SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
Commission file number 1-3932
WHIRLPOOL CORPORATION
(Exact name of registrant as specified in its charger)
Delaware 38-1490038
(State of incorporation) (I.R.S. Employer Identification No.)
2000 M-63
Benton Harbor, Michigan 49022-2692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 616/923-5000
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
---
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date:
Class of common stock Shares outstanding at September 30, 1999
--------------------- ----------------------------------------
Common stock, par value $1 per share 74,427,978
PAGE 1 OF 23
QUARTERLY REPORT ON FORM 10-Q
-----------------------------
WHIRLPOOL CORPORATION
---------------------
Quarter Ended September 30, 1999
INDEX OF INFORMATION INCLUDED IN REPORT
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Statements
of Earnings 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements
of Changes in Equity 5
Consolidated Condensed Statements
of Cash Flows 6
Notes to Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 13
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 20
2
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
WHIRLPOOL CORPORATION
FOR THE PERIOD ENDED SEPTEMBER 30
(millions of dollars except share and dividend data)
Three Months Ended Year-to-Date
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
Net sales $ 2,719 $ 2,539 $ 7,822 $ 7,588
EXPENSES:
Cost of products sold 2,036 1,929 5,869 5,760
Selling and administrative 437 421 1,296 1,293
Intangible amortization 8 9 23 28
------- ------- ------- -------
2,481 2,359 7,188 7,081
------- ------- ------- -------
OPERATING PROFIT 238 180 634 507
OTHER INCOME (EXPENSE):
Interest and sundry income (expense) (27) 28 (176) 109
Interest expense (41) (70) (126) (197)
------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES AND OTHER ITEMS 170 138 332 419
Income taxes 65 56 134 161
------- ------- ------- -------
EARNINGS FROM CONTINUING OPERATIONS BEFORE EQUITY
EARNINGS AND MINORITY INTERESTS 105 82 198 258
Equity in affiliated companies (2) -- (4) 2
Minority interests 4 (4) 40 (33)
------- ------- ------- -------
EARNINGS FROM CONTINUOUS OPERATIONS 107 78 234 227
Discontinued operations less applicable taxes -- -- -- 15
------- ------- ------- -------
NET EARNINGS $ 107 $ 78 $ 234 $ 242
======= ======= ======= =======
Per share of common stock:
Basic earnings from continuing operations $ 1.42 $ 1.03 $ 3.10 $ 3.00
Basic net earnings $ 1.42 $ 1.03 $ 3.10 $ 3.19
Diluted earnings from continuing operations $ 1.40 $ 1.02 $ 3.06 $ 2.97
Diluted net earnings $ 1.40 $ 1.02 $ 3.06 $ 3.16
Cash dividends $ .34 $ .34 $ 1.02 $ 1.02
======= ======= ======= =======
See notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED BALANCE SHEETS
WHIRLPOOL CORPORATION
(millions of dollars)
September 30 December 31
1999 1998
(Unaudited) (Audited)
------------ -----------
ASSETS
Current Assets
- --------------
Cash and equivalents $ 230 $ 636
Trade receivables, less allowances of
(1999: $126; 1998: $116) 1,708 1,711
Inventories 1,079 1,100
Prepaid expenses and other 208 268
Deferred income taxes 164 167
----------- -----------
Total Current Assets 3,389 3,882
Other Assets
- ------------
Investment in affiliated companies 111 108
Intangibles, net 820 936
Deferred income taxes 250 262
Other 316 329
----------- -----------
1,497 1,635
Property, Plant and Equipment
- -----------------------------
Land 70 77
Buildings 849 900
Machinery and equipment 4,250 4,534
Accumulated depreciation (3,056) (3,093)
----------- -----------
2,113 2,418
----------- -----------
Total Assets $ 6,999 $ 7,935
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
Notes payable $ 712 $ 905
Accounts payable 1,017 1,079
Employee compensation 250 271
Accrued expenses 867 870
Restructuring costs 69 117
Current maturities of long-term debt 215 25
----------- -----------
Total Current Liabilities 3,130 3,267
Other Liabilities
- -----------------
Deferred income taxes 154 152
Postemployment benefits 618 622
Other liabilities 167 192
Long-term debt 772 1,087
----------- -----------
1,711 2,053
Minority interests 393 614
Stockholders' Equity
- --------------------
Common stock 84 83
Paid-in capital 370 321
Retained earnings 2,180 2,024
Unearned restricted stock (5) (3)
Accumulated other comprehensive income (456) (183)
Treasury stock - at cost (408) (241)
----------- -----------
Total Stockholders' Equity 1,765 2,001
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,999 $ 7,935
=========== ===========
See notes to consolidated condensed financial statements.
