Item 1. Business.
Maytag is a leading producer of home and commercial appliances. Its products are sold to customers throughout North America and in international markets. Maytag was organized as a Delaware corporation in 1925.
Maytag is among the top three major appliance companies in the North American market, offering consumers a full line of washers, dryers, dishwashers, refrigerators and ranges distributed through large and small retailers across the U.S. and Canada. Maytag also has a significant presence in the commercial laundry market. Effective August 1, 2001, Maytag acquired the major appliances and commercial microwave oven businesses of Amana Appliances ("Amana"). Maytag's Hoover brand is the market leader in North America floor care products.
Maytag owns Dixie-Narco, one of the original brand names in the vending machine industry and today the leading manufacturer of soft drink can and bottle vending machines in the United States. Dixie-Narco venders are sold primarily to major soft drink bottlers such as Coca-Cola and Pepsico.
In commercial cooking appliances, Maytag owns Jade Range, a leading manufacturer of premium-priced commercial ranges and refrigerators, and commercial-style ranges for the residential market.
Maytag makes significant annual capital investments that have led directly to demonstrable and superior product innovations in its strongest brands. Superior product performance reinforces brand positioning; product and brand positioning drive average pricing and distribution.
The Company operates in two business segments: home appliances and commercial appliances. Sales to Sears, Roebuck and Co. represented 18% of 2001 consolidated net sales, 12% of 2000 consolidated net sales and 11% of 1999 consolidated net sales. Financial and other information relating to these reportable business segments is included in Part II, Item 7, Pages 7-13, and Item 8, Pages 45-47.
During 2001, Maytag classified its Blodgett foodservice operations and its 50.5 percent owned joint venture in China ("Rongshida-Maytag") as discontinued operations. All prior periods presented have been reclassified to reflect these results as discontinued operations. Previously, Blodgett was included in the commercial appliances segment and the international segment consisted solely of Rongshida-Maytag. Maytag completed the sale of Blodgett in December 2001.
Home Appliances
The home appliances segment represented 94.7 percent of consolidated net sales in 2001.
The operations of the Company's home appliances segment manufacture major appliances (laundry products, dishwashers, refrigerators, cooking appliances) and floor care products. These products are primarily sold to major national retailers and independent retail dealers in North America and targeted international markets. These products are sold primarily under the Maytag, Hoover, Jenn-Air, Magic Chef and beginning in 2001, Amana brand names. Included in this segment is Maytag International, Inc., the Company's international marketing subsidiary that administers the sale of home appliances and licensing of certain home appliance brands in markets outside the United States and Canada.
A portion of the Company's operations and sales is outside the United States. The risks involved in foreign operations vary from country to country and include tariffs, trade restrictions, changes in currency values, economic conditions and international relations.
The Company uses basic raw materials such as steel, copper, aluminum, rubber and plastic in its manufacturing process in addition to purchased motors, compressors, timers, valves and other components. These materials are supplied by established sources and the Company anticipates that such sources will, in general, be able to meet its future requirements.
The Company holds a number of patents that are important in the manufacture of its products. The Company also holds a number of trademark registrations of which the most important are
ADMIRAL, AMANA, HOOVER, JENN-AIR, MAGIC CHEF, MAYTAG, and the associated corporate symbols.
The Company's home appliance business is generally not considered seasonal.
A portion of the Company's accounts receivable is concentrated among major retailers. A significant loss of business with any of these national retailers could have an adverse impact on the Company's ongoing operations.
The dollar amount of backlog orders of the Company is not considered significant for home appliances in relation to the total annual dollar volume of sales. Because it is the Company's practice to maintain a level of inventory sufficient to cover anticipated shipments and since orders are generally shipped upon receipt, a large backlog would be unusual.
The home appliances market is highly competitive with the two principal major appliances competitors being larger than the Company. The Company is focused on growth through product innovation that supports superior product performance in the Company's premium brands. The Company also uses brand image, product quality, customer service, advertising and warranty as methods of competition.
