailment loss of $6.6 million included in net periodic cost with an offset to other comprehensive income, net of tax. During 2009, we recorded the entire loss in our Consolidated Statement of Income as a component of cost of products sold. The closure of the Evansville facility also triggered a curtailment in our U.S. retiree healthcare plan, resulting in a curtailment gain. The curtailment gain will be recognized in our Consolidated Statement of Income as a component of cost of products sold as the employees terminate, which is expected to occur in 2010.
On June 15, 2004, Whirlpool announced that16, 2009, the Board of Directors authorized a new share repurchase program ofthe option for the company to use up to $500$100 million of company stock to fund the U.S. pension plans. If we elect to partially fund the U.S. pension plans in company stock, contributions may be made on a periodic basis from treasury stock, or, with the prior approval of the Finance Committee of the Board of Directors, from authorized, but unissued shares. As of December 31, 2009, we have not used company stock to fund our U.S. pension plans.
On February 9, 2009, we announced the indefinite suspension of the annual credit to retirement health savings accounts for the majority of active participants. The result of the suspension was a curtailment gain of $89 million.
On August 1, 2008, we amended certain retiree medical benefits associated with our Newton, Iowa manufacturing facility to be consistent with those benefits provided by the Whirlpool did not repurchase any shares during 2006.Corporation Group Benefit Plan. This amendment resulted in a reduction in the postretirement benefit obligation of $229 million with a corresponding increase to other comprehensive income, net of tax, within equity of our Consolidated Balance Sheet at December 31, 2009.
After completion of the Maytag acquisition, Whirlpool was removed from credit watch by rating agencies and our credit ratings were lowered to Baa2 by Moody’s and BBB by both Standard & Poor’s and Fitch. These actions of the rating agencies did not have a material impact on Whirlpool’s liquidity.
On September 9, 2005, Whirlpool entered into an agreement with Harbor Shores Community Redevelopment Inc. (“Harbor Shores”), a not-for-profit entity, whereby Whirlpool Corporation agreed to loan up to $12 million to Harbor Shores, secured by a mortgage on real estate owned by Harbor Shores. At December 31,F-9
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
2006,401(k) Defined Contribution Plan
During the March 2009 quarter we announced an indefinite suspension of company matching contributions to our 401(k) defined contribution plan covering substantially all funds had been loanedU.S. employees. We also announced that our automatic company contributions equal to 3% of employees’ eligible pay will be contributed in company stock. During the December 2009 quarter we announced the reinstatement of company matching contributions to our 401(k) defined contribution plan, covering substantially all U.S. employees, effective March 2010.
For additional information about pension and postretirement benefit plans see Note 12 of the Notes to the Consolidated Financial Statements.
Share Repurchase Program
In June 2004, our Board of Directors authorized a share repurchase program of up to $500 million. During 2007, we repurchased 3.8 million shares at an aggregate purchase price of $368 million and during the three months ended March 31, 2008, we repurchased 1.1 million shares at an aggregate purchase price of $97 million under this agreement. Membership interestsprogram. At March 31, 2008, there were no remaining funds authorized under this program.
On April 23, 2008, our Board of Directors authorized a new share repurchase program of up to $500 million. Share repurchases are made from time to time on the open market as conditions warrant. During 2008, we repurchased 1.9 million shares at an aggregate purchase price of $150 million under this program. There were no repurchases during 2009. At December 31, 2009, there were $350 million of remaining funds authorized under this program.
Sources and Uses of Cash
We expect to meet our cash needs for 2010 from cash flows from continuing operations, cash and equivalents and financing arrangements. Our cash and equivalents were $1.4 billion at December 31, 2009 compared to $146 million at December 31, 2008.
Cash Flows from Operating Activities of Continuing Operations
Cash provided by continuing operating activities in Harbor Shores are held2009 was $1,550 million, an increase of $1,223 million compared to 2008. Cash provided by three U.S. not-for-profit entities, including Whirlpool Foundation. Certaincontinuing operations reflects lower payments for inventory, lower cash payments for accounts payable and other operating accruals and lower employee compensation payments, partially offset by lower collections of accounts receivable. Cash provided by continuing operating activities in 2008 was $327 million, a decrease of $600 million compared to the year ended December 31, 2007. Cash provided by continuing operations for 2008 reflects lower cash earnings primarily from our North America and Europe segments compared to 2007. Cash provided by continuing operations also reflects lower accounts payable due to adjusting volume based on demand and higher pension contributions. The above decreases in cash flows were partially offset by a decrease in accounts receivable and lower restructuring spending.
Cash Flows from Investing Activities of Continuing Operations
Cash used in investing activities from continuing operations was an outflow of $499 million in 2009 compared to an outflow of $433 million last year. The increase in cash used in investing activities was primarily due to lower proceeds from the sale of assets in 2009 and higher investments primarily associated with business acquisition activity in our international locations. Cash used in investing activities from continuing operations in 2008 was an outflow of $433 million compared to an outflow of $331 million during 2007. The increase in cash
F-10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
used in investing activities was primarily due to 2007 receipt of proceeds from the sale of certain Maytag discontinued businesses of $100 million, lower proceeds from the sale of assets in 2008, and higher capital spending.
The goal of our global operating platform is to enhance our competitive position in the global home appliance industry by reducing costs, driving productivity and quality improvements, and accelerating our rate of innovation. We plan to continue our comprehensive worldwide effort to optimize our regional manufacturing facilities, supply base, product platforms and technology resources to better support our global products, brands and customers. We intend to make additional investments to improve our competitiveness in 2010. Capital spending is expected to be between $525 and $575 million in 2010 in support of our investment in innovative product technologies and our global operating platform initiatives.
Cash Flows from Financing Activities of Continuing Operations
Cash provided by financing activities from continuing operations for 2009 compared to 2008 was an inflow of $144 million in the year ended December 31, 2009 compared to an inflow of $141 million for the year ended December 31, 2008. The current and former membersyear reflects proceeds received related to two debt offerings totaling $850 million while the prior year reflects proceeds received related to the issuance of $500 million of 5.5% notes due March 1, 2013. For additional information about our $850 million debt offerings, see Note 5 of the Whirlpool Corporation management team are involvedNotes to the Consolidated Financial Statements. The current year also reflects net repayments of short-term borrowings and long-term debt repayments totaling $572 million compared to net repayments of $30 million in 2008. During 2009, we paid dividends to common stockholders totaling $128 million, paid debt financing fees of $38 million and received proceeds from the issuance of common stock related to option exercises of $21 million. During 2008, we repurchased stock totaling $247 million, paid dividends to common stockholders totaling $128 million and received proceeds from the issuance of common stock related to option exercises of $21 million.
Cash provided by financing activities from continuing operations for 2008 compared to 2007 was an inflow of $141 million in the Harbor Shores project, including Whirlpool’s current CFOyear ended December 31, 2008 compared to an outflow of $696 million for the year ended December 31, 2007. The year ended December 31, 2008 reflects proceeds received related to the issuance of $500 million of 5.5% notes due March 1, 2013 and its former CEO, boththe repayment of whom are trustees$125 million of 9.1% debentures. Net proceeds of short-term borrowings were $101 million for the year ended December 31, 2008 compared to net repayments of $243 million in 2007. During 2008, we repurchased stock totaling $247 million, paid dividends to common stockholders totaling $128 million and officersreceived proceeds from the issuance of Harbor Shores. Nonecommon stock related to option exercises of these individuals receives any additional compensation$21 million. During 2007, we repurchased stock totaling $368 million, paid dividends to common stockholders totaling $134 million and received proceeds from Whirlpool or the Whirlpool Foundation for their servicesissuance of common stock related to Harbor Shores. The purposeoption exercises of the Harbor Shores project is to transform approximately 530 acres in Benton Harbor and St. Joseph, Michigan, into a residential and commercial community with a goal of enhancing the economic base in southwest Michigan. The project will also place a special emphasis on providing literacy and job training combined with employment options for low and moderate income residents.
$68 million.
OFF-BALANCE SHEET ARRANGEMENTS
Whirlpool 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 Whirlpool, following its normal credit policies. If 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 December 31, 20062009 and 2005,2008, these amounts totaled $312$300 million and $236$203 million, respectively. TheOur only recourse Whirlpool has related to these agreements would beis legal or administrative collection efforts directed against the customer.
F-11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS
The following table summarizes Whirlpool’sour expected cash outflows resulting from financial contracts and commitments.commitments:
Payments due by period | |||||||||||||||
Millions of dollars | Total | 2007 | 2008 & 2009 | 2010 & 2011 | Thereafter | ||||||||||
Debt obligations(1) | $ | 1,815 | $ | 17 | $ | 330 | $ | 673 | $ | 795 | |||||
Operating lease obligations | 460 | 134 | 167 | 80 | 79 | ||||||||||
Purchase obligations(2) | 1,020 | 262 | 469 | 289 | — | ||||||||||
Long-term liabilities(3) | 195 | 195 | — | — | — | ||||||||||
Total | $ | 3,490 | $ | 608 | $ | 966 | $ | 1,042 | $ | 874 | |||||
Payments due by period | |||||||||||||||
Total | 2010 | 2011 & 2012 | 2013 & 2014 | Thereafter | |||||||||||
Millions of dollars | |||||||||||||||
Long-term debt obligations(1) | $ | 3,583 | $ | 563 | $ | 969 | $ | 1,287 | $ | 764 | |||||
Operating lease obligations | 897 | 186 | 285 | 178 | 248 | ||||||||||
Purchase obligations(2) | 1,004 | 278 | 480 | 131 | 115 | ||||||||||
Other long-term liabilities(3) | 41 | 41 | — | — | — | ||||||||||
Total(4)(5) | $ | 5,525 | $ | 1,068 | $ | 1,734 | $ | 1,596 | $ | 1,127 | |||||
(1) |
(2) |
(3) |
(4) | The table does not include short-term credit facility borrowings. For additional information about short-term borrowings, see Note 5 of the Notes to the Consolidated Financial Statements. |
(5) | Not included in the above table are tax payments associated with uncertain tax positions as we are unable to estimate the period of payment. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The goalpreparation of Whirlpool’s global operating platform is to enhance our competitive positionfinancial statements in conformity with generally accepted accounting principles in the global home appliance industry by reducing costs, driving productivity and quality improvements, and accelerating our rate of innovation. Whirlpool plans to continue its comprehensive worldwide effort to optimize our regional manufacturing facilities, supply base, product platforms and technology resources to better support our global products, brands and customers. Whirlpool intendsU.S. (“GAAP”) requires management to make additional investmentscertain estimates and assumptions. We periodically evaluate these estimates and assumptions, which are based on historical experience, changes in the business environment and other factors that management believes to improve our competitiveness in fiscal 2007. Capital spending is expected to approximate $625 million in 2007 in support of Whirlpool’s investment in innovative product technologies and its global operating platform initiatives.be reasonable under the circumstances. Actual results may differ materially from these estimates.
F-12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
During 2004,Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits involves estimating the costs of future benefits and attributing the cost over the employee’s expected period of employment. The determination of our obligation and expense for these costs requires the use of certain assumptions. Those assumptions include, among other assumptions, the discount rate, expected long-term rate of return on plan assets and health care cost trend rates. These assumptions are subject to change based on interest rates on high quality bonds, stock and bond markets and medical cost inflation, respectively. As permitted by GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and accrued liability in such future periods. While we believe that our assumptions are appropriate given current economic conditions and actual experience, significant differences in results or significant changes in our assumptions may materially affect our pension and other postretirement obligations and related future expense. Our pension and other postretirement benefit obligations as of December 31, 2009 and preliminary retirement benefit costs for 2010 were prepared using the assumptions that were determined as of December 31, 2009. The following table summarizes the sensitivity of our December 31, 2009 retirement obligations and 2010 retirement benefit costs of our U.S. plans to changes in the key assumptions used to determine those results:
Millions of dollars Change in assumption | Estimated increase (decrease) in 2010 pension cost | Estimated increase (decrease) in Projected Benefit Obligation for the year ended December 31, 2009 | Estimated increase (decrease) in 2010 Other Postretirement Benefits cost | Estimated increase (decrease) in Other Postretirement Benefit Obligation for the year ended December 31, 2009 | ||||||||||||
0.25% increase in discount rate | $ | (1.6 | ) | $ | (102.1 | ) | $ | 0.7 | $ | (14.1 | ) | |||||
0.25% decrease in discount rate | 1.4 | 105.2 | (0.7 | ) | 15.1 | |||||||||||
0.25% increase in long-term return on assets | (6.1 | ) | — | — | — | |||||||||||
0.25% decrease in long-term return on assets | 6.1 | — | — | — | ||||||||||||
0.50% increase in discount rate | (3.4 | ) | (201.1 | ) | 1.3 | (28.1 | ) | |||||||||
0.50% decrease in discount rate | 2.5 | 213.5 | (1.5 | ) | 30.3 | |||||||||||
0.50% increase in long-term return on assets | (12.2 | ) | — | — | — | |||||||||||
0.50% decrease in long-term return on assets | 12.2 | — | — | — | ||||||||||||
1.00% increase in medical trend rates | — | — | 1.8 | 31.7 | ||||||||||||
1.00% decrease in medical trend rates | — | — | (1.7 | ) | (28.4 | ) | ||||||||||
These sensitivities may not be appropriate to use for other years’ financial results. Furthermore, the impact of assumption changes outside of the ranges shown above may not be approximated by using the above results. For additional information about our pension and other postretirement benefit obligations, see Note 12 of the Notes to the Consolidated Financial Statements.
Income Taxes
We estimate our income taxes in each of the taxing jurisdictions in which we operate. This involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes in accordance with GAAP guidance. These differences may result in deferred tax assets or liabilities, which are included in our Consolidated Balance Sheets. We are required to assess the likelihood that deferred tax assets, which include net operating loss carryforwards and deductible temporary differences, are expected to be realizable in future years. Realization of our net operating loss and tax credit deferred tax assets is supported by specific tax planning strategies and considers projections of future profitability. We provide a valuation
F-13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
allowance to reduce our deferred tax assets to an amount that will more likely than not be realized based on estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. If future taxable income is lower than expected or if tax planning strategies are not available as anticipated, we may record additional valuation allowances through income tax expense in the period such determination is made. Likewise, if we determine that we are able to realize our deferred tax assets in the future in excess of net recorded amounts, an adjustment to the deferred tax asset will increase income in the period such determination is made.
As of December 31, 2009 and 2008, we had total deferred tax assets of $2,275 million and $2,212 million, respectively, net of valuation allowances of $180 million and $147 million, respectively. Our effective tax rate has ranged from (81.7)% to 33.9% over the past five years and has been influenced by tax credits, audit settlements and adjustments, tax planning strategies, enacted legislation, and dispersion of global income. A 1.0% increase in our effective tax rate would have decreased 2009 earnings by approximately $3 million. Future changes in the effective tax rate will be subject to several factors, including enacted laws, tax planning strategies, business profitability and the expiration of energy tax credit legislation at the end of 2010.
In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. For additional information about income taxes, see Notes 1 and 11 of the Notes to the Consolidated Financial Statements.
BEFIEX Credits
Our Brazilian operations earned tax credits under the Brazilian government’s export incentive program. These credits reduce Brazilian federal excise taxes on domestic sales, resulting in an increase in the operations’ recorded net sales. Based on a recalculation of available credits and a favorable court decision in the December 2005 quarter, we were able to recognize approximately $69 million, $168 million and $131 million of export credits during 2009, 2008 and 2007, respectively. As of December 31, 2009, approximately $693 million of export credits remain. We recognize credits as they are monetized; however, future actions by the Brazilian government could limit our ability to monetize these export credits. BEFIEX credits are not subject to income taxes.
Product Recalls
The establishment of a liability for product recalls is periodically required and is impacted by several factors such as customer response rate, consumer options, field repair costs, inventory repair costs, extended warranty costs, communication structure and other miscellaneous costs such as legal, logistics and consulting. The customer response rate, which represents an estimate of the total number of units to be serviced as a percentage of the total number of units affected by the recall, is the most significant factor in estimating the total cost of each recall. To determine a response rate, we consider the population of the affected appliances based on evaluating the design issue or defective part in the appliance and the respective years in which it was included in manufacturing the appliance to determine the affected population. We also consider the type and age of the affected appliance to determine the affected population and apply historical response rates based on current and past experience factors to derive an estimated liability which is revised, as necessary, depending on our actual response rate. Differences between our assumptions and actual experience could have a material impact on our product recall reserves. For additional information about product recalls, see Note 6 of the Notes to the Consolidated Financial Statements.
Warranty Obligations
The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and reflects our best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or anticipated
F-14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
warranty claims as new information becomes available. Future events and circumstances could materially change our estimates and require adjustments to the warranty obligations. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. For additional information about warranty obligations, see Note 6 of the Notes to the Consolidated Financial Statements.
Goodwill and Intangible Valuations
We sell products under a number of trademarks, many of which we developed. Trademark development costs are expensed as incurred. We also purchase trademark assets and goodwill in acquisitions. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including trademark assets, based on estimated fair value, with any remaining purchase price recorded as goodwill. Trademarks and goodwill are considered indefinite lived intangible assets and as such are not amortized. We have two reporting units where goodwill is recorded which include North America and Embraco in our Latin America region. There have been no changes to our reporting units or allocations of goodwill by reporting units. We have trademark assets in our North America and Europe regions. Forecasted financial statements utilized in the valuation of our reporting units and forecasted revenue amounts utilized in determining the fair values of our trademarks are based upon Whirlpool’s current long range plans which are consistent with commercially available industry expectations. We test indefinite lived intangibles for impairment as of November 30 each year and more frequently if indicators of impairment exist.
Goodwill Valuations
Goodwill is evaluated using a two-step impairment test at the reporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to determine the amount of goodwill impairment loss to be recorded. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The difference between the total fair value of the reporting unit and the fair value of all the assets and liabilities other than goodwill is the implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
We determine fair value based primarily on a discounted cash flow model which is an accepted valuation technique. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows from our reporting units.
Significant Assumptions in evaluating Goodwill
In assessing goodwill for impairment for the North America reporting unit, significant assumptions used in our discounted cash flow model as of November 30, 2009 included revenue growth rates, a long term growth rate and the discount rate.
Revenue growth rates used in the discounted cash flows model were based upon our long range plan for the next three years and range from -12% to 6%. Subsequent to this three year period, we applied expected growth rates to revenues which were consistent with commercially available industry market value and volume forecasts. The long term growth rate used was 2% based upon the compound average growth rate for the U.S. T-7 appliance industry (T-7 refers to the following appliance categories: washers, dryers, refrigerators, freezers, dishwashers, ranges and compactors) over a 25 year period, and was also consistent with commercially available industry market value and volume forecasts.
F-15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
The discount rate of 11% used in our discounted cash flow model, as of the November 30, 2009 assessment, was developed using the capital asset pricing model through which a weighted average cost of capital was derived. The discount rate was estimated using the risk free rate, market risk premium, and cost of debt prevalent as of the valuation date. The Beta and capital structure were estimated based on an analysis of comparable guideline companies. In addition, a risk premium was included to account for the risks inherent in the cash flows and to reconcile the fair value indicated by the discounted cash flow model to Whirlpool’s public market equity value at November 30, 2009.
Other Considerations in evaluating Goodwill
Additionally, in assessing goodwill impairment for the North America reporting unit, we considered the implied control premium and concluded the implied control premium was reasonable based on other recent market transactions.
The estimated fair value of our North America reporting unit has historically exceeded the carrying value by a substantial amount. As of our November 30, 2009 valuation, the estimated fair value of our North America reporting unit exceeded the carrying value by approximately 25%.
Our methodology for evaluating goodwill for impairment has not changed since our impairment test performed as of November 30, 2008. We have updated our revenue projections discussed above based on our current long range plan, and current industry and economic conditions. The long term growth rate for the North America reporting unit has not changed from the rate that was used in our last annual impairment test.
These assumptions could be adversely impacted by certain of the risks discussed in “Risk Factors” in Item 1A of this report.
Intangible Valuations
In assessing the fair value of trademarks, we utilize a relief from royalty method. If the carrying amount of a trademark exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Considerable judgment is necessary to estimate key assumptions involved in valuing our trademarks, including projected revenues, royalty rates and applicable discount rates.
In developing discount rates for the valuation of our trademarks, we used the industry average weighted average cost of capital as the base adjusted for the higher relative level of risks associated with doing business in other countries, as applicable, as well as the higher relative levels of risks associated with intangible assets. The premium added considered that we have reduced the projected revenue from the forecasts used in previous years due in part to lower industry demand driven by the current economic conditions in our respective markets. Based on this analysis, we determined discount rates ranging from 11.0% to 11.5% (11.0% to 11.5% in 2008).
In determining royalty rates for the valuation of our trademarks, we considered factors that affect the intrinsic royalty rates that would hypothetically be paid for the use of the trademarks. The most significant factors in determining the intrinsic royalty rates include the overall role and importance of the trademarks in the particular industry, the profitability of the products utilizing the trademark and trade name intangibles, and the position of the trademarked products in a given market segment. Based on this analysis, we determined royalty rates ranging from 2.0% to 5.0% (0.5% to 5.0% in 2008).
Based on the compound annual growth rate of the U.S. T-7 appliance industry over the past 25 years of 2%, and the strength of our trademarks in the marketplace, any reasonably likely change in the projected revenues or discount rate utilized in the valuation of our trademarks would not result in a material impairment charge.
F-16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
For additional information about goodwill and intangible valuations, see Note 2 of the Notes to the Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP. The standard is effective for interim and annual periods ending after September 15, 2009. We adopted the provisions of the standard on September 30, 2009, which did not have a material impact on our financial statements.
In June 2009, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding the consolidation of variable interest entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (formerly SFAS No. 166, “Accounting for Transfers of Financial Assets”). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In April 2009, the FASB issued ASC 825, “Financial Instruments” (formerly FASB Staff Position 107-1, “Interim Disclosures about Fair Value of Financial Instruments”). ASC 825 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods ending after June 15, 2009. We adopted the provisions of ASC 825 on June 30, 2009. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements for information related to the fair value of our financial instruments.
In March 2008, the FASB issued the disclosure requirements within ASC 815, “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133”). ASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. The disclosure requirements apply to all derivative instruments within the scope of ASC 815. The standard also applies to non-derivative hedging instruments and all hedged items designated and qualifying under ASC 815. We adopted the disclosure requirements of ASC 815 on January 1, 2009. For additional information regarding derivative instruments and hedging activities, see Note 7 of the Notes to the Consolidated Financial Statements.
In December 2007, the FASB issued accounting guidance contained within ASC 805, “Business Combinations” (formerly SFAS No. 141(R), “Business Combinations”). ASC 805 requires us to continue to follow the guidance in SFAS 141 for certain aspects of business combinations, with additional guidance provided
F-17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
defining the acquirer, the accounting for transaction costs and contingent consideration, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and measuring goodwill or a gain from a bargain purchase. In addition, adjustments associated with changes in tax contingencies that occur after the measurement period, not to exceed one year, are recorded as adjustments to income. This statement was effective for all business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008; however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. We adopted ASC 805 on January 1, 2009.
In December 2007, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding noncontrolling interests (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”). ASC 810-10-65 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We adopted ASC 810-10-65 on January 1, 2009. As a result, we have reclassified financial statement line items within our Consolidated Balance Sheets and Statements of Income for the prior period to conform with this standard. Additionally, see Note 8 of the Notes to the Consolidated Financial Statements for disclosure reflecting the impact of ASC 810-10-65 on our reconciliation of comprehensive income and stockholders’ equity.
MARKET RISK
We have in place an enterprise risk management process that involves systematic risk identification and mitigation covering the categories of enterprise, strategic, financial, operation and compliance and reporting risk. The enterprise risk management process receives Board of Directors increasedand Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.
We are exposed to market risk from changes in foreign currency exchange rates, domestic and foreign interest rates, and commodity prices, which can affect our operating results and overall financial condition. We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the quarterly dividend from 34 cents per shareuse of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are contracted with a diversified group of investment grade counterparties to 43 cents per share.reduce exposure to nonperformance on such instruments.
We use foreign currency forward contracts, currency options and currency swaps to hedge the price risk associated with firmly committed and forecasted cross-border payments and receipts related to ongoing business and operational financing activities. Foreign currency contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2009, a 10% unfavorable exchange rate movement in each currency in our portfolio of foreign currency contracts would have resulted in an incremental unrealized loss of approximately $168 million, while a 10% favorable shift would have resulted in an incremental unrealized gain of approximately $168 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the re-measurement of the underlying exposures.
We enter into commodity swap contracts to hedge the price risk associated with firmly committed and forecasted commodities purchases that are not fixed directly through supply contracts. As of December 31, 2009, a 10% favorable or unfavorable shift in commodity prices would have resulted in an incremental $50 million gain or a $50 million loss related to these contracts.
Whirlpool believes that its capital resources and liquidity position at December 31, 2006, coupled with its planned cash flow generated from operations in 2007, are adequate to support higher capital spending, higher pension contributions, acquisition integration costs, continued dividend payments, repayment of debt and to meet anticipated business needs to fund future growth opportunities, Currently, Whirlpool has access to capital markets in the U.S. and internationally.F-18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
MAYTAG ACQUISITION
On March 31, 2006, Whirlpool completed its acquisition of Maytag. Maytag reported consolidated net sales for the year ended December 31, 2005 of approximately $4.9 billion. With the acquisition, we add an array of home appliance brands includingMaytag,Jenn-Air andAmana. The aggregate purchase price for Maytag was approximately $1.9 billion, including approximately $848 million of cash and approximately 9.7 million shares of Whirlpool common stock. The purchase price also included the exchange of fully-vested Whirlpool options for fully-vested Maytag options to become exercisable, in aggregate, for an additional 1.8 million shares of Whirlpool 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 Whirlpool common stock was determined using the average market price of Whirlpool’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.RESULTS OF OPERATIONS—(CONTINUED)
In addition, Whirlpool assumed Maytag’s existingJanuary 2009, Standard & Poor’s and Fitch Ratings lowered our senior unsecured debt of approximately $973 million. Whirlpool incurred approximately $102 millionrating from “BBB” to “BBB-” and our short-term corporate credit and commercial paper ratings from “A-2” to “A-3” and “F-2” to “F-3”, respectively, based on weakened operating performance and the pullback in acquisition-related expenses, which are includeddiscretionary consumer spending. Also in January 2009, Moody’s Investor Services lowered our senior unsecured rating from “Baa2” to “Baa3” and our commercial paper ratings from “Prime-2” to “Prime-3” based on weakening appliance industry demand. These rating adjustments may result in higher interest costs if we were to seek additional financing in the purchase price above. Initially, Whirlpool borrowed amounts required to fund the cash portioncapital markets. See Note 5 of the purchase price through issuances inNotes to the U.S. commercial paper market and in June 2006, refinanced a portion of this commercial paper through the issuance of long-term bonds. (ForConsolidated Financial Statements for additional information on the Maytag acquisition, see Note 3 to the Consolidated Condensed Financial Statements.)financing arrangements.
Cost efficiencies are being realized from all areas of the value chain, including product manufacturing, procurement, logistics, infrastructure and support areas. Whirlpool expects to achieve efficiencies of $350 to $400 million during 2007, compared to $107 million in 2006, and anticipates annualized savings in excess of $400 million to be fully realized in 2008. Whirlpool expects to incur approximately $410 million in additional pre-tax, one-time cash costs between 2006 through 2008 to realize the annualized savings estimates. Approximately $150 million of these costs are expected to impact earnings between 2006 through 2008, with the remainder included as part of purchase accounting.
OTHER MATTERSCRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires management to make certain estimates and assumptions. We periodically evaluate these estimates and assumptions, which are based on historical experience, changes in the business environment and other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates.
Whirlpool 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. As necessary, Whirlpool undertakes to effect repair or replacement of appliances in the event that an investigation leads to the conclusion that such action is warranted. Whirlpool currently believes that no such repair or replacement actions of a material nature are required, other than the voluntary recall described in Note 19 to the Consolidated Financial Statements, but will continue to evaluate potential quality and safety issues as new information develops.F-12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Pension and Other Postretirement Medical Benefit PlansBenefits
Accounting for pensions and other postretirement benefits involves estimating the costs of future benefits and attributing the cost over the employee’s expected period of employment. The determination of our obligation and expense for these costs requires the use of certain assumptions. Those assumptions include, among other assumptions, the discount rate, expected long-term rate of return on plan assets and health care cost trend rates. These assumptions are subject to change based on interest rates on high quality bonds, stock and bond markets and medical cost inflation, respectively. As permitted by GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and accrued liability in such future periods. While we believe that our assumptions are appropriate given current economic conditions and actual experience, significant differences in results or significant changes in our assumptions may materially affect our pension and other postretirement obligations and related future expense. Our pension and other postretirement benefit obligations as of December 31, 2009 and preliminary retirement benefit costs for 2010 were prepared using the assumptions that were determined as of December 31, 2009. The following table summarizes the sensitivity of our December 31, 2009 retirement obligations and 2010 retirement benefit costs of our U.S. plans to changes in the key assumptions used to determine those results:
Millions of dollars Change in assumption | Estimated increase (decrease) in 2010 pension cost | Estimated increase (decrease) in Projected Benefit Obligation for the year ended December 31, 2009 | Estimated increase (decrease) in 2010 Other Postretirement Benefits cost | Estimated increase (decrease) in Other Postretirement Benefit Obligation for the year ended December 31, 2009 | ||||||||||||
0.25% increase in discount rate | $ | (1.6 | ) | $ | (102.1 | ) | $ | 0.7 | $ | (14.1 | ) | |||||
0.25% decrease in discount rate | 1.4 | 105.2 | (0.7 | ) | 15.1 | |||||||||||
0.25% increase in long-term return on assets | (6.1 | ) | — | — | — | |||||||||||
0.25% decrease in long-term return on assets | 6.1 | — | — | — | ||||||||||||
0.50% increase in discount rate | (3.4 | ) | (201.1 | ) | 1.3 | (28.1 | ) | |||||||||
0.50% decrease in discount rate | 2.5 | 213.5 | (1.5 | ) | 30.3 | |||||||||||
0.50% increase in long-term return on assets | (12.2 | ) | — | — | — | |||||||||||
0.50% decrease in long-term return on assets | 12.2 | — | — | — | ||||||||||||
1.00% increase in medical trend rates | — | — | 1.8 | 31.7 | ||||||||||||
1.00% decrease in medical trend rates | — | — | (1.7 | ) | (28.4 | ) | ||||||||||
Whirlpool made $51 millionThese sensitivities may not be appropriate to use for other years’ financial results. Furthermore, the impact of voluntary contributions to its U.S. pension plans during 2006, and paid $5 million under the U.S. unfunded plans. We also contributed $22 million to our foreign pension plans during 2006. At December 31, 2006, Whirlpool’s defined benefit pension plans are under-funded. (For the obligations and funded statusassumption changes outside of the U.S.ranges shown above may not be approximated by using the above results. For additional information about our pension and foreign plans,other postretirement benefit obligations, see Note 1612 of the Notes to the Consolidated Financial Statements.)
Income Taxes
We estimate our income taxes in each of the taxing jurisdictions in which we operate. This involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes in accordance with GAAP guidance. These differences may result in deferred tax assets or liabilities, which are included in our Consolidated Balance Sheets. We are required to assess the likelihood that deferred tax assets, which include net operating loss carryforwards and deductible temporary differences, are expected to be realizable in future years. Realization of our net operating loss and tax credit deferred tax assets is supported by specific tax planning strategies and considers projections of future profitability. We provide a valuation
The Whirlpool Employees Pension Plan (the “WEPP”) has been amended to cease benefit accruals for the majority of participants effective December 31, 2006. For certain salaried Whirlpool participants who are eligible to retire on or before December 31, 2009, the plan has been amended to continue previous plan benefit accruals through the earlier of the date of retirement or December 31, 2009. The Maytag Corporation Employees Retirement Plan has been amended to cease benefit accruals for non-union participants effective December 31, 2006. In addition, the Whirlpool Production Employees Retirement Plan at Whirlpool’s LaVergne, Tennessee manufacturing facility, which covers union employees, has been amended to cease benefit accruals effective January 31, 2007. A defined contribution benefit is being provided to eligible affected employees subsequent to the effective date of the plan amendments. As a result of these changes, Whirlpool recognized a net curtailment charge of approximately $6 million during 2006.
Whirlpool previously amended the WEPP in January 2005 and we re-measured the net periodic cost and funded status of the plan. The amendment reduced the projected benefit obligation (“PBO”) by approximately $80 million. The accumulated benefit obligation (“ABO”) was not affected by the amendment since the accrued benefits as of December 31, 2005 were not affected by this change.
Whirlpool recognized consolidated pre-tax pension costs of $116 million, $94 million and $91 million in 2006, 2005 and 2004, respectively.
U.S. pension plans comprise 91% of Whirlpool’s projected benefit obligation. The discount rate and expected return on assets assumption used in determining Whirlpool’s U.S. pension benefit obligations and costs are as follows:
Weighted-average discount rate | Expected return on assets | |||||
Benefit obligation—December 31 | ||||||
2006 | 5.85 | % | N/A | |||
2005 | 5.60 | % | N/A | |||
Pension costs | ||||||
2007 | 5.85 | % | 8.50 | % | ||
2006 | 5.6%/6.05 | % | 8.50 | % | ||
2005 | 5.80 | % | 8.75 | % |
Whirlpool’s expected return on assets assumption of 8.5% was based on historical asset returns for publicly traded equity and fixed income securities tracked between 1926 and 2006 and the historical returns for private equity. The expected returns are weighted by the targeted asset allocations. The resulting weighted average return was rounded to the nearest quarter of one percent. Whirlpool uses a measurement date of December 31.
Whirlpool also provides postretirement health care benefits for eligible retired U.S. employees. Eligible retirees include those who were full-time employees with 10 years of service who attained age 55 while in service with us and those union retirees who met the eligibility requirements of their collective bargaining agreements. In general, the postretirement health care plans are contributory with participants’ contributionsF-13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
adjusted annuallyallowance to reduce our deferred tax assets to an amount that will more likely than not be realized based on estimates of future taxable income in the various taxing jurisdictions, and generally include cost-sharing provisionsthe amount of deferred taxes that limit Whirlpool’s exposure for recent andare ultimately realizable. If future retirees. The planstaxable income is lower than expected or if tax planning strategies are unfunded. Whirlpool has generally reservednot available as anticipated, we may record additional valuation allowances through income tax expense in the rightperiod such determination is made. Likewise, if we determine that we are able to modifyrealize our deferred tax assets in the benefits. We provide no significant postretirement medical benefitsfuture in excess of net recorded amounts, an adjustment to non-U.S. employees.the deferred tax asset will increase income in the period such determination is made.
AtAs of December 31, 20062009 and 2005, discount rates were determined individually for each2008, we had total deferred tax assets of its pension plans$2,275 million and $2,212 million, respectively, net of valuation allowances of $180 million and $147 million, respectively. Our effective tax rate has ranged from (81.7)% to 33.9% over the past five years and has been influenced by tax credits, audit settlements and adjustments, tax planning strategies, enacted legislation, and dispersion of global income. A 1.0% increase in our effective tax rate would have decreased 2009 earnings by approximately $3 million. Future changes in the effective tax rate will be subject to several factors, including enacted laws, tax planning strategies, business profitability and the postretirement plan based onexpiration of energy tax credit legislation at the yieldend of Aa rated non-callable (or callable with make whole provisions) bonds.
2010.
In 2004, Whirlpool measured the effectsaddition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. For additional information about income taxes, see Notes 1 and 11 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) following the guidance in FASB Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements RelatedNotes to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” For the year ended December 31, 2004, we reflected the estimated federal subsidyConsolidated Financial Statements.