4
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY
WHIRLPOOL CORPORATION
FOR THE PERIOD ENDED SEPTEMBER 30
(millions of dollars)
Third Quarter
-------------------------------------------------------------
Accumulated
Other Treasury
Retained Comprehensive Common Stock/Paid-
Total Earnings Income Stock in-Capital
------- -------- ------------- ------ -----------
Begining balance, 1998 $ 1,895 $ 1,913 $ (172) $ 83 $ 71
Comprehensive income
Net income 78 78
Foreign currency items, net of tax 1 1
-------
Comprehensive income 79
=======
Common stock issued 3 3
Dividends declared on common stock (25) (25)
------- ------- ------- ---- -----
Ending balance, September 30, 1998 $ 1,952 $ 1,966 $ (171) $ 83 $ 74
======= ======= ======= ==== =====
Beginning balance, 1999 $ 1,784 $ 2,098 $ (433) $ 83 $ 36
Comprehensive income
Net income 107 107
Foreign currency items, net of tax (23) (23)
-------
Comprehensive income 84
=======
Common stock issued (78) 1 (79)
Dividends declared on common stock (25) (25)
------- ------- ------- ---- -----
Ending balance, September 30, 1999 $ 1,765 $ 2,180 $ (456) $ 84 $ (43)
======= ======= ======= ==== =====
Year-to-Date
-------------------------------------------------------------
Accumulated
Other Treasury
Retained Comprehensive Common Stock/Paid-
Total Earnings Income Stock in-Capital
------- -------- ------------- ------ -----------
Begining balance, 1998 $ 1,771 $ 1,801 $ (149) $ 82 $ 37
Comprehensive income
Net income 242 242
Foreign currency items, net of tax (22) (22)
-------
Comprehensive income 220
=======
Common stock issued 38 1 37
Dividends declared on common stock (77) (77)
------- ------- ------- ---- -----
Ending balance, September 30, 1998 $ 1,952 $ 1,966 $ (171) $ 83 $ 74
======= ======= ======= ==== =====
Beginning balance, 1999 $ 2,001 $ 2,024 $ (183) $ 83 $ 77
Comprehensive income
Net income 234 234
Foreign currency items, net of tax (273) (273)
-------
Comprehensive income (39)
=======
Common stock issued (119) 1 (120)
Dividends declared on common stock (78) (78)
------- ------- ------- ---- -----
Ending balance, September 30, 1999 $ 1,765 $ 2,180 $ (456) $ 84 $ (43)
======= ======= ======= ==== =====
5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
WHIRLPOOL CORPORATION
FOR NINE MONTHS ENDED SEPTEMBER 30
(millions of dollars)
1999 1998
------------ -----------
OPERATING ACTIVITIES
Net earnings (loss) $ 234 $ 242
Depreciation 292 312
Deferred income taxes (53) 28
Equity in net earnings of affiliated
companies, less dividends received 4 (2)
Gain on business dispositions -- (25)
Provision for doubtful accounts 37 24
Amortization of goodwill 23 28
Restructuring charges, net of cash paid (49) (64)
Minority interests (40) 33
Changes in assets and liabilities,
net of effects of business
acquisitions and dispositions:
Trade receivables (259) (229)
Inventories (79) (63)
Accounts payable 28 11
Other - net 53 19
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES $ 191 $ 314
INVESTING ACTIVITIES
Net additions to properties $ (281) $ (340)
Acquisitions of businesses, less cash acquired -- (105)
Business dispositions -- 587
Other -- --
----------- -----------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES $ (281) $ 142
FINANCING ACTIVITIES
Proceeds of short-term borrowings 13,010 15,784
Repayments of short-term borrowings (13,133) (16,117)
Proceeds of long-term debt 120 270
Repayments of long-term debts (119) (183)
Dividends (78) (77)
Purchase of treasury stock (167) --
Other 51 (110)
----------- -----------
CASH USED FOR FINANCING ACTIVITIES (316) (433)
----------- -----------
INCREASE/(DECREASE) IN CASH AND EQUIVALENTS (406) 23
Cash and equivalents at beginning of year 636 578
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 230 $ 601
=========== ===========
See notes to consolidated financial statements
6
WHIRLPOOL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNUDITED)
NOTE A--BASIS OF PRESENTATION AND SUMMARY OF PRINCIPAL
ACCOUNTING POLICIES
The accompanying unaudited consolidated condensed financial statements present
information in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and applicable
rules of Regulation S-X. Accordingly, they do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements. Management believes the financial statements include all
normal recurring accrual adjustments necessary for a fair presentation.