Expenditures for company-sponsored research and development activities relating to the development of new products and the improvement of existing products are included in Part II, Item 8, page 43. Most of the research and development expenditures relate to the home appliances segment.
Although the Company has manufacturing sites with environmental concerns, compliance with laws and regulations regarding the discharge of materials into the environment or relating to the protection of the environment has not had a significant effect on capital expenditures, earnings or the Company's competitive position.
The Company has been identified as one of a group of potentially responsible parties by state and federal environmental protection agencies in remedial activities related to various "superfund" sites in the United States. The Company presently does not anticipate any significant adverse effect upon the Company's earnings or financial condition arising from resolution of these matters. Additional information regarding environmental remediation is included in Part II, Item 8, Page 45.
The Company is subject to changes in government mandated energy and environmental standards regarding appliances that may become effective over the next several years. The Company is in compliance with those existing standards where it does business. As any new standards that effect the entire appliance industry become effective, the Company intends to be in compliance with the new standards where it does business.
The number of employees of the Company in the home appliances segment as of December 31, 2001 was 20,288. Approximately 43 percent of these employees are covered by collective bargaining agreements. A collective bargaining agreement covering one of Maytag's refrigeration manufacturing sites is scheduled for negotiations in April of 2002.
Commercial Appliances
The commercial appliances segment represented 5.3 percent of consolidated net sales in 2001.
The operations of the Company's commercial appliances segment manufacture commercial cooking and vending equipment. These products are primarily sold to distributors, soft drink bottlers, restaurant chains and dealers in North America and targeted international markets. These products are sold primarily under the Dixie-Narco and Jade brand names.
The Company uses steel as a basic raw material in its manufacturing processes in addition to purchased motors, compressors and other components. These materials are supplied by established sources and the Company anticipates that such sources will, in general, be able to meet its future requirements.
The Company holds a number of patents that are important in the manufacture of its products. The Company also holds a numbers of trademark registrations of which the most important are DIXIE-NARCO and JADE and the associated corporate symbols.
Commercial appliance sales are considered seasonal to the extent that the Company normally experiences lower sales in the fourth quarter compared to other quarters.
Within the commercial appliances segment, the Company's vending equipment sales are dependent upon a few major soft drink suppliers. Therefore, the loss of one or more of these customers could have a significant adverse effect on the commercial appliances segment.
The dollar amount of backlog orders of the Company is not considered significant for commercial appliances in relation to the total annual dollar volume of sales. Because it is the Company's practice to maintain a level of inventory sufficient to cover shipments and since orders are generally shipped upon receipt, a large backlog would be unusual.
The Company uses brand image, product quality, product innovation, customer service, warranty and price as its principal methods of competition.
Expenditures for company-sponsored research and development activities relating to the development of new products and the improvement of existing products are included in Part II, Item 8, page 43.
Although the Company has manufacturing sites with environmental concerns, compliance with laws and regulations regarding the discharge of materials into the environment or relating to the protection of the environment has not had a significant effect on capital expenditures, earnings or the Company's competitive position.
The number of employees of the Company in the commercial appliances segment as of December 31, 2001 was 1,293.
Item 2.
Item 2. Properties.
The Company's corporate headquarters are located in Newton, Iowa. Major offices and manufacturing facilities in the United States related to the home appliances segment are located in: Newton, Iowa; Galesburg, Illinois; Cleveland, Tennessee; Jackson, Tennessee; Milan, Tennessee; Herrin, Illinois; Amana, Iowa; Florence, South Carolina; Searcy, Arkansas; Jefferson City, Missouri; North Canton, Ohio; and El Paso, Texas. The Company also has two facilities in Mexico. The Company has announced its plan to sell the facility located in Jefferson City, Missouri.
Major offices and manufacturing facilities in the United States related to the commercial appliances segment are located in: Williston, South Carolina and Commerce, California.