BEFIEX Credits
Our Brazilian operations earned tax credits under the Act asBrazilian government’s export incentive program. These credits reduce Brazilian federal excise taxes on domestic sales, resulting in an actuarial gain as required by FSP 106-2, which causedincrease in the accumulated other postretirement benefit obligation to decrease by $104 million,operations’ recorded net sales. Based on a recalculation of available credits and reduced the cost recognized by approximately $15 million.
Legal Proceedings
Whirlpool is currently a defendant in eight purported class action lawsuits. Each of the pending purported class action lawsuits alleges that certain named appliance products contain a design or component defect that amounts to a breach of express warranty, a breach of implied warranty, and/or a violation of consumer fraud statutes. There are no allegations of personal injury or property damage in any of the cases and the complaints seek unspecified compensatory damages in each case. Whirlpool believes that each of these suits is without merit and intends to vigorously defend these actions. Whirlpool cannot reasonably estimate a possible range of loss, if any, for any of the cases.
In 1989, a Brazilian affiliate (now a subsidiary) of Whirlpool 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, afavorable court decision in the declaratory action adverseDecember 2005 quarter, we were able to us became final. In 2001,recognize approximately $69 million, $168 million and $131 million of export credits during 2009, 2008 and 2007, respectively. As of December 31, 2009, approximately $693 million of export credits remain. We recognize credits as they are monetized; however, future actions by the financial institution beganBrazilian government could limit our ability to monetize these export credits. BEFIEX credits are not subject to income taxes.
Product Recalls
The establishment of a collection action,liability for product recalls is periodically required and is impacted by several factors such as customer response rate, consumer options, field repair costs, inventory repair costs, extended warranty costs, communication structure and other miscellaneous costs such as legal, logistics and consulting. The customer response rate, which represents an estimate of the total number of units to be serviced as a percentage of the total number of units affected by the recall, is the most significant factor in estimating the total cost of each recall. To determine a response rate, we responded with a counterclaim. The lower court dismissedconsider the counterclaimpopulation of the affected appliances based on evaluating the design issue or defective part in 2002the appliance and the Superior Court confirmedrespective years in which it was included in manufacturing the lower court decision in December 2005. Whirlpool provided forappliance to determine the potential exposure resulting from this litigation during 2005. After official publicationaffected population. We also consider the type and age of the Superior Court’s rulingaffected appliance to determine the affected population and apply historical response rates based on the counterclaim, Whirlpool madecurrent and past experience factors to derive an additional legal filing with the Superior Court to clarify its ruling. Dependingestimated liability which is revised, as necessary, depending on the final ruling, an additional legal appeal may be available to the Superior Court.
Whirlpool 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 notour actual response rate. Differences between our assumptions and actual experience could have a material adverse effectimpact on our financial positionproduct recall reserves. For additional information about product recalls, see Note 6 of the Notes to the Consolidated Financial Statements.
Warranty Obligations
The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and reflects our best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or results of operations.anticipated
Other
The Brazilian Constitution provides the basis for tax credits on purchases of raw materials used in production. The credit applies to purchases of raw materials that are tax exempt or have a zero tax rate. Several court decisions supported the tax credit and during 2003 and 2004, Whirlpool calculated tax credits under this provision. The original amount recorded as tax credits is approximately $22 million. No credits were recorded in 2005 and 2006. The credit recorded by Whirlpool has been challenged by the Tax Authorities. We are vigorously defending the case at the administrative level.
On September 15, 2006, the Latin America region paid the Brazilian government approximately $22 million in federal taxes, penalties and interest for amounts relating to certain VAT tax amounts that had been in dispute for a number of years.F-14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
warranty claims as new information becomes available. Future events and circumstances could materially change our estimates and require adjustments to the warranty obligations. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. For additional information about warranty obligations, see Note 6 of the Notes to the Consolidated Financial Statements.
Goodwill and Intangible Valuations
We sell products under a number of trademarks, many of which we developed. Trademark development costs are expensed as incurred. We also purchase trademark assets and goodwill in acquisitions. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including trademark assets, based on estimated fair value, with any remaining purchase price recorded as goodwill. Trademarks and goodwill are considered indefinite lived intangible assets and as such are not amortized. We have two reporting units where goodwill is recorded which include North America and Embraco in our Latin America region. There have been no changes to our reporting units or allocations of goodwill by reporting units. We have trademark assets in our North America and Europe regions. Forecasted financial statements utilized in the valuation of our reporting units and forecasted revenue amounts utilized in determining the fair values of our trademarks are based upon Whirlpool’s current long range plans which are consistent with commercially available industry expectations. We test indefinite lived intangibles for impairment as of November 30 each year and more frequently if indicators of impairment exist.
Goodwill Valuations
Goodwill is evaluated using a two-step impairment test at the reporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to determine the amount of goodwill impairment loss to be recorded. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The difference between the total fair value of the reporting unit and the fair value of all the assets and liabilities other than goodwill is the implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
We determine fair value based primarily on a discounted cash flow model which is an accepted valuation technique. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows from our reporting units.
Significant Assumptions in evaluating Goodwill
In assessing goodwill for impairment for the North America reporting unit, significant assumptions used in our discounted cash flow model as of November 30, 2009 included revenue growth rates, a long term growth rate and the discount rate.
Revenue growth rates used in the discounted cash flows model were based upon our long range plan for the next three years and range from -12% to 6%. Subsequent to this three year period, we applied expected growth rates to revenues which were consistent with commercially available industry market value and volume forecasts. The long term growth rate used was 2% based upon the compound average growth rate for the U.S. T-7 appliance industry (T-7 refers to the following appliance categories: washers, dryers, refrigerators, freezers, dishwashers, ranges and compactors) over a 25 year period, and was also consistent with commercially available industry market value and volume forecasts.
F-15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
The discount rate of 11% used in our discounted cash flow model, as of the November 30, 2009 assessment, was developed using the capital asset pricing model through which a weighted average cost of capital was derived. The discount rate was estimated using the risk free rate, market risk premium, and cost of debt prevalent as of the valuation date. The Beta and capital structure were estimated based on an analysis of comparable guideline companies. In addition, a risk premium was included to account for the risks inherent in the cash flows and to reconcile the fair value indicated by the discounted cash flow model to Whirlpool’s public market equity value at November 30, 2009.
Other Considerations in evaluating Goodwill
Additionally, in assessing goodwill impairment for the North America reporting unit, we considered the implied control premium and concluded the implied control premium was reasonable based on other recent market transactions.
The estimated fair value of our North America reporting unit has historically exceeded the carrying value by a substantial amount. As of our November 30, 2009 valuation, the estimated fair value of our North America reporting unit exceeded the carrying value by approximately 25%.
Our methodology for evaluating goodwill for impairment has not changed since our impairment test performed as of November 30, 2008. We have updated our revenue projections discussed above based on our current long range plan, and current industry and economic conditions. The long term growth rate for the North America reporting unit has not changed from the rate that was used in our last annual impairment test.
These assumptions could be adversely impacted by certain of the risks discussed in “Risk Factors” in Item 1A of this report.
Intangible Valuations
In assessing the fair value of trademarks, we utilize a relief from royalty method. If the carrying amount of a trademark exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Considerable judgment is necessary to estimate key assumptions involved in valuing our trademarks, including projected revenues, royalty rates and applicable discount rates.
In developing discount rates for the valuation of our trademarks, we used the industry average weighted average cost of capital as the base adjusted for the higher relative level of risks associated with doing business in other countries, as applicable, as well as the higher relative levels of risks associated with intangible assets. The premium added considered that we have reduced the projected revenue from the forecasts used in previous years due in part to lower industry demand driven by the current economic conditions in our respective markets. Based on this analysis, we determined discount rates ranging from 11.0% to 11.5% (11.0% to 11.5% in 2008).
In determining royalty rates for the valuation of our trademarks, we considered factors that affect the intrinsic royalty rates that would hypothetically be paid for the use of the trademarks. The most significant factors in determining the intrinsic royalty rates include the overall role and importance of the trademarks in the particular industry, the profitability of the products utilizing the trademark and trade name intangibles, and the position of the trademarked products in a given market segment. Based on this analysis, we determined royalty rates ranging from 2.0% to 5.0% (0.5% to 5.0% in 2008).
Based on the compound annual growth rate of the U.S. T-7 appliance industry over the past 25 years of 2%, and the strength of our trademarks in the marketplace, any reasonably likely change in the projected revenues or discount rate utilized in the valuation of our trademarks would not result in a material impairment charge.
F-16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
For additional information about goodwill and intangible valuations, see Note 2 of the Notes to the Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP. The standard is effective for interim and annual periods ending after September 15, 2009. We adopted the provisions of the standard on September 30, 2009, which did not have a material impact on our financial statements.
In June 2009, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding the consolidation of variable interest entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (formerly SFAS No. 166, “Accounting for Transfers of Financial Assets”). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In April 2009, the FASB issued ASC 825, “Financial Instruments” (formerly FASB Staff Position 107-1, “Interim Disclosures about Fair Value of Financial Instruments”). ASC 825 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods ending after June 15, 2009. We adopted the provisions of ASC 825 on June 30, 2009. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements for information related to the fair value of our financial instruments.
In March 2008, the FASB issued the disclosure requirements within ASC 815, “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133”). ASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. The disclosure requirements apply to all derivative instruments within the scope of ASC 815. The standard also applies to non-derivative hedging instruments and all hedged items designated and qualifying under ASC 815. We adopted the disclosure requirements of ASC 815 on January 1, 2009. For additional information regarding derivative instruments and hedging activities, see Note 7 of the Notes to the Consolidated Financial Statements.
In December 2007, the FASB issued accounting guidance contained within ASC 805, “Business Combinations” (formerly SFAS No. 141(R), “Business Combinations”). ASC 805 requires us to continue to follow the guidance in SFAS 141 for certain aspects of business combinations, with additional guidance provided
F-17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
defining the acquirer, the accounting for transaction costs and contingent consideration, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and measuring goodwill or a gain from a bargain purchase. In addition, adjustments associated with changes in tax contingencies that occur after the measurement period, not to exceed one year, are recorded as adjustments to income. This statement was effective for all business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008; however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. We adopted ASC 805 on January 1, 2009.
In December 2007, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding noncontrolling interests (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”). ASC 810-10-65 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We adopted ASC 810-10-65 on January 1, 2009. As a result, we have reclassified financial statement line items within our Consolidated Balance Sheets and Statements of Income for the prior period to conform with this standard. Additionally, see Note 8 of the Notes to the Consolidated Financial Statements for disclosure reflecting the impact of ASC 810-10-65 on our reconciliation of comprehensive income and stockholders’ equity.
MARKET RISK
We have in place an enterprise risk management process that involves systematic risk identification and mitigation covering the categories of enterprise, strategic, financial, operation and compliance and reporting risk. The enterprise risk management process receives Board of Directors and Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.
We are exposed to market risk from changes in foreign currency exchange rates, domestic and foreign interest rates, and commodity prices, which can affect our operating results and overall financial condition. We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are contracted with a diversified group of investment grade counterparties to reduce exposure to nonperformance on such instruments.
We use foreign currency forward contracts, currency options and currency swaps to hedge the price risk associated with firmly committed and forecasted cross-border payments and receipts related to ongoing business and operational financing activities. Foreign currency contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2009, a 10% unfavorable exchange rate movement in each currency in our portfolio of foreign currency contracts would have resulted in an incremental unrealized loss of approximately $168 million, while a 10% favorable shift would have resulted in an incremental unrealized gain of approximately $168 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the re-measurement of the underlying exposures.
We enter into commodity swap contracts to hedge the price risk associated with firmly committed and forecasted commodities purchases that are not fixed directly through supply contracts. As of December 31, 2009, a 10% favorable or unfavorable shift in commodity prices would have resulted in an incremental $50 million gain or a $50 million loss related to these contracts.
F-18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
In January 2009, Standard & Poor’s and Fitch Ratings lowered our senior unsecured debt rating from “BBB” to “BBB-” and our short-term corporate credit and commercial paper ratings from “A-2” to “A-3” and “F-2” to “F-3”, respectively, based on weakened operating performance and the pullback in discretionary consumer spending. Also in January 2009, Moody’s Investor Services lowered our senior unsecured rating from “Baa2” to “Baa3” and our commercial paper ratings from “Prime-2” to “Prime-3” based on weakening appliance industry demand. These rating adjustments may result in higher interest costs if we were to seek additional financing in the capital markets. See Note 5 of the Notes to the Consolidated Financial Statements for additional information on financing arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has evaluated theThe preparation of financial statements in conformity with generally accepted accounting policies usedprinciples in the preparation ofU.S. (“GAAP”) requires management to make certain estimates and assumptions. We periodically evaluate these estimates and assumptions, which are based on historical experience, changes in the accompanying Consolidated Financial Statementsbusiness environment and related notes andother factors that management believes those policies to be reasonable and appropriate. Whirlpool’s accounting policies are described in Note 1 tounder the Consolidated Financial Statements. Certain ofcircumstances. Actual results may differ materially from these accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Whirlpool’s critical accounting policies include the following:
F-12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
Pension and Other Postretirement Benefits—
Accounting for pensions and other postretirement benefits involves estimating the costs of future benefits and attributing the cost over the employee’s expected period of employment with Whirlpool.employment. The determination of Whirlpool’sour obligation and expense for these costs requires the use of certain assumptions. Those assumptions are included in Note 16 to the Consolidated Financial Statements and include, among others,other assumptions, the discount rate, expected long-term rate of return on plan assets and health care cost trend rates. These assumptions are subject to change based on interest rates on high quality bonds, stock and bond markets and medical cost inflation, respectively. As permitted by GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and accrued liability in such future periods. While we believe that our assumptions are appropriate given current economic conditions and actual experience, significant differences in results or significant changes in our assumptions may materially affect our pension and other postretirement obligations and related future expense. As required by Statements of Financial Accounting Standards (“SFAS”) No. 87, SFAS No. 106 and SFAS No. 132 (R) as amended by SFAS No. 158, Whirlpool’sOur pension and other postretirement benefit obligations as of December 31, 20062009 and preliminary retirement benefit costs for the 2007 fiscal year2010 were prepared using the assumptions that were determined as of December 31, 2006.2009. The following table highlightssummarizes the sensitivity of Whirlpool’sour December 31, 20062009 retirement obligations and 20072010 retirement benefit costs of our U.S. plans to changes in the key assumptions used to determine those results:
Millions of dollars
Change in assumption | Estimated increase (decrease) in 2007 pension cost | Estimated increase (decrease) in Projected Benefit Obligation for the year ended December 31, 2006 | Estimated increase (decrease) in 2007 Other Postretirement Benefits cost | Estimated increase (decrease) in Other Postretirement Benefit Obligation for the year ended December 31, 2006 | ||||||||||||
0.25% increase in discount rate | $ | (2.7 | ) | $ | (102.1 | ) | $ | (2.0 | ) | $ | (31.4 | ) | ||||
0.25% decrease in discount rate | $ | 2.6 | $ | 104.9 | $ | 2.0 | $ | 32.2 | ||||||||
0.25% increase in long-term return on assets | $ | (7.3 | ) | N/A | N/A | N/A | ||||||||||
0.25% decrease in long-term return on assets | $ | 7.3 | N/A | N/A | N/A | |||||||||||
0.50% increase in discount rate | $ | (5.5 | ) | $ | (201.2 | ) | $ | (4.1 | ) | $ | (62.1 | ) | ||||
0.50% decrease in discount rate | $ | 4.9 | $ | 212.7 | $ | 4.0 | $ | 65.2 | ||||||||
0.50% increase in long-term return on assets | $ | (14.8 | ) | N/A | N/A | N/A | ||||||||||
0.50% decrease in long-term return on assets | $ | 14.8 | N/A | N/A | N/A | |||||||||||
Millions of dollars Change in assumption | Estimated increase (decrease) in 2010 pension cost | Estimated increase (decrease) in Projected Benefit Obligation for the year ended December 31, 2009 | Estimated increase (decrease) in 2010 Other Postretirement Benefits cost | Estimated increase (decrease) in Other Postretirement Benefit Obligation for the year ended December 31, 2009 | ||||||||||||
0.25% increase in discount rate | $ | (1.6 | ) | $ | (102.1 | ) | $ | 0.7 | $ | (14.1 | ) | |||||
0.25% decrease in discount rate | 1.4 | 105.2 | (0.7 | ) | 15.1 | |||||||||||
0.25% increase in long-term return on assets | (6.1 | ) | — | — | — | |||||||||||
0.25% decrease in long-term return on assets | 6.1 | — | — | — | ||||||||||||
0.50% increase in discount rate | (3.4 | ) | (201.1 | ) | 1.3 | (28.1 | ) | |||||||||
0.50% decrease in discount rate | 2.5 | 213.5 | (1.5 | ) | 30.3 | |||||||||||
0.50% increase in long-term return on assets | (12.2 | ) | — | — | — | |||||||||||
0.50% decrease in long-term return on assets | 12.2 | — | — | — | ||||||||||||
1.00% increase in medical trend rates | — | — | 1.8 | 31.7 | ||||||||||||
1.00% decrease in medical trend rates | — | — | (1.7 | ) | (28.4 | ) | ||||||||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
The analysis is an estimate only. These sensitivities may not be appropriate to use for other years’ financial results. Furthermore, the impact of assumption changes outside of the ranges shown above may not be approximated by using the above results.
Income Taxes—As part For additional information about our pension and other postretirement benefit obligations, see Note 12 of the process of preparing itsNotes to the Consolidated Financial Statements, Whirlpool estimates itsStatements.
Income Taxes
We estimate our income taxes in each of the taxing jurisdictions in which it operates.we operate. This process involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes in accordance with SFAS No. 109, “Accounting for Income Taxes.”GAAP guidance. These differences may result in deferred tax assets andor liabilities, which are included in Whirlpool’sour Consolidated Balance Sheets. Whirlpool isWe are required to assess the likelihood that its deferred tax assets, which include net operating loss carryforwards and deductible temporary differences, that are expected to be deductiblerealizable in future years, will be recoverable.years. Realization of Whirlpool’sour net operating loss and tax credit deferred tax assets is supported by specific tax planning strategies and considers planned projections of future profitability. If recovery isWe provide a valuation
F-13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
allowance to reduce our deferred tax assets to an amount that will more likely than not likely, Whirlpool provides a valuation allowancebe realized based on its estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. If future taxable income wasis lower than expected or if tax-planningtax planning strategies wereare not available as anticipated, Whirlpoolwe may record additional valuation allowances through income tax expense in the period such determination is made. Likewise, if we determine that we would beare able to realize our deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax asset wouldwill increase income in the period such determination is made.
As of December 31, 20062009 and 2005, Whirlpool2008, we had total deferred tax assets of $1,633$2,275 million and $923$2,212 million, respectively, net of valuation allowances of $151$180 million and $119$147 million, respectively. (See Note 15 to the Consolidated Financial Statements). Whirlpool’sOur effective tax rate has ranged from 20.4%(81.7)% to 39%33.9% over the past five years and has been influenced by tax credits, audit settlements and adjustments, tax planning strategies, enacted legislation, and dispersion of global income. A 1%1.0% increase in Whirlpool’sour effective tax rate would have decreased 20062009 earnings by approximately $6$3 million. Future changes in the effective tax rate will be subject to several factors, including enacted laws, tax planning strategies, business profitability and business profitability.
the expiration of energy tax credit legislation at the end of 2010.
In addition, Whirlpool operateswe operate within multiple taxing jurisdictions and isare subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In the opinion of management, adequate provisions forFor additional information about income taxes, have been made for all years.
see Notes 1 and 11 of the Notes to the Consolidated Financial Statements.
BEFIEX Credits
Our Brazilian operations earned tax credits under the Brazilian government’s export incentive program. These credits reduce Brazilian federal excise taxes on domestic sales, resulting in an increase in the operations’ recorded net sales. Based on a recalculation of available credits and a favorable court decision in the December 2005 quarter, we were able to recognize approximately $69 million, $168 million and $131 million of export credits during 2009, 2008 and 2007, respectively. As of December 31, 2009, approximately $693 million of export credits remain. We recognize credits as they are monetized; however, future actions by the Brazilian government could limit our ability to monetize these export credits. BEFIEX credits are not subject to income taxes.
Product Recall—Recalls
The establishment of a liability for product recall expensesrecalls is occasionallyperiodically required and is impacted by several factors such as customer response rate, consumer options, field repair costs, inventory repair costs, extended warranty costs, communication structure and other miscellaneous costs such as legal, logistics and consulting. The customer response rate, which represents an estimate of the total number of units to be serviced as a percentage of the total number of units affected by the recall, is the most significant factor in estimating the total cost of each recall. ThisTo determine a response rate, reflects several factors, includingwe consider the population of the affected appliances based on evaluating the design issue or defective part in the appliance and the respective years in which it was included in manufacturing the appliance to determine the affected population. We also consider the type of product, the year manufactured,and age of the product soldaffected appliance to determine the affected population and apply historical response rates based on current and past experience factors. Significant differencesfactors to derive an estimated liability which is revised, as necessary, depending on our actual response rate. Differences between Whirlpool’sour assumptions and its actual experience or significant changes in its assumptions could have a material impact on our product recall reserves.
On February 1, 2007, Maytag Corporation announced a voluntary recall of approximately 2.3 million Maytag brand and Jenn-Air dishwashers. A reserve has been established in accordance with the above policy and was recorded as an adjustment to purchase accounting based on the fact that the products involved were manufactured and sold by Maytag prior to our acquisition For additional information about product recalls, see Note 6 of the company on March 31, 2006. (See Note 19—Subsequent Events.)
Notes to the Consolidated Financial Statements.
Befiex Credits—Prior to 2006, Whirlpool’s Brazilian operations had recognized tax credits under the Brazilian government’s export incentive program (“Befiex”), which reduces Brazilian federal excise taxes on
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDWarranty Obligations
RESULTS OF OPERATIONS—(CONTINUED)
domestic sales, resulting in an increase in the operations’ recorded net sales. Based on a recalculation of available credits and a favorable court decision in the fourth quarter of 2005, we recognized approximately $23 million of export credits in 2005. During 2006, we were able to recognize approximately $52 million of export credits. As of December 31, 2006, approximately $750 million of export credits remain and we expect to continue recognizing credits as they are monetized.
Warranty Obligations—The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and reflects management’sour best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or anticipated
F-14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
warranty claims as new information becomes available. Future events and circumstances could materially change our estimates and require adjustments to the warranty obligation.obligations. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. (SeeFor additional information about warranty obligations, see Note 96 of the Notes to the Consolidated Financial StatementsStatements.
Goodwill and Intangible Valuations
We sell products under a number of trademarks, many of which we developed. Trademark development costs are expensed as incurred. We also purchase trademark assets and goodwill in acquisitions. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including trademark assets, based on estimated fair value, with any remaining purchase price recorded as goodwill. Trademarks and goodwill are considered indefinite lived intangible assets and as such are not amortized. We have two reporting units where goodwill is recorded which include North America and Embraco in our Latin America region. There have been no changes to our reporting units or allocations of goodwill by reporting units. We have trademark assets in our North America and Europe regions. Forecasted financial statements utilized in the valuation of our reporting units and forecasted revenue amounts utilized in determining the fair values of our trademarks are based upon Whirlpool’s current long range plans which are consistent with commercially available industry expectations. We test indefinite lived intangibles for impairment as of November 30 each year and more frequently if indicators of impairment exist.
Goodwill Valuations
Goodwill is evaluated using a summarytwo-step impairment test at the reporting unit level. The first step of the activitygoodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to determine the amount of goodwill impairment loss to be recorded. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The difference between the total fair value of the reporting unit and the fair value of all the assets and liabilities other than goodwill is the implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
We determine fair value based primarily on a discounted cash flow model which is an accepted valuation technique. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows from our reporting units.
Significant Assumptions in Whirlpool’s product warranty accountsevaluating Goodwill
In assessing goodwill for 2006impairment for the North America reporting unit, significant assumptions used in our discounted cash flow model as of November 30, 2009 included revenue growth rates, a long term growth rate and 2005.)the discount rate.
Revenue growth rates used in the discounted cash flows model were based upon our long range plan for the next three years and range from -12% to 6%. Subsequent to this three year period, we applied expected growth rates to revenues which were consistent with commercially available industry market value and volume forecasts. The long term growth rate used was 2% based upon the compound average growth rate for the U.S. T-7 appliance industry (T-7 refers to the following appliance categories: washers, dryers, refrigerators, freezers, dishwashers, ranges and compactors) over a 25 year period, and was also consistent with commercially available industry market value and volume forecasts.
F-15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
The discount rate of 11% used in our discounted cash flow model, as of the November 30, 2009 assessment, was developed using the capital asset pricing model through which a weighted average cost of capital was derived. The discount rate was estimated using the risk free rate, market risk premium, and cost of debt prevalent as of the valuation date. The Beta and capital structure were estimated based on an analysis of comparable guideline companies. In addition, a risk premium was included to account for the risks inherent in the cash flows and to reconcile the fair value indicated by the discounted cash flow model to Whirlpool’s public market equity value at November 30, 2009.
Other Considerations in evaluating Goodwill
Additionally, in assessing goodwill impairment for the North America reporting unit, we considered the implied control premium and concluded the implied control premium was reasonable based on other recent market transactions.
The estimated fair value of our North America reporting unit has historically exceeded the carrying value by a substantial amount. As of our November 30, 2009 valuation, the estimated fair value of our North America reporting unit exceeded the carrying value by approximately 25%.
Our methodology for evaluating goodwill for impairment has not changed since our impairment test performed as of November 30, 2008. We have updated our revenue projections discussed above based on our current long range plan, and current industry and economic conditions. The long term growth rate for the North America reporting unit has not changed from the rate that was used in our last annual impairment test.
These assumptions could be adversely impacted by certain of the risks discussed in “Risk Factors” in Item 1A of this report.
Intangible Valuations
In assessing the fair value of trademarks, we utilize a relief from royalty method. If the carrying amount of a trademark exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Considerable judgment is necessary to estimate key assumptions involved in valuing our trademarks, including projected revenues, royalty rates and applicable discount rates.
In developing discount rates for the valuation of our trademarks, we used the industry average weighted average cost of capital as the base adjusted for the higher relative level of risks associated with doing business in other countries, as applicable, as well as the higher relative levels of risks associated with intangible assets. The premium added considered that we have reduced the projected revenue from the forecasts used in previous years due in part to lower industry demand driven by the current economic conditions in our respective markets. Based on this analysis, we determined discount rates ranging from 11.0% to 11.5% (11.0% to 11.5% in 2008).
In determining royalty rates for the valuation of our trademarks, we considered factors that affect the intrinsic royalty rates that would hypothetically be paid for the use of the trademarks. The most significant factors in determining the intrinsic royalty rates include the overall role and importance of the trademarks in the particular industry, the profitability of the products utilizing the trademark and trade name intangibles, and the position of the trademarked products in a given market segment. Based on this analysis, we determined royalty rates ranging from 2.0% to 5.0% (0.5% to 5.0% in 2008).
Based on the compound annual growth rate of the U.S. T-7 appliance industry over the past 25 years of 2%, and the strength of our trademarks in the marketplace, any reasonably likely change in the projected revenues or discount rate utilized in the valuation of our trademarks would not result in a material impairment charge.
F-16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
For additional information about goodwill and intangible valuations, see Note 2 of the Notes to the Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2007,June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP. The standard is effective for interim and annual periods ending after September 15, 2009. We adopted the provisions of the standard on September 30, 2009, which did not have a material impact on our financial statements.
In June 2009, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding the consolidation of variable interest entities (formerly SFAS No. 159, “The Fair Value Option167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (formerly SFAS No. 166, “Accounting for Transfers of Financial Assets and Financial Liabilities—Including an amendmentAssets”). ASC 860 requires more information about transfers of FASB Statement 115” that provides companies with an option to report certain financial assets and liabilities in their entirety at fair value.where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This statementstandard is effective as of the beginning of an entity’s first fiscal year that beginsfor interim and annual periods ending after November 15, 2007. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. A business entity would report unrealized gains and losses2009. We adopted the provisions of the standard on items forJanuary 1, 2010, which the fair value option has been elected in earnings at each subsequent reporting date. Whirlpool is evaluating its options provided for under this statement and their potentialdid not have a material impact on itsour financial statements when implemented. This statement is being reviewed in conjunction with the requirements of SFAS No. 157 discussed below.
statements.
In September 2006,April 2009, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendmentASC 825, “Financial Instruments” (formerly FASB Staff Position 107-1, “Interim Disclosures about Fair Value of FASB Statements No. 87, 88, 106, and 132(R)”Financial Instruments”). SFAS No. 158ASC 825 requires us to recognize the over-funded or under-funded status of our single employer defined benefit and postretirement plans as of the end of the year as an asset or liability in our statement of financial position. It also requires Whirlpool to record as a component of other comprehensive income, net of tax, the gains and losses and prior service costs or credits that arose during the period but are recognized as components of net periodic benefit cost pursuant to SFAS No. 87 or SFAS No. 106. SFAS No. 158 is effective for fiscal years that begin after December 15, 2006. The adoption of SFAS 158 resulted in an adjustment of $114 million, after tax, to accumulated other comprehensive income at December 31, 2006.
In September 2006, the FASB issued 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 expandedof financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. This standard also requires those disclosures in this statement aboutsummarized financial information at interim reporting periods ending after June 15, 2009. We adopted the useprovisions of ASC 825 on June 30, 2009. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements for information related to the 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. Whirlpool will implement SFAS No. 157 beginning January 1, 2008 and anticipates that the statement will not materially impact our financial statements, but will provide expanded disclosure on our fair value measurements.
instruments.
In June 2006,March 2008, the FASB issued Interpretationthe disclosure requirements within ASC 815, “Derivatives and Hedging” (formerly SFAS No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes —an interpretation161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 109”133”). FIN 48 clarifiesASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. The disclosure requirements apply to all derivative instruments within the scope of ASC 815. The standard also applies to non-derivative hedging instruments and all hedged items designated and qualifying under ASC 815. We adopted the disclosure requirements of ASC 815 on January 1, 2009. For additional information regarding derivative instruments and hedging activities, see Note 7 of the Notes to the Consolidated Financial Statements.
In December 2007, the FASB issued accounting guidance contained within ASC 805, “Business Combinations” (formerly SFAS No. 141(R), “Business Combinations”). ASC 805 requires us to continue to follow the guidance in SFAS 141 for uncertainty in income taxescertain aspects of business combinations, with additional guidance provided
F-17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
recognizeddefining the acquirer, the accounting for transaction costs and contingent consideration, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an enterprise’s financial statementsthe acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and measuring goodwill or a gain from a bargain purchase. In addition, adjustments associated with changes in accordance with SFAS No. 109, “Accountingtax contingencies that occur after the measurement period, not to exceed one year, are recorded as adjustments to income. This statement was effective for Income Taxes.” This interpretation prescribes a recognition threshold of “more-likely-than-not” and a measurement attributeall business combinations for which the acquisition date is on or after the beginning of an amountentity’s first fiscal year that cumulatively has greater than a 50% likelihood of being realized to be recognized in the financial statements for a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginningbegins after December 15, 2006. Based2008; however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. We adopted ASC 805 on January 1, 2009.
In December 2007, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding noncontrolling interests (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”). ASC 810-10-65 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We adopted ASC 810-10-65 on January 1, 2009. As a result, we have reclassified financial statement line items within our Consolidated Balance Sheets and Statements of Income for the prior period to conform with this standard. Additionally, see Note 8 of the Notes to the Consolidated Financial Statements for disclosure reflecting the impact of ASC 810-10-65 on our evaluation, asreconciliation of December 31, 2006, we do not believe that FIN 48 will have a material impact on our financial statements.
comprehensive income and stockholders’ equity.
MARKET RISK
Whirlpool hasWe have in place an Enterprise Risk Managemententerprise risk management process that involves systematic risk identification and mitigation covering the categories of Enterprise, Strategic, Financial, Operationenterprise, strategic, financial, operation and Compliancecompliance and Reportingreporting risk. The Enterprise Risk Managemententerprise risk management process receives Board of Directors and Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.
Whirlpool isWe are exposed to market risk from changes in foreign currency exchange rates, domestic and foreign interest rates, and commodity prices, which can affect our operating results and overall financial condition. Whirlpool manages itsWe manage exposure to these market risks through itsour operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are contracted with a diversified group of primarily investment grade counterparties to reduce exposure to nonperformance on such instruments. Whirlpool’s sensitivity analysis reflects the effects of changes in market risk.
Whirlpool usesWe use foreign currency forward contracts, currency options and currency swaps 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. Foreign currency contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2006,2009, a 10% unfavorable exchange rate movement in each currency in Whirlpool’sour portfolio of foreign currency contracts would have resulted in an incremental unrealized loss of approximately $183$168 million, while a 10% favorable shift would have resulted in an incremental unrealized gain of approximately $183$168 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the re-measurement of the underlying exposures.
Whirlpool entersWe enter into commodity swap contracts to hedge the price risk associated with firmly committed and forecasted commodities purchases that are not fixed directly through supply contracts. As of December 31, 2006,2009, a 10% favorable or unfavorable shift in commodity prices would have resulted in an incremental $27$50 million gain or a $50 million loss related to these contracts.
F-18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
In January 2009, Standard & Poor’s and Fitch Ratings lowered our senior unsecured debt rating from “BBB” to “BBB-” and our short-term corporate credit and commercial paper ratings from “A-2” to “A-3” and “F-2” to “F-3”, respectively, based on weakened operating performance and the pullback in discretionary consumer spending. Also in January 2009, Moody’s Investor Services lowered our senior unsecured rating from “Baa2” to “Baa3” and our commercial paper ratings from “Prime-2” to “Prime-3” based on weakening appliance industry demand. These rating adjustments may result in higher interest costs if we were to seek additional financing in the capital markets. See Note 5 of the Notes to the Consolidated Financial Statements for additional information on financing arrangements.
OTHER MATTERS
Government authorities in various jurisdictions are conducting antitrust investigations of the global compressor industry, including our compressor business headquartered in Brazil (“Embraco”). In 2009, Embraco sales represented approximately 7% of our global net sales.
In February 2009, competition authorities in Brazil, the U.S. and Europe began to seek documents from us in connection with their investigations. A grand jury subpoena from the U.S. Department of Justice requested documents for the time period from 2003 to 2009. Competition authorities in other jurisdictions have sought similar information.
In September 2009, the Brazilian competition commission (CADE) agreed to terminate the administrative investigation of our compressor business. Under the terms of the settlement agreement, Whirlpool affiliates and certain executives located in Brazil acknowledged a violation of Brazilian antitrust law in the Brazilian compressor market by some Embraco employees. The settlement agreement provides for the affiliates to make contributions totaling 100 million Brazilian reais to a Brazilian government fund. The contributions translate to approximately $56 million, all of which was recorded as an expense in 2009. In December 2009, a Brazilian court agreed to the public prosecutor’s request to suspend a related criminal proceeding as to certain employees, including Paulo Periquito, former President, Whirlpool International. The proceeding will be dismissed after three years provided that the individuals comply with certain conditions imposed by the court, such as payment to a government fund, a charitable donation and periodic reporting to authorities. Suspension and dismissal of the proceeding does not involve any admission or finding of wrongdoing. We utilize interest rate swapsare cooperating with the ongoing government investigations in other jurisdictions and have taken actions, and will continue to hedgetake actions, to minimize our interest rate risk.potential exposure.
Since the government investigations became public in February 2009, we have been named as a defendant in numerous related antitrust lawsuits in various jurisdictions seeking damages in connection with the pricing of compressors from 1996 to 2009. Several other compressor manufacturers who are the subject of the government investigations have also been named as defendants in the litigation. United States federal lawsuits instituted on behalf of purported purchasers and containing class action allegations have been combined in one proceeding in the United States District Court for the Eastern District of Michigan. We intend to defend the lawsuits vigorously.