Operating results for the three and nine months ended September 30, 1999 do not
necessarily indicate the results that may be expected for the full year. For
further information, refer to the consolidated financial statements and notes
thereto included in the company's annual report for the year ended December 31,
1998.
7
WHIRLPOOL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following table provides the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions except earnings per share)
Basic:
Average Shares Outstanding 74.9 75.7 75.4 75.7
Earnings:
Continuing Operations $ 106.6 $ 78.1 $ 233.7 $ 227.0
Discontinued Operations - - - 14.8
-------- -------- -------- --------
Net Earnings $ 106.6 $ 78.1 $ 233.7 $ 241.8
======== ======== ======== ========
Earnings Per Share
from Continuing Operations $ 1.42 $ 1.03 $ 3.10 $ 3.00
Net Earnings Per Share $ 1.42 $ 1.03 $ 3.10 $ 3.19
======== ======== ======== ========
Diluted:
Average Shares Outstanding 74.9 75.7 75.4 75.7
Treasury Stock Method:
Stock Options 1.2 0.8 0.9 0.8
-------- -------- -------- --------
Diluted Average Shares Outstanding 76.1 76.5 76.3 76.5
======== ======== ======== ========
Diluted Earnings:
Continuing Operations $ 106.6 $ 78.1 $ 233.7 $ 227.0
Discontinued Operations - - - 14.8
-------- -------- -------- --------
Diluted Net Earnings $ 106.6 $ 78.1 $ 233.7 $ 241.8
======== ======== ======== ========
Diluted Earnings Per Share
from Continuing Operations $ 1.40 $ 1.02 $ 3.06 $ 2.97
Diluted Net Earnings Per Share $ 1.40 $ 1.02 $ 3.06 $ 3.16
======== ======== ======== ========
NOTE B--BUSINESS ACQUISITIONS & DISPOSITIONS
In September 1998, the company completed a transaction to sell 75% of its
majority-owned air conditioning joint venture in Shenzhen, China, for $13
million, to Electra Consumer Products Ltd., a leading European manufacturer of
air conditioners. Shenzhen Whirlpool Raybo Air-Conditioner Industrial Co. Ltd.
was a joint venture formed in 1995. After completion of the sale, the company
holds 20% of the joint venture. The joint venture continues to sell products
under the Whirlpool brand in China for a period of
8
WHIRLPOOL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
three years while it introduces the Electra brand. No significant gain or loss
was recognized from this transaction.
During the third and fourth quarters of 1998, the company increased its
ownership stake in its Brazilian subsidiaries to approximately 55% by purchasing
$43 million of additional shares.
In July 1998, the company purchased the remaining 35% ownership in Shunde SMC
Microwave Products Co., Ltd. ("SMC"), a Chinese manufacturer and marketer of
microwave ovens, for about $60 million in cash. The company now owns 100% of
SMC.
In March 1998, the company increased its majority ownership interest to 80% in
Whirlpool Narcissus Co., its Chinese joint venture that manufactures washing
machines, for approximately $12 million in cash.
NOTE C--DISCONTINUED OPERATIONS
During the third quarter of 1997, the company discontinued its financing
operations and reached an agreement to sell the majority of Whirlpool Financial
Corporation's ("WFC") assets in a series of transactions. During the first six
months of 1998, the company concluded the sale of international assets and
consumer financing receivables under this agreement which resulted in the
company recording a discontinued pretax gain of $25 million ($15 million after-
tax).
NOTE D--INVENTORIES
Inventories consist of the following:
September 30 December 31
1999 1998
------------ -----------
(millions of dollars)
Finished products $ 992 $ 960
Raw materials and work in process 273 333
------------ -----------
Total FIFO cost 1,265 1,293
Less excess of FIFO cost
over LIFO cost 186 193
------------ -----------
$ 1,079 $ 1,100
============ ===========
9
WHIRLPOOL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E--RESTRUCTURING CHARGES
During 1997, the company incurred restructuring costs of $343 million ($244
million cash costs and $99 million noncash costs) to better align the company's
cost structure within the global home-appliance marketplace. Pretax
restructuring charges of $172 million, $101 million, $35 million, $25 million
and $10 million relate to the company's European, Asian, Latin American,
Corporate and North American operations, respectively. More than 80% of the cash
costs have been paid to date, and during the third quarter of 1999, the company
reversed $4.5 million of the 1997 restructuring reserve resulting in a credit to
the income statement to reflect the company's revised estimates of the remaining
cash to be paid over the next several months. The restructuring charge included
the elimination of approximately 7,900 positions globally, of which more than
7,100 positions have been eliminated to date.