The facilities for the home appliances and commerical appliances segments are well maintained, suitably equipped and in good operating condition. The facilities used had sufficient capacity to meet production needs in 2001, and the Company expects that such capacity will be adequate for planned production in 2002. The Company's major capital projects and planned capital expenditures for 2002 are described in Part II, Item 7, Page 14.
The Company also owns or leases sales offices and warehouses in many large metropolitan areas throughout the United States and Canada. Lease commitments are included in Part II, Item 8, Page 36.
Item 3.
Item 3. Legal Proceedings.
The Company is involved in contractual disputes, environmental, administrative and legal proceedings and investigations of various types. Although any litigation, proceeding or investigation has an element of uncertainty, the Company believes that the outcome of any proceeding, lawsuit or claim which is pending or threatened, or all of them combined, will not have a significant adverse effect on its consolidated financial position. The Company's contingent liabilities are discussed in Part II, Item 8, Page 45.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders during the fourth quarter of 2001 through a solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers has served the Company in various executive or administrative positions for at least the last five years except as noted above and except for:
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The principal U.S. market the Company's common stock is traded on is the New York Stock Exchange under the symbol MYG. As of March 11, 2002, the Company had 21,114 shareowners of record.
Item 6.
Item 6. Selected Financial Data
Prior year results have been restated to reflect Blodgett and Rongshida-Maytag as discontinued operations. - -------- (1) Includes the net sales of Amana of $304.5 million that was acquired effective August 1, 2001. Operating income includes $9.8 million in special charges associated with a salaried workforce reduction. The after-tax special charges of $6.2 million are included in income from continuing operations. Income from continuing operations also includes a $7.2 million charge for loss on securities and a one-time tax credit of $42 million. (2) Operating income includes $39.9 million in special charges associated with terminated product initiatives, asset write-downs and severance costs related to management changes. The after-tax special charges of $25.3 million are included in income from continuing operations. Income from continuing operations also includes a $17.6 million ($11.2 million after-tax) charge for loss on securities. (3) Net sales include $20 million of sales from the Company's acquisition of Jade, a manufacturer of commercial ranges and refrigerators and residential ranges in the first quarter of 1999.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Maytag early adopted FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in the fourth quarter of 2001 and classified the 2001 results of its Blodgett foodservice business and its 50.5 percent owned joint venture in China ("Rongshida-Maytag") as discontinued operations. All prior periods presented have been restated to reflect these results as discontinued operations (see "Discontinued Operations" section in this Management's Discussion and Analysis).
Critical Accounting Policies
The following accounting policies and practices are those that management believes are most important to the portrayal of Maytag's financial condition and results and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Allowance for Doubtful Accounts: Maytag evaluates the collectibility of its accounts receivable based on a combination of factors. Where Maytag is aware of a customer's inability to meet its financial obligations (e.g., where it has filed for bankruptcy), Maytag specifically reserves for the potential bad debt to reduce the net recognized receivable to the amount it reasonably believes will be collected. For all other customers, Maytag establishes reserves for bad debts based on the length of time the receivables are past due ranging from 0.05% of the face amount of the account receivable for current amounts up to 90% for amounts more than 90 days past due, based on Maytag's historical experience. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a customer's ability to meet its financial obligations), Maytag's estimates of the recoverability of amounts due could be revised by a material amount.
Pensions: Maytag provides noncontributory defined benefit pension plans for most of its employees. Plans covering salaried, management and some nonunion hourly employees generally provide pension benefits that are based on an average of the employee's earnings and credited service. Plans covering union hourly and other nonunion hourly employees generally provide benefits of stated amounts for each year of service. Maytag's funding policy for the plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts that Maytag may determine to be appropriate. Maytag accounts for its defined benefit pension plans in accordance with FASB Statement No. 87, "Employers' Accounting for Pensions" which requires that amounts recognized in financial statements be determined on an actuarial basis. A minimum liability is required to be established on the Consolidated Balance Sheets representing the amount of unfunded accrued pension cost. The unfunded accrued pension cost is the difference between the accumulated benefit obligation and the fair value of the plan assets. When it is necessary to establish an additional minimum pension liability, an equal amount is recorded as an intangible pension asset limited to unrecognized prior service cost. Any excess amount is recorded as a reduction to shareowners' equity in Accumulated other comprehensive income, net of tax, in the Consolidated Balance Sheets.