The final outcome and impact of these matters, and related claims and investigations that may be brought in the future are subject to many variables, and cannot be predicted with certainty. An accrual has been established only where we have determined that a loss is probable and the amount of loss can be reasonably estimated. As of December 31, 2006, a 10% shift in interest rates would2009, we have resulted in an incremental $1.0accrued charges of approximately $82 million gain or loss related to these contracts.matters. While it is currently not possible to reasonably estimate the aggregate amount of costs which we may incur in connection with these matters, such costs could have a material adverse effect on the financial position, liquidity, or results of operations of Whirlpool.
F-19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
The Brazilian Constitution provides a general basis for recognizing tax credits on the purchase of raw materials used in production (“IPI tax credit”). Certain raw materials that are exempt or have a zero tax basis in the production process qualify for these IPI tax credits. Based on legal precedent, in 2003 and 2004, we recognized tax credits in an aggregate amount of $26 million adjusted for currency. The Brazilian tax authority subsequently challenged the recording of IPI tax credits. No credits were recognized in 2005 through 2009. In 2009, we entered into an agreement under a special Brazilian government program providing for extended payment terms and reductions in penalties and interest to encourage taxpayers to resolve disputed IPI tax credit amounts. Charges recorded related to this program for the year ended December 31, 2009 include $27 million in tax that was recorded in cost of products sold, $16 million in interest expense and $4 million in penalties recorded in interest and sundry income (expense) in our Consolidated Statements of Income. During the December 2009 quarter, based on newly issued regulations, we settled with the Brazilian tax authority to resolve these and other disputed tax amounts. As a result of this settlement agreement, we recorded an increase in value added taxes owed of approximately $4 million in cost of goods sold, a reduction in interest expense totaling $18 million related to interest abatement, a reduction in interest and sundry income (expense) of $4 million related to penalty abatement and related income tax expense of $5 million under this special program.
In 1989, a Brazilian affiliate (now a subsidiary) 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, an adverse decision in the declaratory action became final. In 2001, the financial institution began a collection action and we 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 Superior Court dismissed our counterclaim in 2007. In late 2008, the lower court issued a decision in the collection action in favor of the financial institution in the amount of 283 million Brazilian reais (approximately $162 million), plus judicial adjustments, which could be significant. We have appealed this decision. Based on our outside counsel’s assessment of the case, we increased the amount previously accrued for our estimated exposure for this litigation by 80 million Brazilian reais (approximately $46 million) in the December 2009 quarter. However, the amount of the final award, if any, may be materially different than the amount we have accrued.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on behalf of Whirlpool. Management’s Discussion and Analysis and other sections of this report may contain forward-looking statements that reflect Whirlpool’s current views with respect to future events and financial performance.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
our behalf. Certain statements contained in this quarterlyannual report, including those within the forward-looking perspective section within this Management’s Discussion and Analysis, and other written and oral statements made from time to time by Whirlpoolus or on our behalf do not relate strictly to historical or current facts.facts and may contain forward-looking statements that reflect our current views with respect to future events and financial performance. 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. Whirlpool’sOur forward-looking statements generally relate to itsour 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.
This document contains forward-looking statements about Whirlpool Corporation and its consolidated subsidiaries (“Whirlpool”) that speak only as of this date. Whirlpool disclaims any obligation to update these statements. Forward-looking statements in this document may include, but are not limited to, statements regarding expected earnings per share, cash flow, productivity and material and oil-related prices, as well as expectations as to the integration with Maytag.prices. Many risks, contingencies and uncertainties could cause actual results to differ materially from Whirlpool’s forward-looking
F-20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS—(CONTINUED)
statements. Among these factors are: (1) changes in economic conditions which affect demand for our products, including the strength of the building industry and the level of interest rates; (2) the effects of the global economic crisis on our customers, suppliers and the availability of credit; (3) Whirlpool’s ability to continue its relationship with significant trade customers and the ability of these trade customers to maintain or increase market share; (4) intense competition in the home appliance industry reflecting the impact of both new and established global competitors, including Asian and European manufacturers and the strength of trade customers; (2) Whirlpool Corporation’s ability to continue its strong relationship with Sears Holding Corporation in North America (accounting for approximately 14% of Whirlpool’s 2006 consolidated net sales of $18 billion) and other significant trade customers, andmanufacturers; (5) the ability of these trade customersWhirlpool to maintain or increase market share; (3) Whirlpool Corporation’s ability to integrate Maytag on a timely basismanage foreign currency fluctuations; (6) product liability and realize the full anticipated benefits of the merger within the current estimate ofproduct recall costs; (4) demand for Whirlpool’s products, including the strength of the U.S. building industry(7) litigation and the level of interest rates; (5)legal compliance risk; (8) 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; (6)(9) inventory and other asset risk; (10) fluctuations in the cost of key materials (including steel, oil, plastic, resins, copper and zinc)aluminum) and components and the ability of Whirlpool to offset cost increases; (7)(11) the ability of our suppliers to deliverof critical parts, components and manufacturing equipment to our manufacturing facilities, including our abilitydeliver sufficient quantities to manufacture without disruption; (8) changesWhirlpool in market conditions,a timely and cost-effective manner; (12) health care cost trends, regulatory changes and pending regulationvariations between results and estimates that could increase future funding obligations for pension and postretirementpost retirement benefit plans; (9) the cost of compliance with environmental and health and safety regulations, including new regulations in Europe regarding appliance disposal; (10) potential exposure to product liability claims, including claims that may arise through Whirlpool’s regular investigations of potential quality and safety issues as part of its ongoing effort to provide quality products to consumers; (11) the impact of labor relations; (12)(13) Whirlpool’s ability to obtain and protect intellectual property rights; (13) volatility in Whirlpool’s effective tax rate; (14) the ability of Whirlpool to manage foreign currency;information technology system failures and data security breaches; (15) global, political and/or economic uncertainty and disruptions, especially in Whirlpool’s significant geographic markets,regions, including uncertainty and disruptions arising from natural disasters or terrorist activities;attacks; (16) the effects of governmental investigations or related actions by third parties; (17) the impact of labor relations; (18) our ability to attract, develop and (16) risks associated with operations outsideretain executives and other qualified employees; (19) changes in the U.S.legal and regulatory environment including environmental and health and safety regulations.
Whirlpool undertakesWe undertake no obligation to update any forward-looking statement, and investors are advised to review disclosures 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 from forward-looking statements. Additional information concerning these and other factors can be found in “Risk Factors” in Item 1A to Part II of this report and Item 1A to Part I of Whirlpool’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.report.
F-21
WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
Year Ended December 31
(Millions of dollars, except per share data)
2006 | 2005 | 2004 | 2009 | 2008 | 2007 | |||||||||||||||||||
Net sales | $ | 18,080 | $ | 14,317 | $ | 13,220 | $ | 17,099 | $ | 18,907 | $ | 19,408 | ||||||||||||
Expenses | ||||||||||||||||||||||||
Cost of products sold | 15,420 | 12,123 | 11,081 | 14,713 | 16,383 | 16,517 | ||||||||||||||||||
Selling, general and administrative (exclusive of intangible amortization) | 1,752 | 1,343 | 1,364 | 1,544 | 1,798 | 1,736 | ||||||||||||||||||
Intangible amortization | 30 | 2 | 2 | 28 | 28 | 31 | ||||||||||||||||||
Restructuring costs | 55 | 57 | 15 | 126 | 149 | 61 | ||||||||||||||||||
Operating profit | 823 | 792 | 758 | 688 | 549 | 1,063 | ||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Interest and sundry income (expense) | (2 | ) | (65 | ) | (14 | ) | (175 | ) | (100 | ) | (63 | ) | ||||||||||||
Interest expense | (202 | ) | (130 | ) | (128 | ) | (219 | ) | (203 | ) | (203 | ) | ||||||||||||
Gain on sale of investment | — | — | 7 | |||||||||||||||||||||
Earnings from continuing operations before income taxes and other items | 619 | 597 | 616 | 294 | 246 | 804 | ||||||||||||||||||
Income taxes | 126 | 171 | 209 | |||||||||||||||||||||
Income tax (benefit) expense | (61 | ) | (201 | ) | 117 | |||||||||||||||||||
Earnings from continuing operations before equity earnings and minority interests | 493 | 426 | 407 | |||||||||||||||||||||
Equity in income (loss) of affiliated companies | 1 | 1 | (1 | ) | ||||||||||||||||||||
Minority interests | (8 | ) | (5 | ) | — | |||||||||||||||||||
Earnings from continuing operations before equity earnings | 355 | 447 | 687 | |||||||||||||||||||||
Equity in loss of affiliated companies | (1 | ) | — | (18 | ) | |||||||||||||||||||
Earnings from continuing operations | 486 | 422 | 406 | 354 | 447 | 669 | ||||||||||||||||||
Loss from discontinued operations, net of tax | (53 | ) | — | — | ||||||||||||||||||||
Loss from discontinued operations net of tax of $3 for the year ended December 31, 2007 | — | — | (7 | ) | ||||||||||||||||||||
Net earnings | $ | 433 | $ | 422 | $ | 406 | 354 | 447 | 662 | |||||||||||||||
Less: Net earnings available to noncontrolling interests | (26 | ) | (29 | ) | (22 | ) | ||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||
Basic earnings from continuing operations | $ | 6.47 | $ | 6.30 | $ | 6.02 | ||||||||||||||||||
Discontinued operations, net of tax | (0.71 | ) | — | — | ||||||||||||||||||||
Net earnings available to Whirlpool common stockholders | $ | 328 | $ | 418 | $ | 640 | ||||||||||||||||||
Basic net earnings | $ | 5.76 | $ | 6.30 | $ | 6.02 | ||||||||||||||||||
Diluted earnings from continuing operations | $ | 6.35 | $ | 6.19 | $ | 5.90 | ||||||||||||||||||
Discontinued operations, net of tax | (0.68 | ) | — | — | ||||||||||||||||||||
Per share of common stock | ||||||||||||||||||||||||
Basic earnings from continuing operations available to Whirlpool common stockholders | $ | 4.39 | $ | 5.57 | $ | 8.24 | ||||||||||||||||||
Discontinued operations available to Whirlpool common stockholders, net of tax | — | — | (0.09 | ) | ||||||||||||||||||||
Diluted net earnings | $ | 5.67 | $ | 6.19 | $ | 5.90 | ||||||||||||||||||
Basic net earnings available to Whirlpool common stockholders | $ | 4.39 | $ | 5.57 | $ | 8.15 | ||||||||||||||||||
Diluted net earnings from continuing operations available to Whirlpool common stockholders | $ | 4.34 | $ | 5.50 | $ | 8.10 | ||||||||||||||||||
Discontinued operations available to Whirlpool common stockholders, net of tax | — | — | (0.09 | ) | ||||||||||||||||||||
Diluted net earnings available to Whirlpool common stockholders | $ | 4.34 | $ | 5.50 | $ | 8.01 | ||||||||||||||||||
Dividends | $ | 1.72 | $ | 1.72 | $ | 1.72 | $ | 1.72 | $ | 1.72 | $ | 1.72 | ||||||||||||
Weighted-average shares outstanding (in millions): | ||||||||||||||||||||||||
Weighted-average shares outstanding (in millions) | ||||||||||||||||||||||||
Basic | 75.1 | 67.1 | 67.4 | 74.6 | 75.1 | 78.5 | ||||||||||||||||||
Diluted | 76.5 | 68.3 | 68.9 | 75.6 | 76.0 | 79.9 |
See Notes toThe accompanying notes are an integral part of these Consolidated Financial Statements
F-22
WHIRLPOOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)dollars, except per share data)
December 31 2006 | December 31 2005 | December 31, 2009 | December 31, 2008 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and equivalents | $ | 262 | $ | 524 | $ | 1,380 | $ | 146 | ||||||||
Trade receivables, less allowances (2006: $84; 2005: $76) | 2,676 | 2,081 | ||||||||||||||
Accounts receivable, net of allowance for uncollectible accounts of $76 and $66 at December 31, 2009 and December 31, 2008, respectively | 2,500 | 2,103 | ||||||||||||||
Inventories | 2,348 | 1,591 | 2,197 | 2,591 | ||||||||||||
Prepaid expenses | 95 | 95 | 99 | 110 | ||||||||||||
Deferred income taxes | 372 | 134 | 295 | 580 | ||||||||||||
Other current assets | 483 | 338 | 554 | 514 | ||||||||||||
Assets of discontinued operations | 240 | — | ||||||||||||||
Total Current Assets | 6,476 | 4,763 | ||||||||||||||
Total current assets | 7,025 | 6,044 | ||||||||||||||
OTHER ASSETS | ||||||||||||||||
Investment in affiliated companies | 23 | 28 | ||||||||||||||
Other assets | ||||||||||||||||
Goodwill, net | 1,663 | 169 | 1,729 | 1,728 | ||||||||||||
Other intangibles, net | 1,871 | 115 | ||||||||||||||
Deferred income taxes | 513 | 472 | ||||||||||||||
Other intangibles, net of accumulated amortization of $132 and $96 at December 31, 2009 and December 31, 2008, respectively | 1,796 | 1,821 | ||||||||||||||
Other assets | 175 | 243 | 1,427 | 954 | ||||||||||||
Total other assets | 4,952 | 4,503 | ||||||||||||||
4,245 | 1,027 | |||||||||||||||
PROPERTY, PLANT AND EQUIPMENT | ||||||||||||||||
Property, plant and equipment | ||||||||||||||||
Land | 94 | 80 | 77 | 74 | ||||||||||||
Buildings | 1,174 | 1,033 | 1,207 | 1,186 | ||||||||||||
Machinery and equipment | 7,186 | 6,108 | 8,193 | 7,549 | ||||||||||||
Accumulated depreciation | (5,297 | ) | (4,710 | ) | (6,360 | ) | (5,824 | ) | ||||||||
Total property, plant and equipment | 3,117 | 2,985 | ||||||||||||||
3,157 | 2,511 | |||||||||||||||
Total assets | $ | 15,094 | $ | 13,532 | ||||||||||||
Total Assets | $ | 13,878 | $ | 8,301 | ||||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 3,308 | $ | 2,805 | ||||||||||||
Accrued expenses | 632 | 530 | ||||||||||||||
Accrued advertising and promotions | 475 | 440 | ||||||||||||||
Employee compensation | 501 | 306 | ||||||||||||||
Notes payable | 23 | 393 | ||||||||||||||
Current maturities of long-term debt | 378 | 202 | ||||||||||||||
Other current liabilities | 624 | 887 | ||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Notes payable | $ | 521 | $ | 131 | ||||||||||||
Accounts payable | 2,945 | 2,330 | ||||||||||||||
Employee compensation | 420 | 352 | ||||||||||||||
Accrued advertising and promotions | 550 | 421 | ||||||||||||||
Deferred income taxes | 74 | 61 | ||||||||||||||
Accrued expenses | 698 | 512 | ||||||||||||||
Total current liabilities | 5,941 | 5,563 | ||||||||||||||
Noncurrent liabilities | ||||||||||||||||
Long-term debt | 2,502 | 2,002 | ||||||||||||||
Pension benefits | 16 | — | 1,557 | 1,505 | ||||||||||||
Postretirement benefits | 97 | — | 693 | 822 | ||||||||||||
Restructuring costs | 177 | 19 | ||||||||||||||
Income taxes | 79 | 18 | ||||||||||||||
Other current liabilities | 287 | 145 | ||||||||||||||
Current maturities of long-term debt | 17 | 365 | ||||||||||||||
Liabilities of discontinued operations | 121 | — | ||||||||||||||
Other liabilities | 641 | 567 | ||||||||||||||
Total Current Liabilities | 6,002 | 4,354 | ||||||||||||||
Total noncurrent liabilities | 5,393 | 4,896 | ||||||||||||||
OTHER LIABILITIES | ||||||||||||||||
Deferred income taxes | 352 | 167 | ||||||||||||||
Pension benefits | 838 | 467 | ||||||||||||||
Postemployment benefits | 1,207 | 511 | ||||||||||||||
Other liabilities | 350 | 220 | ||||||||||||||
Long-term debt | 1,798 | 745 | ||||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity | ||||||||||||||||
Common stock, $1 par value, 250 million shares authorized, 105 million and 104 million shares issued at December 31, 2009 and December 31, 2008, respectively, 75 million and 73 million shares outstanding at December 31, 2009 and December 31, 2008, respectively | 105 | 104 | ||||||||||||||
Additional paid-in capital | 2,067 | 2,033 | ||||||||||||||
Retained earnings | 4,193 | 3,993 | ||||||||||||||
Accumulated other comprehensive income (loss) | (868 | ) | (1,259 | ) | ||||||||||||
Treasury stock, 30 million shares and 31 million shares at December 31, 2009 and December 31, 2008, respectively | (1,833 | ) | (1,865 | ) | ||||||||||||
Total Whirlpool stockholders’ equity | 3,664 | 3,006 | ||||||||||||||
4,545 | 2,110 | |||||||||||||||
Noncontrolling interests | 96 | 67 | ||||||||||||||
MINORITY INTERESTS | 48 | 92 | ||||||||||||||
Total stockholder’s equity | 3,760 | 3,073 | ||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Common stock, $1 par value: | 102 | 92 | ||||||||||||||
Paid-in capital | 1,869 | 863 | ||||||||||||||
Retained earnings | 3,205 | 2,902 | ||||||||||||||
Accumulated other comprehensive loss | (643 | ) | (862 | ) | ||||||||||||
Treasury stock—24 million shares (2006); 24 million shares (2005) | (1,250 | ) | (1,250 | ) | ||||||||||||
Total liabilities and stockholders’ equity | $ | 15,094 | $ | 13,532 | ||||||||||||
Total Stockholders’ Equity | 3,283 | 1,745 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 13,878 | $ | 8,301 | ||||||||||||
See Notes toThe accompanying notes are an integral part of these Consolidated Financial Statements
F-23
WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
(Millions of dollars)
2006 | 2005 | 2004 | ||||||||||
Operating Activities of Continuing Operations | ||||||||||||
Net earnings | $ | 433 | $ | 422 | $ | 406 | ||||||
Loss from discontinued operations | 53 | — | — | |||||||||
Earnings from continuing operations | 486 | 422 | 406 | |||||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||||||
Equity in losses of affiliated companies, less dividends received | 5 | 2 | 1 | |||||||||
Gain on disposition of assets | (4 | ) | (39 | ) | (7 | ) | ||||||
Gain on disposition of businesses | (32 | ) | (9 | ) | — | |||||||
Depreciation and amortization | 550 | 442 | 445 | |||||||||
Changes in assets and liabilities, net of business acquisitions: | ||||||||||||
Trade receivables | 50 | (173 | ) | (16 | ) | |||||||
Inventories | (118 | ) | 37 | (266 | ) | |||||||
Accounts payable | 44 | 87 | 253 | |||||||||
Restructuring charges, net of cash paid | (80 | ) | 8 | (33 | ) | |||||||
Taxes deferred and payable, net | (154 | ) | (105 | ) | (18 | ) | ||||||
Accrued pension | 53 | 47 | 6 | |||||||||
Employee compensation | 25 | 79 | (23 | ) | ||||||||
Other—net | 55 | 86 | 46 | |||||||||
Cash Provided By Continuing Operating Activities | $ | 880 | $ | 884 | $ | 794 | ||||||
Investing Activities of Continuing Operations | ||||||||||||
Capital expenditures | $ | (576 | ) | $ | (494 | ) | $ | (511 | ) | |||
Proceeds from sale of assets | 86 | 93 | 74 | |||||||||
Proceeds from sale of businesses | 36 | 48 | — | |||||||||
Purchase of minority interest shares | (53 | ) | — | — | ||||||||
Proceeds from sale of Maytag adjacent businesses | 110 | — | — | |||||||||
Acquisitions of businesses, less cash acquired | (797 | ) | (77 | ) | (2 | ) | ||||||
Cash Used For Investing Activities of Continuing Operations | $ | (1,194 | ) | $ | (430 | ) | $ | (439 | ) | |||
Financing Activities of Continuing Operations | ||||||||||||
Net proceeds (repayments) of short-term borrowings | $ | 381 | $ | (124 | ) | $ | (37 | ) | ||||
Proceeds of long-term debt | 757 | — | — | |||||||||
Repayments of long-term debt | (1,046 | ) | (7 | ) | (21 | ) | ||||||
Dividends paid | (130 | ) | (116 | ) | (116 | ) | ||||||
Purchase of treasury stock | — | (34 | ) | (251 | ) | |||||||
Common stock issued under stock plans | 54 | 102 | 64 | |||||||||
Other | 13 | 9 | 3 | |||||||||
Cash Provided By (Used For) Financing Activities of Continuing Operations | $ | 29 | $ | (170 | ) | $ | (358 | ) | ||||
Cash Provided By (Used For) Discontinued Operations | ||||||||||||
Operating Activities | $ | 8 | $ | — | $ | — | ||||||
Investing Activities | (3 | ) | — | — | ||||||||
Cash Provided By Discontinued Operations | $ | 5 | $ | — | $ | — | ||||||
Effect of Exchange Rate Changes on Cash and Equivalents | 18 | (3 | ) | (3 | ) | |||||||
Increase (Decrease) in Cash and Equivalents | $ | (262 | ) | $ | 281 | $ | (6 | ) | ||||
Cash and Equivalents at Beginning of Year | 524 | 243 | 249 | |||||||||
Cash and Equivalents at End of Year | $ | 262 | $ | 524 | $ | 243 | ||||||
2009 | 2008 | 2007 | ||||||||||
Operating activities of continuing operations | ||||||||||||
Net earnings | $ | 354 | $ | 447 | $ | 662 | ||||||
Loss from discontinued operations | — | — | 7 | |||||||||
Earnings from continuing operations | 354 | 447 | 669 | |||||||||
Adjustments to reconcile net earnings from continuing operations to cash provided by operating activities from continuing operations: | ||||||||||||
Depreciation and amortization | 525 | 597 | 593 | |||||||||
Curtailment gain | (92 | ) | — | — | ||||||||
Gain on disposition of assets | (4 | ) | (60 | ) | (65 | ) | ||||||
Gain on sale of investment | — | — | (7 | ) | ||||||||
(Decrease) increase in LIFO inventory reserve | (41 | ) | 42 | 9 | ||||||||
Equity in losses of affiliated companies, less dividends received | 1 | — | 18 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (286 | ) | 300 | 181 | ||||||||
Inventories | 578 | (174 | ) | (194 | ) | |||||||
Accounts payable | 326 | (250 | ) | 105 | ||||||||
Restructuring charges, net of cash paid | (14 | ) | 33 | (82 | ) | |||||||
Taxes deferred and payable, net | (112 | ) | (256 | ) | 10 | |||||||
Accrued pension | (84 | ) | (123 | ) | (70 | ) | ||||||
Employee compensation | 213 | (84 | ) | (24 | ) | |||||||
Other | 186 | (145 | ) | (216 | ) | |||||||
Cash provided by continuing operating activities | 1,550 | 327 | 927 | |||||||||
Investing activities of continuing operations | ||||||||||||
Capital expenditures | (541 | ) | (547 | ) | (536 | ) | ||||||
Proceeds from sale of assets | 77 | 119 | 130 | |||||||||
Proceeds from sale of Maytag adjacent businesses | — | — | 100 | |||||||||
Investment in related businesses | (35 | ) | (5 | ) | (25 | ) | ||||||
Cash used in investing activities of continuing operations | (499 | ) | (433 | ) | (331 | ) | ||||||
Financing activities of continuing operations | ||||||||||||
Proceeds from borrowings of long-term debt | 872 | 545 | 3 | |||||||||
Net (repayments) proceeds from short-term borrowings | (362 | ) | 101 | (243 | ) | |||||||
Repayments of long-term debt | (210 | ) | (131 | ) | (17 | ) | ||||||
Dividends paid | (128 | ) | (128 | ) | (134 | ) | ||||||
Common stock issued | 21 | 21 | 68 | |||||||||
Purchase of treasury stock | — | (247 | ) | (368 | ) | |||||||
Other | (49 | ) | (20 | ) | (5 | ) | ||||||
Cash provided by (used in) financing activities of continuing operations | 144 | 141 | (696 | ) | ||||||||
Cash provided by operating activities from discontinued operations | — | — | 6 | |||||||||
Effect of exchange rate changes on cash and equivalents | 39 | (90 | ) | 33 | ||||||||
Increase (decrease) in cash and equivalents | 1,234 | (55 | ) | (61 | ) | |||||||
Cash and equivalents at beginning of year | 146 | 201 | 262 | |||||||||
Cash and equivalents at end of year | $ | 1,380 | $ | 146 | $ | 201 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid for interest | $ | 209 | $ | 200 | $ | 204 | ||||||
Cash paid for taxes | 51 | 76 | 39 |
See Notes toThe accompanying notes are an integral part of these Consolidated Financial Statements
See Note 3 for non-cash financing activitiesF-24
WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Year ended December 31
(Millions of dollars)
Total | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock / Paid-in-Capital | Common Stock | |||||||||||||||
Balances, December 31, 2003 | $ | 1,301 | $ | 2,276 | $ | (757 | ) | $ | (306 | ) | $ | 88 | |||||||
Comprehensive income | |||||||||||||||||||
Net earnings | 406 | 406 | — | — | — | ||||||||||||||
Unrealized loss on derivative instruments | 13 | — | 13 | — | — | ||||||||||||||
Minimum pension liability adjustment, net of tax of $14 | (31 | ) | — | (31 | ) | — | — | ||||||||||||
Foreign currency items, net of tax of $14 | 174 | — | 174 | — | — | ||||||||||||||
Comprehensive income | 562 | ||||||||||||||||||
Common stock repurchased, net of reissuances | (251 | ) | — | — | (251 | ) | — | ||||||||||||
Common stock issued | 80 | — | — | 78 | 2 | ||||||||||||||
Dividends declared on common stock | (86 | ) | (86 | ) | — | — | — | ||||||||||||
Balances, December 31, 2004 | $ | 1,606 | $ | 2,596 | $ | (601 | ) | $ | (479 | ) | $ | 90 | |||||||
Comprehensive income | |||||||||||||||||||
Net earnings | 422 | 422 | — | — | — | ||||||||||||||
Unrealized gain on derivative instruments | 12 | — | 12 | — | — | ||||||||||||||
Minimum pension liability adjustment, net of tax of $141 | (248 | ) | — | (248 | ) | — | — | ||||||||||||
Foreign currency items, net of tax of $12 | (25 | ) | — | (25 | ) | — | — | ||||||||||||
Comprehensive income | 161 | ||||||||||||||||||
Common stock repurchased, net of reissuances | (34 | ) | — | — | (34 | ) | — | ||||||||||||
Common stock issued | 128 | — | — | 126 | 2 | ||||||||||||||
Dividends declared on common stock | (116 | ) | (116 | ) | — | — | — | ||||||||||||
Balances, December 31, 2005 | $ | 1,745 | $ | 2,902 | $ | (862 | ) | $ | (387 | ) | $ | 92 | |||||||
Comprehensive income | |||||||||||||||||||
Net earnings | 433 | 433 | — | — | — | ||||||||||||||
Unrealized gain on derivative instruments, net of tax of $4 | 48 | — | 48 | — | — | ||||||||||||||
Minimum pension liability adjustment, net of tax of $(78) | 116 | — | 116 | — | — | ||||||||||||||
Foreign currency items, net of tax of $4 | 169 | — | 169 | — | — | ||||||||||||||
Comprehensive income | 766 | ||||||||||||||||||
SFAS No. 158 transition adjustment, net of tax of $63 | (114 | ) | — | (114 | ) | — | — | ||||||||||||
Common stock repurchased, net of reissuances | — | — | — | — | — | ||||||||||||||
Common stock issued | 1,016 | — | — | 1,006 | 10 | ||||||||||||||
Dividends declared on common stock | (130 | ) | (130 | ) | — | — | — | ||||||||||||
Balances, December 31, 2006 | $ | 3,283 | $ | 3,205 | $ | (643 | ) | $ | 619 | $ | 102 | ||||||||
Total | Whirlpool Common Stockholders | Non- Controlling Interests | |||||||||||||||||||||
Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock/ Additional Paid- in-Capital | Common Stock | ||||||||||||||||||||
Balances, December 31, 2006 | $ | 3,331 | $ | 3,205 | $ | (643 | ) | $ | 619 | $ | 102 | $ | 48 | ||||||||||
Comprehensive income | |||||||||||||||||||||||
Net earnings | 662 | 640 | — | — | — | 22 | |||||||||||||||||
Other comprehensive income | 385 | — | 373 | — | — | 12 | |||||||||||||||||
Comprehensive income | 1,047 | ||||||||||||||||||||||
Adoption of ASC 740 | (8 | ) | (8 | ) | — | — | — | — | |||||||||||||||
Stock repurchased | (368 | ) | — | — | (368 | ) | — | — | |||||||||||||||
Stock issued | 130 | — | — | 124 | 1 | 5 | |||||||||||||||||
Dividends declared | (152 | ) | (134 | ) | — | — | — | (18 | ) | ||||||||||||||
Balances, December 31, 2007 | 3,980 | 3,703 | (270 | ) | 375 | 103 | 69 | ||||||||||||||||
Comprehensive income | |||||||||||||||||||||||
Net earnings | 447 | 418 | — | — | — | 29 | |||||||||||||||||
Other comprehensive income | (1,003 | ) | — | (989 | ) | — | — | (14 | ) | ||||||||||||||
Comprehensive income | (556 | ) | |||||||||||||||||||||
Stock repurchased | (247 | ) | — | — | (247 | ) | — | — | |||||||||||||||
Stock issued | 41 | — | — | 40 | 1 | — | |||||||||||||||||
Dividends declared | (145 | ) | (128 | ) | — | — | — | (17 | ) | ||||||||||||||
Balances, December 31, 2008 | 3,073 | 3,993 | (1,259 | ) | 168 | 104 | 67 | ||||||||||||||||
Comprehensive income | |||||||||||||||||||||||
Net earnings | 354 | 328 | — | — | — | 26 | |||||||||||||||||
Other comprehensive income | 409 | — | 391 | — | — | 18 | |||||||||||||||||
Comprehensive income | 763 | ||||||||||||||||||||||
Stock issued | 67 | — | — | 66 | 1 | — | |||||||||||||||||
Dividends declared | (143 | ) | (128 | ) | — | — | — | (15 | ) | ||||||||||||||
Balances, December 31, 2009 | $ | 3,760 | $ | 4,193 | $ | (868 | ) | $ | 234 | $ | 105 | $ | 96 | ||||||||||
See Notes toThe accompanying notes are an integral part of these Consolidated Financial Statements
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Nature of OperationsGeneral Information
Whirlpool Corporation, a Delaware corporation, is the world’s leading manufacturer and marketer of major home appliances. The Company manufacturesWe manufacture appliances in 12 countries under 1413 principal brand names in four geographic operating segments and marketsmarket products in nearly every country around the world.
Principles of Consolidation
The Our Consolidated Financial Statements include all majority-owned subsidiaries. Investments in affiliated companies consist of a 40% voting interest in an international company engaged in the sale of major home appliances and a 26% interest in an international company engaged in the sale of kitchen cabinets. These companies are accounted for by the equity method. All intercompany transactions have been eliminated upon consolidation.
We have evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission, which was February 17, 2010.
Use of Estimates
Management isWe are required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.
Revenue Recognition
Sales are recorded when title passes to the customer. The point at which title passes iscustomer as determined by the shipping terms. For the majority of the Company’sour sales, title is transferred to the customer as soon as the product isproducts are shipped. For a portion of the Company’sour sales, primarily in Europe, title is transferred to the customer upon receipt of the productproducts at the customer’s location. Allowances for estimated returns are made on sales of certain products based on historical return rates for the products involved.
Accounts Receivable and Allowance for Doubtful Accounts
The Company carries itsWe carry accounts receivable at their face amountssales value less an allowance for doubtful accounts. On a periodic basis, the Company evaluates itsWe periodically evaluate accounts receivable and establishes theestablish an allowance for doubtful accounts based on a combination of specific customer circumstances, and credit conditions and based on athe history of write-offs and collections. The Company evaluatesWe evaluate items on an individual basis when determining accounts receivable write-offs. The Company’sOur policy is generally to not charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments havepayment has not been received within agreed upon invoice terms.
Freight and Warehousing Costs
The Company applies Emerging Issues Task Force (“EITF”) No. 00-10, “Accounting for ShippingWe classify freight and Handling Fees and Costs”. This EITF requires the classification of suchwarehousing costs within cost of products sold or if classified elsewhere, to be disclosed. 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 thewithin our Consolidated Statements of Operations. This change was adopted to better reflect these costs being directly tied to product sales. The amounts reclassified from the selling, general and administrative expense line to the cost of products sold line were $854 million and $723 million in 2005 and 2004, respectively. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Income.
Cash and Equivalents
All highly liquid debt instruments purchased with an initial maturity of three months or less are considered cash equivalents.
Inventories
Inventories are stated at first-in, first-out (“FIFO”) cost, except U.S. production inventories, which are stated at last-in, first-out (“LIFO”) cost, and BrazilianBrazil and Asia inventories, which are stated at average cost. Costs do not exceed realizable values. See Note 4 for additional information about inventories.
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Goodwill and Other Intangibles
Goodwill and other intangibles are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that the Company evaluate goodwill and other indefinite lived intangible assets are required to be evaluated for impairment on an annual basis (or whenever events occur which may indicate possible impairment). Goodwill is evaluated using a two-step impairment is determined by comparingtest at the fairreporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to its carrying amount. Ifdetermine the amount of goodwill impairment loss to be recorded. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit exceeds its carrying amount, goodwillto all of the reporting unit is not considered impaired. Conversely, ifassets and liabilities other than goodwill (including any unrecognized intangible assets). The difference between the total fair value of the reporting unit and the fair value of all the assets and liabilities other than goodwill is less thanthe implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
In assessing the fair value of trademarks, we utilize a relief from royalty method. If the carrying amount goodwill may be considered impaired.
of a trademark exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Considerable judgment is necessary to estimate key assumptions involved in valuing our trademarks, including projected revenues, royalty rates and applicable discount rates.
Definite lived intangible assets are amortized to expense over thetheir estimated useful life ranging from 16 to 18 years.
See Note 2 for additional information about goodwill and intangible assets.
Property, PlantAccounts Payable Outsourcing
We offer our suppliers access to a payables presentment and Equipment
Property, plantsettlement service (PPS) provided by a third party processor. This service allows our suppliers to view scheduled Whirlpool payments online, enabling them to better manage their cash flow and equipment arereduce payment processing costs. Independent of Whirlpool, the PPS provider also allows suppliers to sell their receivables to financial institutions at the sole discretion of both the supplier and the financial institution. We have no economic interest in the sale of these receivables and no direct relationship with financial institutions concerning this service. All of our obligations, including amounts due, remain to our suppliers as stated at cost. Depreciationin our supplier agreements. As of plantDecember 31, 2009 and equipment2008, approximately $246 million and $119 million, respectively, of our total accounts payable is computed using the straight-line method based on the estimated useful lives of the assets. Useful livesavailable for buildings range from 25this purpose and approximately $145 million and $72 million, respectively, has been sold by suppliers to 50 years, machinery and equipment range from 3 to 10 years, and computer/software range from 1 to 8 years. Assets recorded under capital leases are included in property, plant and equipment.
participating financial institutions.
Research and Development Costs
Research and development costs are charged to expense as incurred. Such costs were $428incurred and totaled $455 million, $339$436 million and $315$421 million in 2006, 20052009, 2008 and 2004,2007, respectively.
Advertising Costs
Advertising costs are charged to expense as incurred. Such costs were $316when the advertisement is first communicated and totaled $211 million, $239$336 million and $221$321 million in 2006, 20052009, 2008 and 2004,2007, respectively.