In the third quarter of 1999, the company recorded a restructuring charge of
$4.9 million, primarily for the severance payments to consolidate administrative
offices in Brazil and Argentina, which will result in the elimination of 63
positions. The balance as of September 30, 1999 was $4.9 million and these cash
costs are expected to be paid out over the next six months.
NOTE F--BRAZILIAN CURRENCY DEVALUATION
The Brazilian real declined from 1.21 to 1.94 per USD from mid-January, when the
Brazilian government changed its foreign exchange policy to a floating exchange
rate, to September 30, 1999. Because the Brazilian operations maintain
significant USD denominated debt on their books, the currency devaluation
resulted in a $146 million pre-tax charge to earnings (Whirlpool's share after-
tax and minority interest was $53 million) in the first quarter. Also included
in other income and expense during the first quarter was a $12 million pre-tax
mark-to-market charge ($7 million after-tax) related to short term forward
contracts purchased to hedge movement in Brazil's currency. Year-to-date,
foreign exchange losses within the Brazilian operations have totaled $182
million pre-tax (Whirlpool's share after-tax and minority interest was $67
million) and charges related to short term forward contracts totalled $13
million pre-tax ($8 million after-tax).
NOTE G--CONTINGENCIES
The company is involved in various legal actions arising in the normal course of
business. Management, after taking into consideration legal counsel's evaluation
of such actions, is of the opinion that the outcome of these matters will not
have a material adverse effect on the company's financial position.
The company is a party to certain financial instruments with off-balance-sheet
risk which are entered into in the normal course of business. These instruments
consist of financial guarantees, repurchase agreements and letters of credit.
The company's exposure to
10
WHIRLPOOL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
credit loss in the event of nonperformance by the debtors is the contractual
amount of the financial instruments. The company uses the same credit policies
in making commitments and conditional obligations as it does for on-balance-
sheet instruments. Collateral or other security is generally required to support
financial instruments with off-balance-sheet risk.
At September 30, 1999, the company had $176 million in receivables subject to
recourse provisions and $134 million in guarantees of customer lines of credit
at commercial banks.
NOTE H--GEOGRAPHIC SEGMENTS
The company identifies operating segments based upon geographical regions of
operations because each operating segment manufactures home appliances and
related components, but serves strategically different markets.
(millions of dollars)
Three Months North Latin Other and Total
Ended Sepember 30 America Europe America Asia (Eliminations) Whirlpool
- ----------------------------------------------------------------------------------------------
Sales
1999 $1,619 $ 626 $ 432 $ 83 $(41) $2,719
1998 $1,389 $ 629 $ 483 $ 70 $(32) $2,539
Intangible amortization
1999 $ 1 $ 4 $ - $ 1 $ 2 $ 8
1998 $ 1 $ 4 $ 2 $ 1 $ 1 $ 9
Depreciation
1999 $ 39 $ 21 $ 24 $ 5 $ - $ 89
1998 $ 36 $ 24 $ 33 $ 4 $ 4 $ 101
Operating profit (loss)
1999 $ 191 $ 48 $ 35 $ 4 $(40) $ 238
1998 $ 158 $ 37 $ 28 $ (7) $(36) $ 180
Total assets
1999 $2,182 $2,028 $1,745 $719 $325 $6,999
1998 $2,069 $2,323 $2,559 $726 $429 $8,106
Capital expenditures
1999 $ 58 $ 9 $ 40 $ 1 $ 1 $ 109
1998 $ 38 $ 18 $ 64 $ 1 $ 1 $ 122
11
WHIRLPOOL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(millions of dollars)
Nine Months North Latin Other and Total
Ended Sepember 30 America Europe America Asia (Eliminations) Whirlpool
- ----------------------------------------------------------------------------------------------
Sales
1999 $4,638 $1,819 $1,214 $266 $(115) $7,822
1998 $4,189 $1,744 $1,521 $225 $ (91) $7,588
Intangible amortization
1999 $ 2 $ 12 $ 2 $ 4 $ 3 $ 23
1998 $ 2 $ 12 $ 5 $ 3 $ 6 $ 28
Depreciation
1999 $ 119 $ 67 $ 75 $ 16 $ 15 $ 292
1998 $ 114 $ 69 $ 101 $ 12 $ 16 $ 312
Operating profit (loss)
1999 $ 543 $ 126 $ 78 $ 8 $(121) $ 634
1998 $ 471 $ 86 $ 90 $(17) $(123) $ 507
Total assets
1999 $2,182 $2,028 $1,745 $719 $ 325 $6,999
1998 $2,069 $2,323 $2,559 $726 $ 429 $8,106
Capital expenditures
1999 $ 140 $ 48 $ 84 $ 2 $ 7 $ 281
1998 $ 94 $ 39 $ 183 $ 18 $ 6 $ 340
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The statements of earnings summarize operating results for the three and nine
month periods ended September 30, 1999 and 1998. This section of Management's
Discussion highlights the main factors affecting the changes in operating
results.