To account for its defined benefit plans in accordance with Statement No. 87, at the end of each year, Maytag must make three main determinations: First, it must determine the actuarial assumption for the discount rate used to reflect the time value of money in the calculation of the projected benefit obligation for the end of the current year and to determine net periodic pension cost for the subsequent year. For guidance in determining the discount rate, Maytag looks at rates of return on high-quality fixed-income investments. At December 31, 2001, it determined this rate to be 7.5 percent compared to 7.75 percent used for 2000 and 1999.
Second, Maytag must determine the actuarial assumption for rates of increase in compensation levels used in the calculation of the projected benefit obligation for the end of the current year and to determine net periodic pension cost for the subsequent year. At December 31, 2001, it determined this rate to be 4.75 percent compared to 5.25 percent used for 2000 and 1999.
Third, Maytag must determine the expected long-term rate of return on assets assumption that is used to determine the expected return on plan assets component of the net periodic pension cost for the subsequent year. The difference between the actual
return on plan assets and the expected return is deferred under Statement No. 87 and is recognized to net periodic pension cost over a four year period. At December 31, 2001, Maytag determined the rate for determining 2002 net periodic pension cost to be 9 percent compared to 9.5 percent used for 2001.
At December 31, 2001, Maytag's accrued pension cost was $353 million, an increase from $50 million at the end of 2000. The majority of the increase in the accrued pension cost resulted from the significant decline in the plan's asset performance during 2001. In 2001, Maytag increased its pension contributions to $68 million from $42 million in 2000 and expects 2002 pension contributions to be approximately $115 million. For the year ended December 31, 2001, Maytag recognized consolidated pension expense of $42 million, an increase from $40 million in 2000. Maytag currently expects that consolidated pension expense for 2002 will increase to approximately $56 million due to a lower expected return on pension plan assets and a lower discount rate used to value the projected benefit obligation, partially offset by the decrease in expected rates of increase in compensation levels, as described above.
Postretirement Benefits: Maytag provides postretirement health care and life insurance benefits for certain employee groups in the United States. Most of the postretirement plans are contributory and contain certain other cost sharing features such as deductibles and coinsurance. The plans are unfunded. Employees do not vest and these benefits are subject to change. Death benefits for certain retired employees are funded as part of, and paid out of, pension plans.
Maytag accounts for its postretirement benefits in accordance with FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires the postretirement liability recognized in the Consolidated Balance Sheets and the postretirement cost recognized in the Consolidated Statements of Income be determined on an actuarial basis.
To account for its postretirement benefits in accordance with Statement No. 106, at the end of each year, Maytag must make two main determinations: First, it must determine the actuarial assumption for the discount rate used to reflect the time value of money in the calculation of the accumulated postretirement benefit obligation for the end of the current year and to determine postretirement cost for the subsequent year. For guidance in determining the discount rate, Maytag looks at rates of return on high-quality fixed-income investments. At December 31, 2001, Maytag determined this rate to be 7.5 percent compared to 7.75 percent used for 2000 and 1999.
Second, Maytag must determine the actuarial assumption for the health care trend rate used in the calculation of the accumulated postretirement benefit obligation for the end of the current year and to determine net periodic postretirement benefit cost for the subsequent year. At December 31, 2001, due to increasing medical costs, Maytag increased this initial health care trend rate from 5 percent to 7 percent. The health care trend rate decreases gradually to 5 percent in 2005 and thereafter.
At December 31, 2001, Maytag's postretirement benefit liability was $497 million, an increase from $479 million at the end of 2000. For the year ended December 31, 2001, Maytag recognized postretirement cost of $46 million, an increase from $43 million in 2000. Maytag currently expects that postretirement expense for 2002 will increase to approximately $53 million due to a lower discount rate used to value the accumulated postretirement benefit obligation and an increase in the assumed health care cost trend rate, as described above.