Discontinued Operations
The Company presentsWe present the results of operations, financial position and cash flows of operations that have either been sold or that meet the “held for sale accounting” and certain other criteria as discontinued operations.
Contingent Tax Matters
The Company establishes liabilities for probable and estimable assessments by taxing authorities resulting from known tax exposures. Such amounts represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes known.F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Foreign Currency Translation
The functional currency for the Company’sour international subsidiaries and affiliates is typically the local currency. Certain international subsidiaries primarily utilize the U.S. dollar and Euro as the functional currency.
Long-Lived Assets
Property, plant and equipment are stated at cost. During the March 2009 quarter, we changed our method of depreciation prospectively for substantially all long-lived production machinery and equipment to a modified units of production depreciation method. Under this method, we record depreciation based on units produced, unless units produced drop below a minimum threshold at which point depreciation is recorded using the straight-line method. Prior to 2009, all machinery and equipment was depreciated using the straight-line method. We believe depreciating machinery and equipment based on units of production is a preferable method as it best matches the usage of assets with the revenues derived from those assets. For nonproduction long-lived assets, we depreciate costs based on the straight-line method. Depreciation expense for property, plant and equipment was $497 million, $569 million and $562 million in 2009, 2008 and 2007, respectively.
The estimated useful lives for major asset classifications are as follows:
Asset Classification | Estimated Useful Life | |
Buildings | 25 to 50 years | |
Machinery and equipment | 4 to 23 years | |
Computer/Software | 1 to 8 years |
As a result of this change in method, and lower overall production levels in 2009, depreciation expense decreased by $83 million from what would have been recorded using the straight-line method. Net of amounts capitalized into ending inventories and income taxes, net earnings increased $48 million for 2009, or $.64 per diluted share.
We classify gains and losses associated with asset dispositions in the same line item as the underlying depreciation of the disposed asset in the Consolidated Statements of Income. Net gains and losses recognized in cost of products sold include a loss of $3 million for 2009 and gains of $16 million and $51 million for 2008, and 2007, respectively. Net gains recognized in selling, general and administrative expenses include $1 million, $19 million and $14 million for 2009, 2008 and 2007, respectively.
We record impairment losses on long-lived assets when events and circumstances indicate the assets may be impaired and the estimated future cash flows generated by those assets are less than their carrying amounts.
Derivative Financial Instruments
The Company recognizes all of itsWe use derivative instruments designated as cash flow and fair value hedges to manage our exposure to the volatility in accordance with SFAS No. 133, “Accounting for Derivative Instrumentsmaterial costs, foreign currency and Hedging Activities,” as amended.interest rates on certain debt instruments. We fair value these derivative instruments periodically. Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether a hedge has been designated. For those derivative instruments that are designated and qualify as hedging instruments, the Company must furtherfor hedge accounting, we designate the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, fair value hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of derivative instruments that do not qualify for hedge accounting are recognized immediately in current earnings. See Note 7 for additional information about hedges and derivative financial instruments.
Cash flow hedges are hedges that use derivatives to offset the variability of expected future cash flows. The effective portion of the unrealized gain or loss on a derivative instrument designated as a cash flow hedge is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the unrealized gain or loss on the derivative instrument, if any, is recognized in interest and sundry income/expense in current earnings during the period of change.F-28
Fair value hedges are hedges that mitigate the risk of changes in the fair values of assets, liabilities and certain types of firm commitments. The gain or loss on a derivative instrument designated as a fair value hedge and the offsetting loss or gain on the hedged item are recognized in the same line item associated with the hedged item in current earnings during the period of the change in fair values.
Net investment hedge designation refers to the use of derivative contracts or cash instruments to hedge the foreign currency exposure of a net investment in a foreign operation. For those derivatives that qualify as net investment hedges, the effective portion of any unrealized gain or loss is reported in accumulated other comprehensive income as part of the cumulative translation adjustment. Any ineffective portion of net investment hedges is recognized in interest and sundry income (expense) in current earnings during the period of change.
For derivative instruments not designated as hedging instruments, the unrealized gain or loss is recognized in interest and sundry income/expense in current earnings during the period of change.
Net Earnings Per Common Share
Diluted net earnings per share of common stock include the dilutive effect of stock options and other share-based compensation plans. For the years ended December 31, 2006, 2005 and 2004, a total of approximately 2,021,000 options, 576,000 options and 1,831,000 options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices would render them anti-dilutive.
Basic and diluted earnings per share from continuing operations were calculated as follows:
Millions of dollars and shares | 2006 | 2005 | 2004 | ||||||
Numerator for basic and diluted earnings per share – earnings from continuing operations | $ | 486 | $ | 422 | $ | 406 | |||
Denominator for basic earnings per share—weighted-average shares | 75.1 | 67.1 | 67.4 | ||||||
Effect of dilutive securities—share-based compensation | 1.4 | 1.2 | 1.5 | ||||||
Denominator for diluted earnings per share—adjusted weighted-average shares | 76.5 | 68.3 | 68.9 | ||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Income Taxes
In accounting for income taxes, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of the respective assets and liabilities, using enacted tax rates in effect for the year that the differences are expected to reverse. Judgment is required in determining and evaluating our income tax provisions. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We evaluate and adjust these accruals in light of changing facts and circumstances. For additional information about income taxes, see Note 11.
Stock Based Compensation
We recognize stock based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award (generally the vesting period). The fair value of stock options is determined using the Black-Scholes option-pricing model, which incorporates assumptions regarding the risk-free interest rate, expected volatility, expected option life and dividend yield. Stock options are granted with an exercise price equal to the stock price on the date of grant. The fair value of restricted stock units and performance stock units is based on the closing market price of Whirlpool common stock on the grant date. See Note 9 for additional information about stock based compensation.
BEFIEX Credits
Our Brazilian operations earned tax credits under the Brazilian government’s export incentive program. These credits reduce Brazilian federal excise taxes on domestic sales, resulting in an increase in the operations’ recorded net sales. Based on a recalculation of available credits and a favorable court decision in the fourth quarter of 2005, we were able to recognize approximately $69 million, $168 million and $131 million of export credits during 2009, 2008 and 2007, respectively. As of December 31, 2009, approximately $693 million of export credits remain. We recognize credits as they are monetized; however, future actions by the Brazilian government could limit our ability to monetize these export credits. See Note 11 for additional information about how these credits impact our effective tax rate which are included in “Foreign government tax incentive” in the rate reconciliation of our effective tax rate.
Reclassifications
CertainWe reclassified certain prior period amounts in our Consolidated Financial Statements to be consistent with current period presentation. The effect of these reclassifications have been made to prior year data to conform to the current year presentation which had no effect on net income reported for any period.
is not material.
(2) NEW ACCOUNTING STANDARDSNew Accounting Standards
In September 2006,June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP. The standard is effective for interim and annual periods ending after September 15, 2009. We adopted the provisions of the standard on September 30, 2009, which did not have a material impact on our financial statements.
In June 2009, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding the consolidation of variable interest entities (formerly SFAS No. 158, “Employers’ Accounting167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by providing additional guidance to companies
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for Defined Benefit Pensioninterim and Other Postretirement Plans –annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (formerly SFAS No. 166, “Accounting for Transfers of Financial Assets”). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods ending after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.
In April 2009, the FASB issued ASC 825, “Financial Instruments” (formerly FASB Staff Position 107-1, “Interim Disclosures about Fair Value of Financial Instruments”). ASC 825 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods ending after June 15, 2009. We adopted the provisions of ASC 825 on June 30, 2009. See Notes 3 and 5 for information related to the fair value of our financial instruments.
In March 2008, the FASB issued the disclosure requirements within ASC 815, “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendmentAmendment of FASB Statements No. 87, 88, 106,133”). ASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and 132(R)”. This statement requires an employer to recognizehedging activities and their effects on the over-funded or under-funded status of a defined benefit and postretirement plan as an asset or liability in its statement ofentity’s financial position, financial performance, and cash flows. The disclosure requirements apply to recognize changes in that funded status inall derivative instruments within the year in whichscope of ASC 815. The standard also applies to non-derivative hedging instruments and all hedged items designated and qualifying under ASC 815. We adopted the changes occur through comprehensive income. The Company reflected the impactdisclosure requirements of adopting SFAS No. 158 in its Consolidated Statements of Financial Position at December 31, 2006. The incremental effect of adopting SFAS No. 158 is reflected in the following table:
Millions of dollars | Before adopting SFAS No. 158 | Adjustments to adopt SFAS No. 158 | After adopting SFAS No. 158 | |||||||||
ASSETS | ||||||||||||
Non-current benefit asset | $ | 12 | $ | (12 | ) | $ | — | |||||
Intangible asset | 38 | (38 | ) | — | ||||||||
Deferred tax asset | 115 | 63 | 178 | |||||||||
LIABILITIES | ||||||||||||
Current benefit liability | — | 113 | 113 | |||||||||
Non-current benefit liability | 2,031 | 14 | 2,045 | |||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||
Accumulated other comprehensive loss | $ | (201 | ) | $ | (114 | ) | $ | (315 | ) |
ASC 815 on January 1, 2009. For additional information regarding derivative instruments and hedging activities, see Note 7.
In FebruaryDecember 2007, the FASB issued accounting guidance contained within ASC 805, “Business Combinations” (formerly SFAS No. 159, “The Fair Value Option141(R), “Business Combinations”). ASC 805 requires us to continue to follow the guidance in SFAS 141 for Financial Assetscertain aspects of business combinations, with additional guidance provided defining the acquirer, the accounting for transaction costs and Financial Liabilities—Including an amendment of FASB Statement 115” that provides companies with an option to report certain financialcontingent consideration, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and measuring goodwill or a gain from a bargain purchase. In addition, adjustments associated with changes in their entirety at fair value.tax contingencies that occur after the measurement period, not to exceed one year, are recorded as adjustments to income. This statement was effective for all business combinations for which the acquisition date is effective as ofon or after the beginning of an entity’s first fiscal year that begins after NovemberDecember 15, 2007. The fair value option may be applied instrument by instrument, and may be applied only2008; however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to entire instruments. A business entity would report unrealized gains and lossescombinations completed prior to January 1, 2009. We adopted ASC 805 on items for which the fair value option has been elected in earnings at each subsequent reporting date. The Company is evaluating its options provided for under this statement and their potential impact on its financial statements when implemented. This statement is being reviewed in conjunction with the requirements of SFAS No. 157 discussed below.
January 1, 2009.
In September 2006,December 2007, the FASB issued accounting guidance contained within ASC 810, “Consolidation”, regarding noncontrolling interests (formerly SFAS No. 157, “Fair Value Measurements”, which defines fair value,160, “Noncontrolling Interests in Consolidated Financial Statements”). ASC 810-10-65 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)reporting standards for the period. SFAS No. 157noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will implement SFAS No. 157 beginning January 1, 2008 and anticipatesan ownership interest in the consolidated entity that the statement will not materially impactshould be reported as equity in the consolidated financial statements, but will provide expandedstatements. We adopted ASC 810-10-65 on January 1, 2009. As a result, we have reclassified financial statement line items within our Consolidated Balance Sheets and Statements of Income for the prior period to conform with this standard. Additionally, see Note 8 for disclosure reflecting the impact of ASC 810-10-65 on its fair value measurements.our reconciliation of comprehensive income and stockholders’ equity.
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
In June 2006, the 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 will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings. Based on the Company’s evaluation as of December 31, 2006, the adoption of FIN 48 is not expected to have a material impact to its Consolidated Financial Statements.
(3) MAYTAG ACQUISITION
On March 31, 2006, the Company completed its acquisition of Maytag. The results of Maytag’s operations have been included in the Consolidated Financial Statements beginning April 1, 2006.
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 exchange of fully-vested Whirlpool options for fully-vested 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 $973 million. The Company also 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
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 | $ | 1,349 | |
Assets of discontinued operations | 435 | ||
Property, plant and equipment | 551 | ||
Goodwill | 1,493 | ||
Intangible assets | 1,845 | ||
Other non-current assets | 24 | ||
Total assets acquired | 5,697 | ||
Current liabilities | 1,591 | ||
Liabilities of discontinued operations | 164 | ||
Non-current liabilities | 2,072 | ||
Total liabilities assumed | 3,827 | ||
Net assets acquired | $ | 1,870 | |
Goodwill, which is not deductible for tax purposes, has been allocated to the North America operating segment on the basis that the cost efficiencies identified will primarily benefit this segment of the business.
The Company has preliminarily estimated the fair value of Maytag’s identifiable intangible assets as $1,845 million. The preliminary allocation of identifiable intangible assets is as follows:
Millions of dollars | Estimated Fair Value | Estimated Useful Life | |||
Trademarks—indefinite lived | $ | 1,463 | |||
Customer relationships | 288 | 18 years | |||
Patents and non-compete agreements | 94 | 1 to 7 years | |||
$ | 1,845 | ||||
The majority of the intangible valuation relates to trademarks. The Company’s preliminary assessment as to trademarks 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 estimated useful life of 18 years based on the very low historical and projected customer attrition rates among major retailers. The patents have an estimated useful life of 7 years based on the estimate of the expected life of the technology and the products associated with the technology. The non-compete agreements have an estimated useful life of one year based on the time period in which the agreements are enforceable.
The Company is also in the process of completing its analysis of integration plans, pursuant to which the Company has incurred costs primarily related to the elimination of duplicative manufacturing facilities and selling, general and administrative overlap. The Company 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 $236 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
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 and residential products businesses. Refer to Note 4—Discontinued Operations for additional information related to the sales of these businesses.
The following table provides pro forma results of operations for the years ended December 31, 2006, 2005 and 2004 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.
Year Ended December 31, | ||||||||
2006 | 2005 | |||||||
Net sales | $ | 19,097 | $ | 18,430 | ||||
Earnings from continuing operations | $ | 474 | $ | 307 | ||||
Net earnings | $ | 421 | $ | 267 | ||||
Diluted net earnings per share: | ||||||||
Earnings from continuing operations | $ | 5.96 | $ | 3.93 | ||||
Loss from discontinued operations | $ | (0.67 | ) | $ | (0.51 | ) | ||
Net earnings | $ | 5.29 | $ | 3.42 | ||||
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.
(4) DISCONTINUED OPERATIONS
The Company classified the Hoover floor-care, Dixie-Narco vending systems, Amana commercial microwave and Jade commercial and residential products businesses as discontinued operations during the second quarter of 2006. The decision to divest these businesses will allow the Company to focus on its core appliance business.
Amana commercial
On September 6, 2006, the Company sold the Amana commercial microwave business to Aga Foodservice Inc. for approximately $49 million. Revenues and costs for this business were classified as a component of discontinued operations during the second quarter of 2006. Due to the Company’s continuing involvement with the Amana commercial microwave business as an OEM supplier, the Company reclassified the operating results related to Amana commercial microwave business into continuing operations during the third quarter of 2006.
Dixie-Narco
On October 23, 2006, the Company completed the sale of the Dixie-Narco vending systems business to Crane Co. for approximately $46 million.
Hoover
On December 6, 2006, the Company entered into a definitive agreement to sell the Hoover floor-care business to Techtronic Industries, Co., Ltd (“TTI”) for approximately $107 million. $15 million of the proceeds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
were received in December 2006, and the remaining proceeds of $92 million were received at the date of closing date on January 31, 2007.
Jade
On February 17, 2007, the Company entered into a definitive agreement to sell the Jade commercial and residential products businesses to Middleby Corporation. The sale is expected to be completed in the second quarter of 2007. Refer to Note 19 – Subsequent Events for additional information.
As part of the sale of each of the above discontinued operations, the Company retained certain liabilities associated with pension benefits and, in the case of Hoover, postretirement medical benefits for currently retired Hoover employees. In addition, with respect to the sale of the Dixie-Narco vending systems business, Whirlpool retained certain environmental liabilities.
The difference between the proceeds and the net book value of the above acquired businesses was recorded as an adjustment to the goodwill amount recorded in connection with the acquisition of Maytag, and accordingly, there were no gains or losses related to the sales.
The following table includes certain summary income statement information related to the results of discontinued operations:
Millions of dollars | Year Ended December 31, 2006 | |||
Net sales | $ | 443 | ||
Loss before income taxes | (79 | ) | ||
Income tax benefit | 26 | |||
Loss from discontinued operations, net of tax | $ | (53 | ) | |
Additionally, the Consolidated Balance Sheets for 2006 include the assets and liabilities of the Hoover and Jade commercial and residential businesses presented as discontinued operations:
Millions of dollars | December 31, 2006 | ||
Assets | |||
Net receivables | $ | 83 | |
Inventories | 85 | ||
Net property, plant and equipment | 67 | ||
Other assets | 5 | ||
Total assets of discontinued operations | $ | 240 | |
Liabilities | |||
Accounts payable | $ | 33 | |
Postretirement benefits | 38 | ||
Other liabilities | 50 | ||
Total liabilities of discontinued operations | $ | 121 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(5)(2) GOODWILL AND OTHER INTANGIBLES
Goodwill
Under SFAS No. 142, goodwillGoodwill and indefinite lived intangibles are no longer amortized and are subject to an annual impairment analysis performed during the fourth quarter of each year. The Company determinesyear, by reporting unit. We determine the fair value of each reporting unit using a discounted cash flow approach. The Company has determined itsflows. Our reporting units are:include: North America, Europe, Multibras and Embraco (which combined is our Latin America),America reportable operating segment) and Asia. The CompanyWe performed the annual impairment tests and determined there wasis no impairment of remaining goodwill for the years ended December 31, 2006, 2005 and 2004.
any period presented.
The following table summarizes the changes in thenet carrying amount of goodwill:
December 31, | ||||||
Reporting Unit—Millions of dollars | 2006 | 2005 | ||||
North America | $ | 1,659 | $ | 165 | ||
Embraco | 4 | 4 | ||||
Total | $ | 1,663 | $ | 169 | ||
The increase in the carrying value of North America goodwill is primarily related to the Maytag acquisition. See Note 3—Maytag Acquisition for additional information.
Reporting unit—Millions of dollars | December 31, | |||||
2009 | 2008 | |||||
North America | $ | 1,724 | $ | 1,724 | ||
Embraco | 5 | 4 | ||||
Total | $ | 1,729 | $ | 1,728 | ||
Other Intangible Assets
The following table summarizes our net carrying amountsvalue of other intangibles, which have increased from the prior year primarily due to the Maytag acquisition, are comprised of the following:intangible assets by operating segment (North America (“NAR”), Latin America (“LAR”) and Europe (“WER”)), as follows:
December 31, | ||||||
Millions of dollars | 2006 | 2005 | ||||
Trademarks—indefinite lived | $ | 1,516 | $ | 51 | ||
Patents, non-compete agreements and customer relationships | 355 | — | ||||
Pension related | — | 64 | ||||
Total other intangible assets, net | $ | 1,871 | $ | 115 | ||
December 31—Millions of dollars | NAR | LAR | WER | Total | Estimated Useful Life | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Trademarks | $ | 1,478 | $ | 1,478 | $ | — | $ | — | $ | 34 | $ | 34 | $ | 1,512 | $ | 1,512 | Indefinite life | |||||||||
Customer relationships | 226 | 242 | — | — | — | — | 226 | 242 | 18 years | |||||||||||||||||
Patents and non-compete agreements | 42 | 53 | 6 | 5 | 10 | 9 | 58 | 67 | 6 to 10 years | |||||||||||||||||
Total other intangibles assets, net | $ | 1,746 | $ | 1,773 | $ | 6 | $ | 5 | $ | 44 | $ | 43 | $ | 1,796 | $ | 1,821 | ||||||||||
The Company adopted SFAS No. 158 on December 31, 2006, and, as required, eliminated the pension related intangible. Net earnings were not impacted. See Note 16 - Pension and Postretirement Medical Benefit Plans for additional information.
Accumulated amortization totaled $33 million and $4 million at December 31, 2006 and 2005, respectively. Amortization expense for 2007 is estimated to be $35 million and $32$28 million for each of the years 2008-2011.2010-2012, $20 million for 2013 and $16 million for 2014.
(3) FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is established, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are identified in the table below and are as follows:
(a) | Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities |
F-31
(6) BUSINESS DISPOSITIONSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(b) | Cost approach—amount that would be required to replace the service capacity of an asset (replacement cost) |
On August 10, 2006, the Company’s Latin America region sold the remaining 30% interest
(c) | Income approach—techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models) |
Assets and liabilities measured at fair value on a recurring basis are as follows:
December 31—Millions of dollars | Total | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Valuation Technique | ||||||||||||
2009 | |||||||||||||||||
Money market funds(1) | $ | 355 | $ | 355 | $ | — | $ | — | (a | ) | |||||||
Net derivative contracts | 97 | — | 97 | — | (a | ) | |||||||||||
Available for sale investments | 25 | 25 | — | — | (a | ) | |||||||||||
2008 | |||||||||||||||||
Net derivative contracts | $ | (234 | ) | $ | — | $ | (234 | ) | $ | — | (a | ) | |||||
Available for sale investments | 17 | 17 | — | — | (a | ) |
(1) | Money market funds are primarily comprised of U.S. government obligations. |
During 2008, we recorded an impairment charge of $9 million in our Europe segment associated with an equityavailable for sale investment. Proceeds from the sale were approximately $31 million. A pre-tax gain of $30 millionThe impairment charge was recognizedrecorded in the Consolidated Statements of Operations and has been classified to the interest and sundry income (expense) line.
In September 2005, the Company completed the sale of its 93% interest in Multibras da Amazonia S.A. (“MASA”), an injection molding subsidiary located in Manaus, Brazil, to Flextronics Plasticos Ltda. Proceeds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
from the sale were $48 million, and a $9 million pre-tax gain from the sale is included in the interest and sundry income (expense) line of theour Consolidated Statements of Operations. Whirlpool will continue to purchase certain products from MASA. The entity was not a significant subsidiary, and accordingly, pro forma results of operations have not been provided.
Income for the year ended December 31, 2008.
(7)(4) INVENTORIES
December 31—Millions of dollars | 2006 | 2005 | ||||||
Finished products | $ | 1,980 | $ | 1,361 | ||||
Work in process | 55 | 64 | ||||||
Raw materials | 448 | 299 | ||||||
2,483 | 1,724 | |||||||
Less excess of FIFO cost over LIFO cost | (135 | ) | (133 | ) | ||||
Total inventories | $ | 2,348 | $ | 1,591 | ||||
December 31—Millions of dollars | 2009 | 2008 | ||||||
Finished products | $ | 1,853 | $ | 2,213 | ||||
Work in process | 50 | 49 | ||||||
Raw materials | 439 | 515 | ||||||
2,342 | 2,777 | |||||||
Less excess of FIFO cost over LIFO cost | (145 | ) | (186 | ) | ||||
Total inventories | $ | 2,197 | $ | 2,591 | ||||
The increasedecrease in inventories whenin 2009 compared to December 31, 2005,2008 is driven primarily by the Maytag acquisition, foreign currency translation and additional safety stock requiredincreased demand in our Latin America region due to favorable economic conditions in Brazil, the closureImpostos sobre Produtos sales tax holiday declared by the Brazilian government for the second half of two Maytag laundry facilities2009 and transferdecreases in production levels in our North America and Europe regions.
LIFO inventories represent approximately 40% and 43% of production to the Company’s Ohio manufacturing facilities.
Thetotal inventories at December 31, 2009 and 2008, respectively. Throughout 2009, we decreased our excess of FIFO cost over LIFO cost remained relatively flat when compared to December 31, 2005,reserve due to the impact of adding the Maytag inventory at fair value to existing Whirlpool inventory.lower materials costs during 2009 and decrements in LIFO layers totaling approximately $2 million.
LIFO inventories represent approximately 46% and 28% of total inventories at December 31, 2006 and 2005, respectively.
(8) FINANCING ARRANGEMENTS
Notes Payable and Debt
On June 19, 2006, the Company completed an offering of $750 million aggregate principal amount of senior notes which replaced commercial paper borrowings used to initially finance the Maytag acquisition consisting of (a) $200 million aggregate principal amount of floating rate notes due 2009 to bear interest at a floating rate equal to the three-month USD London Interbank Offered Rate (“LIBOR”) plus 0.50% per annum; (b) $300 million aggregate principal amount of 6.125% senior notes due 2011; and (c) $250 million aggregate principal amount of 6.50% senior notes due 2016. Initially, Whirlpool borrowed amounts required to fund the cash portion of the Maytag 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.
On December 2, 2005, Whirlpool entered into an Amended and Restated Long Term Five-Year Credit Agreement (the “Amended and Restated Credit Agreement”), which amends and restates the Amended and Restated Long Term Credit Agreement dated May 28, 2004. On December 2, 2005, the parties to the Amended and Restated Credit Agreement also entered into a 364-Day Credit Agreement (the “364-Day Credit Agreement” and together with the Amended and Restated Credit Agreement, the “Credit Facilities”).
The Credit Facilities provide for a $2.2 billion 5-year credit facility, which includes a $200 million letter of credit subfacility, and a $500 million 364-day credit facility, which may be converted into a term loan. Borrowing capacity of $1.2 billion under the Amended and Restated Credit Agreement became available on December 2, 2005. Borrowing capacity of $500 million under the 364-Day Credit Agreement and the remaining $1.0 billion under the Amended and Restated Credit Agreement became available on March 29, 2006. TheF-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
$500(5) FINANCING ARRANGEMENTS
Debt
The following table summarizes our debt at December 31, 2009 and 2008:
Millions of dollars | 2009 | 2008 | ||||
Variable rate notes, maturing through 2009 | $ | — | $ | 200 | ||
Senior note—8.6%, maturing 2010 | 325 | 325 | ||||
Senior note—6.125%, maturing 2011 | 300 | 300 | ||||
Senior note—8.0%, maturing 2012 | 350 | — | ||||
Medium-term note—5.5%, maturing 2013 | 499 | 499 | ||||
Maytag medium-term note—6.5%, maturing 2014 | 102 | 102 | ||||
Senior note—8.6%, maturing 2014 | 500 | — | ||||
Maytag medium-term note—5.0%, maturing 2015 | 192 | 190 | ||||
Senior note—6.5%, maturing 2016 | 249 | 249 | ||||
Debentures—7.75%, maturing 2016 | 244 | 243 | ||||
Other (various maturing through 2016) | 119 | 96 | ||||
2,880 | 2,204 | |||||
Less current maturities | 378 | 202 | ||||
Total long-term debt, net of current maturities | $ | 2,502 | $ | 2,002 | ||
The following table summarizes the contractual maturities of our debt, including current maturities, at December 31, 2009:
Millions of dollars | |||
2010 | $ | 378 | |
2011 | 312 | ||
2012 | 361 | ||
2013 | 511 | ||
2014 | 611 | ||
Thereafter | 707 | ||
Total debt | $ | 2,880 | |
On May 4, 2009, we completed a debt offering comprised of (1) $350 million 364-day credit facility matured on November 30, 2006aggregate principal amount of 8.000% notes due May 1, 2012 and is no longer outstanding. Borrowings under(2) $500 million aggregate principal amount of 8.600% notes due May 1, 2014. The proceeds from the Amended and Restated Credit Agreement will be available to Whirlpool and designated subsidiariesnotes were used for general corporate purposes, including commercial paper support. Subsidiary borrowingspurposes. If we experience a downgrade in our credit ratings, the notes are subject to an increase in the interest rate, resulting in higher interest payments. The notes contain customary covenants that limit our ability to incur certain liens or enter into certain sale and lease-back transactions. In addition, if we experience a specific kind of change of control, we are required to make an offer to purchase all of the notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest. The notes are registered under the facilities, if any, are guaranteed by Whirlpool. InterestSecurities Act of 1933, as amended, pursuant to our Registration Statement on Form S-3 (File No. 333-157392) filed with the Securities and Exchange Commission on February 19, 2009.
On February 28, 2008 we completed the issuance of $500 million 5.50% notes due March 1, 2013. The notes were issued under an existing shelf registration statement filed with the AmendedSecurities and Restated Credit Agreement accrues atExchange Commission. We pay interest semiannually on March 1 and September 1. The notes contain a variable annual rate based on the LIBOR plus a margin dependent on the Company’s credit rating at that time. The Amended and Restated Credit Agreementprovision which requires Whirlpool to meetmake an offer to purchase the notes at a purchase price equal to 101% of the principal amount plus any accrued and unpaid interest if certain financial tests and contains specificchange of control events occur. The notes are also subject to customary non-financial covenants. Undrawn stand-by letters of credit issued under the letter of credit subfacility of $17 million reduce the availability of these committed lines.
The Company wasF-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
During 2009, we have incurred and paid a total of $5.3 million in debt financing related fees. These amounts have been capitalized and are being amortized over the term of the respective agreements.
We are in compliance with the financial covenants under these credit agreements for all periods presented.
Atdebt covenant requirements at December 31, 20062009.
The fair value of long-term debt (including current maturities) at December 31, 2009 and 2005, there were no borrowings outstanding under these credit agreements.2008 was $3,060 million and $2,037 million, respectively, and was estimated using discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements.
Notes Payable
Notes payable consist of the following:
December 31—Millions of dollars | 2006 | 2005 | ||||
Payable to banks | $ | 147 | $ | 131 | ||
Commercial paper | 374 | — | ||||
Total notes payable | $ | 521 | $ | 131 | ||
short-term borrowings payable to banks. The fair value of the Company’sour notes payable approximates the carrying amount due to the short maturity of these obligations. The weighted-average interest rate on notes payable was 5.1%4.3% and 4.7%3.8% for the years ended December 31, 20062009 and 2005,2008, respectively.
We have credit facilities which provide $1.35 billion maturing on August 13, 2012 and $522 million maturing December 1, 2010, and include a $200 million letter of credit subfacility. Borrowings under the credit facilities are available to us and designated subsidiaries for general corporate purposes, including commercial paper support. Subsidiary borrowings under these facilities, if any, are guaranteed by us. Interest under the credit facilities accrues at a variable annual rate based on LIBOR plus a margin or the prime rate plus a margin. The margin is dependent on our credit rating at that time. The credit facilities require us to meet certain leverage and interest coverage requirements. At December 31, 2009 and 2008, borrowings of $0 and $247 million, respectively, were outstanding under these credit agreements and are included within notes payable in our Consolidated Balance Sheets. We are in compliance with financial covenant requirements at December 31, 2009 and 2008.
Long-term debt consistsOn February 27, 2009, we entered into an amendment (the “First Amendment”) to the Amended and Restated Long-Term Five-Year Credit Agreement (the “Credit Agreement”), dated as of December 1, 2005, by and among Whirlpool Corporation, certain other borrowers, the lenders referred to therein, Citibank N.A., as administrative agent and fronting agent, JPMorgan Chase Bank, N.A., as syndication agent, and ABN Amro Bank N.V., Royal Bank of Scotland and Bank of America, as documentation agents.
The First Amendment amends our $2.2 billion Credit Agreement to (1) increase our maximum Leverage Ratio (as defined in the Credit Agreement) to 3.5 to 1.0 for each fiscal quarter ended on or prior to December 31, 2009, reverting to 3.0 to 1.0 for each fiscal quarter ended thereafter; (2) reduce our minimum Interest Coverage Ratio (as defined in the Credit Agreement) to 1.5 to 1.0 for each fiscal quarter ended on or prior to December 31, 2009, reverting to 2.0 to 1.0 for each fiscal quarter ended thereafter; (3) limit the value of the following:
December 31—Millions of dollars | 2006 | 2005 | ||||
Eurobonds (EUR 300 million)—5.875% due 2006 | $ | — | $ | 357 | ||
Medium-term notes, from 5% to 9.03%, maturing from 2007 to 2015 | 314 | — | ||||
Debentures—9.1%, maturing 2008 | 125 | 125 | ||||
Variable rate notes, maturing through 2009 | 200 | — | ||||
Senior notes, from 6.125% to 8.6%, maturing from 2010 to 2016 | 873 | 325 | ||||
Debentures—7.75%, maturing 2016 | 243 | 243 | ||||
Other (various maturing through 2013) | 60 | 60 | ||||
$ | 1,815 | $ | 1,110 | |||
Less current maturities | 17 | 365 | ||||
Total long-term debt, net of current maturities | $ | 1,798 | $ | 745 | ||
The Company’s Euro-denominated Eurobonds matured in July 2006assets subject to non-permitted liens to an amount equal to $200 million and were repaidpermit liens on assets located outside of the United States arising by operation of law; (4) exclude an amount of non-recurring cash restructuring charges of up to $100 million on a rolling 12 month basis for the purposes of calculating “Consolidated EBIT” and “Consolidated EBITDA” under the Credit Agreement; (5) for purposes of calculating the “Leverage Ratio,” provide for a $200 million exclusion from the definition of “Indebtedness” for net assets or liabilities with available cashrespect to hedging contracts; (6) increase the spread over LIBOR to 3%, the spread over prime to 2%, and the issuanceutilization fee to be paid, if amounts borrowed exceed $1.1 billion, to 1% as of commercial paper in the U.S.
On March 31, 2006, the date of the Maytag acquisition, $185 millionFirst Amendment; and (7) replace the facility fee with an unused commitment fee of Maytag debt matured0.50%, as of the date of the First Amendment.
On August 13, 2009, we entered into a second amendment (the “Second Amendment”) to the Credit Agreement pursuant to which Whirlpool Corporation amended and was repaid.restated such facility to be an Amended and Restated Long-Term Credit Agreement (the “Amended Credit Agreement”), by and among Whirlpool Corporation, certain other borrowers, the lenders referred to therein, JPMorgan Chase Bank, N.A., as Administrative Agent and Fronting Agent, Citibank, N.A., as Syndication Agent, The Royal Bank of Scotland plc, Fortis Capital Corp. and Bank of America, N.A., as Documentation Agents.
During the third quarter of 2006, the 7.875% Public Interest Notes (“PINES”), assumed by the Company as part of the Maytag acquisition, due August 1, 2031 were redeemed. The Company exercised its option to call 100% of the PINES, which had a principal amount of $250 million, at par, plus accrued interest. The redemption was financed through a combination of available cash and the issuance of commercial paper.
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
InThe Second Amendment divides and reduces the existing credit facility into a $1.35 billion tranche maturing on August 200613, 2012 (the “Extending Tranche”) and a $522 million tranche maturing December 2006, $251, 2010 (the “Non-Extending Tranche”). The Second Amendment also increases the letter of credit sublimit from $100 million to $200 million. The interest rate margin over LIBOR and $200 million, respectively, of Medium-term notes matured and were repaid. These notes were assumed by Whirlpool as partthe prime rate will be charged based on Whirlpool’s credit rating.
For the Extending Tranche, the Second Amendment provides that the utilization fee to be paid, if amounts borrowed exceed 50% of the Maytag acquisition.facility, is 0.50%. For the Non-Extending Tranche, the Second Amendment provides that the utilization fee to be paid, if amounts borrowed exceed 50% of the facility, is 1%. We will incur a commitment fee for any unused portion of the credit facility which is based on Whirlpool’s credit rating.
Annual maturities of long-term debtThe Second Amendment requires us to meet certain financial tests. Whirlpool’s maximum rolling twelve month Leverage Ratio (as defined in the next five years are $17 million, $127 million, $203 million, $372 million and $301 million, respectively.
The Company paid interestAmended Credit Agreement) is limited to 3.5 to 1.0 for each fiscal quarter ended on short-term and long-term debt totaling $225 million, $137 million and $124 million in 2006, 2005 and 2004, respectively.
The fair value of long-term debt (including current maturities) was $1,893 million and $1,213 million as ofor prior to December 31, 20062010, and 2005, respectively, and was estimated using discounted cash flow analyses based3.25 to 1.0 for each fiscal quarter ended thereafter. The rolling twelve month Interest Coverage Ratio (as redefined in the Amended Credit Agreement as EBITDA to Interest Expense) is required to be greater than or equal to 2.5 to 1.0 for each fiscal quarter ended on incremental borrowing rates for similar types of borrowing arrangements.