Net Sales
- ---------
Net sales were $2.7 billion for the third quarter and $7.8 billion for the first
nine months of 1999, representing seven and three percent increases over the
comparable 1998 periods. Excluding the impact of currency fluctuations around
the world, sales would have increased 15% and 11% over the prior year's quarter
and year-to-date periods, respectively.
North American unit volumes were up 17% in the third quarter and 12% in the
first nine months of the year over 1998. North American sales were 17% higher
for the third quarter and 11% year-to-date periods. Whirlpool North American
unit shipments are currently expected to exceed the anticipated 8% growth within
the industry for the full year. European unit shipments increased 8% and 9% for
the quarter and year-to-date comparisons. European sales in U.S. dollars were
down slightly in the third quarter comparison as the unfavorable impact from
currency fluctuations were partially offset by the increased unit shipments
while year-to-date sales increased 4% as the increased shipments offset the
year-to-date unfavorable impact of currency fluctuations. Whirlpool European
unit shipments are currently expected to exceed the industry growth expectations
of 1% to 2% for the full year. The continued devaluation within the quarter of
the Brazilian currency offset an 18% increase in units shipped for the Latin
American region, resulting in a decrease for the quarter in net sales of 10%.
For the year-to-date comparison, Latin American unit shipments decreased 2% and
net sales decreased 20% reflecting the weak economic conditions within the
region over the first nine months of the year. The current year quarter and
year-to-date net sales included $13.2 million and $26.3 million of recoveries of
Brazilian sales taxes paid in prior years. The comparable periods for 1998
included $2.6 million and $42.2 million in Brazilian tax incentives,
respectively. Asia's unit volumes increased 9% and 12% and net sales increased
19% and 18% for the quarter and year-to-date comparisons, respectively, due to
improving economic conditions in the region.
Gross Margin
- ------------
Gross margin percentage on products sold to net sales improved by 1.1 and 0.9
percentage points for the third quarter and year-to-date comparison with 1998.
This improvement was due to the benefits resulting from the restructuring
started in 1997 and ongoing productivity gains from our Operational Excellence
program, partially offset by a reclassification in the second and third quarters
within North America of certain sales allowances from selling, general and
administrative expenses into net sales, to be consistent with the treatment of
similar sales program costs in other areas of the company. The reclassification
reduced the quarter's gross margin by 0.2 percentage points and the year-to-date
gross margin by 0.2 percentage points.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Selling, General and Administrative
- -----------------------------------
Appliance selling and administrative expenses as a percent of net sales
decreased by 0.5 percentage points for the third quarter comparison with 1998
and 0.4 percentage points for the year-to-date comparison. Quarter-over-quarter
improvements in Europe, Brazil and Asia and a 0.3 percentage points impact from
the reclassification of sales allowances within North America contributed to the
improved cost performance ratio. The year-to-date improvement provided by Europe
and Asia along with the reclassification within North America, which accounted
for an approximate 0.2 percentage points improvement, offset declines in North
America and Brazil. The North American results included additional advertising
costs and costs to implement Enterprise Resource Planning, which is based on SAP
software. The comparisons for Brazil included $8.3 million and $33.1 million in
bad debt expense for the 1999 quarter and year-to-date periods versus $1.2
million and $24.3 million in the year ago periods.
Other Income and Expense
- ------------------------
Interest and sundry income (expense) in the third quarter was $27 million
unfavorable to the third quarter of 1998 due to $31 million of foreign exchange
losses primarily related to the Brazilian currency and an $11 million increase
in other miscellaneous costs, which were primarily a tax on Brazilian financial
transactions, offsetting a $15 million decrease in interest expense, net of
interest income. The decrease in interest expense, net of interest income, was
due in part to a $7 million recovery of Brazilian taxes paid in prior years.