Financial Instruments: Maytag uses foreign exchange forward contracts to manage certain foreign currency exchange exposure related to sales denominated in foreign currency. The fair values of the contracts are recognized in Other current assets in the Consolidated Balance Sheets. The forward contracts are designated as cash flow hedges, and changes in the fair value of the contracts are recognized in Other comprehensive income until the hedged item is recognized in Net sales of the Consolidated Statements of Income. Hedge ineffectiveness related to these contracts is recognized through earnings over the terms of the contract and is not significant.
Maytag has a trading program of interest rate swap contracts outstanding that are marked to market each period. The fair values of the swap positions are reflected in Other noncurrent liabilities in the Consolidated Balance Sheets. The payments made or received, as well as the mark to market adjustment, are recognized in interest expense.
Maytag uses interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swap contracts are designated as fair value hedges and the fair value of the contracts and the underlying debt obligations are recorded as Other noncurrent assets and Long-term debt on the Consolidated Balance Sheets, respectively, with equal and offsetting unrealized gains and losses in the interest expense component of the Consolidated Statements of Income. As the terms, interest rates and payment dates match exactly with the underlying debt there is no hedge ineffectiveness. Payments made or received are recognized in interest expense.
Maytag uses commodity swap agreements to manage certain commodity price exposure related to components used in the manufacture of home and commercial appliances. The fair value of the contracts is recognized in Other current assets in the Consolidated Balance Sheets. The swap contracts are designated as cash flow hedges, and changes in the fair value of the contracts are recognized in Other comprehensive income until the hedged item is recognized in Cost of sales of the Consolidated Statements of Income. Hedge ineffectiveness related to these contracts is recognized through earnings over the terms of the contract and is not significant.
See discussion of quantitative and qualitative disclosures about market risk in "Market Risks" section of this Management's Discussion and Analysis.
Litigation and Tax Contingencies: Maytag is a defendant in a number of legal proceedings associated with employment and product liability matters. Maytag's legal department estimates the costs to settle pending litigation, including legal expenses, based on its experience involving similar cases, specific facts known, and if applicable based on judgments of outside counsel. Maytag does not believe it is a party to any legal proceedings that will likely have a material adverse effect on its consolidated financial position. It is possible, however, that future results of operations, for any particular quarterly or annual period, could be materially affected by changes in Maytag's assumptions related to these proceedings.
Maytag's tax returns are subject to audit by various domestic and foreign tax authorities. During the course of these audits, the authorities often question the positions taken in the return, including the timing and amount of deductions and the allocation of income among various tax jurisdictions, which can affect the amount of taxes ultimately due. In evaluating the exposure associated with its various filing positions, Maytag records reserves for probable exposures. To the extent Maytag were to prevail in matters where accruals have been established or required to pay amounts in excess of the accrual, Maytag's effective tax rate and net income in a given financial period may be materially impacted.
Comparison of 2001 with 2000
Maytag has two reportable segments: home appliances and commercial appliances (see discussion and financial information about Maytag's reportable segments in "Segment Reporting" section of the Notes to Consolidated Financial Statements). The 2001 results include the major appliances business of Amana Appliances ("Amana") that was acquired by Maytag effective August 1, 2001 (see "Business Acquisitions" section in this Management's Discussion and Analysis).
Net Sales: Consolidated net sales for 2001 were $4.324 billion, an increase of eight percent from 2000. Excluding the impact of the Amana acquisition, 2001 net sales increased one percent over 2000.
Home appliances net sales, which include major appliances, floor care products and international export sales, increased ten percent compared to 2000 primarily due to the impact of the Amana acquisition. Excluding Amana, home appliances sales were up two percent with increases in major appliances partially offset by decreases in floor care products and export sales. The increase in major appliances sales was achieved despite a decline in industry unit shipments for 2001. The decrease in sales of floor care products was due to the industry being down, the retail focus on lower priced products in contrast to Maytag's strategy of premium priced products, and higher sales beginning in the third quarter of 2000 associated with the introduction of Maytag's new bagless floor care products.