Preferred Stock
Although most of its assets have been divested, Whirlpool Financial Corporation (“WFC”) remains a legal entity with assets consisting primarily of leveraged leases. WFC also has 17,500 shares of Series B preferred stock outstanding as ofor prior to December 31, 20062010 and 2005 with a face value of $100 per share, an annual dividend of $6.55 per share3.0 to 1.0 for each fiscal quarter ended thereafter.
During 2009, we have incurred and a mandatory redemption date of September 1, 2008. The preferred stock amounts are included within minority interests in the Consolidated Balance Sheets and the carrying amounts approximate fair value.
The preferred stockholders are entitled to vote together on a share-for-share basis with WFC’s common stockholder, Whirlpool. Preferred stock dividends are payable quarterly. On September 1, 2003, WFC redeemed 331,800 shares of the Series B preferred stock at a price of $100 per share (at par). The redemption terms required the payment of any accrued unpaid dividends in addition to the applicable redemption premium, and accordingly,paid a total of $0.6$32.8 million was paid on September 1, 2003in notes payable financing related to dividends. The termsfees. These amounts have been capitalized and are being amortized over the term of the preferred stockholders agreement provides for a final payment on September 1, 2008 (the mandatory redemption date) equal to the number of Series B preferred stock outstanding multiplied by the face value of $100 per share.
The Company and WFC are parties to a support agreement. Pursuant to the agreement, if at the close of any quarter WFC’s net earnings available for fixed charges (as defined) for the preceding twelve months is less than a stipulated amount, the Company is required to make a cash payment to WFC equal to the insufficiency within 60 days of the end of the quarter. The Company was not required to make any payments under this agreement during 2006, 2005 or 2004. The support agreement may be terminated by either WFC or the Company upon 30 days notice provided that certain conditions are met. The Company has also agreed to maintain ownership of at least 70% of WFC’s voting stock.
respective agreements.
(9) GUARANTEES,(6) COMMITMENTS AND CONTINGENCIES
Guarantees
The Company hasWe have 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 supportingto support purchases from the Company, following its normal credit policies. If a customer were to default on its line of credit with the bank, theour subsidiary would be required to satisfy the obligation with the bank, and the receivable would revert back to the subsidiary. As ofAt December 31, 20062009 and December 31, 2005,2008, the guaranteed amounts totaled $312$309 million and $236$203 million, respectively. TheOur only recourse the Company has with respect to these arrangements would be legal or administrative collection efforts directed against the customer.
The Company providesWe provide guarantees of indebtedness and lines of credit for various consolidated subsidiaries. The maximum amount of credit facilities available under these lines for consolidated subsidiaries totaled
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
$1.4 $1.4 billion and $1.3 billion at both December 31, 20062009 and December 31, 2005. Outstanding credit facility amounts2008, respectively. Our total outstanding bank indebtedness under guarantee approximated $106guarantees totaled $18 million and $103$364 million at December 31, 20062009 and December 31, 2005,2008, respectively.
At December 31, 2006, approximately $17As of May 16, 2008, we guaranteed a $50 million of undrawn stand-by letters offive year revolving credit under committed lines were outstanding. These letters of credit were issued by Maytagfacility between certain financial institutions and assigned to Whirlpool as parta not-for-profit entity in connection with a community and economic development project (“Harbor Shores”). The fair value of the merger.guarantee is nominal. The purpose of Harbor Shores is to stimulate employment and growth in the areas of Benton Harbor and St. Joseph, Michigan. In the event of default, we must satisfy the guarantee of the credit facility up to the amount borrowed at the date of default.
Warranty Reserves
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’sour best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The following represents a reconciliation of the changes in product warranty reserves for the periods presented:
December 31—Millions of dollars | 2006 | 2005 | ||||||||||||||
Millions of dollars | 2009 | 2008 | ||||||||||||||
Balance at January 1 | $ | 149 | $ | 165 | $ | 215 | $ | 226 | ||||||||
Acquisition | 153 | — | ||||||||||||||
Warranties issued during the period | 448 | 277 | 396 | 417 | ||||||||||||
Settlements made during the period | (459 | ) | (294 | ) | (433 | ) | (411 | ) | ||||||||
Other changes | (7 | ) | 1 | 11 | (17 | ) | ||||||||||
Balance at December 31 | $ | 284 | $ | 149 | $ | 189 | $ | 215 | ||||||||
Current portion | $ | 219 | $ | 89 | $ | 159 | $ | 174 | ||||||||
Non-current portion | 65 | 60 | 30 | 41 | ||||||||||||
Total | $ | 284 | $ | 149 | $ | 189 | $ | 215 | ||||||||
Product warranty reserves are included within other current liabilities and other noncurrent liabilities in our Consolidated Balance Sheets at December 31, 2009 and 2008.
Operating Lease Commitments
At December 31, 2006, the Company2009, we had noncancelable operating lease commitments totaling $460$897 million. The annual future minimum lease payments are detailedsummarized by year in the table below.below:
Millions of dollars | ||||||
2007 | $ | 134 | ||||
2008 | 101 | |||||
2009 | 66 | |||||
2010 | 45 | $ | 186 | |||
2011 | 35 | 159 | ||||
2012 | 126 | |||||
2013 | 99 | |||||
2014 | 79 | |||||
Thereafter | 79 | 248 | ||||
Total noncancelable operating lease commitments | $ | 460 | $ | 897 | ||
The Company’sOur rent expense was $154$208 million, $123$201 million and $100$183 million for the years 2006, 20052009, 2008 and 2004,2007, respectively.
Purchase Obligations
The following summarizes Whirlpool’sOur expected cash outflows resulting from purchase obligations:obligations are summarized by year in the table below:
Millions of dollars | ||||||
2007 | $ | 262 | ||||
2008 | 240 | |||||
2009 | 229 | |||||
2010 | 198 | $ | 278 | |||
2011 | 91 | 296 | ||||
2012 | 184 | |||||
2013 | 85 | |||||
2014 | 46 | |||||
Thereafter | — | 115 | ||||
Total purchase obligations | $ | 1,020 | $ | 1,004 | ||
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Legal Contingencies
Government authorities in various jurisdictions are conducting antitrust investigations of the global compressor industry, including our compressor business headquartered in Brazil (“Embraco”). In 2009, Embraco sales represented approximately 7% of our global net sales.
In February 2009, competition authorities in Brazil, the U.S. and Europe began to seek documents from us in connection with their investigations. A grand jury subpoena from the U.S. Department of Justice requested documents for the time period from 2003 to 2009. Competition authorities in other jurisdictions have sought similar information.
In September 2009, the Brazilian competition commission (CADE) agreed to terminate the administrative investigation of our compressor business. Under the terms of the settlement agreement, Whirlpool affiliates and certain executives located in Brazil acknowledged a violation of Brazilian antitrust law in the Brazilian compressor market by some Embraco employees. The Company is currentlysettlement agreement provides for the affiliates to make contributions totaling 100 million Brazilian reais to a Brazilian government fund. The contributions translate to approximately $56 million, all of which was recorded as an expense in 2009. In December 2009, a Brazilian court agreed to the public prosecutor’s request to suspend a related criminal proceeding as to certain employees, including Paulo Periquito, former President, Whirlpool International. The proceeding will be dismissed after three years provided that the individuals comply with certain conditions imposed by the court, such as payment to a government fund, a charitable donation and periodic reporting to authorities. Suspension and dismissal of the proceeding does not involve any admission or finding of wrongdoing. We are cooperating with the ongoing government investigations in other jurisdictions and have taken actions, and will continue to take actions, to minimize our potential exposure.
Since the government investigations became public in February 2009, we have been named as a defendant in eight purported class actions lawsuits. Eachnumerous related antitrust lawsuits in various jurisdictions seeking damages in connection with the pricing of compressors from 1996 to 2009. Several other compressor manufacturers who are the subject of the pendinggovernment investigations have also been named as defendants in the litigation. United States federal lawsuits instituted on behalf of purported purchasers and containing class action allegations have been combined in one proceeding in the United States District Court for the Eastern District of Michigan. We intend to defend the lawsuits allegesvigorously.
The final outcome and impact of these matters, and related claims and investigations that certain named appliance products containmay be brought in the future are subject to many variables, and cannot be predicted with certainty. An accrual has been established only where we have determined that a design or component defect that amounts to a breach of express warranty, a breach of implied warranty, and/or violate consumer fraud statutes. There are no allegations of personal injury or property damage in any of the casesloss is probable and the complaints seek unspecified compensatory damages in each case. The Company believes that eachamount of loss can be reasonably estimated. As of December 31, 2009, we have accrued charges of approximately $82 million related to these suitsmatters. While it is without merit and intendscurrently not possible to vigorously defend these actions. The Company cannot reasonably estimate the aggregate amount of costs which we may incur in connection with these matters, such costs could have a possible rangematerial adverse effect on the financial position, liquidity, or results of loss, if any, for anyoperations of these cases.
Whirlpool.
The Brazilian Constitution provides thea general basis for recognizing tax credits on purchasesthe purchase of raw materials used in production. The credit applies to purchases ofproduction (“IPI tax credit”). Certain raw materials that are tax exempt or have a zero tax rate. Several court decisions supportedbasis in the production process qualify for these IPI tax credit and duringcredits. Based on legal precedent, in 2003 and 2004, the Company calculatedwe recognized tax credits under this provision.in an aggregate amount of $26 million adjusted for currency. The original amount recorded asBrazilian tax credits is approximately $22 million.authority subsequently challenged the recording of IPI tax credits. No credits were recognized in 2005 through 2009. In 2009, we entered into an agreement under a special Brazilian government program providing for extended payment terms and reductions in penalties and interest to encourage taxpayers to resolve disputed IPI tax credit amounts. Charges recorded related to this program for the year ended December 31, 2009 include $27 million in tax that was recorded in 2005cost of products sold, $16 million in interest expense and 2006. The credit recorded by the Company has been challenged by the Tax Authorities. The Company is vigorously defending the case at the administrative level.$4 million in penalties
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
recorded in interest and sundry income (expense) in our Consolidated Statements of Income. During the December 2009 quarter, based on newly issued regulations, we settled with the Brazilian tax authority to resolve these and other disputed tax amounts. As a result of this settlement agreement, we recorded an increase in value added taxes owed of approximately $4 million in cost of goods sold, a reduction in interest expense totaling $18 million related to interest abatement, a reduction in interest and sundry income (expense) of $4 million related to penalty abatement and related income tax expense of $5 million under this special program.
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, aan adverse decision in the declaratory action adverse to the Company became final. In 2001, the financial institution began a collectivecollection action and the Companywe 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 providedSuperior Court dismissed our counterclaim in 2007. In late 2008, the lower court issued a decision in the collection action in favor of the financial institution in the amount of 283 million Brazilian reais (approximately $162 million), plus judicial adjustments, which could be significant. We have appealed this decision. Based on our outside counsel’s assessment of the case, we increased the amount previously accrued for the potentialour estimated exposure resulting fromfor this litigation during 2005. After official publicationby 80 million Brazilian reais (approximately $46 million) in the December 2009 quarter. However, the amount of the Superior Court’s ruling on the counterclaim, the Company filed an additional legal recourse with the Superior Court to clarify its ruling. Depending on the final ruling, an additional legal appealaward, if any, may be availablematerially different than the amount we have accrued.
We are currently defending a number of class action suits in federal and state courts alleging breach of warranty, fraud and violation of state consumer protection acts. There are no allegations of any personal injury or property damage. However, unspecified compensatory damages are being sought. We believe these suits are without merit. We intend to the Superior Court.vigorously defend these actions.
The Company isWe are 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, if any, on our Consolidated Financial Statements.
Product Recalls
We regularly engage in investigations of potential quality and safety issues as part of our ongoing effort to deliver quality products to customers. We are currently investigating a limited number of potential quality and safety issues. As necessary, we undertake to effect repair or replacement of appliances in the Company’s financial position or resultsevent that an investigation leads to the conclusion that such action is warranted.
On March 10, 2009, we announced, in a joint press release issued with the U.S. Product Safety Commission, a voluntary recall of operations.1.8 million refrigerators sold in the U.S. and Canada between 2001 and 2004. The recall is due to a defect in an electrical relay component purchased from a supplier. The estimate of the affected population is higher by 0.8 million refrigerators than as disclosed in our 2008 Form 10-K due to a determination that the defective part which caused the product recall also resulted in similar failures in another type of refrigerator. There have been no other significant changes in assumptions other than increasing the affected population. As a result, we have accrued $67 million as the estimated cost of this recall. We have recorded $35 million and $32 million, respectively, as a charge to cost of products sold related to this accrual during the years ended December 31, 2009 and 2008. Our actual costs related to this action will depend on several factors, including the number of consumers who respond to the recall, the costs of repair and administration, and whether costs will be recovered from the supplier. Of this accrual, we have approximately $2 million remaining at December 31, 2009.
On February 1, 2007, Maytag Corporation announced a voluntary recall of approximately 2.3 millionMaytag andJenn-Air brand dishwashers. We originally estimated the cost of the recall to be $82 million, which we recorded as an assumed liability in our purchase price allocation related to the acquisition of Maytag, with a
F-38
(10)NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
corresponding increase to recorded goodwill. As of September 30, 2008, we had revised this estimate to $102 million due to an anticipated increase in the response rate. The incremental increase of $20 million was charged to cost of products sold in our Consolidated Statement of Income during 2008. Of this $102 million accrual, we had approximately $7 million remaining at December 31, 2008, all of which was paid during 2009.
(7) HEDGES AND DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments are accounted for at fair value. The Companyaccounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is exposed to market riskrecognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (“OCI”) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains and losses from changes in foreign currency exchange rates, domestic and foreign interest rates, and commodity prices. Fluctuationsfair values of derivatives that are not designated as hedges for accounting purposes are recognized in these rates and prices can affect the Company’s operating results and financial condition. The Company manages its exposure to these market risks through its operating and financing activities and through the use of derivative financial instruments. The Company does not enter into derivative financial instruments for speculative or trading purposes.
earnings.
Using derivative marketsinstruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss the Companywe could incur if a counterparty defaultedwere to default on a derivative contract. The Company primarily dealsWe deal with investment-gradeinvestment grade counterparties and monitors itsmonitor the overall credit risk and exposure to individual counterparties. The Company doesWe do not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is generally the unrealized gains, if any, on such derivative contracts. The Company doesWe do not require, nor does itdo we post, collateral or security on such contracts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)Hedging Strategy
We are exposed to certain risks relating to our ongoing business operations. As a result, we enter into derivative transactions to manage certain of these exposures that arise in the normal course of business. The primary risks managed by using derivative instruments are foreign currency exchange rate, commodity price and domestic and foreign interest rate risks. Fluctuations in these rates and prices can affect our operating results and financial condition. We manage the exposure to these market risks through operating and financing activities and through the use of derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes.
The following summarizesForeign currency exchange rate risk
We incur expenses associated with the outstanding derivativeprocurement and production of products in a limited number of countries, while we sell in the local currencies of a large number of countries. Our primary foreign currency exchange exposures result from cross-currency sales of products. As a result, we enter into foreign exchange contracts at December 31, 2006to hedge certain firm commitments and 2005forecasted transactions to acquire products and the exposuresservices that are denominated in foreign currencies.
We enter into certain undesignated non-functional currency asset and liability hedges that relate primarily to which they relate:
Notional Amount in Millions of dollars | ||||||||||||
Exposure | Derivative | 2006 | 2005 | Hedge Type | Term | |||||||
Forecasted cross currency cash flows | Foreign exchange forwards/options | $ | 1,313 | $ | 1,277 | Cash flow or fair value hedge | Various, up to 17 months | |||||
Non-functional currency asset/liability | Foreign exchange forwards/options | $ | 608 | $ | 479 | Undesignated | Various, up to 4 months | |||||
Raw Material Purchases | Commodity swaps | $ | 297 | $ | 122 | Cash flow hedge | Various, up to 16 months | |||||
Raw Material Purchases | Commodity swaps | $ | 19 | $ | — | Undesignated | Various, up to 9 months | |||||
Floating Rate Debt | Interest rate swaps | $ | — | $ | 100 | Cash flow hedge | 2006 | |||||
Fixed Rate Debt | Interest rate swaps | $ | 100 | $ | 100 | Fair value hedge | 2008 | |||||
Floating Rate Debt | Interest rate swaps | $ | 150 | $ | — | Cash flow hedge | 2008 | |||||
Floating Rate Debt | Interest rate swap | $ | 50 | $ | — | Cash flow hedge | 2009 | |||||
Anticipated Debt Issuance | Interest rate swaps | $ | — | $ | 200 | Cash flow hedge | 2013 |
Forecasted cross currencyshort-term payables, receivables, inventory and intercompany loans. These forecasted cross-currency cash flows relate primarily to foreign currency denominated expenditures and intercompany financing agreements, royalty agreements and dividends. Non-functional currency asset and liability hedges are undesignated but relate primarily
Commodity price risk
We enter into forward contracts on various commodities to short term payables and receivables and intercompany loans. Commodity swaps relate to raw materialmanage the price risk associated with forecasted purchases (for example, copper and aluminum)of materials used in theour manufacturing process. Unrealized gains relatingThe objective of the hedges is to these foreign exchange forwards/options and commodity swaps were $70 million and $44 million asreduce the variability of December 31, 2006 and 2005, respectively.cash flows associated with the forecasted purchase of those commodities.
The Company’s $100 million interest rate swaps maturing in 2008 are designated and are effective as hedges of the fair value of the fixed rate debt and are treated as fair value hedges for accounting purposes. The fair values of these contracts are a loss of $1.7 million and $1 million as of December 31, 2006 and 2005, respectively.
The Company’s $150 million interest rate swaps maturing in 2008 are designated and are effective as hedges of the cash flow of the floating rate debt and are treated as cash flow hedges for accounting purposes. The fair values of these contracts are a loss of $0.3 million as of December 31, 2006.
The Company’s $50 million interest rate swap maturing in 2009 is designated and is effective as a hedge of future cash payments and is treated as a cash flow hedge for accounting purposes. The fair value of this contract is a gain of $0.2 million as of December 31, 2006.
The Company had designated a portion of the Euro-denominated fixed-rate debt as a hedge to protect the value of its net investments in its European subsidiaries. During the year ended December 31, 2006, the Euro-denominated Eurobonds matured, and the net investment hedge was de-designated at the maturity date. The Company recognized $10 million of net losses within the cumulative translation adjustment related to this net investment hedge through July 3, 2006, the date the Eurobonds matured.
During the years ended December 31, 2006 and 2005, the Company’s gains and losses related to the ineffective portion of its hedging instruments were immaterial. The Company did not recognize any material gains or losses during the years ended December 31, 2006 and 2005 for cash flow hedges that were discontinued because the forecasted transaction was not probable to occur.F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Interest rate risk
We enter into interest rate swap agreements to manage interest rate risk exposure. Our interest rate swap agreements effectively modify our exposure to interest rate risk, primarily through converting certain of our floating rate debt to a fixed rate basis, and certain fixed rate debt to a floating rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements involve either the receipt or payment of floating rate amounts in exchange for fixed rate interest payments or receipts, respectively, over the life of the agreements without an exchange of the underlying principal amounts.
The following table summarizes our outstanding derivative contracts and their effects on our Consolidated Balance Sheet at December 31, 2009:
Fair Value of(1) | |||||||||||||
Millions of dollars | Notional Amount | Hedge Assets | Hedge Liabilities | Type of Hedge(2) | Term | ||||||||
Designated derivatives | |||||||||||||
Foreign exchange forwards/options | $ | 1,090 | $ | 40 | $ | 54 | (CF)/(FV) | Various, up to 15 months | |||||
Commodity swaps/options | 486 | 109 | 2 | (CF)/(FV) | Various, up to 29 months | ||||||||
Total designated derivatives | $ | 149 | $ | 56 | |||||||||
Undesignated derivatives | |||||||||||||
Foreign exchange forwards/options | $ | 801 | $ | 6 | $ | 4 | Various, up to 5 months | ||||||
Commodity swaps/options | 24 | 4 | 2 | Various, up to 24 months | |||||||||
Total undesignated derivatives | 10 | 6 | |||||||||||
Total derivatives | $ | 159 | $ | 62 | |||||||||
(1) | Periodic adjustments from fair valuing hedge assets and liabilities are recorded in other current assets and other assets or other current liabilities and other liabilities. As of December 31, 2009, hedge assets of $119 million and $40 million were recorded in other current assets and other assets, respectively, and hedge liabilities of $61 million and $1 million were recorded in other current liabilities and other liabilities, respectively. |
(2) | Designated derivatives are either considered cash flow (CF) or fair value hedges (FV). |
The effects of derivative instruments on our Consolidated Statement of Income for the year ended December 31, 2009 are as follows:
Cash Flow Hedges—Millions of dollars | Gain (Loss) Recognized in OCI (Effective Portion) | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)(1) | Gain (Loss) Recognized in Income (Ineffective Portion)(2) | ||||||||
Foreign exchange forwards/options | $ | (23 | ) | $ | 8 | (a)(b) | $ | 1 | |||
Commodity swaps/options | 196 | (101 | )(b) | 2 | |||||||
Interest rate swaps | 1 | 1 | (c) | — | |||||||
$ | 174 | $ | (92 | ) | $ | 3 | |||||
(1) | Gains and losses reclassified from accumulated OCI into income are recorded in (a) interest and sundry income (expense), (b) cost of products sold or (c) interest expense. |
(2) | Gains and losses recognized in income related to the ineffective portion of hedges are recorded in interest and sundry income (expense). |
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Fair Value Hedges—Millions of dollars | Gain (Loss) Recognized on Derivative(3) | Gain (Loss) Recognized on Related Hedged Items(3) | Hedged Item | ||||||
Foreign exchange forwards/options | $ | (7 | ) | $ | 7 | Non-functional currency assets and liabilities |
(3) | Gains and losses recognized in income are recorded in interest and sundry income (expense). |
Undesignated Hedges—Millions of dollars | Gain (Loss) Recognized on Undesignated Hedges(4) | |||
Foreign exchange forwards/options | $ | 70 | ||
Commodity swaps | (6 | ) | ||
$ | 64 | |||
(4) | Mark to market gains and losses are recorded in interest and sundry income (expense). |
The net amount of unrealized gainsgain or loss on derivative instruments included in accumulated other comprehensive income related to contracts maturing, and expected to be realized during 2007the next twelve months is approximately $66a gain of $57 million at December 31, 2006.2009.
Early Hedge Settlement
During November and December 2008, we cash settled certain foreign currency derivative contracts prior to their scheduled settlement dates. As a result of these transactions, we received $82 million in cash, which represented the fair value of these contracts at the date of settlement. Effective gains of $82 million were initially recorded in accumulated OCI until the hedged forecasted transactions affected earnings, then the gains were recorded as a reduction in cost of products sold on our Consolidated Statements of Income. Approximately $10 million of these gains were recorded in earnings during 2008 and the remainder was recorded in earnings in 2009. There was no ineffectiveness related to these settled foreign currency derivative contracts.
(8) STOCKHOLDERS’ EQUITY
Comprehensive Income
Comprehensive income primarily includes (1) our reported net earnings, (2) foreign currency translation, (3) changes in the effective portion of our open derivative contracts designated as cash flow hedges, (4) changes in our unrecognized pension and other postretirement benefits and (5) changes in fair value of our available for sale securities.
F-41
(11) STOCKHOLDERS’ EQUITYNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The Company’sfollowing table shows the components of accumulated other comprehensive income (loss) available to Whirlpool common stockholders at December 31, 2007, 2008 and 2009, and the activity for the years then ended:
Millions of dollars | Foreign Currency | Derivative Instruments | Unrecognized Pension and Postretirement Liability | Marketable Securities | Total | |||||||||||||||
December 31, 2006 | $ | (376 | ) | $ | 48 | $ | (315 | ) | $ | — | $ | (643 | ) | |||||||
Unrealized gain (loss) | 320 | (68 | ) | — | 17 | 269 | ||||||||||||||
Unrealized gain and prior service credit | — | — | 225 | — | 225 | |||||||||||||||
Tax effect | (34 | ) | 4 | (79 | ) | — | (109 | ) | ||||||||||||
Other comprehensive income (loss), net of tax | 286 | (64 | ) | 146 | 17 | 385 | ||||||||||||||
Less: Other comprehensive income available to noncontrolling interests |
| 11 |
|
| 1 |
|
| — |
|
| — |
|
| 12 |
| |||||
Other comprehensive income (loss) available to Whirlpool common stockholders | 275 | (65 | ) | 146 | 17 | 373 | ||||||||||||||
December 31, 2007 | (101 | ) | (17 | ) | (169 | ) | 17 | (270 | ) | |||||||||||
Unrealized loss | (461 | ) | (161 | ) | — | (10 | ) | (632 | ) | |||||||||||
Unrealized loss and prior service credit | — | — | (726 | ) | — | (726 | ) | |||||||||||||
Tax effect | 34 | 47 | 274 | — | 355 | |||||||||||||||
Other comprehensive loss, net of tax | (427 | ) | (114 | ) | (452 | ) | (10 | ) | (1,003 | ) | ||||||||||
Less: Other comprehensive loss available to noncontrolling interests |
| (3 | ) |
| (11 | ) |
| — |
|
| — |
|
| (14 | ) | |||||
Other comprehensive loss available to Whirlpool common stockholders | (424 | ) | (103 | ) | (452 | ) | (10 | ) | (989 | ) | ||||||||||
December 31, 2008 | (525 | ) | (120 | ) | (621 | ) | 7 | (1,259 | ) | |||||||||||
Unrealized gain | 333 | 266 | — | 1 | 600 | |||||||||||||||
Unrealized loss and prior service cost | — | — | (109 | ) | — | (109 | ) | |||||||||||||
Tax effect | (23 | ) | (86 | ) | 27 | — | (82 | ) | ||||||||||||
Other comprehensive income (loss), net of tax | 310 | 180 | (82 | ) | 1 | 409 | ||||||||||||||
Less: Other comprehensive income available to noncontrolling interests |
| 11 |
|
| 7 |
|
| — |
|
| — |
|
| 18 |
| |||||
Other comprehensive income (loss) available to Whirlpool common stockholders | 299 | 173 | (82 | ) | 1 | 391 | ||||||||||||||
December 31, 2009 | $ | (226 | ) | $ | 53 | $ | (703 | ) | $ | 8 | $ | (868 | ) | |||||||
Net Earnings per Share
Diluted net earnings per share of common stock include the dilutive effect of stock options and other share-based compensation plans. For the years ended December 31, 2009, 2008 and 2007, a total of approximately 3,090,508 options, 2,728,410 options and 1,709,000 options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices would render them anti-dilutive.
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Basic and diluted earnings per share from continuing operations were calculated as follows:
December 31—Millions of dollars | 2009 | 2008 | 2007 | ||||||
Numerator for basic and diluted earnings per share—net earnings available to Whirlpool common stockholders | $ | 328 | $ | 418 | $ | 640 | |||
Denominator for basic earnings per share—weighted-average shares | 74.6 | 75.1 | 78.5 | ||||||
Effect of dilutive securities—stock-based compensation | 1.0 | 0.9 | 1.4 | ||||||
Denominator for diluted earnings per share—adjusted weighted-average shares | 75.6 | 76.0 | 79.9 | ||||||
Noncontrolling Interests
During the December 2009 quarter, our Latin America region entered into a definitive agreement to purchase 1.8% of the outstanding noncontrolling interest in Brasmotor S.A. for $12 million. This transaction closed on January 15, 2010 and raised our ownership interest in Brasmotor S.A. to 95.6%.
Repurchase Program
In June 2004, our Board of Directors authorized a share repurchase program of up to $500 million. During 2007, we repurchased 3.8 million shares at an aggregate purchase price of $368 million and during the March 2008 quarter, we repurchased 1.1 million shares at an aggregate purchase price of $97 million under this program. At March 31, 2008, there were no remaining funds authorized under this program.
On April 23, 2008, our Board of Directors authorized a new share repurchase program of up to $500 million on June 15, 2004. The sharemillion. Share repurchases are made from time to time on the open market as conditions warrant. There were no share repurchases in 2006. During the year ended December 31, 2005, the Company2008, we repurchased 530,1001.9 million shares of Whirlpool common stock in the open market at an aggregate purchase price of approximately $34 million.
During 2004, the Company concluded the$150 million under this program. We made no share repurchase programs approved by the Company’s Board of Directors on March 1, 1999 ($250 million) and February 15, 2000 ($750 million).
In addition to its common stock, the Company has 10repurchases during 2009. At December 31, 2009, there were $350 million remaining funds authorized shares of preferred stock (par value $1 per share), none of which is outstanding.
Accumulated other comprehensive loss, net of tax, consists of:
Millions of dollars | 2006 | 2005 | ||||||
Foreign currency translation adjustments | $ | (376 | ) | $ | (545 | ) | ||
Derivative financial instruments | 48 | �� | ||||||
Pension and postretirement adjustments | (315 | ) | — | |||||
Minimum pension liability adjustments | — | (317 | ) | |||||
Total | $ | (643 | ) | $ | (862 | ) | ||
under this program.
Preferred Stock Purchase Rights
One Preferred Stock Purchase Right (“Rights”) is outstanding for each share of common stock. The Rights which expireto repurchase preferred stock under the Rights Agreement dated April 12, 1998 expired on May 22, 2008 will become exercisable 10 days after a person or group (an “Acquiring Person”) has acquired, or obtainedpursuant to the right to acquire, beneficial ownership of 15% or more of the outstanding common stock (the “Trigger Date”) or 10 business days after the commencement, or public disclosure of an intention to commence, a tender offer or exchange offer by a person that could result in beneficial ownership of 15% or more of the outstanding common stock. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of a Junior Participating Preferred Stock, Series B, par value $1.00 per share, of the Company at a price of $300 per one one-thousandth of a Preferred Share subject to adjustment.
If a person becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights that are or were beneficially owned by the Acquiring Person (which will thereafter be void), shall thereafter have the right to receive upon exercise of such Right that number of shares of common stock (or other securities) having at the time of such transaction a market value of two times the exercise price of the Right. If a person becomes an Acquiring Person and the Company is involved in a merger or other business combination transaction where the Company is not the surviving corporation or where common stock is changed or exchanged or in a transaction or transactions in which 50% or more of its consolidated assets or earning power are sold, proper provision shall be made so that each holder of a Right (other than such Acquiring Person) shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the Right. In addition, if an Acquiring Person does not have beneficial ownership of 50% or more of the common stock, the Company’s Board of Directors has the option of exchanging all or partterms of the Rights for an equal number of shares of common stock in the manner described in the Rights Agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Prior to the Trigger Date, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right, payable in cash, shares of common stock or any other consideration deemed appropriate by the Board of Directors. Immediately upon action of the Board of Directors ordering redemption of the Rights, the ability of holders to exercise the Rights will terminate and such holders will only be able to receive the redemption price.
Until such time as the Rights become exercisable, the Rights have no voting or dividend privileges and are attached to, and do not trade separately from, the common stock.
The Company covenants and agrees that it will cause to be reserved and keep available at all times a sufficient number of shares of Preferred Stock (and following the occurrence of a Triggering Event, shares of common stock and/or other securities) to permit the exercise in full of all Rights from time to time outstanding.
(12)(9) STOCK OPTION AND INCENTIVE PLANS
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 sponsorsWe sponsor several share-based employee incentive plans. Pre-tax amortization ofShare-based compensation costsexpense for stock option grants awarded under these plans was $27 million, $30 million and $40 million in 2009, 2008, and 2007, respectively. Related income tax benefits recognized during the year ended December 31, 2006 was approximately $7 million. Compensation expense related to restricted stock units (“RSU”) for the year ended was approximately $30 million.
in earnings were $10 million, $11 million and $15 million in 2009, 2008, and 2007, respectively.
At December 31, 2006,2009, unrecognized compensation cost related to non-vested stock option and RSUstock unit awards totaled $61$33 million. The cost of these non-vested awards is expected to be recognized over the requisite vesting period. Thea weighted-average remaining vesting period of 34 months.
Share-Based Employee Incentive Plans
On April 17, 2007, our shareholders approved the non-vested awards is approximately2007 Omnibus Stock and Incentive Plan (“2007 OSIP”). This plan was previously adopted by our Board of Directors on February 20, months.2007 and provides for the issuance
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 year ended December 31, 2006 are $7 million and $4 million lower, respectively, than if it had continued to account for share-based compensation under Accounting Principles Board (“APB”) Opinion No. 25. Basic and diluted net earnings per share for the year ended December 31, 2006 are $.05 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 year ended December 31, 2005 and 2004, 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.F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Share-Based Compensation—Pro Forma Net Income and Earnings
Millions of dollars, except per share data | Year Ended December 31, 2005 | Year Ended December 31, 2004 | ||||||
Net earnings as reported | $ | 422 | $ | 406 | ||||
Add: Share-based employee compensation expense included in reported net earnings, net of related tax effects | 15 | 9 | ||||||
Deduct: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (19 | ) | (17 | ) | ||||
Pro forma net earnings | $ | 418 | $ | 398 | ||||
Earnings per share: | ||||||||
Basic—as reported | $ | 6.30 | $ | 6.02 | ||||
Basic—pro forma | $ | 6.23 | $ | 5.90 | ||||
Diluted—as reported | $ | 6.19 | $ | 5.90 | ||||
Diluted—pro forma | $ | 6.13 | $ | 5.78 | ||||
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 periodsunits with terms of up to ten years to eligible employees. Onno more than 10 years. At December 31, 2005,2009, approximately 630 thousand shares remain available for issuance under 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 this2007 OSIP, our only active plan.
The following table summarizes the plans:
December 31, 2006 | ||||||||
Millions of shares | 1996 OSIP | 1998 OSIP | 2000 OSIP | 2002 OSIP | ||||
Share-based awards granted | 3.4 | 3.5 | 2.6 | 2.0 | ||||
Outstanding awards | 0.8 | 1.1 | 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 generallyand are subject to forfeiture upon termination of employment.