Year-to-date, interest and sundry income (expense) was $214 million unfavorable,
also due primarily to the Brazilian real devaluation. The Brazilian real
declined from 1.21 to 1.94 per US Dollars from mid-January, when the Brazilian
government changed its foreign exchange policy to a floating exchange rate, to
September 30, 1999. The main impact from the devaluation occurred in the first
quarter and resulted in a $146 million pre-tax charge to earnings (Whirlpool's
share after-tax and minority interest was $53 million). Also included in this
category was a $12 million pre-tax mark-to-market charge ($7 million after-tax)
related to short term forward contracts purchased to hedge movement in Brazil's
currency. Year-to-date, foreign exchange losses within the Brazilian operations
have totalled $182 million pre-tax (Whirlpool's share after-tax and minority
interest was $67 million) and charges related to short term forward contracts
totaled $13 million pre-tax ($7 million after-tax).
Income Taxes
- ------------
The consolidated effective income tax rate was 38% for the quarter and year-to-
date periods versus rates of 40% and 38%, respectively, for the year ago
periods. The losses within the Brazilian operations, which resulted in tax
benefits at an average lower rate than the U.S. statutory tax rate and thereby
increased the effective rate, have been offset by the impact of implemented tax
strategies.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Discontinued Operations
- -----------------------
The company recorded a gain of $5 million pre-tax, $3 million after-tax, in the
second quarter of 1998 related to the sale of certain consumer financing and
European inventory financing assets. For the first half of 1998, the total gain
recorded for similar transactions was $25 million pre-tax and $15 million after
tax.
Refer to Note C to the accompanying consolidated financial statements for a
discussion of discontinued operations.
Net Earnings
- ------------
Third quarter earnings from continuing operations were $107 million or $1.40 per
diluted share compared to $78 million or $1.02 per diluted share in 1998. Year-
to-date earnings from continuing operations were $234 million, or $3.06 per
diluted share, versus earnings of $227 million, or $2.97 per diluted share, in
1998. Excluding the first quarter impact of the Brazilian currency devaluation,
year-to-date earnings from continuing operations were $294 million, or $3.85 per
diluted share. Including discontinued operations, 1998 net earnings were $242
million, or $3.16 per diluted share, year-to-date.
CASH FLOWS
The statements of cash flows reflect the changes in cash and equivalents for the
nine months ended September 30, 1999 and 1998 by classifying transactions into
three major categories: operating, investing and financing activities.
Operating Activities
- --------------------
The company's main source of liquidity is cash from operating activities
consisting of net earnings from operations adjusted for non-cash operating items
such as depreciation and changes in operating assets and liabilities such as
receivables, inventories and payables.
Cash provided by operating activities in the first nine months of 1999 was $191
million compared to $314 million in 1998, reflecting the $98 million first
quarter impact of the currency devaluation flowing through net earnings and
minority interest and a build up of inventories over the first nine months of
the year due to the business slowdown in Brazil.
Investing Activities
- --------------------
The principal recurring investing activities are property additions. Net
property additions for the first nine months were $281 million in 1999, down
from $340 million in the 1998 period. These expenditures are primarily for
equipment and tooling related to product improvements, more efficient production
methods and replacement for normal wear and tear.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Refer to Note B to the accompanying consolidated financial statements for a
discussion of business dispositions and acquisitions.
Financing Activities
- --------------------
Dividends to shareholders totaled $78 million for the first nine months of 1999
versus $77 million in 1998 and the company repurchased $167 million of its
shares through a previously announced stock buyback plan. The company's
borrowings decreased by $122 million during the first nine months of 1999.
FINANCIAL CONDITION AND OTHER MATTERS
The financial position of the company remains strong as evidenced by the
September 30, 1999 balance sheet. The company's total assets were $7.0 billion
and stockholders' equity totalled $1.8 billion. The balances at December 31,
1998 were total assets of $7.9 billion and stockholders' equity of $2.0 billion.
The decrease in assets is due primarily to the currency devaluation in Brazil
while the decrease in equity is due to currency translation adjustments,
primarily in Brazil, and $167 million related to share buybacks referred to
below, offsetting net earnings retention of $156 million.
On March 1, 1999, the company announced that its Board of Directors approved the
repurchase of up to $250 million of the company's outstanding shares of common
stock. The shares are to be purchased in the open market and through privately
negotiated sales as the company deems appropriate. Through September 30, 1999,
the company had repurchased a total of 2.6 million shares at a cost of $167
million.