For 2002, Maytag expects the floor care and major appliances industries to be flat to up slightly relative to 2001. The bankruptcy filing in January 2002 by a major national retailer may negatively impact Maytag's floor care sales in the first half of
2002. A collective bargaining agreement covering one of Maytag's refrigeration manufacturing sites is scheduled for negotiations in April of 2002. If agreement is not reached in a timely manner, any resulting work stoppage could have an adverse impact on Maytag's results of operations.
Commercial appliances net sales, which include vending and foodservice, decreased 18 percent in 2001 compared to 2000. The net sales decrease was due primarily to the continued weak vending equipment industry. For 2002, the vending equipment industry is expected to be flat relative to 2001.
Gross Profit: Consolidated gross profit as a percent of sales decreased to 23.2 percent in 2001 from 27.3 percent of sales in 2000. The decrease in gross margin was due primarily to weaker product pricing, product mix and higher distribution and warranty costs partially offset by lower raw material costs. Maytag expects raw material prices for 2002 to be flat to slightly lower compared to 2001. Maytag expects 2002 pension and postretirement costs to increase by approximately $17 million compared to 2001 due to a lower expected return on pension plan assets, a lower discount rate used to value the projected benefit obligation and an increase in the assumed health care cost trend rate.
Selling, General and Administrative Expenses: Consolidated selling, general and administrative expenses were 16.3 percent of sales in 2001 compared to 15.3 percent of sales in 2000. The increase was due primarily to higher national advertising expenses as well as other general and administrative expenses. Selling, general and administrative expenses are expected to decrease as a percentage of sales in 2002 compared to 2001. This is due to a corporate-wide cost reduction initiative as well as a change in accounting standards, effective January 1, 2002, whereby goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but subject to annual impairment tests. Selling, general and administrative expense is also expected to decrease in 2002 due to new accounting standards effective January 1, 2002 that require Maytag to classify certain sales incentive offers as a reduction to sales that were previously classified in selling, general and administrative expense (see "Impact of Recently Issued Accounting Standards" section in the Notes to the Consolidated Financial Statements).
Special Charges: During the fourth quarter of 2001, Maytag recorded in operating income special charges of $9.8 million, or $6.2 million after-tax, primarily associated with severance costs related to a salaried workforce reduction. Of the $9.8 million special charges, $7.9 million, $0.7 million and $1.2 million were recorded in the home appliances segment, commercial appliances segment and corporate, respectively.
During the fourth quarter of 2000, Maytag recorded in operating income, special charges of $39.9 million, or $25.3 million after-tax, associated with terminated product initiatives, asset write downs and executive severance costs related to management changes. Of the $39.9 million special charges, $19.7 million and $20.2 million were recorded in the home appliances segment and corporate, respectively.
Operating Income: Consolidated operating income for 2001 was $289 million, or 6.7 percent of sales, compared to $440 million, or 11 percent of sales, in 2000. Excluding the special charges of $9.8 million, consolidated operating income for 2001 was $299 million, or 6.9 percent of sales. Excluding the special charges of $39.9 million, consolidated operating income for 2000 was $480 million, or 12 percent of sales. The decrease in operating margin was primarily due to the decrease in gross profit margin discussed above.
Home appliances operating income, excluding special charges of $7.9 million, decreased 33 percent in 2001 compared to 2000. Operating margin, excluding special charges, for 2001 was 8.1 percent of sales compared to 13.4 percent of sales in 2000. The decrease in operating margin was due primarily to the decrease in gross profit margins discussed above.
Commercial appliances operating income, excluding special charges of $0.7 million, decreased 78 percent in 2001 compared to 2000. Operating margin for 2001, excluding special charges, was 2.8 percent of sales compared to 10.5 percent of sales in 2000. The decrease in operating income was due primarily to the decrease in sales discussed above.