The Company uses We use the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. StockGranted 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,option; and (3) expected option life—an estimate based on historical experience including the effect of employee
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
terminations.experience. Based on the results of the model, the weighted-average fair valuevalues of stock options granted during the yearyears ended December 31, 2006 was $22.072009, 2008, and 2007 were $6.42, $21.03 and $22.54, respectively, using the following assumptions:
Weighted Average Black-Scholes Assumptions | 2006 | 2005 | 2004 | 2009 | 2008 | 2007 | |||||||||
Risk-free interest rate | 4.6% | 4.4% | 3.6% | 1.9 | % | 3.0 | % | 4.7 | % | ||||||
Expected volatility | 25.6% | 25.5% | 28.7% | 37.5 | % | 28.1 | % | 22.6 | % | ||||||
Expected dividend yield | 2.1% | 2.4% | 2.6% | 5.5 | % | 2.0 | % | 1.9 | % | ||||||
Expected option life | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years |
Stock Option Activity
The following table summarizes stock option activity during the year ended December 31, 2006. During this period, the Company granted 2,249,000 stock options of which 1,778,000 related to stock options granted to former Maytag employees.2009:
2006 Stock Option Activity
Thousands of shares, except per share data | Number of Options | Weighted-Average Exercise Price | Expiration Dates | |||||
Outstanding, December 31, 2005 | 3,733 | $ | 60.37 | June 2006 – November 2015 | ||||
Granted | 2,249 | 90.98 | ||||||
Exercised | (871 | ) | 65.83 | |||||
Canceled or expired | (98 | ) | 80.37 | |||||
Outstanding, December 31, 2006 | 5,013 | $ | 72.76 | April 2007 – July 2016 | ||||
2005 and 2004 Stock Option Activity:
2005 | 2004 | |||||||||||
Thousands of shares, except per share data | Number of Options | Weighted- Average Exercise Price | Number of Options | Weighted- Average Exercise Price | ||||||||
Outstanding at January 1 | 5,325 | $ | 58.46 | 5,892 | $ | 55.82 | ||||||
Granted | 256 | 63.99 | 666 | 72.91 | ||||||||
Exercised | (1,731 | ) | 54.54 | (1,124 | ) | 52.84 | ||||||
Canceled or expired | (117 | ) | 67.59 | (109 | ) | 61.82 | ||||||
Outstanding at December 31 | 3,733 | $ | 60.37 | 5,325 | $ | 58.46 | ||||||
Exercisable at December 31 | 3,156 | $ | 58.76 | 4,237 | $ | 57.62 | ||||||
Fair value of options granted during the year | $ | 15.55 | $ | 17.07 | ||||||||
Thousands of shares, except per share data | Number of Options | Weighted- Average Exercise Price | ||||
Outstanding at January 1 | 4,137 | $ | 87.81 | |||
Granted | 1,451 | 32.09 | ||||
Exercised | (404 | ) | 51.91 | |||
Canceled or expired | (487 | ) | 108.93 | |||
Outstanding at December 31 | 4,697 | $ | 71.32 | |||
Exercisable at December 31 | 2,874 | $ | 87.34 | |||
The total intrinsic value of stock options exercised duringwas $9 million, $10 million and $39 million for the yearyears ended December 31, 2006 was $20 million for which2009, 2008 and 2007, respectively. The related tax benefits totaled approximately $8 million.were $3 million, $3 million and $15 million in 2009, 2008 and 2007, respectively. Cash received from the exercise of stock options during the year ended December 31, 2006 totaled $54 million.
The fair value of stock options vested was $32$21 million, $11$21 million, and $20$68 million for the years ended December 31, 2006, 20052009, 2008 and 2004,2007, respectively. The fair value of stock options vested in 2006 of $32 million includes $27 million related to the Maytag acquisition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The table below providessummarizes additional information related to stock options outstanding at December 31, 2006:2009:
Options in thousands / dollars in millions, except share data | Outstanding Net of Expected Forfeitures | Options Exercisable | ||||||||||
Options in thousands / dollars in millions, except per share data | Outstanding Net of Expected Forfeitures | Options Exercisable | ||||||||||
Number of options | 4,729 | 4,488 | 4,545 | 2,874 | ||||||||
Weighted-average exercise price | $ | 72.02 | $ | 71.26 | $ | 72.47 | $ | 87.34 | ||||
Aggregate intrinsic value | $ | 66 | $ | 66 | $ | 82 | $ | 21 | ||||
Weighted-average remaining contractual term, in years | 6.2 | 5.6 | 5.9 | 4.3 |
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Restricted Stock Units
Eligible employees may receive RSUsrestricted stock units or performance stock units as a portion of their total compensation. RSU awards
Restricted stock units are typically granted to selected management employees on an annual basis and vest over various time periods depending upon the program, butthree years. Periodically, restricted stock units may be granted to selected executives based on special recognition or retention circumstances and generally vest from twothree years to seven years. Some of these awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based on dividends declared on Whirlpool common stock. These awards convert to unrestricted common stock at the conclusion of the vesting period.
Performance stock units are granted to executives on an annual basis. The final award may equal 0 – 200% of a target based on pre-established Whirlpool financial performance measures related to the current year. The awards vest two years following the end of the performance period 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)
We measure compensation cost for stock units based on dividends declared on Whirlpool common stock.
The Company measures compensation cost based on the closing market price of Whirlpool common stock at the grant date.
The weighted average grant date fair values of awards granted during the years ended December 31, 2009, 2008 and 2007 were $26.51, $55.83 and $96.81, respectively.
The following table summarizes RSUstock unit activity during the year ended December 31, 2006:2009:
RSUs in thousands | Number of RSUs | Weighted-Average Grant Date Fair Value | ||||
Outstanding, December 31, 2005 | 1,499 | $ | 67.55 | |||
Granted | 560 | 81.11 | ||||
Canceled | (60 | ) | 64.52 | |||
Vested and transferred to unrestricted | (83 | ) | 77.78 | |||
Outstanding, December 31, 2006 | 1,916 | $ | 71.32 | |||
Stock units in thousands, except per share data | Number of Stock Units | Weighted- Average Grant Date Fair Value | ||||
Non-vested, December 31, 2008 | 1,108 | $ | 77.66 | |||
Granted | 660 | 26.51 | ||||
Canceled | (198 | ) | 41.83 | |||
Vested and transferred to unrestricted | (354 | ) | 85.67 | |||
Non-vested, December 31, 2009 | 1,216 | $ | 52.87 | |||
Nonemployee Director Equity Plan
Whirlpool has aOur Nonemployee Director Equity Plan. This planPlan provides for (a)(1) a one time grant of 1,000 shares of common stock uponmade at the time a director joiningfirst joins the Board of Directors; (b)Board; (2) an annual grant of stock worth $54,000options, with the number of options to be determined by dividing $36,000 by the product of the fair market value of a single share of our common stock on the final trading day before the annual meeting of stockholders multiplied by 0.35; and (3) an annual grant of stock, with the number of shares to be issued to the director determined by dividing $54,000 by the then current fair market value of the common stock of the Company; and (c) an annual grant of stock options valued at $36,000 with the number of options to be based on dividing $36,000 by the product of the then currentaverage fair market value of a single share of theour common stock multiplied by 0.35.for the final three trading days before the grant. The exercise price under each option granted is the fair market value of the common stock as ofon the finallast trading day before the annual meeting of stockholders. These options are exercisable for 20 years or, if earlier, two years after a nonemployee director ceases to serve on Whirlpool’s Board of Directors, provided that no option is exercisable within the first six months of its term, unless death or disability of the director occurs. In the event of a nonemployee director’s death, such options will be exercisable for one year from the date of death. Payment of the exercise price may be made in cash or, if permitted by law, Whirlpool common stock, valued at its market price at the time of exercise. At December 31, 2006, there were 257,471 shares available for grant under this plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(13)(10) RESTRUCTURING CHARGES
Whirlpool Restructuring
Under Whirlpool’sour ongoing global operating platform initiatives, the Companywe implemented certain restructuring initiatives to strengthen itsour leadership position in the global appliance industry. The Company plansWe plan to continue itsa comprehensive worldwide effort to optimize itsour regional manufacturing facilities, supply base, product platforms and technology resources to better support itsour 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 CompanyWe incurred pre-taxtotal restructuring charges of $55$126 million, related to these actions$149 million, $61 million during the yearyears ended December 31, 2006.2009, 2008, 2007 respectively. These charges are included in the restructuring costs line in the Company’sour Consolidated Statements of OperationsIncome and primarily consist of severance
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
charges to restructure the cooking platform in Latin America, shift refrigeration and dishwasher capacity within Europe and North America, shift cooking capacity within North America, restructure the laundry platforms in North America, Europe and Asia and reorganize the salaried workforce throughout North America and Europe.
On October 27, 2008, management committed to a workforce reduction plan to reduce our employee base worldwide beginning during the fourth quarter of 2008 through the beginning of 2010. We expect to incur approximately $100 million in employee termination costs, $14 million in asset impairment costs and impairment$3 million in other associated costs for a total of fixed assets. These$117 million that will be incurred as a result of this workforce reduction. We incurred charges include shifting refrigerationof $39 million in 2009 and compressor capacity to lower cost regions, as well as salary$64 million in 2008 associated with this workforce reorganization throughout Europe,reduction, which are included in the $126 million and $149 million, respectively, in total restructuring charges discussed above. As of December 31, 2009, approximately $15 million of these workforce reduction costs remain, all of which will result in future cash expenditures.
Our 2008 restructuring initiatives are reducing our overall workforce by approximately 5,000 employees and contractors worldwide through the eliminationbeginning of a laundry platform. The Company expects2010. We expect to incur additional costs of $75 to $100$14 million in 2007our Europe region and $1 million in our North American region through the beginning of 2010 related to these initiatives.
Under a restructuring initiative begun in 2004, the Company incurred For additional information about restructuring charges by business segment, see Note 13.
On August 28, 2009, we announced changes to our North America manufacturing operations which will result in the closure of $57 million and $15our manufacturing facility in Evansville, Indiana in mid-2010. We currently expect that approximately 1,100 full-time positions will be eliminated as a result of the closure. We estimate that we will incur approximately $50 million in 2005total costs in connection with the exit of this facility comprised of $20 million in employee termination costs, $13 million in equipment relocation costs, $5 million in asset impairment costs, and 2004, respectively. These costs are$12 million in other associated costs. During 2009 we incurred $20 million associated with this announcement, $14 million of which is included in the $126 million in total restructuring charges discussed above. We expect to recognize approximately $27 million of these costs line in the Company’s Consolidated Statements2010 fiscal year, $2 million of Operations.
Detailsthese costs in the 2011 fiscal year and estimate that approximately $31 million of the estimated $50 million in total cost will result in future cash expenditures. As of December 31, 2009, approximately $30 million of these closure costs remain, all of which will result in future cash expenditures.
A summary of our restructuring liability balance and full year restructuring activity for 2006, 20052009, 2008 and 2004 are2007 is as follows:
Millions of dollars | Beginning Balance | Charge to Earnings | Cash Paid | Non-Cash | Revision of Estimate | Translation | Ending Balance | January 1, 2009 Balance | Charge to Earnings | Cash Paid | Non-Cash | Revision of Estimate | Translation | December 31, 2009 Balance | ||||||||||||||||||||||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Termination costs | $ | 15 | $ | 26 | $ | (29 | ) | $ | — | $ | — | $ | 2 | $ | 14 | $ | 82 | $ | 86 | $ | (93 | ) | $ | (3 | ) | $ | (2 | ) | $ | (2 | ) | $ | 68 | |||||||||||||||||
Non-employee exit costs | 4 | 29 | (10 | ) | (20 | ) | — | — | 3 | 22 | 40 | (15 | ) | (29 | ) | (4 | ) | 1 | 15 | |||||||||||||||||||||||||||||||
Total | $ | 19 | $ | 55 | $ | (39 | ) | $ | (20 | ) | $ | — | $ | 2 | $ | 17 | $ | 104 | $ | 126 | $ | (108 | ) | $ | (32 | ) | $ | (6 | ) | $ | (1 | ) | $ | 83 | ||||||||||||||||
2005 | ||||||||||||||||||||||||||||||||||||||||||||||||||
2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Termination costs | $ | 9 | $ | 50 | $ | (42 | ) | $ | — | $ | — | $ | (2 | ) | $ | 15 | $ | 56 | $ | 134 | $ | (86 | ) | $ | — | $ | (21 | ) | $ | (1 | ) | $ | 82 | |||||||||||||||||
Non-employee exit costs | 4 | 7 | (1 | ) | (6 | ) | — | — | 4 | 44 | 15 | (12 | ) | (18 | ) | (7 | ) | — | 22 | |||||||||||||||||||||||||||||||
Total | $ | 13 | $ | 57 | $ | (43 | ) | $ | (6 | ) | $ | — | $ | (2 | ) | $ | 19 | $ | 100 | $ | 149 | $ | (98 | ) | $ | (18 | ) | $ | (28 | ) | $ | (1 | ) | $ | 104 | |||||||||||||||
2004 | ||||||||||||||||||||||||||||||||||||||||||||||||||
2007 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Termination costs | $ | 41 | $ | 16 | $ | (41 | ) | $ | — | $ | (7 | ) | $ | — | $ | 9 | $ | 128 | $ | 34 | $ | (95 | ) | $ | — | $ | (13 | ) | $ | 2 | $ | 56 | ||||||||||||||||||
Non-employee exit costs | 4 | 6 | (2 | ) | (4 | ) | — | — | 4 | 49 | 27 | (30 | ) | (18 | ) | 16 | — | 44 | ||||||||||||||||||||||||||||||||
Total | $ | 45 | $ | 22 | $ | (43 | ) | $ | (4 | ) | $ | (7 | ) | $ | — | $ | 13 | $ | 177 | $ | 61 | $ | (125 | ) | $ | (18 | ) | $ | 3 | $ | 2 | $ | 100 | |||||||||||||||||
Maytag IntegrationF-46
Maytag integration reserves are included in the restructuring costs line in the Consolidated Balance Sheets. The following represents a reconciliation of the changes in reserves related to Maytag projects as of and for the year ended December 31, 2006:
Millions of dollars | Balance April 1, 2006 | Charge to Earnings | Cash Paid | Non-Cash | Revision of Estimate | Translation | Balance December 31, 2006 | |||||||||||||||
Termination costs | $ | 134 | $ | — | $ | (71 | ) | $ | — | $ | 51 | $ | — | $ | 114 | |||||||
Non-employee exit costs | 35 | — | (5 | ) | — | 16 | — | 46 | ||||||||||||||
Total | $ | 169 | $ | — | $ | (76 | ) | $ | — | $ | 67 | $ | — | $ | 160 | |||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
InFor 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 of Maytag. The Company has established reserves for certain severance and 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. Atyears ended December 31, 2006, a $158 million reserve remains. Adjustments to2009, 2008 and 2007, the reserve have been reflected in the table above and relate primarily to the communicationrevisions of severance accruals. It is expected that all restructuring actions related to these reserves will be completed during or prior to 2008.
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.
(14) PRODUCT RECALLS
On February 1, 2007, Maytag Corporation announced a voluntary recall of approximately 2.3 millionMaytag brand andJenn-Air brand plastic tub dishwashers. Refer to Note 19 – Subsequent Events for additional information.
On February 25, 2005, the Company announced the recall of approximately 162,000 under-the-counter plastic tall tub dishwashers due to a potential safety issue. There have been no reports of personal injury or property damage associated with these dishwashers. The Company also is undertaking the repair of up to an additional 223,000 of these dishwashers for a separate quality issue. The Company accrued $17.1 millionestimates related to the quality issues within cost of products sold during the fourth quarter of 2004. During 2005, the estimated costMaytag operations exit, relocation and employee termination accruals were approximately $6 million, $25 million and $3 million, respectively, which were recorded with a corresponding offset to recall and repair these units was reduced to $13.7 million primarily due to the recovery of certain costs from a parts supplier. The remaining cost accrual and supplier receivable were not material at December 31, 2005.
goodwill.
(15)(11) INCOME TAXES
Income tax (benefit) expense is as follows:
Year ended December 31—Millions of dollars | 2006 | 2005 | 2004 | |||||||||
Current: | ||||||||||||
Federal | $ | 125 | $ | 57 | $ | 202 | ||||||
State and local | (7 | ) | 10 | 18 | ||||||||
Foreign | 68 | 117 | 73 | |||||||||
186 | 184 | 293 | ||||||||||
Deferred: | ||||||||||||
Federal | (112 | ) | (9 | ) | (119 | ) | ||||||
State and local | 1 | (3 | ) | (4 | ) | |||||||
Foreign | 51 | (1 | ) | 39 | ||||||||
(60 | ) | (13 | ) | (84 | ) | |||||||
Total income tax expense | $ | 126 | $ | 171 | $ | 209 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Year ended December 31—Millions of dollars | 2009 | 2008 | 2007 | |||||||||
Current: | ||||||||||||
Federal | $ | 10 | $ | 9 | $ | (28 | ) | |||||
State and local | (3 | ) | 14 | 8 | ||||||||
Foreign | 115 | 66 | 128 | |||||||||
122 | 89 | 108 | ||||||||||
Deferred: | ||||||||||||
Federal | (182 | ) | (309 | ) | 28 | |||||||
State and local | 3 | (31 | ) | 3 | ||||||||
Foreign | (4 | ) | 50 | (22 | ) | |||||||
(183 | ) | (290 | ) | 9 | ||||||||
Total income tax (benefit) expense | $ | (61 | ) | $ | (201 | ) | $ | 117 | ||||
Domestic and foreign earnings (loss) before income taxes and other items are as follows:
Year ended December 31—Millions of dollars | 2006 | 2005 | 2004 | ||||||
Domestic | $ | 231 | $ | 347 | $ | 402 | |||
Foreign | 388 | 250 | 214 | ||||||
Total earnings from continuing operations before taxes and other items | $ | 619 | $ | 597 | $ | 616 | |||
Year ended December 31—Millions of dollars | 2009 | 2008 | 2007 | ||||||||
Domestic | $ | (110 | ) | $ | (433 | ) | $ | 103 | |||
Foreign | 404 | 679 | 701 | ||||||||
Earnings from continuing operations before income taxes and other items | $ | 294 | $ | 246 | $ | 804 | |||||
Reconciliations between tax expense at the U.S. federal statutory income tax rate of 35% and the consolidated effective income tax rate for earnings from continuing operations before income taxes and other items are as follows:
Year ended December 31—Millions of dollars | 2006 | 2005 | 2004 | |||||||||
Income tax expense computed at U.S. federal statutory rate | $ | 217 | $ | 209 | $ | 217 | ||||||
State and local taxes, net of federal tax benefit | 2 | 7 | 9 | |||||||||
Tax effect of permanent differences | (13 | ) | 11 | 4 | ||||||||
Medicare Part D subsidy | (7 | ) | (11 | ) | — | |||||||
Foreign tax rate differential | 10 | 7 | 8 | |||||||||
U.S. tax on foreign dividends and subpart F income | 18 | 81 | 3 | |||||||||
U.S. foreign tax credits | (33 | ) | (144 | ) | (53 | ) | ||||||
Foreign withholding taxes | 14 | 18 | 10 | |||||||||
Foreign government tax incentive | (17 | ) | — | (2 | ) | |||||||
Expired foreign loss carryforwards | — | 2 | — | |||||||||
Deductible interest on capital | (5 | ) | (1 | ) | (7 | ) | ||||||
U.S. government tax incentives | (63 | ) | (5 | ) | (5 | ) | ||||||
Settlement of global tax audits | 15 | (30 | ) | 45 | ||||||||
Valuation allowances | 2 | 4 | 6 | |||||||||
Other items, net | (14 | ) | 23 | (26 | ) | |||||||
Income tax expense | $ | 126 | $ | 171 | $ | 209 | ||||||
Year ended December 31 | 2009 | 2008 | 2007 | ||||||
Income tax rate computed at U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
U.S. government tax incentives | (42.5 | ) | (42.6 | ) | (3.7 | ) | |||
Foreign government tax incentives | (15.1 | ) | (34.5 | ) | (7.6 | ) | |||
Foreign tax rate differential | (10.6 | ) | (9.4 | ) | (1.4 | ) | |||
Settlement of global tax audits | 7.6 | (8.6 | ) | 2.7 | |||||
U.S. foreign tax credits | (6.3 | ) | (73.9 | ) | (2.2 | ) | |||
Foreign withholding taxes | 5.1 | 4.7 | 1.9 | ||||||
Deductible interest on capital | (5.1 | ) | (13.4 | ) | (2.7 | ) | |||
Medicare Part D subsidy | 4.0 | — | (0.6 | ) | |||||
U.S. tax on foreign dividends and subpart F income | 3.6 | 66.6 | 0.7 | ||||||
Valuation allowances | 3.3 | 2.1 | (7.1 | ) | |||||
Impact of tax rate changes | (1.3 | ) | 0.7 | 1.9 | |||||
State and local taxes, net of federal tax benefit | 0.3 | (6.7 | ) | 1.0 | |||||
Real estate donations | — | — | (1.1 | ) | |||||
Other items, net | 1.4 | (1.7 | ) | (2.3 | ) | ||||
Effective tax rate | (20.6 | )% | (81.7 | )% | 14.5 | % | |||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes.
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Significant components of the Company’sour deferred tax liabilities and assets from continuing operations are as follows:
December 31—Millions of dollars | 2006 | 2005 | ||||||
Deferred tax liabilities | ||||||||
Property, plant and equipment | $ | 303 | $ | 230 | ||||
Financial services leveraged leases | 30 | 37 | ||||||
Pensions | — | 116 | ||||||
Software costs | 13 | 6 | ||||||
LIFO inventory | 40 | 15 | ||||||
Intangibles | 639 | — | ||||||
Other | 149 | 141 | ||||||
Total deferred tax liabilities | $ | 1,174 | $ | 545 | ||||
Deferred tax assets | ||||||||
Postretirement obligations | $ | 486 | $ | 184 | ||||
Pensions | 249 | 191 | ||||||
Restructuring costs | 60 | 7 | ||||||
Product warranty accrual | 108 | 36 | ||||||
Receivable and inventory allowances | 116 | 68 | ||||||
Capital loss carryforwards | 19 | — | ||||||
Loss carryforwards | 272 | 272 | ||||||
Employee payroll and benefits | 86 | 57 | ||||||
Foreign tax credit carryforwards | 93 | 62 | ||||||
U.S. general business credit carryforwards | 63 | — | ||||||
Accrued expenses | 117 | 55 | ||||||
Other | 115 | 110 | ||||||
Total deferred tax assets | $ | 1,784 | $ | 1,042 | ||||
Valuation allowances for deferred tax assets | (151 | ) | (119 | ) | ||||
Deferred tax assets, net of valuation allowances | 1,633 | 923 | ||||||
Net deferred tax assets | $ | 459 | $ | 378 | ||||
December 31—Millions of dollars | 2009 | 2008 | ||||||
Deferred tax liabilities | ||||||||
Intangibles | $ | 622 | $ | 633 | ||||
Property, plant and equipment | 185 | 229 | ||||||
LIFO inventory | 55 | 86 | ||||||
Hedging & Swaps | 43 | — | ||||||
Inventories | 26 | — | ||||||
Pensions | 17 | 17 | ||||||
Software costs | 13 | 12 | ||||||
Financial services leveraged leases | 11 | 22 | ||||||
Other | 123 | 164 | ||||||
Total deferred tax liabilities | 1,095 | 1,163 | ||||||
Deferred tax assets | ||||||||
Loss carryforwards | 595 | 306 | ||||||
Pensions | 514 | 439 | ||||||
U.S. general business credit carryforwards | 317 | 175 | ||||||
Postretirement obligations | 302 | 470 | ||||||
Employee payroll and benefits | 150 | 87 | ||||||
Inventory prepayments | 68 | 323 | ||||||
Accrued expenses | 66 | 68 | ||||||
Receivable and inventory allowances | 57 | 57 | ||||||
Product warranty accrual | 56 | 75 | ||||||
Foreign tax credit carryforwards | 47 | 4 | ||||||
Restructuring costs | 27 | 28 | ||||||
Capital loss carryforwards | 8 | — | ||||||
Hedging | 10 | 109 | ||||||
Other | 238 | 218 | ||||||
Total deferred tax assets | 2,455 | 2,359 | ||||||
Valuation allowances for deferred tax assets | (180 | ) | (147 | ) | ||||
Deferred tax assets, net of valuation allowances | 2,275 | 2,212 | ||||||
Net deferred tax assets | $ | 1,180 | $ | 1,049 | ||||
At December 31, 2006, the Company has foreign2009, we have net operating loss carryforwards of $940$2,689 million, $732$1,063 million of which are U.S. state net operating loss carryforwards. Of the total net operating loss carryforwards, $751 million do not expire, with substantially all of the remaining $208 millioncarryforwards expiring in various years through 2015.2029. As of December 31, 2006, the Company2009, we had $93$47 million of foreign tax credit carryforwards and $63$317 million of U.S. general business credit carryforwards available to offset future payments of federal income taxes, expiring in varying amounts between 20092016 and 2026.2029.
Whirlpool’s acquisitionWe routinely review the future realization of Maytag included $19 million of net deferred tax assets related to capital loss carryforwardsbased on projected future reversal of $51 milliontaxable temporary differences, available tax planning strategies and relatedprojected future taxable income. We have recorded a valuation allowance offsettingto reflect the net estimated amount of certain deferred tax asset in the amountassets associated with net operating loss and other deferred tax assets we believe will be realized. Our recorded valuation allowance of $19 million. The capital loss carryforwards can only be offset against capital gains and expire$180 million at December 31, 2009. The Company currently believes the net deferred tax assets are more likely than not to remain unrealized in the future.
The Company has recorded valuation allowances to reflect the estimated amount2009 consists of $149 million of net operating loss carryforward deferred tax assets and foreign tax credit carryforwards that will be realized. The valuation allowance of $151 million at December 31, 2006 is made up of $99 million of foreign net operating loss carryforwards and $52$31 million of other deferred tax assetsassets. We believe that the Company currently believes areit is more likely than not to remain unrealized inthat we will realize the future.benefit of existing deferred tax assets, net of valuation allowances mentioned above.
Other than earnings specifically noted below, the Company hasF-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
We have historically reinvested all of the unremitted earnings of itsour foreign subsidiaries and affiliates. The Company plansWe plan to distribute approximately $142$139 million of foreign earnings over the next several years. This distribution is presently forecastforecasted to result in tax benefits which
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
have not been recorded currently because of itstheir contingent nature. There has been no deferred tax liability provided on the remaining amount of unremitted earnings of $1.4$2.4 billion at December 31, 2006.2009. Should the Companywe make a distribution fromout of the $2.4 billion of unremitted earnings, of its foreign subsidiaries and affiliates, itwe would be subject to additional U.S. taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. It is not practicable to estimate the amount of the deferred tax liability associated with these unremitted earnings becauseearnings.
On October 3, 2008, The Emergency Economic Stabilization Act of 2008 (the “Act”) was signed into law. The Act includes a wide-range of provisions that are intended to 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 for the accelerated U.S. production of super-efficient clothes washers, refrigerators and dishwashers that meet or exceed certain Energy Star thresholds for energy and water conservation levels as set by the U.S. Department of Energy (“Energy Credit”). The tax credits apply to eligible production during the 2008 to 2010 calendar years provided the production of qualifying product in any individual year exceeds a rolling two year baseline of production. We have historically, and will continue to, invest over 2% of our annual sales in research and development to provide innovative and energy efficient products that meet these standards for our customers. As a result, during 2008 and 2009 and in 2010 we expect to record a tax credit benefit under the provisions of the complexities associated with this hypothetical calculation.Act related to the production of qualifying appliances. Including the Energy Credit, total general business tax credits recorded during 2009 reduced our effective tax rate by 42.5%.
As of December 31, 2006, the Company wasWe are in various stages of audits by variouscertain governmental tax authorities. The Company establishesWe establish liabilities for probablethe difference between tax return provisions and estimable assessments by taxing authorities resulting from known tax exposures.the benefits recognized in our financial statements. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and may need to be adjusted over time as more information becomes known.
We adopted ASC 740, “Income Taxes” (formerly FIN 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB 109” (“FIN 48”)) on January 1, 2007, at which time the total amount of gross unrecognized tax benefit on the Consolidated Balance Sheet was $166 million. Upon adoption of FIN 48, we recognized a $2 million increase in the liability for unrecognized tax benefits and a $2 million decrease in federal benefit related to state uncertain tax positions. The Company paid income taxesincrease was accounted for as a reduction to retained earnings in the amount of $173$8 million and a reduction to goodwill in 2006, $276the amount of $4 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Millions of dollars | 2009 | 2008 | ||||||
Balance, January 1 | $ | 119 | $ | 189 | ||||
Additions for tax positions of the current year | 47 | 4 | ||||||
Additions for tax positions of prior years | 15 | 2 | ||||||
Reductions for tax positions of prior years for: | ||||||||
Changes in judgment | (6 | ) | (39 | ) | ||||
Settlements during the period | (2 | ) | (37 | ) | ||||
Lapses of applicable statute of limitation | (10 | ) | — | |||||
Balance, December 31 | $ | 163 | $ | 119 | ||||
Included in the liability for unrecognized tax benefits at December 31, 2009 and 2008 are $163 and $119 million, in 2005respectively, of unrecognized tax benefits that if recognized would impact the effective tax rate, net of $15 million and $277$16 million, in 2004.respectively, of federal benefits related to state uncertain tax positions.
F-49
(16)NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
We recognize charges related to interest and penalties for unrecognized tax benefits as a component of income tax expense. As of December 31, 2009 and 2008, we have accrued interest and penalties of $26 and $25 million, respectively. Interest and penalties are not included in the tabular rollforward of unrecognized tax benefits above.
Included in additions for tax positions of the current year are $13 million of unrecognized tax benefits related to our September 30, 2009 settlement with the Brazilian competition commission. For additional information see Note 6.
We file income tax returns in the U.S. federal, various state, local and foreign jurisdictions. We are no longer subject to any significant U.S. federal, state, local or foreign income tax examinations by tax authorities for years before 2006. The Internal Revenue Service commenced an examination of our U.S. income tax returns for 2006 and 2007 in the fourth quarter of 2008 that is anticipated to be completed during early 2011. It is reasonably possible that certain unrecognized tax benefits of $12 million could be settled with the related jurisdictions during the next 12 months.
(12) PENSION AND POSTRETIREMENT MEDICAL BENEFITS PLANS
The Company has bothWe have funded and unfunded noncontributory defined benefit pension plans that cover substantially all of itsour North American employees and certain European, Asian and Brazilian employees. The formula for U.S. salaried employees covered under the qualified defined benefit plan sponsored by Whirlpool was based on years of service and final average salary, while the formulasformula for U.S. hourly employees covered under the defined benefit plans sponsored by Whirlpool werewas based on specific dollar amounts for each year of service.
Whirlpool acquired Maytag on March 31, 2006, and the pension and postretirement net periodic costs have been reflected from that date forward. There arewere multiple formulas for employees covered under the qualified and nonqualified defined benefit planplans sponsored by Maytag, including a cash balance formula.
The U.S. plans are frozen for the majority of participants. A defined contribution plan is being provided to all U.S. employees subsequent to the pension plan freezes and is not classified within the net periodic benefit cost. In addition, we sponsor an unfunded Supplemental Executive Retirement Plan. This plan is nonqualified and provides certain key employees defined pension benefits that supplement those provided by the company’s other retirement plans.
The U.S. qualified defined benefit pension plans provide that in the event of a plan termination within five years (36 months for the defined benefit plan sponsored by Maytag) following a change in control of the Company,Whirlpool, any assets held by the plans in excess of the amounts needed to fund accrued benefits would be used to provide additional benefits to plan participants. A change in control generally means either a change in the majority of the incumbent Board of Directors or an acquisition of 25% (30% for purposes of the Whirlpool Production Employees Retirement Plans and 20% for purposes of the defined benefit plan sponsored by Maytag) or more of the voting power of the Company’sWhirlpool’s outstanding stock.
The U.S. Whirlpool and Maytag pension plans were amended to cease benefit accruals for the majority of salaried and non-union participants effective December 31, 2006. For certain salaried Whirlpool employees who are eligible to retire on or before December 31, 2009, the amendment ceasing benefit accruals will be effective December 31, 2009. In addition, the Whirlpool Production Employees Retirement Plan at LaVergne, the Company’s Tennessee manufacturing facility, which covers union employees, was amended to cease all benefit accruals effective January 31, 2007. An enhanced defined contribution benefit is being provided to eligible affected employees subsequent to the effective date of the plan amendments. As a result of the amendments, the Company recognized a net curtailment charge of approximately $6 million in 2006.
As a result of a law change in Italy, the Company recognized a curtailment credit of approximately $5 million in 2006.
On November 14, 2005, the Company amended the Whirlpool Employees Pension Plan (the “WEPP”). The amendment was reflected in the Company’s 2006 pension cost and did not affect the accumulated benefit obligation (“ABO”) or the projected benefit obligation (“PBO”) at December 31, 2005.
In January 2005, the Company amended the WEPP. The Company remeasured the net periodic cost and funded status of the plan at January 1, 2005 to reflect the amendment. The effect of this amendment was to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
reduce the PBO by approximately $80 million. The ABO was not affected by the amendment since the accrued benefits as of December 31, 2005 were not affected by this change.
Lump sum retirement distributions were made from the Company’s nonqualified pension plans in the third and fourth quarters of 2004 resulting in the recognition of settlement charges of $9.5 million. As a result of these settlements, the Company remeasured the nonqualified pension plans at July 1, 2004 using a discount rate of 6.25% and at December 31, 2004 using a discount rate of 5.85%.
The Company also providesWe provide postretirement health care benefits for eligible retired U.S. employees. Eligible retirees include those who were full-time employees with 10 years of service who attained age 55 while in service with the Companyus and those union retirees who met the eligibility requirements of their collective bargaining agreements. In general, the postretirement health care plans are contributory with participants’ contributions adjusted annually and generally include cost-sharing provisions that limit the Company’sour exposure for recent and future retirees. The plans are unfunded. The Company has generally reservedWe reserve the right to modify the benefits. The Company providesbenefits in the future. We provide no significant postretirement medical benefits to non-U.S. employees.
Amended Plans
During 2009, we modified retiree medical benefits for certain retirees as part of our effort to provide consistent benefits to all U.S. employees. These modifications resulted in a decrease in our postretirement benefit obligation of $113 million with a corresponding offset to other comprehensive income, net of tax.
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
On August 28, 2009, we announced the closure of our manufacturing facility in Evansville, Indiana in mid-2010. The Company was required to remeasure theannouncement triggered a curtailment within our pension plan for Evansville hourly employees, resulting in a one-time curtailment loss of $6.6 million included in net periodic cost and funded statuswith an offset to other comprehensive income, net of onetax. During the September 2009 quarter, we recorded the entire loss in our Consolidated Statement of itsIncome as a component of cost of products sold.
On June 16, 2009, the Board of Directors authorized the option for the company to use up to $100 million of company stock to fund the U.S. pension plans. If we elect to partially fund the U.S. pension plans in company stock, contributions may be made on a periodic basis from treasury stock, or, with the prior approval of the Finance Committee of the Board of Directors, from authorized, but unissued shares. As of December 31, 2009, we have not used company stock to fund our U.S. pension plans.
On February 9, 2009, we announced the suspension of the annual credit to retiree health savings accounts for the majority of active participants. The result of the indefinite suspension was a one-time curtailment gain of $89 million included in net periodic cost with an offset to other comprehensive income, net of tax. During the March 2009 quarter, we recorded $80 million of this gain in our Consolidated Statement of Income as a component of cost of products sold and $9 million was recorded as a component of selling, general and administrative expenses.
On August 1, 2008, certain retiree medical benefits for the retirees and remaining active participants associated with our Newton, Iowa manufacturing facility were amended (Newton Amendment), effective January 1, 2009, to be consistent with those benefits provided by the Whirlpool Retiree Healthcare Plan at February 29, 2004.Corporation Group Benefit Plan. The interest rate used forresult of this remeasurementamendment was 6%,a reduction in the same as at year-end 2003.
In 2004, the Company measured the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) following the guidance in FASB Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” For the year ended December 31, 2004, the Company reflected the estimated federal subsidy under the Act as an actuarial gain as required by FSP 106-2, which caused the accumulated other postretirement benefit obligation of $229 million with a corresponding increase to decrease by $104 million,other comprehensive income, net of tax.
In conjunction with the Newton Amendment, we initiated legal proceedings with certain retirees and reduced the cost recognized by approximately $15 million.
United Automobile, Aerospace, and Agricultural Implement Workers of America to seek a declaratory judgment that Whirlpool has the right to change retiree medical benefits after July 31, 2008, the expiration date of the collective bargaining agreement. In response, a similar group of retirees has initiated legal proceedings against Whirlpool asserting the above benefits are vested. We believe the outcome of the legal proceedings against Whirlpool will not have a material adverse effect on our Consolidated Financial Statements.
The Company maintains aU.S. heritage Whirlpool and Maytag pension plans were amended to cease benefit accruals for the majority of salaried and non-union participants effective December 31, 2006. For heritage Whirlpool salaried employees who are eligible to retire before January 1, 2010, the plan freeze was effective December 31, 2009. An enhanced defined contribution plan is being provided to affected employees subsequent to the plan freeze.