The overall debt to invested capital ratio of 44.1% at September 30, 1999 was
down over one percent from the year ago ratio, but up almost one percent from
the December 31, 1998 ratio due to the share buyback offsetting the reduction in
debt. The company's debt continues to be rated investment grade by Moody's
Investors Service Inc., Standard and Poor's, and Duff & Phelps.
Various European currency swaps and forward contracts serve as a hedge against
net foreign currency cash flows and also hedge a portion of the company's
European net assets. Changes in the value of the swaps and forward contracts due
to movements in exchange rates are included in the currency translation
component of stockholders' equity if they relate to the European net asset hedge
or otherwise are included in other income (expense) in the income statement.
In 1999, the company began hedging the USD debt of its subsidiaries in Brazil by
entering into forward contracts to reduce the company's exposure to exchange
rate fluctuations. As of September 30, 1999, the notional amount of outstanding
contracts totalled $104 million with expiration dates ranging from October, 1999
through February, 2000. These contracts had $4.1 million in unrealized gains as
of September 30, 1999.
In December 1996, a favorable decision was obtained by Multibras S.A.
Eletrodomesticos (Multibras) and Empresa Brasileira de Compresorres S.A.
(Embraco) with respect to additional
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
export incentives in connection with the Befiex program. In April 1997,
Multibras and Embraco submitted tax-credit claims for about 447 million reais
(equivalent to US$440 million as of December 1996) relating to the favorable
decision for exports from July 1988 through December 1996. This amount is
impacted by exchange rate fluctuations, offset by accrued interest. The
Brazilian government has filed an appeal to this ruling on which the courts must
render a decision, and then the Brazilian court must render a final decision on
the amount, timing and payment method of any final award, which will also be
subject to appeal. The company has not recognized any income relating to the
claims involving sales prior to 1997 because the timing and payment amount of
such claims is uncertain.
The company has external sources of capital available and believes it has
adequate financial resources and liquidity to meet anticipated business needs
and to fund future growth opportunities such as new products, acquisitions and
joint ventures.
Year 2000
- ---------
An issue affecting the company and most other companies is whether computer
systems and applications will properly process dates beyond the Year 2000. In
1996, the company began assessing the effect of this issue on its operations and
has since utilized the services of outside consultants in this effort. In 1998,
the company appointed a new Chief Information Officer, who has as one of his key
responsibilities the global coordination of the company's efforts to assess the
Year 2000 problem and implement the necessary changes.
The company currently does not anticipate any material adverse effect on its
computer software systems as a result of the Year 2000 problem. Key internal
computer systems have been evaluated for Year 2000 compliance and regional
remediation plans have been developed. Work is underway to replace or upgrade
key internal systems to ensure they remain operational up to and beyond December
31, 1999. Critical computer systems have been upgraded and implemented. Testing
and audits will continue through the end of 1999 to insure no new problems are
introduced. The company anticipates that Year 2000 remediation projects will be
successfully completed according to plan and that the costs of such projects
will not be material to the company. The cumulative cost of projects dedicated
solely to Year 2000 remediation is approximately $19 million and is currently
expected to be approximately $27 million by December 31, 1999. These costs do
not include the cost of upgrading systems for other business reasons; such
upgrades will usually provide the additional benefit of making the systems Year
2000 compliant. Also excluded is the cost of business assessments and readiness
activities.
The company also has completed an assessment of its products and does not
anticipate that any significant problems will be experienced with the appliances
it manufactures due to the Year 2000 issue. Appliances produced by the company
generally do not have calendar date systems and therefore are not likely to
experience failures caused by the millennium date change.
The company has surveyed its key suppliers to understand their plans to address
the Year 2000 problem. The company will continue monitoring its suppliers to
determine the availability of components and raw materials as the millennium
approaches; however, suppliers could have
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
significant Year 2000 problems that could adversely affect the company. The
company has established business teams in each of its regions around the world
to refine contingency plans that may be necessary for this issue, particularly
with regard to delays that may occur with supplier orders and the corresponding
need to recommend possible increases in inventories of raw materials, parts, and
finished product. Additionally, building and equipment infrastructure compliance
is still being assessed.
Although the company believes that it can address Year 2000 readiness issues
related to its operations, there still may be disruptions that are unforeseen.