Interest Expense: Interest expense for 2001 was seven percent higher than 2000. The increase resulted from additional debt issued for the acquisition of Amana and the classification of the financing costs related to the Maytag Trusts as
interest expense instead of minority interest during the third quarter of 2001. These increases were partially offset by lower average borrowing rates (see "Company Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Debentures and Minority Interests" section in the Notes to Consolidated Financial Statements for further discussion on the Maytag Trusts).
Loss on Securities: During the fourth quarter of 2001, Maytag recorded a loss on securities of $7.2 million resulting from the write-off of a remaining investment in an Internet-related company. During the fourth quarter of 2000, Maytag recorded losses on securities of $17.6 million, or $11.2 million after-tax, resulting from a lower market valuation of securities held in TurboChef Technologies, Inc. and investments in privately held Internet-related companies.
Income Taxes: The 2001 effective tax rate, excluding a one-time tax benefit of $42 million and the $7.2 million loss on securities where future tax benefit is uncertain, was 32.9 percent compared to 33.6 percent in 2000. The $42 million one time tax benefit was associated with an Internal Revenue Service audit settlement related to recognition of capital gains in prior year tax returns that were offset by available capital loss carryforwards. Maytag expects the effective tax rate for 2002 to be approximately 34 percent.
Minority Interest: Minority interest decreased by $6.1 million in 2001 compared to 2000 primarily due to the early retirement of the $200 million Maytag Trust obligations as discussed under "Extraordinary Item-Loss on Early Retirement of Debt" of this Management's Discussion and Analysis and the classification of the financing costs related to the Maytag Trusts as interest expense instead of minority interest in the third quarter of 2001 (see "Company Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Debentures and Minority Interests" section in the Notes to Consolidated Financial Statements for further discussion on the Maytag Trusts).
Discontinued Operations: During the third quarter of 2001, a $59.5 million net loss was recognized on the pending sale of Blodgett that was subsequently completed in December 2001. No tax benefit was recorded on the $59.5 million capital loss as the future tax benefit from such loss is uncertain. The sale of Blodgett generated notes receivable of $21 million and net cash proceeds of $70.6 million after transaction costs of $3.4 million.
Maytag has committed to a plan to dispose of its interest in Rongshida-Maytag during 2002. A charge was recognized in the fourth quarter of 2001 of approximately $42.3 million to write down Maytag's interest in the net assets of Rongshida-Maytag to its fair value less cost to dispose. The estimated fair value was calculated using expected future cash flows discounted at a ten percent rate as there was no observable market price. The fair value of Maytag's interest in Rongshida-Maytag will be evaluated in each subsequent period. No tax benefit was recorded on the $42.3 million capital loss as the future tax benefit from such loss is uncertain.
Cumulative Effect of Accounting Change: A cumulative effect of accounting change of $3.7 million was recognized in the second quarter of 2001 due to the implementation of accounting rules effective June 30, 2001. The accounting rules required Maytag to establish the fair market value of the put obligations and purchase contracts associated with the Maytag Trusts on the balance sheet (see "Impact of Recently Issued Accounting Standards" and "Earnings Per Share" sections in the Notes to the Consolidated Financial Statements).
Extraordinary Item-Loss on Early Retirement of Debt: In the third quarter of 2001, Maytag recognized an after-tax loss on early retirement of debt of $5.2 million related to the cost of refinancing the Maytag Trusts (see "Company Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Debentures and Minority Interests" section in the Notes to Consolidated Financial Statements for further discussion on the Maytag Trusts).
Net Income (Loss): The following table summarizes the impact of the special charges, loss on securities, discontinued operations, one-time tax benefit, extraordinary item and cumulative effect of accounting change on reported net income and diluted earnings per share. The decrease in net income in 2001 compared to the same period in 2000,
excluding the special items above, was due primarily to the decrease in operating income.
The decrease in diluted earnings per share in 2001 compared to 2000, excluding the special items was also due primarily to the decrease in operating income partially offset by lower diluted average shares outstanding.