401(k) Defined Contribution Plan
During the March 2009 quarter we announced the suspension of company matching contributions for our 401(k) defined contribution plan covering substantially all U.S. employees. Company matchingWe also announced that our automatic company contributions are based on the levelequal to 3% of individual participant’s contributions and, for certain domestic hourly and other employees under the plan, are based on the Company’s annual operating results and the level of individual participants’ contributions. Matchingemployees’ eligible pay will be contributed in company stock. Our contributions amounted to $23 million, $20 million, and $12 million in 2006, 2005, and 2004, respectively.the following amounts:
Millions of dollars | 2009 | 2008 | 2007 | ||||||
401 (k) Company contributions | $ | 40 | $ | 70 | $ | 68 |
During the December 2009 quarter we announced the reinstatement of company matching contributions for our 401(k) defined contribution plan covering substantially all U.S. employees, effective March 2010.
The Company uses a December 31 measurement date for the majority of its pension and other postretirement benefit plans.F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Obligations and Funded Status at End of Year
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
December 31—Millions of dollars | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Funded status, end of year: | ||||||||||||||||||||||||
Fair value of plan assets | $ | 3,146 | $ | 1,695 | $ | 137 | $ | 111 | $ | — | $ | — | ||||||||||||
Benefit obligations | 3,777 | 2,053 | 360 | 329 | 1,304 | 701 | ||||||||||||||||||
Funded status (plan assets less than benefit obligations) | $ | (631 | ) | $ | (358 | ) | $ | (223 | ) | $ | (218 | ) | $ | (1,304 | ) | $ | (701 | ) | ||||||
Unrecognized net actuarial (gain) loss | — | 556 | — | 51 | — | 262 | ||||||||||||||||||
Unrecognized prior service (credit) cost | — | 57 | — | 6 | — | (73 | ) | |||||||||||||||||
Unrecognized transition (asset) obligation | — | — | — | — | — | 1 | ||||||||||||||||||
Amount recognized, end of year | $ | (631 | ) | $ | 255 | $ | (223 | ) | $ | (161 | ) | $ | (1,304 | ) | $ | (511 | ) | |||||||
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Funded status | ||||||||||||||||||||||||
Fair value of plan assets | $ | 2,273 | $ | 2,212 | $ | 179 | $ | 156 | $ | — | $ | — | ||||||||||||
Benefit obligations | 3,637 | 3,547 | 383 | 342 | 761 | 904 | ||||||||||||||||||
Funded status | $ | (1,364 | ) | $ | (1,335 | ) | $ | (204 | ) | $ | (186 | ) | $ | (761 | ) | $ | (904 | ) | ||||||
Amounts recognized in the statement of financial position | ||||||||||||||||||||||||
Noncurrent asset | $ | — | $ | — | $ | 7 | $ | 3 | $ | — | $ | — | ||||||||||||
Current liability | (6 | ) | (12 | ) | (12 | ) | (7 | ) | (68 | ) | (82 | ) | ||||||||||||
Noncurrent liability | (1,358 | ) | (1,323 | ) | (199 | ) | (182 | ) | (693 | ) | (822 | ) | ||||||||||||
Amount recognized | $ | (1,364 | ) | $ | (1,335 | ) | $ | (204 | ) | $ | (186 | ) | $ | (761 | ) | $ | (904 | ) | ||||||
Amounts recognized in accumulated other comprehensive income (pre-tax) | ||||||||||||||||||||||||
Net actuarial loss | $ | 1,305 | $ | 1,187 | $ | 54 | $ | 41 | $ | 45 | $ | 75 | ||||||||||||
Prior service (credit)/cost | (29 | ) | (23 | ) | 4 | 4 | (276 | ) | (290 | ) | ||||||||||||||
Transition (asset)/obligation | — | — | (1 | ) | (1 | ) | 1 | 1 | ||||||||||||||||
Amount recognized | $ | 1,276 | $ | 1,164 | $ | 57 | $ | 44 | $ | (230 | ) | $ | (214 | ) | ||||||||||
Change in Benefit Obligation
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Benefit obligation, beginning of year | $ | 3,547 | $ | 3,580 | $ | 342 | $ | 393 | $ | 904 | $ | 1,151 | ||||||||||||
Service cost | 11 | 14 | 6 | 7 | 11 | 21 | ||||||||||||||||||
Interest cost | 206 | 211 | 20 | 22 | 48 | 66 | ||||||||||||||||||
Plan participants’ contributions | — | — | 2 | 2 | 18 | 18 | ||||||||||||||||||
Actuarial loss/(gain) | 190 | 52 | 20 | (3 | ) | (2 | ) | (56 | ) | |||||||||||||||
Gross benefits paid | (307 | ) | (305 | ) | (30 | ) | (30 | ) | (88 | ) | (113 | ) | ||||||||||||
less: federal subsidy on benefits paid | — | — | — | — | 2 | 5 | ||||||||||||||||||
Plan amendments | — | 1 | 1 | — | (113 | ) | (182 | ) | ||||||||||||||||
New plans | 2 | — | — | 9 | — | — | ||||||||||||||||||
Special termination benefits | 1 | — | — | — | — | — | ||||||||||||||||||
Curtailments | — | — | 2 | (17 | ) | (25 | ) | — | ||||||||||||||||
Settlements | (13 | ) | (6 | ) | (4 | ) | (1 | ) | — | — | ||||||||||||||
Foreign currency exchange rates | — | — | 24 | (40 | ) | 6 | (6 | ) | ||||||||||||||||
Benefit obligation, end of year | $ | 3,637 | $ | 3,547 | $ | 383 | $ | 342 | $ | 761 | $ | 904 | ||||||||||||
ABO, end of year | $ | 3,633 | $ | 3,537 | $ | 367 | $ | 326 | $ | — | $ | — | ||||||||||||
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Amounts recognized in the statement of financial position consist of: | ||||||||||||||||||||||||
Noncurrent asset | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Current liability | (8 | ) | — | (8 | ) | — | (97 | ) | — | |||||||||||||||
Noncurrent liability | (623 | ) | (277 | ) | (215 | ) | (190 | ) | (1,207 | ) | (511 | ) | ||||||||||||
Prepaid benefit cost | — | — | — | — | — | — | ||||||||||||||||||
Intangible asset | — | 60 | — | 4 | — | — | ||||||||||||||||||
Accumulated other comprehensive income | — | 472 | — | 25 | — | — | ||||||||||||||||||
$ | (631 | ) | $ | 255 | $ | (223 | ) | $ | (161 | ) | $ | (1,304 | ) | $ | (511 | ) | ||||||||
U.S. Pension 2006 | Foreign Pension 2006 | Other 2006 | ||||||||||||||||||||||
Amounts recognized in accumulated other comprehensive income (pretax) consist of: | ||||||||||||||||||||||||
Net actuarial loss (gain) | $ 281 | $39 | $215 | |||||||||||||||||||||
Prior service cost (credit) | 33 | 5 | (80) | |||||||||||||||||||||
Transition obligation (asset) | — | (1) | 1 | |||||||||||||||||||||
$314 | $43 | $136 | ||||||||||||||||||||||
The projected benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets at December 31, 2006 and 2005 were as follows:
U.S. Pension Benefits | Foreign Pension Benefits | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Projected benefit obligation, end of year | $ | 3,777 | $ | 2,053 | $ | 320 | $ | 298 | ||||
Fair value of plan assets, end of year | 3,146 | 1,695 | 101 | 80 |
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2006 and 2005 were as follows:
U.S. Pension Benefits | Foreign Pension Benefits | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Projected benefit obligation, end of year | $ | 3,777 | $ | 2,053 | $ | 285 | $ | 258 | ||||
Accumulated benefit obligation, end of year | 3,746 | 1,972 | 273 | 239 | ||||||||
Fair value of plan assets, end of year | 3,146 | 1,695 | 66 | 45 |
NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Change in Benefit Obligation—Millions of dollarsPlan Assets
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Benefit obligation, beginning of year | $ | 2,053 | $ | 1,985 | $ | 329 | $ | 331 | $ | 701 | $ | 676 | ||||||||||||
Service cost | 82 | 84 | 12 | 11 | 21 | 14 | ||||||||||||||||||
Interest cost | 197 | 113 | 18 | 17 | 66 | 37 | ||||||||||||||||||
Plan participants’ contributions | — | — | 1 | 1 | 13 | 9 | ||||||||||||||||||
Actuarial (gain) loss | (101 | ) | 46 | (12 | ) | 22 | (31 | ) | 38 | |||||||||||||||
Gross benefits paid | (235 | ) | (101 | ) | (29 | ) | (27 | ) | (98 | ) | (54 | ) | ||||||||||||
less: federal subsidy on benefits paid | — | — | — | — | 7 | — | ||||||||||||||||||
Plan amendments | — | (74 | ) | — | — | (16 | ) | (20 | ) | |||||||||||||||
Acquisitions/divestitures | 1,818 | — | 21 | — | 641 | — | ||||||||||||||||||
New plans | — | — | — | 3 | — | — | ||||||||||||||||||
Special termination benefits | — | — | — | — | — | — | ||||||||||||||||||
Curtailments | (37 | ) | — | (7 | ) | 4 | — | — | ||||||||||||||||
Settlements | — | — | — | (4 | ) | — | — | |||||||||||||||||
Foreign currency exchange rates | — | — | 27 | (29 | ) | — | 1 | |||||||||||||||||
Benefit obligation, end of year | $ | 3,777 | $ | 2,053 | $ | 360 | $ | 329 | $ | 1,304 | $ | 701 | ||||||||||||
Accumulated benefit obligation, end of year | $ | 3,746 | $ | 1,972 | $ | 338 | $ | 304 | $ | — | $ | — | ||||||||||||
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Fair value of plan assets, beginning of year | $ | 2,212 | $ | 3,062 | $ | 156 | $ | 180 | $ | — | $ | — | ||||||||||||
Actual return on plan assets | 229 | (633 | ) | 17 | (15 | ) | — | — | ||||||||||||||||
Employer contribution | 152 | 94 | 24 | 32 | 70 | 95 | ||||||||||||||||||
Plan participants’ contributions | — | — | 2 | 2 | 18 | 18 | ||||||||||||||||||
Gross benefits paid | (307 | ) | (305 | ) | (30 | ) | (30 | ) | (88 | ) | (113 | ) | ||||||||||||
New plans | — | — | — | 9 | — | — | ||||||||||||||||||
Settlements | (13 | ) | (6 | ) | (4 | ) | (1 | ) | — | |||||||||||||||
Foreign currency exchange rates | — | — | 14 | (21 | ) | — | — | |||||||||||||||||
Fair value of plan assets, end of year | $ | 2,273 | $ | 2,212 | $ | 179 | $ | 156 | $ | — | $ | — | ||||||||||||
Weighted-Average Assumptions Used to DetermineComponents of Net Periodic Benefit Obligation at End of Year:Cost
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||
Discount rate | 5.85% | 5.60% | 4.5% – 11.3% | 4.0% – 11.3% | 5.75% | 5.50% | ||||||
Rate of compensation increase | 4.50%/3.0% | 4.50% | 2.5% – 7.1% | 2.5% – 7.1% | N/A | N/A | ||||||
Health care cost trend rate | ||||||||||||
—Initial rate | N/A | N/A | N/A | N/A | 9.00% | 9.00% | ||||||
—Ultimate rate | N/A | N/A | N/A | N/A | 5.00% | 5.00% | ||||||
—Years to ultimate rate | N/A | N/A | N/A | N/A | 4 | 4 |
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
Service cost | $ | 11 | $ | 14 | $ | 25 | $ | 6 | $ | 7 | $ | 7 | $ | 11 | $ | 21 | $ | 22 | ||||||||||||||||||
Interest cost | 206 | 211 | 215 | 20 | 22 | 19 | 48 | 66 | 73 | |||||||||||||||||||||||||||
Expected return on plan assets | (198 | ) | (240 | ) | (251 | ) | (11 | ) | (11 | ) | (10 | ) | — | — | — | |||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||||||
Actuarial loss | 35 | 12 | 16 | 3 | 1 | 1 | 1 | 1 | 4 | |||||||||||||||||||||||||||
Prior service cost/(credit) | — | — | 5 | 1 | 1 | 1 | (32 | ) | (25 | ) | (13 | ) | ||||||||||||||||||||||||
Special termination benefit | 1 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Curtailment loss/(gain) | 7 | 1 | 14 | — | (7 | ) | — | (95 | ) | (17 | ) | — | ||||||||||||||||||||||||
Settlement loss/(gain) | 4 | 2 | — | (1 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
One-time benefit (credit)/charge for new plan | — | — | — | — | — | (8 | ) | — | — | 1 | ||||||||||||||||||||||||||
Net periodic benefit cost | $ | 66 | $ | — | $ | 24 | $ | 18 | $ | 13 | $ | 10 | $ | (67 | ) | $ | 46 | $ | 87 | |||||||||||||||||
During 2009, we recognized a curtailment loss of $6.6 million in one of our U.S. pension plans related to the announced closure of our manufacturing facility in Evansville, Indiana in mid-2010. Additionally, we recognized a curtailment gain of $89 million in our U.S. postretirement health care plan as a result of the suspension of the annual credit to retiree health savings accounts for the majority of active participants.
During 2008, we recognized a curtailment gain of $7 million related to the conversion of our Mexico defined benefit plan to a defined contribution plan. Additionally, we recognized a curtailment gain of $17 million in our U.S. postretirement health care plan as a result of the reduction in force announced on October 27, 2008. See Note 10 for additional information regarding our restructuring initiatives.
During 2007, we recognized curtailment losses of $14 million related to amendments to cease all benefit accruals in our pension plan for Fort Smith.
Change in Plan Assets—Millions of dollarsF-53
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Fair value of plan assets, beginning of year | $ | 1,695 | $ | 1,672 | $ | 111 | $ | 112 | $ | — | $ | — | ||||||||||||
Actual return on plan assets | 344 | 109 | 9 | 11 | — | — | ||||||||||||||||||
Employer contributions | 56 | 15 | 22 | 25 | 85 | 45 | ||||||||||||||||||
Plan participants’ contributions | — | — | 1 | 1 | 13 | 9 | ||||||||||||||||||
Gross benefits paid | (235 | ) | (101 | ) | (29 | ) | (27 | ) | (98 | ) | (54 | ) | ||||||||||||
Acquisitions/divestitures | 1,286 | — | 14 | — | — | — | ||||||||||||||||||
New plans | — | — | — | 1 | — | — | ||||||||||||||||||
Settlements | — | — | — | (4 | ) | — | — | |||||||||||||||||
Foreign currency exchange rates | — | — | 9 | (8 | ) | — | — | |||||||||||||||||
Fair value of plan assets, end of year | $ | 3,146 | $ | 1,695 | $ | 137 | $ | 111 | $ | — | $ | — | ||||||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
U.S. PensionOther Changes in Plan Asset AllocationAssets and Benefit Obligations Recognized in Other Comprehensive Income (Pre-Tax) in 2009
Target | Percentage of Plan Assets, End of Year | ||||||||
Asset Category | 2007 | 2006 | 2005 | ||||||
Equity securities | 66 | % | 70 | % | 71 | % | |||
Debt securities | 34 | % | 30 | % | 29 | % | |||
Other | — | — | — | ||||||
Total | 100 | % | 100 | % | 100 | % | |||
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||
Current year actuarial loss/(gain) | $ | 157 | $ | 15 | $ | (29 | ) | |||||
Actuarial (loss)/gain recognized during the year | (39 | ) | (1 | ) | (1 | ) | ||||||
Current year prior service cost/(credit) | — | 1 | (113 | ) | ||||||||
Prior service (cost)/credit recognized during the year | (7 | ) | (1 | ) | 127 | |||||||
Total recognized in other comprehensive income (pre-tax) | $ | 111 | $ | 14 | $ | (16 | ) | |||||
Total recognized in net periodic benefit costs and other comprehensive income (pre-tax) | $ | 177 | $ | 32 | $ | (83 | ) | |||||
Estimated Pre-Tax Amounts that will be amortized from Accumulated Other Comprehensive Income into Net Periodic Pension Cost in 2010
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||
Actuarial loss | $ | 30 | $ | 2 | $ | — | |||||
Prior service (credit)/cost | (3 | ) | 1 | (38 | ) | ||||||
Total | $ | 27 | $ | 3 | $ | (38 | ) | ||||
Assumptions
Weighted-average assumptions used to determine benefit obligation at end of year
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||
Discount rate | 5.75 | % | 6.05 | % | 2.5-11.9 | % | 1.5-13.2 | % | 5.30 | % | 5.95 | % | ||||||
Rate of compensation increase | 4.50 | % | 4.50 | % | 2.0-7.1 | % | 2.0-7.1 | % | — | — | ||||||||
Health care cost trend rate | ||||||||||||||||||
Initial rate | — | — | — | — | 8.00 | % | 8.00 | % | ||||||||||
Ultimate rate | — | — | — | — | 5.00 | % | 5.00 | % | ||||||||||
Years to ultimate | — | — | — | — | 5 | 6 |
Weighted-average assumptions used to determine net periodic cost
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
Discount rate | 6.05 | % | 6.15 | % | 5.85 | % | 1.5-13.2 | % | 3.5-11.3 | % | 3.0-11.3 | % | 5.10/5.95/6.20 | % | 6.05/6.55 | % | 5.75/6.15 | % | |||||||||
Expected long-term rate of return on plan assets | 7.75 | % | 8.25 | % | 8.50 | % | 4.0-11.3 | % | 4.5-11.3 | % | 4.5-11.3 | % | — | — | — | ||||||||||||
Rate of compensation increase | 4.50 | % | 4.50/3.00 | % | 4.50/3.00 | % | 2.0-7.1 | % | 2.0-7.1 | % | 2.0-7.1 | % | — | — | — | ||||||||||||
Health care cost trend rate | |||||||||||||||||||||||||||
Initial rate | — | — | — | — | — | — | 8.00 | % | 8.50 | % | 9.00 | % | |||||||||||||||
Ultimate rate | — | — | — | — | — | — | 5.00 | % | 5.00 | % | 5.00 | % | |||||||||||||||
Years to ultimate | — | — | — | — | — | — | 6 | 7 | 4 |
F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Expected return on plan assets
In the U.S., the expected rate of return on plan assets was determined by using the historical asset returns for publicly traded equity and fixed income securities tracked from 19261927 through 20062009 and the historical returns for private equity. The historical equity returns were adjusted downward to reflect future expectations. This adjustment was based on published academic research. The expected returns are weighted by the targeted asset allocations. The resulting weighted-average return was rounded to the nearest quarter of one percent.
Foreign Pension Plan Asset Allocation
Target | Percentage of Plan Assets, End of Year | ||||||||
Asset Category | 2007 | 2006 | 2005 | ||||||
Equity securities | 42 | % | 44 | % | 54 | % | |||
Debt securities | 58 | % | 54 | % | 44 | % | |||
Other | — | 2 | % | 2 | % | ||||
Total | 100 | % | 100 | % | 100 | % | |||
For foreign pension plans, the expected rate of return on plan assets was determined by observing historical returns in the local fixed income and equity markets and computing the weighted-averageweighted average returns with the weights being the asset allocation of each plan.
Components of Net Periodic Benefit Cost—Millions of dollars
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||
Service cost | $ | 82 | $ | 84 | $ | 88 | $ | 12 | $ | 11 | $ | 12 | $ | 21 | $ | 14 | $ | 12 | ||||||||||||||||||
Interest cost | 197 | 113 | 110 | 18 | 17 | 16 | 66 | 37 | 37 | |||||||||||||||||||||||||||
Expected return on plan assets | (224 | ) | (154 | ) | (160 | ) | (8 | ) | (5 | ) | (7 | ) | — | — | — | |||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||||||
Actuarial (gain) loss | 26 | 14 | 1 | 1 | — | 1 | 13 | 15 | 11 | |||||||||||||||||||||||||||
Prior service (credit) cost | 9 | 9 | 19 | 1 | — | — | (8 | ) | (7 | ) | (6 | ) | ||||||||||||||||||||||||
Transition (asset) obligation | — | — | — | 1 | 1 | 1 | — | — | — | |||||||||||||||||||||||||||
Special termination benefit charges | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Curtailment (gain) loss | 6 | — | — | (5 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Settlement (gain) loss | — | — | 10 | — | 4 | — | — | — | — | |||||||||||||||||||||||||||
Net periodic benefit cost | $ | 96 | $ | 66 | $ | 68 | $ | 20 | $ | 28 | $ | 23 | $ | 92 | $ | 59 | $ | 54 | ||||||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Weighted-Average Assumptions Used to Determine Net Periodic Cost:
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||
Discount rate | 5.6%/ 6.05% | 5.80% | 6.0% | 4.0% – 11.3% | 4.5% – 11.3% | 5.0% – 11.3% | 5.5%/6.0% | 5.5% | 6.0% | |||||||||
Expected long-term rate of return on plan assets | 8.50% | 8.75% | 8.75% | 4.5% – 11.3% | 4.5% – 11.3% | 5.0% – 11.3% | N/A | N/A | N/A | |||||||||
Rate of compensation increase | 4.5% | 4.5% | 4.5% | 2.5% – 7.1% | 2.5% – 8.15% | 2.5% – 8.15% | N/A | N/A | N/A | |||||||||
Health care cost trend rate | ||||||||||||||||||
—Initial rate | N/A | N/A | N/A | N/A | N/A | N/A | 9.0% | 10.0% | 11.0% | |||||||||
—Ultimate rate | N/A | N/A | N/A | N/A | N/A | N/A | 5.0% | 5.0% | 5.0% | |||||||||
—Years to ultimate rate | N/A | N/A | N/A | N/A | N/A | N/A | 4 | 4 | 3 |
Additional Information
Estimated Pretax Amounts that will be Amortized from Accumulated Other Comprehensive Income into Net Periodic Pension Cost in 2007—Millions of dollars
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||
Actuarial (gain) loss | $ | 17 | $ | 2 | $ | 7 | ||||
Prior service (credit) cost | 6 | 1 | (9 | ) | ||||||
Transition (asset) obligation | — | — | — | |||||||
Total | $ | 23 | $ | 3 | $ | (2 | ) | |||
Estimated impact of one percentage pointpercentage-point change in assumed health care cost trend rate
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
Millions of dollars | One Percentage Point Increase | One Percentage Point Decrease | |||||
Effect on total of service and interest cost | $ | 6 | $ | (5 | ) | ||
Effect on postretirement benefit obligation | 95 | (85 | ) |
Millions of dollars | One Percentage Point Increase | One Percentage Point Decrease | |||||
Effect on total of service and interest cost | $ | 3 | $ | (3 | ) | ||
Effect on postretirement benefit obligations | 35 | (31 | ) |
Cash Flows
Funding Policy
The Company’sOur funding policy is to contribute to itsour 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 Companywe may determine to be appropriate. In certain countries other than the U.S., the funding of pension plans is not common practice. The Company hasWe have several unfunded non-U.S. pension plans. The Company paysWe pay for retiree medical benefits as they are incurred.
Expected Employer Contributions to Funded Plans—Millions of dollarsPlans
U.S. Pension Benefits | Foreign Pension Benefits | |||||
2007 | $ | 189 | $ | 6 |
Millions of dollars | U.S. Pension Benefits(1) | Foreign Pension Benefits(2) | ||||
2010 | $ | 35 | $ | 6 |
(1) | Represents discretionary contributions to our funded U.S. pension plans. |
(2) | Represents required contributions to our funded foreign pension plans. |
Contributions to both our U.S. and foreign pension plans can be made in cash or company stock.
Expected Benefit Payments
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||
Gross | Expected Federal Subsidy | ||||||||||||
2010 | $ | 307 | $ | 25 | $ | 70 | $ | (2 | ) | ||||
2011 | 262 | 19 | 75 | (1 | ) | ||||||||
2012 | 260 | 23 | 75 | (2 | ) | ||||||||
2013 | 260 | 21 | 75 | (2 | ) | ||||||||
2014 | 256 | 25 | 72 | (2 | ) | ||||||||
2015-2019 | 1,285 | 137 | 315 | (11 | ) |
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The $189 million expectedPlan Assets
Our overall investment strategy is to be contributed to the U.S. pension plans during 2007 represents expected voluntary contributions to its funded U.S. pension plans. The Company expects no minimum required contributions to its funded U.S. pension plans in 2007.
The $6 million expected to be contributed to the foreign pension plans during 2007 represents contributions to the Company’s funded foreign pension plans.
Theachieve an appropriate mix of investments for long-term growth and for near-term benefit payments from the majoritywith a wide diversification of U.S. pension plans come from a trust, which the Company funds from time to time. Benefit payments fromasset types, fund strategies, and investment fund managers. The target allocation for plan assets is generally 60% equity and 40% fixed income, with exceptions for certain foreign pension plans also come from trusts, whichplans. Of the Company funds from timetarget allocation for equity securities, approximately 50% is allocated to time.U.S. large-cap, 30% to international equity, 13% to U.S. mid and small-cap companies and 7% in venture capital). The target allocation for fixed income is allocated evenly with 50% to corporate bonds and 50% to U.S. treasury and other government securities. The fixed income securities duration is intended to match that of our U.S. pension liabilities.
The fair values of our pension plan assets at December 31, 2009, by asset category are as follows:
Asset Category—Millions of dollars | December 31, 2009 | |||||||||||
Quoted prices (Level 1) | Other significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Cash and cash equivalents | $ | 105 | $ | — | $ | — | $ | 105 | ||||
Equity securities: | ||||||||||||
U.S. companies | 187 | — | — | 187 | ||||||||
International companies | 45 | 216 | — | 261 | ||||||||
Mutual funds(a) | 104 | — | — | 104 | ||||||||
Common and collective funds(b) | — | 712 | — | 712 | ||||||||
U.S. government and government agency securities | — | 333 | — | 333 | ||||||||
U.S. corporate bonds and notes | — | 404 | — | 404 | ||||||||
International government and government agency securities | — | 51 | — | 51 | ||||||||
International corporate bonds and notes | — | 110 | — | 110 | ||||||||
Limited partnerships(c) | — | — | 153 | 153 | ||||||||
Real estate | — | 7 | — | 7 | ||||||||
All other investments | — | 25 | — | 25 | ||||||||
$ | 441 | $ | 1,858 | $ | 153 | $ | 2,452 | |||||
(a) | The fund primarily invests in a diversified portfolio of equity securities issued by non-U.S. companies. |
(b) | Eighty percent of the common and collective funds are invested in an equity index fund which tracks the S&P 500. Twenty percent of the Plan’s common and collective fund investments are invested in international equity securities. |
(c) | Primarily invested in diversified fund of funds and generally focused on buyouts, venture capital and private equity investments. |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Millions of dollars | Limited Partnerships | |||
Balance, December 31, 2008 | $ | 159 | ||
Realized losses | (1 | ) | ||
Unrealized losses | (16 | ) | ||
Purchases, sales, issuances and settlements (net) | 11 | |||
Balance, December 31, 2009 | $ | 153 | ||
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Expected Benefit Payments—MillionsAdditional Information
The PBO and fair value of dollarsplan assets for pension plans with a PBO in excess of plan assets at December 31, 2009 and 2008 were as follows:
U.S. Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | |||||||||||
Gross | Expected Federal Subsidy | ||||||||||||
2007 | $ | 291 | $ | 18 | $ | 108 | $ | (10 | ) | ||||
2008 | 256 | 18 | 115 | (10 | ) | ||||||||
2009 | 263 | 19 | 119 | (11 | ) | ||||||||
2010 | 262 | 20 | 120 | (12 | ) | ||||||||
2011 | 270 | 21 | 121 | (12 | ) | ||||||||
2012-2016 | 1,343 | 141 | 582 | (67 | ) |
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | ||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
PBO | $ | 3,637 | $ | 3,547 | $ | 307 | $ | 275 | ||||
Fair value of plan assets | 2,273 | 2,212 | 96 | 85 |
The PBO, ABO and fair value of plan assets for pension plans with an ABO in excess of plan assets at December 31, 2009 and 2008 were as follows:
Millions of dollars | U.S. Pension Benefits | Foreign Pension Benefits | ||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
PBO | $ | 3,637 | $ | 3,547 | $ | 299 | $ | 213 | ||||
ABO | 3,633 | 3,537 | 288 | 204 | ||||||||
Fair value of plan assets | 2,273 | 2,212 | 89 | 27 |
(17) BUSINESS(13) OPERATING SEGMENT INFORMATION
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.performance.
The Company identifiesWe identify such 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 income (expense), interest expense, income taxes, minority interests and restructuring.restructuring costs. Total assets by segment are those assets directly associated with the respective operating activities. 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 restructuring 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.
Sales activity with Sears, a North American major home appliance retailer, represented 14%10%, 16%11% and 17%12% of consolidated net sales in 2006, 20052009, 2008, and 2004,2007, respectively. Related receivables were 18%11% and 21%13% of consolidated trade receivables as of December 31, 20062009 and 2005.2008, respectively.
The Company conductsWe conduct business in two countries that individually comprised over 10% of consolidated net sales and/or total assets within the last three years. The United States represented 63%48%, 56% and 56%48%, 53% of net sales for 2006, 20052009, 2008, and 2004,2007, respectively, while Brazil totaled 9%15%, 8%13%, 12% for 2009, 2008, and 6% for 2006, 2005 and 2004,2007, respectively. As a percentage of total assets, the United States accounted for 71%53%, and 42%51% at the end of 20062009 and 2005.2008, respectively. Brazil accounted for 10%12% and 15%10% of total assets at the end of 20062009 and 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
2008, respectively.
As described above, the Company’sour chief operating decision maker reviews each operating segment’s performance based upon operating income excluding restructuring.which excludes restructuring costs. These chargesrestructuring costs are included in operating profit on a consolidated basis and included in the Other/Eliminations column in the tables below. For 2006,2009, the operating segments recorded total restructuring chargescosts (See Note 10) as follows: North America—$1835 million, Europe—$2374 million, Latin America—$75 million, Asia—$7 million and Corporate—$0 million, for a total of $55 million. For 2005, the operating segments recorded total restructuring charges as follows: North America—$4 million, Europe—$36 million, Latin America—$8 million, Asia—$710 million and Corporate—$2 million, for a total of $57$126 million. For 2004,2008, the operating segments recorded total restructuring (See Note 13)costs as follows: North
F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
America—$256 million, Europe—$778 million, Latin America—$67 million, Asia—$02 million and Corporate—$06 million for a total of $15$149 million. For 2007, the operating segments recorded total restructuring costs as follows: North America—$13 million, Europe—$28 million, Latin America—$20 million, for a total of $61 million.
As disclosed in Note 1, during the March 2009 quarter, we changed our method of depreciation prospectively for substantially all long-lived production machinery and equipment to a modified units of production depreciation method. Under this method, we record depreciation based on units produced, unless units produced drop below a minimum threshold at which point depreciation is then recorded using the straight-line method. Prior to 2009, all machinery and equipment was depreciated using the straight-line method. We believe depreciating machinery and equipment based on units of production is a preferable method as it best matches the usage of assets with the revenues derived from those assets. As a result, our depreciation expense by operating segment decreased for 2009 as follows: North America—$46 million, Europe—$25 million Latin America—$11 million and Asia—$1 million, for a total of $83 million. Net of amounts capitalized into ending inventories, operating profit increased for 2009 as follows: North America—$41 million, Europe—$19 million, Latin America—$11 million and Asia—$1, for a total of $72 million.