These issues create risks for the entire business community with a wide range of
opinions on the effect of the Year 2000 issue on the overall global economy. The
effect of the problem on transportation systems, public utilities, and
government agencies, among others, are risks that cannot be adequately assessed
or addressed to eliminate the risk of the Year 2000 issue for the company. As a
result, while it is difficult for the company to appraise the likelihood, or the
impact on its business, of the risks of the Year 2000 problem, the company does
not believe its risks are greater than or different from other companies with
similar operations.
The company has taken further steps to increase the global coordination of its
Year 2000 compliance program and has appointed a global project manager to
oversee the Year 2000 compliance efforts of the company's operations in each
region. As part of this global coordination, an outside consultant has completed
reviews of the internal Year 2000 programs of the company's operations in each
of its regions around the world. The latest review during September indicated
that the company's major business units in its key markets of Europe, North
America and Latin America are following reasonable plans to address the Year
2000 issue. The company's increased focus on business units in India and China
has resulted in significant process over the past several months and these units
are now aligned with the other regional programs.
The above section, even if incorporated by reference into other documents or
disclosures, is a Year 2000 Readiness Disclosure as defined under the Year 2000
Information and Readiness Disclosure Act of 1998.
Euro Currency Conversion
- ------------------------
On January 1, 1999, eleven member nations of the European Union began the
conversion to a common currency, the "euro." The company has significant
manufacturing operations and sales in these countries. The introduction of the
euro has eliminated transaction gains and losses within participating countries
and there currently has not been any significant impact on operating results
from the change over to the euro.
Internal computer system and business processes will need to be changed to
accommodate the new currency. The company has established a cross-functional
team, guided by an executive-level steering committee, to address these issues.
It currently plans to make changes in two phases. In the first phase, from 1999
to 2001, the company will have the capability to bill customers and pay
suppliers in euro, but will continue to maintain its accounts in the national
currencies. In 2002, all
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
remaining operational and financial systems will be converted to the euro. The
cost of the first phase is not material; the cost of the second phase has not
been estimated at this time.
Operating efficiencies should ultimately result from reduction of the complexity
of doing business in multiple currencies. No estimate of these efficiencies has
been made.
FORWARD LOOKING STATEMENTS
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the company. Management's
Discussion and Analysis and other sections of this report may contain forward-
looking statements that reflect our current views with respect to future events
and financial performance.
Certain statements contained in this Quarterly Report on Form 10-Q and other
written and oral statements made from time to time by the company do not relate
strictly to historical or current facts. As such, they are considered "forward-
looking statements" which provide current expectations or forecasts of future
events. Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast," and similar words or
expressions. The company's forward-looking statements generally relate to its
growth strategies, financial results, product development, and sales efforts.
These forward-looking statements should be considered with the understanding
that such statements involve a variety of risks and uncertainties, known and
unknown, and may be affected by inaccurate assumptions. Consequently, no
forward-looking statement can be guaranteed and actual results may vary
materially.
Many factors could cause actual results to differ materially from the company's
forward-looking statements. Among these factors are: (1) competitive pressure to
reduce prices; (2) the ability to gain or maintain market share in an intensely
competitive global market; (3) the success of our global strategy to develop
brand differentiation and brand loyalty; (4) our ability to control operating
and selling costs and to maintain profit margins during industry downturns; (5)
the success of our Brazilian businesses operating in a challenging and volatile
environment; (6) continuation of our strong relationship with Sears, Roebuck and
Co. in North America which accounted for approximately 17% of our consolidated
net sales of $10.3 billion in 1998; (7) currency exchange rate fluctuations in
Latin America, Europe, and Asia that could affect our consolidated balance sheet
and income statement; (8) social, economic, and political volatility in
developing markets; and (9) our company's ability and our customers' and
suppliers' ability to replace, modify, or upgrade computer programs in ways that
adequately address the Year 2000 issue.
The company undertakes no obligation to update every forward-looking statement,
and investors are advised to review disclosures by the company in our filings
with the Securities and Exchange Commission. It is not possible to foresee or
identify all factors that could cause actual results to differ from expected or
historic results. Therefore, investors should not consider the foregoing factors
to be an exhaustive statement of all risks, uncertainties, or factors that could
potentially cause actual results to differ.
19
PART II. OTHER INFORMATION
--------------------------
WHIRLPOOL CORPORATION AND SUBSIDIARIES
Quarter Ended September 30, 1999
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. The following are included herein:
(27) Financial Data Schedule
(99) Computation of the ratios of earnings to fixed charges
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WHIRLPOOL CORPORATION
(Registrant)
By /s/ Mark Brown
-------------------------
Mark Brown
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 11, 1999
21