GEOGRAPHIC SEGMENTS | ||||||||||||||||||||||||||||||||||||||||||
Millions of dollars | North America | Europe | Latin America | Asia | Other/ Eliminations | Total Whirlpool | OPERATING SEGMENTS | |||||||||||||||||||||||||||||||||||
Millions of dollars | North America | Europe | Latin America | Asia | Other/ Eliminations | Total Whirlpool | ||||||||||||||||||||||||||||||||||||
2006 | $ | 11,953 | $ | 3,383 | $ | 2,430 | $ | 457 | $ | (143 | ) | $ | 18,080 | |||||||||||||||||||||||||||||
2005 | $ | 8,913 | $ | 3,160 | $ | 1,962 | $ | 422 | $ | (140 | ) | $ | 14,317 | |||||||||||||||||||||||||||||
2004 | $ | 8,254 | $ | 3,062 | $ | 1,674 | $ | 382 | $ | (152 | ) | $ | 13,220 | |||||||||||||||||||||||||||||
2009 | $ | 9,592 | $ | 3,338 | $ | 3,705 | $ | 654 | $ | (190 | ) | $ | 17,099 | |||||||||||||||||||||||||||||
2008 | 10,781 | 4,016 | 3,704 | 593 | (187 | ) | 18,907 | |||||||||||||||||||||||||||||||||||
2007 | 11,735 | 3,848 | 3,437 | 557 | (169 | ) | 19,408 | |||||||||||||||||||||||||||||||||||
Intersegment sales | ||||||||||||||||||||||||||||||||||||||||||
2006 | $ | 64 | $ | 494 | $ | 141 | $ | 231 | $ | (930 | ) | $ | — | |||||||||||||||||||||||||||||
2005 | $ | 47 | $ | 489 | $ | 136 | $ | 198 | $ | (870 | ) | $ | — | |||||||||||||||||||||||||||||
2004 | $ | 46 | $ | 458 | $ | 148 | $ | 163 | $ | (815 | ) | $ | — | |||||||||||||||||||||||||||||
2009 | $ | 142 | $ | 339 | $ | 237 | $ | 169 | $ | (887 | ) | $ | — | |||||||||||||||||||||||||||||
2008 | 148 | 336 | 219 | 161 | (864 | ) | — | |||||||||||||||||||||||||||||||||||
2007 | 171 | 504 | 169 | 220 | (1,064 | ) | — | |||||||||||||||||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||||||||||||||||||
2006 | $ | 332 | $ | 105 | $ | 72 | $ | 21 | $ | 20 | $ | 550 | ||||||||||||||||||||||||||||||
2005 | $ | 211 | $ | 104 | $ | 99 | $ | 16 | $ | 12 | $ | 442 | ||||||||||||||||||||||||||||||
2004 | $ | 214 | $ | 104 | $ | 95 | $ | 16 | $ | 16 | $ | 445 | ||||||||||||||||||||||||||||||
2009 | $ | 280 | $ | 107 | $ | 77 | $ | 18 | $ | 43 | $ | 525 | ||||||||||||||||||||||||||||||
2008 | 329 | 131 | 96 | 22 | 19 | 597 | ||||||||||||||||||||||||||||||||||||
2007 | 352 | 115 | 84 | 22 | 20 | 593 | ||||||||||||||||||||||||||||||||||||
Operating profit (loss) | ||||||||||||||||||||||||||||||||||||||||||
2006 | $ | 753 | $ | 202 | $ | 218 | $ | (3 | ) | $ | (347 | ) | $ | 823 | ||||||||||||||||||||||||||||
2005 | $ | 808 | $ | 164 | $ | 127 | $ | (23 | ) | $ | (284 | ) | $ | 792 | ||||||||||||||||||||||||||||
2004 | $ | 778 | $ | 166 | $ | 65 | $ | (25 | ) | $ | (226 | ) | $ | 758 | ||||||||||||||||||||||||||||
2009 | $ | 560 | $ | 21 | $ | 363 | $ | 30 | $ | (286 | ) | $ | 688 | |||||||||||||||||||||||||||||
2008 | 199 | 149 | 478 | 10 | (287 | ) | 549 | |||||||||||||||||||||||||||||||||||
2007 | 646 | 246 | 438 | (6 | ) | (261 | ) | 1,063 | ||||||||||||||||||||||||||||||||||
Total assets | ||||||||||||||||||||||||||||||||||||||||||
2006 | $ | 8,536 | $ | 2,965 | $ | 1,982 | $ | 603 | $ | (208 | ) | $ | 13,878 | |||||||||||||||||||||||||||||
2005 | $ | 3,798 | $ | 2,650 | $ | 1,748 | $ | 530 | $ | (425 | ) | $ | 8,301 | |||||||||||||||||||||||||||||
2004 | $ | 3,465 | $ | 2,976 | $ | 1,737 | $ | 534 | $ | (531 | ) | $ | 8,181 | |||||||||||||||||||||||||||||
2009 | $ | 8,123 | $ | 3,216 | $ | 2,887 | $ | 690 | $ | 178 | $ | 15,094 | ||||||||||||||||||||||||||||||
2008 | 8,038 | 3,592 | 2,094 | 639 | (831 | ) | 13,532 | |||||||||||||||||||||||||||||||||||
2007 | 8,107 | 3,394 | 2,615 | 689 | (796 | ) | 14,009 | |||||||||||||||||||||||||||||||||||
Capital expenditures | ||||||||||||||||||||||||||||||||||||||||||
2006 | $ | 320 | $ | 129 | $ | 92 | $ | 23 | $ | 12 | $ | 576 | ||||||||||||||||||||||||||||||
2005 | $ | 280 | $ | 104 | $ | 87 | $ | 18 | $ | 5 | $ | 494 | ||||||||||||||||||||||||||||||
2004 | $ | 261 | $ | 129 | $ | 91 | $ | 18 | $ | 12 | $ | 511 | ||||||||||||||||||||||||||||||
2009 | $ | 276 | $ | 116 | $ | 78 | $ | 13 | $ | 58 | $ | 541 | ||||||||||||||||||||||||||||||
2008 | 253 | 156 | 100 | 21 | 17 | 547 | ||||||||||||||||||||||||||||||||||||
2007 | 251 | 144 | 110 | 20 | 11 | 536 |
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(18)(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended | ||||||||||||
Millions of dollars, except per share data | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||
2006: | ||||||||||||
Net sales | $ | 4,954 | $ | 4,843 | $ | 4,747 | $ | 3,536 | ||||
Cost of products sold | 4,259 | 4,139 | 4,043 | 2,979 | ||||||||
Net earnings | 109 | 117 | 91 | 118 | ||||||||
Per share of common stock: | ||||||||||||
Basic net earnings | $ | 1.39 | $ | 1.49 | $ | 1.16 | $ | 1.73 | ||||
Diluted net earnings | $ | 1.37 | $ | 1.47 | $ | 1.14 | $ | 1.70 | ||||
Dividends | $ | 0.43 | $ | 0.43 | $ | 0.43 | $ | 0.43 |
Millions of dollars, except per share data | Three months ended | |||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||
2009: | ||||||||||||
Net sales | $ | 4,864 | $ | 4,497 | $ | 4,169 | $ | 3,569 | ||||
Cost of products sold | 4,176 | 3,877 | 3,615 | 3,045 | ||||||||
Net earnings available to Whirlpool common stockholders | 95 | 87 | 78 | 68 | ||||||||
Per share of common stock: | ||||||||||||
Basic net earnings | 1.26 | 1.17 | 1.05 | 0.92 | ||||||||
Diluted net earnings | 1.24 | 1.15 | 1.04 | 0.91 | ||||||||
Dividends | 0.43 | 0.43 | 0.43 | 0.43 | ||||||||
Millions of dollars, except per share data | Three months ended | |||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||
2008: | ||||||||||||
Net sales | $ | 4,315 | $ | 4,902 | $ | 5,076 | $ | 4,614 | ||||
Cost of products sold | 3,842 | 4,217 | 4,324 | 4,000 | ||||||||
Net earnings available to Whirlpool common stockholders | 44 | 163 | 117 | 94 | ||||||||
Per share of common stock: | ||||||||||||
Basic net earnings | 0.60 | 2.18 | 1.55 | 1.23 | ||||||||
Diluted net earnings | 0.60 | 2.15 | 1.53 | 1.22 | ||||||||
Dividends | 0.43 | 0.43 | 0.43 | 0.43 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Net salesAs described in Note 1, during the March 2009 quarter, we changed our method of depreciation prospectively for substantially all long-lived production machinery and costequipment to a modified units of products sold for the three months ended June 30, 2006 have been changed from the amounts originally filed in the Quarterly Report on Form 10-Q to account for a reclassification between discontinued operations and continuing operations. Net sales and cost of products sold increased by $13 million and $9 million, respectively, from the amounts originally reported. There was no impact on net earnings asproduction depreciation method. As a result of this change in method, net of amounts capitalized into ending inventories, gross margin increased by $8, $24, $21, and $19 for the reclassification.March, June, September and December 2009 quarters, respectively.
Three Months Ended | ||||||||||||
Millions of dollars, except per share data | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||
2005: | ||||||||||||
Net sales | $ | 3,954 | $ | 3,599 | $ | 3,556 | $ | 3,208 | ||||
Cost of products sold | 3,317 | 3,046 | 3,036 | 2,724 | ||||||||
Net earnings | 126 | 114 | 96 | 86 | ||||||||
Per share of common stock: | ||||||||||||
Basic net earnings | $ | 1.87 | $ | 1.70 | $ | 1.44 | $ | 1.28 | ||||
Diluted net earnings | $ | 1.83 | $ | 1.66 | $ | 1.42 | $ | 1.26 | ||||
Dividends | $ | 0.43 | $ | 0.43 | $ | 0.43 | $ | 0.43 |
(19) SUBSEQUENT EVENTSThe quarterly earnings per share amounts will not necessarily add to the earnings per share computed for the year due to the method used in calculating per share data.
On January 31, 2007, the Company sold the Hoover floor-care business to Techtronic Industries Co. Ltd. (TTI) for approximately $107 million in cash following the expiration of a regulatory review process. $15 million in cash was received in December 2006 in conjunction with the signing of a definitive agreement to sell Hoover, and the remaining $92 million was received at closing on January 31, 2007. The difference between the proceeds and the net book value of Hoover assets was recorded as an adjustment to the goodwill amount recorded in connection with the acquisition of Maytag and, accordingly, there was no gain or loss related to the sale. The results of operations, financial position and cash flows related to the Hoover business have been separately reported as discontinued operations.
On February 1, 2007, Maytag Corporation announced a voluntary recall of approximately 2.3 millionMaytag brand andJenn-Air brand dishwashers. The Company estimates the cost of the recall will range from $40 million to $70 million, and a reserve has been recorded at the lower end of the range as an adjustment to purchase accounting.
On February 17, 2007, the Company entered into a definitive agreement to sell the Jade commercial and residential products businesses to Middleby Corporation. The sale is expected to be completed in the second quarter of 2007.F-59
ELEVEN-YEAR CONSOLIDATED STATISTICAL REVIEWFIVE-YEAR SELECTED FINANCIAL DATA
(Millions of dollars except share and employee data) | 2006 | 2005 | 2004 | |||||||||
CONSOLIDATED OPERATIONS | ||||||||||||
Net sales | $ | 18,080 | $ | 14,317 | $ | 13,220 | ||||||
Operating profit(1) | $ | 823 | $ | 792 | $ | 758 | ||||||
Earnings (loss) from continuing operations before income taxes and other items | $ | 619 | $ | 597 | $ | 616 | ||||||
Earnings (loss) from continuing operations | $ | 486 | $ | 422 | $ | 406 | ||||||
Earnings (loss) from discontinued operations(2) | $ | (53 | ) | $ | — | $ | — | |||||
Net earnings (loss)(3) | $ | 433 | $ | 422 | $ | 406 | ||||||
Net capital expenditures | $ | 576 | $ | 494 | $ | 511 | ||||||
Depreciation | $ | 520 | $ | 441 | $ | 443 | ||||||
Dividends | $ | 130 | $ | 116 | $ | 116 | ||||||
CONSOLIDATED FINANCIAL POSITION | ||||||||||||
Current assets | $ | 6,476 | $ | 4,763 | $ | 4,514 | ||||||
Current liabilities | $ | 6,002 | $ | 4,354 | $ | 3,985 | ||||||
Working capital | $ | 474 | $ | 409 | $ | 529 | ||||||
Property, plant and equipment-net | $ | 3,157 | $ | 2,511 | $ | 2,583 | ||||||
Total assets | $ | 13,878 | $ | 8,301 | $ | 8,181 | ||||||
Long-term debt | $ | 1,798 | $ | 745 | $ | 1,160 | ||||||
Stockholders’ equity | $ | 3,283 | $ | 1,745 | $ | 1,606 | ||||||
PER SHARE DATA | ||||||||||||
Basic earnings (loss) from continuing operations before accounting change | $ | 6.47 | $ | 6.30 | $ | 6.02 | ||||||
Diluted earnings (loss) from continuing operations before accounting change | $ | 6.35 | $ | 6.19 | $ | 5.90 | ||||||
Diluted net earnings (loss)(3) | $ | 5.67 | $ | 6.19 | $ | 5.90 | ||||||
Dividends | $ | 1.72 | $ | 1.72 | $ | 1.72 | ||||||
Book value | $ | 42.93 | $ | 25.54 | $ | 23.31 | ||||||
Closing Stock Price—NYSE | $ | 83.02 | $ | 83.76 | $ | 69.21 | ||||||
KEY RATIOS | ||||||||||||
Operating profit margin(4) | 4.6 | % | 5.5 | % | 5.7 | % | ||||||
Pre-tax margin(5) | 3.4 | % | 4.2 | % | 4.7 | % | ||||||
Net margin(6) | 2.7 | % | 2.9 | % | 3.1 | % | ||||||
Return on average stockholders’ equity(7) | 15.7 | % | 24.6 | % | 30.3 | % | ||||||
Return on average total assets(8) | 3.9 | % | 5.1 | % | 5.2 | % | ||||||
Current assets to current liabilities | 1.1 | 1.1 | 1.1 | |||||||||
Total debt-appliance business as a percent of invested capital(9) | 41.2 | % | 40.4 | % | 45.7 | % | ||||||
Price earnings ratio | 14.6 | 13.5 | 11.7 | |||||||||
Interest coverage(10) | 3.8 | 5.6 | 5.8 | |||||||||
OTHER DATA | ||||||||||||
Number of common shares outstanding (in thousands): | ||||||||||||
Average—on a diluted basis | 76,471 | 68,272 | 68,902 | |||||||||
Year-end | 78,484 | 67,880 | 66,604 | |||||||||
Number of stockholders (year-end) | 15,311 | 7,442 | 7,826 | |||||||||
Number of employees (year-end) | 73,416 | 65,682 | 68,125 | |||||||||
Total return to shareholders (five year annualized)(11) | 4.9 | % | 14.5 | % | 3.7 | % |
(Millions of dollars, except share and employee data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
CONSOLIDATED OPERATIONS | ||||||||||||||||||||
Net sales | $ | 17,099 | $ | 18,907 | $ | 19,408 | $ | 18,080 | $ | 14,317 | ||||||||||
Operating profit(1) | 688 | 549 | 1,063 | 823 | 792 | |||||||||||||||
Earnings from continuing operations before income taxes and other items | 294 | 246 | 804 | 619 | 597 | |||||||||||||||
Earnings from continuing operations | 354 | 418 | 647 | 486 | 422 | |||||||||||||||
Loss from discontinued operations(2) | — | — | (7 | ) | (53 | ) | — | |||||||||||||
Net earnings available to Whirlpool common stockholders | 328 | 418 | 640 | 433 | 422 | |||||||||||||||
Net capital expenditures | 541 | 547 | 536 | 576 | 494 | |||||||||||||||
Depreciation(3) | 497 | 569 | 562 | 520 | 440 | |||||||||||||||
Dividends | 128 | 128 | 134 | 130 | 116 | |||||||||||||||
CONSOLIDATED FINANCIAL POSITION | ||||||||||||||||||||
Current assets | $ | 7,025 | $ | 6,044 | $ | 6,555 | $ | 6,517 | $ | 4,763 | ||||||||||
Current liabilities | 5,941 | 5,563 | 5,893 | 6,043 | 4,354 | |||||||||||||||
Working capital | 1,084 | 481 | 662 | 474 | 409 | |||||||||||||||
Property, plant and equipment-net | 3,117 | 2,985 | 3,212 | 3,157 | 2,511 | |||||||||||||||
Total assets | 15,094 | 13,532 | 14,009 | 13,759 | 8,301 | |||||||||||||||
Long-term debt | 2,502 | 2,002 | 1,668 | 1,798 | 745 | |||||||||||||||
Whirlpool stockholders’ equity | 3,664 | 3,006 | 3,911 | 3,283 | 1,745 | |||||||||||||||
PER SHARE DATA | ||||||||||||||||||||
Basic earnings from continuing operations before accounting change | $ | 4.39 | $ | 5.57 | $ | 8.24 | $ | 6.47 | $ | 6.30 | ||||||||||
Diluted earnings from continuing operations before accounting change | 4.34 | 5.50 | 8.10 | 6.35 | 6.19 | |||||||||||||||
Diluted net earnings | 4.34 | 5.50 | 8.01 | 5.67 | 6.19 | |||||||||||||||
Dividends | 1.72 | 1.72 | 1.72 | 1.72 | 1.72 | |||||||||||||||
Book value | 48.48 | 39.54 | 48.96 | 42.93 | 25.54 | |||||||||||||||
Closing Stock Price—NYSE | 80.66 | 41.35 | 81.63 | 83.02 | 83.76 | |||||||||||||||
KEY RATIOS | ||||||||||||||||||||
Operating profit margin | 4.0 | % | 2.9 | % | 5.5 | % | 4.6 | % | 5.5 | % | ||||||||||
Pre-tax margin(4) | 1.7 | % | 1.3 | % | 4.1 | % | 3.4 | % | 4.2 | % | ||||||||||
Net margin(5) | 1.9 | % | 2.2 | % | 3.3 | % | 2.7 | % | 2.9 | % | ||||||||||
Return on average Whirlpool stockholders’ equity(6) | 9.8 | % | 10.7 | % | 18.1 | % | 15.7 | % | 24.6 | % | ||||||||||
Return on average total assets(7) | 2.3 | % | 3.0 | % | 4.6 | % | 3.9 | % | 5.1 | % | ||||||||||
Current assets to current liabilities | 1.2 | 1.1 | 1.1 | 1.1 | 1.1 | |||||||||||||||
Total debt-appliance business as a percent of invested capital(8) | 43.6 | % | 46.0 | % | 34.5 | % | 41.2 | % | 40.4 | % | ||||||||||
Price earnings ratio | 18.6 | 7.5 | 10.2 | 14.6 | 13.5 | |||||||||||||||
OTHER DATA | ||||||||||||||||||||
Number of common shares outstanding (in thousands): | ||||||||||||||||||||
Average—on a diluted basis | 75,584 | 76,019 | 79,880 | 76,471 | 68,272 | |||||||||||||||
Year-end | 74,704 | 73,536 | 75,835 | 78,484 | 67,880 | |||||||||||||||
Number of stockholders (year-end) | 14,930 | 14,515 | 15,011 | 15,311 | 7,442 | |||||||||||||||
Number of employees (year-end) | 66,884 | 69,612 | 73,682 | 73,416 | 65,682 | |||||||||||||||
Total return to shareholders (five year annualized)(9) | 5.8 | % | (8.5 | )% | 11.8 | % | 4.9 | % | 14.5 | % |
(1) | Restructuring charges were $126 million in 2009, $149 million in 2008, $61 million in 2007, $55 million in 2006 and $57 million in |
(2) |
(3) |
(4) |
2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | 1996 | |||||||||||||||||||||||||||
$ | 12,176 | $ | 11,016 | $ | 10,343 | $ | 10,325 | $ | 10,511 | $ | 10,323 | $ | 8,617 | $ | 8,523 | |||||||||||||||||||
$ | 830 | $ | 692 | $ | 306 | $ | 807 | $ | 875 | $ | 688 | $ | 11 | $ | 278 | |||||||||||||||||||
$ | 652 | $ | 495 | $ | 93 | $ | 577 | $ | 514 | $ | 564 | $ | (171 | ) | $ | 100 | ||||||||||||||||||
$ | 414 | $ | 262 | $ | 34 | $ | 367 | $ | 347 | $ | 310 | $ | (46 | ) | $ | 141 | ||||||||||||||||||
$ | — | $ | (43 | ) | $ | (21 | ) | $ | — | $ | — | $ | 15 | $ | 31 | $ | 15 | |||||||||||||||||
$ | 414 | $ | (394 | ) | $ | 21 | $ | 367 | $ | 347 | $ | 325 | $ | (15 | ) | $ | 156 | |||||||||||||||||
$ | 423 | $ | 430 | $ | 378 | $ | 375 | $ | 437 | $ | 542 | $ | 378 | $ | 336 | |||||||||||||||||||
$ | 423 | $ | 391 | $ | 368 | $ | 371 | $ | 386 | $ | 399 | $ | 322 | $ | 318 | |||||||||||||||||||
$ | 94 | $ | 91 | $ | 113 | $ | 70 | $ | 103 | $ | 102 | $ | 102 | $ | 101 | |||||||||||||||||||
$ | 3,865 | $ | 3,327 | $ | 3,311 | $ | 3,237 | $ | 3,177 | $ | 3,882 | $ | 4,281 | $ | 3,812 | |||||||||||||||||||
$ | 3,589 | $ | 3,505 | $ | 3,102 | $ | 3,303 | $ | 2,892 | $ | 3,267 | $ | 3,676 | $ | 4,022 | |||||||||||||||||||
$ | 276 | $ | (178 | ) | $ | 209 | $ | (66 | ) | $ | 285 | $ | 615 | $ | 605 | $ | (210 | ) | ||||||||||||||||
$ | 2,456 | $ | 2,338 | $ | 2,052 | $ | 2,134 | $ | 2,178 | $ | 2,418 | $ | 2,375 | $ | 1,798 | |||||||||||||||||||
$ | 7,361 | $ | 6,631 | $ | 6,967 | $ | 6,902 | $ | 6,826 | $ | 7,935 | $ | 8,270 | $ | 8,015 | |||||||||||||||||||
$ | 1,134 | $ | 1,092 | $ | 1,295 | $ | 795 | $ | 714 | $ | 1,087 | $ | 1,074 | $ | 955 | |||||||||||||||||||
$ | 1,301 | $ | 739 | $ | 1,458 | $ | 1,684 | $ | 1,867 | $ | 2,001 | $ | 1,771 | $ | 1,926 | |||||||||||||||||||
$ | 6.03 | $ | 3.86 | $ | 0.51 | $ | 5.24 | $ | 4.61 | $ | 4.09 | $ | (0.62 | ) | $ | 1.90 | ||||||||||||||||||
$ | 5.91 | $ | 3.78 | $ | 0.50 | $ | 5.20 | $ | 4.56 | $ | 4.06 | $ | (0.62 | ) | $ | 1.88 | ||||||||||||||||||
$ | 5.91 | $ | (5.68 | ) | $ | 0.31 | $ | 5.20 | $ | 4.56 | $ | 4.25 | $ | (0.20 | ) | $ | 2.08 | |||||||||||||||||
$ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 1.36 | |||||||||||||||||||
$ | 18.56 | $ | 10.67 | $ | 21.44 | $ | 23.84 | $ | 24.55 | $ | 26.16 | $ | 23.71 | $ | 25.93 | |||||||||||||||||||
$ | 72.65 | $ | 52.22 | $ | 73.33 | $ | 47.69 | $ | 65.06 | $ | 55.38 | $ | 55.00 | $ | 46.63 | |||||||||||||||||||
6.8 | % | 6.3 | % | 3.0 | % | 7.8 | % | 8.3 | % | 6.7 | % | 0.1 | % | 3.3 | % | |||||||||||||||||||
5.4 | % | 4.5 | % | 0.9 | % | 5.6 | % | 4.9 | % | 5.5 | % | (2.0) | % | 1.2 | % | |||||||||||||||||||
3.4 | % | 2.4 | % | 0.3 | % | 3.6 | % | 3.3 | % | 3.0 | % | (0.5) | % | 1.7 | % | |||||||||||||||||||
42.9 | % | (26.5) | % | 1.3 | % | 20.7 | % | 17.9 | % | 17.2 | % | (0.8) | % | 8.2 | % | |||||||||||||||||||
5.9 | % | (5.8) | % | 0.3 | % | 5.4 | % | 4.7 | % | 4.0 | % | (0.2) | % | 2.0 | % | |||||||||||||||||||
1.1 | 0.9 | 1.1 | 1.0 | 1.1 | 1.2 | 1.2 | 0.9 | |||||||||||||||||||||||||||
50.9 | % | 65.1 | % | 48.0 | % | 49.4 | % | 37.7 | % | 43.5 | % | 46.1 | % | 44.2 | % | |||||||||||||||||||
12.3 | (9.2) | 236.5 | 9.2 | 14.3 | 13.0 | — | 22.4 | |||||||||||||||||||||||||||
5.7 | (0.4) | 1.4 | 4.1 | 4.3 | 3.1 | 0.9 | 2.5 | |||||||||||||||||||||||||||
70,082 | 69,267 | 68,036 | 70,637 | 76,044 | 76,507 | 74,697 | 77,178 | |||||||||||||||||||||||||||
68,931 | 68,226 | 67,215 | 66,265 | 74,463 | 76,089 | 75,262 | 74,415 | |||||||||||||||||||||||||||
8,178 | 8,556 | 8,840 | 11,780 | 12,531 | 13,584 | 10,171 | 11,033 | |||||||||||||||||||||||||||
68,407 | 68,272 | 61,923 | 62,527 | 62,706 | 59,885 | 62,419 | 49,254 | |||||||||||||||||||||||||||
8.1 | % | 1.4 | % | 12.2 | % | 0.3 | % | 7.9 | % | (1.2) | % | 6.8% | 6.3 | % |
Earnings from continuing operations before income taxes and other items, as a percent of sales. |
Net earnings (loss), divided by average stockholders’ equity. |
Net earnings (loss), divided by average total assets. |
Debt divided by debt, Whirlpool stockholders’ equity and minority interests. |
Stock appreciation plus reinvested |
F-60
Report by Management on the Consolidated Financial Statements
The management of Whirlpool Corporation has prepared the accompanying financial statements. The financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, based upon their audits, expresses the opinion that these financial statements present fairly the consolidated financial position, resultsstatements of operationsincome and cash flows of Whirlpool and its subsidiaries in accordance with accounting principles generally accepted in the United States. Their audits are conducted in conformity with the auditing standards of the Public Company Accounting Oversight Board (United States).
The financial statements were prepared from the Company’s accounting records, books and accounts which, in reasonable detail, accurately and fairly reflect all material transactions. The Company maintains a system of internal controls designed to provide reasonable assurance that the Company’s books and records, and the Company’s assets are maintained and accounted for, in accordance with management’s authorizations. The Company’s accounting records, policies and internal controls are regularly reviewed by an internal audit staff.
The audit committee of the Board of Directors of the Company is composed of sixfour independent directors who, in the opinion of the board, meet the relevant financial experience, literacy, and expertise requirements. The audit committee provides independent and objective oversight of the Company’s accounting functions and internal controls and monitors (1) the objectivity of the Company’s financial statements, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent registered public accounting firm’s qualifications and independence, and (4) the performance of the Company’s internal audit function and independent registered public accounting firm. In performing these functions, the committee has the responsibility to review and discuss the annual audited financial statements and quarterly financial statements and related reports with management and the independent registered public accounting firm, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to monitor the adequacy of financial disclosure. The committee also has the responsibility to retain and terminate the Company’s independent registered public accounting firm and exercise the committee’s sole authority to review and approve all audit engagement fees and terms and pre-approve the nature, extent, and cost of all non-audit services provided by the independent registered public accounting firm.
/s/ ROY W. TEMPLIN |
Roy W. Templin |
Executive Vice President and Chief Financial Officer |
February |
F-61
Management’s Report on Internal Control Over Financial Reporting
The management of Whirlpool Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934. Whirlpool’s internal control system is designed to provide reasonable assurance to Whirlpool’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The management of Whirlpool assessed the effectiveness of Whirlpool’s internal control over financial reporting as of December 31, 2006.2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.Based on our assessment and those criteria, management believes that Whirlpool maintained effective internal control over financial reporting as of December 31, 2006.2009.
Whirlpool’s independent registered public accounting firm has issued an audit report on its assessment of Whirlpool’s internal control over financial reporting. This report appears on page F-63.F-64.
/s/ JEFF M. FETTIG | /s/ ROY W. TEMPLIN | |||
Jeff M. Fettig | Roy W. Templin | |||
Chairman of the Board and Chief Executive Officer | Executive Vice President and Chief Financial Officer | |||
February | February |
F-62
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Whirlpool Corporation
Benton Harbor, Michigan
We have audited the accompanying consolidated balance sheets of Whirlpool Corporation as of December 31, 20062009 and 2005,2008, and the related consolidated statements of operations,income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006.2009. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Whirlpool Corporation at December 31, 20062009 and 2005,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006,2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As described in Note 121 of the notes to the consolidated financial statements, effective January 1, 2006,2009, the Company adopted FASB Statement No. 123(R),Share-Based Payments.new rules regarding the accounting for noncontrolling interests. As described in Note 2 to1 of the consolidated financial statements, effective December 31, 2006, the Company adopted FASB Statement No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). As described in Note 1notes to the consolidated financial statements, effective January 1, 2006,2009, the Company changed its method of depreciation for machinery and equipment from straight-line to modified units of production. As described in Note 11 of the notes to the consolidated financial statements, effective January 1, 2007, the Company adopted new rules regarding the accounting for freight and warehousing costs.
income tax uncertainties.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Whirlpool Corporation’s internal control over financial reporting as of December 31, 2006,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 200717, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 28, 200717, 2010
F-63
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
The Stockholders and Board of Directors
Whirlpool Corporation
Benton Harbor, Michigan
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Whirlpool Corporation maintained effectiveCorporation’s internal control over financial reporting as of December 31, 2006,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Whirlpool Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Whirlpool Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Whirlpool Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Whirlpool Corporation as of December 31, 20062009 and 2005,2008, and the related consolidated statements of operations,income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20062009, and our report dated February 28, 200717, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 28, 200717, 2010
F-64
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
WHIRLPOOL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2006, 2005,2009, 2008 and 20042007
(millions of dollars)
COL. A | COL. B | COL. C | COL. D | COL. E | |||||||||||||
Balance at Beginning of Period | ADDITIONS | Deductions —Describe | Balance at End of Period | ||||||||||||||
Description | (1) Charged to Costs and Expenses | (2) Charged to Other Accounts / Other | |||||||||||||||
Year Ended December 31, 2006: | |||||||||||||||||
Allowances for doubtful accounts—trade receivables | $ | 76 | $ | 19 | $ | 14 | —B | $ | (25 | ) —A | $ | 84 | |||||
Year Ended December 31, 2005: | |||||||||||||||||
Allowances for doubtful accounts—trade receivables | $ | 107 | $ | 7 | $ | — | $ | 38 | —A | $ | 76 | ||||||
Year Ended December 31, 2004: | |||||||||||||||||
Allowances for doubtful accounts—trade receivables | $ | 113 | $ | 17 | $ | — | $ | 23 | —A | $ | 107 | ||||||
COL. A | COL. B | COL. C | COL. D | COL. E | ||||||||||||
Description | Balance at Beginning of Period | ADDITIONS | Deductions —Describe | Balance at End of Period | ||||||||||||
(1) Charged to Costs and Expenses | (2) Charged to Other Accounts / Other | |||||||||||||||
Year Ended December 31, 2009: | ||||||||||||||||
Allowance for doubtful accounts—accounts receivables | $ | 66 | $ | 28 | $ | — | $ | (18 | )—A | $ | 76 | |||||
Year Ended December 31, 2008: | ||||||||||||||||
Allowance for doubtful accounts—accounts receivables | 83 | 29 | — | (46 | )—A | 66 | ||||||||||
Year Ended December 31, 2007: | ||||||||||||||||
Allowance for doubtful accounts—accounts receivables | 84 | 19 | — | (20 | ) —A | 83 |
Note A—The amounts represent accounts charged off, less recoveries of $0 in 2006, $0 in 2005, and $0 in 2004,2009 through 2007, translation adjustments and transfers.
Note B—The amount represents allowances for doubtful accounts recorded as part of the Maytag acquisition.F-65
ANNUAL REPORT ON FORM 10-K
ITEMS 15(a)(3) and 15(c)
EXHIBIT INDEX
YEAR ENDED DECEMBER 31, 20062009
The following exhibits are submitted herewith or incorporated herein by reference in response to Items 15(a)(3) and 15(c). Each exhibit that is considered a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(a)(3) of Form 10-K is identified by a “(Z).”
Number and Description of Exhibit | ||
2 | Agreement and Plan of Merger dated as of August 22, 2005 among Whirlpool Corporation, Whirlpool Acquisition Co. and Maytag Corporation. [Incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K filed on August 22, | |
3(i) | Restated Certificate of Incorporation of | |
3(ii) |
| |
4(i) | The registrant hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of instruments defining the rights of holders of each issue of long-term debt of the registrant and its subsidiaries. | |
4(ii) |
| |
Indenture | ||
Indenture dated as of June 15, 1987 between Maytag Corporation and The First National Bank of Chicago. [Incorporated by reference | ||
First Supplemental Indenture dated as of September 1, 1989 between Maytag Corporation and The First National Bank of Chicago. [Incorporated by reference | ||
| ||
| ||
| ||
|
Ninth Supplemental Indenture dated as of October 30, 2001 between Maytag Corporation and Bank One, National Association. [Incorporated by reference | ||
Form of 8% Notes due 2012 and Form of 8.6% Notes due 2014, issued under the Indenture described in Exhibit 4(ii) above. [Incorporated by reference from Annex A and Annex B, respectively, to the Certificate of Designated Officers, Exhibit 4.1 to the Company’s Form 8-K filed on May 5, 2009] | ||
10(i)(a) | Amended and Restated Long-Term Five-Year Credit Agreement dated as of December 1, 2005 among Whirlpool Corporation, Whirlpool Europe B.V., Whirlpool Finance B.V., Certain Financial Institutions and Citibank, N.A., as Administrative Agent and Fronting Agent and JPMorgan Chase Bank, N.A., as Syndication Agent, ABN AMRO Bank N.V., The Royal Bank of Scotland PLC and Bank of America, N.A., as Documentation Agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., Lead Arrangers and Joint Bookrunners. [Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed on December 6, 2005] | |
|
E-1
Number and Description of Exhibit | ||
10(i)(c) | Amendment No. 2 to the Amended and Restated Long-Term Five-Year Credit Agreement dated as of December 1, 2005 among Whirlpool Corporation and the other parties thereto [Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed | |
10(i)(d) | Selling Agency Agreement dated February 25, 2008 among Whirlpool, Banc of America Securities LLC and Greenwich Capital Markets, Inc., as representatives of the several underwriters named therein. [Incorporated by reference from Exhibit 1.1 to the Company’s Form 8-K filed on February 28, 2008] | |
10(iii) | Whirlpool Corporation Nonemployee Director Stock Ownership Plan | |
10(iii) | Whirlpool Corporation Charitable Award Contribution and Additional Life Insurance Plan for Directors (effective April 20, 1993).(Z) [Incorporated by reference from Exhibit 10(iii)(p) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994] | |
10(iii) |
| |
Whirlpool Corporation Deferred Compensation Plan for Directors (as amended effective January 1, 1992 and April 20, 1993).(Z) [Incorporated by reference from Exhibit 10(iii)(f) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993] | ||
10(iii) | Whirlpool Corporation Deferred Compensation Plan II for Non-Employee Directors | |
10(iii) | Whirlpool Corporation Nonemployee Director Equity Plan (effective January 1, 2005).(Z) [Incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K filed on April 21, 2005] | |
10(iii) |
| |
Amendment of the Whirlpool Corporation | ||
10(iii)(g) | Nonemployee Director Stock | |
10(iii) | Whirlpool Corporation 1996 Omnibus Stock and Incentive Plan (as amended, effective February 16, 1999).(Z) [Incorporated by reference from Exhibit 10(iii)(r) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999] |
10(iii) | Whirlpool Corporation 1998 Omnibus Stock and Incentive Plan (as amended, effective February 16, 1999).(Z) [Incorporated by reference from Exhibit 10(iii)(s) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999] | ||
10(iii) | Whirlpool Corporation 2000 Omnibus Stock and Incentive Plan (effective January 1, 2000).(Z) [Incorporated by reference from Exhibit A to the Company’s Proxy Statement for the 2000 annual meeting of stockholders] | ||
10(iii) | Whirlpool Corporation 2002 Omnibus Stock and Incentive Plan (effective January 1, 2002).(Z) [Incorporated by reference from Exhibit A to the Company’s Proxy Statement for the 2002 annual meeting of stockholders] | ||
10(iii) |
| ||
10(iii)(m) | Omnibus Equity Plans 409A Amendment (effective December 19, 2008). (Z) [Incorporated by reference from Exhibit 10(iii) |
E-2
Number and Description of Exhibit | ||
10(iii) | Form of Agreement for the Whirlpool Corporation Career Stock Grant Program (pursuant to one or more of Whirlpool’s Omnibus Stock and Incentive Plans).(Z) [Incorporated by reference from Exhibit 10(iii)(q) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995] | |
10(iii) | Form of Amendment to Whirlpool Corporation Career Stock Grant Agreement. (Z) [Incorporated by reference from Exhibit 10(iii)(p) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008] | |
10(iii)(p) | Form of Stock Option Grant Document for the Whirlpool Corporation Stock Option Program (pursuant to one or more of Whirlpool’s Omnibus Stock and Incentive Plans) | |
10(iii) | Administrative Guidelines for the Whirlpool Corporation Special Retention Program (pursuant to one or more of Whirlpool’s Omnibus Stock and Incentive Plans).(Z) [Incorporated by reference from Exhibit 10(iii)(w) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001] | |
10(iii)(r) | Addendum to Whirlpool Corporation Special Retention Program Features (effective January 1, 2005). (Z) [Incorporated by reference from Exhibit 10(iii)(s) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008] | |
10(iii)(s) | Form of Whirlpool Corporation Strategic Excellence Program Grant Document (pursuant to one or more of Whirlpool’s Omnibus Stock and Incentive Plans) | |
10(iii)(t) | Form of Compensation and Benefits Assurance Agreements | |
10(iii)(u) | Whirlpool Corporation Performance Excellence | |
10(iii)(v) | Whirlpool Corporation Executive Deferred Savings Plan (as amended effective January 1, 1992).(Z) [Incorporated by reference from Exhibit 10(iii)(n) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993] | |
10(iii)(w) | Whirlpool Corporation Executive Deferred Savings Plan II (as amended and restated, effective January 1, 2009), including Supplement A, Whirlpool Executive Restoration Plan (as amended and restated, effective January 1, 2009). (Z) [Incorporated by reference from Exhibit 10(iii)(y) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008] | |
10(iii)(x) | Amendment to the Whirlpool Corporation Executive Deferred Savings Plan II (dated December 21, 2009). (Z) | |
10(iii)(y) | Whirlpool Corporation Executive Officer Bonus Plan (effective | |
10(iii) | Amendment to Whirlpool Corporation | |
10(iii) | Employment Agreement with Paulo F.M.O. Periquito, dated January 1, 1998.(Z) [Incorporated by reference from Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 1998] |
10(iii) | Whirlpool Retirement Benefits Restoration Plan (as amended and restated effective January 1, |
E-3
Number and Description of Exhibit | ||
10(iii) | Whirlpool Supplemental Executive Retirement Plan (as amended and restated, effective | |
10(iii) | Whirlpool Corporation Form of Indemnity Agreement.(Z) [Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed on February 23, 2006] | |
| ||
| ||
12 | Ratio of Earnings to Fixed Charges | |
| ||
21 | List of Subsidiaries | |
23 | Consent of Independent Registered Public Accounting Firm | |
24 | Power of Attorney | |
31(a) | Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31(b) | Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
E-4