The $3.7 million cumulative effect of accounting change was accretive to diluted earnings per share by $0.76 due to the specific calculation requirements of dilutive earnings per share according to FASB No. 128, "Earnings Per Share" (see "Impact of Recently Issued Accounting Standards" and "Earnings Per Share" section in the Notes to the Consolidated Financial Statements for further discussion).
Comparison of 2000 with 1999
Net Sales: Consolidated net sales for 2000 were $4.0 billion, a decrease of 1 percent from 1999. Home appliances net sales, which include major appliances and floor care products, were up slightly compared to 1999 due to increased sales of floor care products and export sales partially offset by a decrease in major appliances sales. The sales growth in floor care products exceeded industry growth primarily due to the introduction of two lines of bagless upright cleaners. The decrease in major appliances sales was due primarily to intense competition attributable to the loss of several key retail distribution channels and a decline in major appliances industry sales in the second half of 2000. Maytag's full year 2000 major appliances shipments were down compared to 1999, despite industry shipments setting a new one-year record.
Commercial appliances net sales, which include vending and foodservice equipment, decreased 19 percent in 2000 compared to 1999. The net sales decrease was due primarily to a softening of industry demand for vending equipment.
Gross Profit: Consolidated gross profit as a percent of sales decreased to 27.3 percent of sales in 2000 from 29.2 percent of sales in 1999. The decrease in gross margin was due primarily to the competitive pricing environment and lower sales volume as well as higher research and development costs.
Selling, General and Administrative Expenses: Consolidated selling, general and administrative expenses were 15.3 percent of sales in 2000 compared to 15 percent of sales in 1999. The increase was due primarily to increased sales promotion expenses partially offset by lower incentive compensation expense.
Special Charges: During the fourth quarter of 2000, Maytag recorded in operating income special charges of $39.9 million, or $25.3 million after-tax, associated with terminated product initiatives, asset write-downs and executive severance costs related to management changes. Of the $39.9 million special charges $19.7 million and $20.2 million were recorded in home appliances and corporate, respectively.
Operating Income: Consolidated operating income for 2000 was $440 million, or 11.0 percent of sales, compared to $572 million, or 14.1 percent of sales, in 1999. Excluding the special charges of $39.9 million, consolidated operating income for 2000 was $480 million, or 12 percent of sales. The decrease in operating margin was primarily due to the decrease in gross profit margin discussed above.
Home appliances operating income, excluding special charges of $19.7 million, decreased 11 percent in 2000 compared to 1999. Operating margin, excluding special charges, for 2000 was 13.4 percent of sales compared to 15.2 percent of sales in 1999. The decrease in operating margin was due primarily to the decrease in gross profit margins discussed above.
Commercial appliances operating income decreased 43 percent in 2000 compared to 1999. Operating margin for 2000 was 10.5 percent of sales compared to 15.0 percent of sales in 1999. The decrease in operating income was due primarily to the decrease in sales discussed above.
Interest Expense: Interest expense for 2000 was 25 percent higher than 1999 due to higher average borrowings primarily associated with share repurchases partially offset by lower interest rates.
Loss on Securities: Maytag recorded losses on securities of $17.6 million, or $11.2 million after-tax, resulting from a lower market valuation of securities held in TurboChef Technologies, Inc. and investments in privately held Internet-related companies.
Income Taxes: The effective tax rate was 33.6 percent, a decrease from 36.2 percent for 1999. The decrease in the effective tax rate was due to benefits associated with additional research and development tax credits and financing transactions that established the Maytag Capital Trusts in the second half of 1999.
Minority Interest: Minority interest increased by $9 million in 2000 compared to 1999 primarily because of the financing transactions that established the Maytag Capital Trusts in the second half of 1999.
Net Income: The following table summarizes the impact of special charges and loss on securities on reported net income and diluted earnings per share. The decrease in net income, excluding special items, was primarily due to the decrease in operating income and higher interest and minority interest expense. The decrease in diluted earnings per share, excluding special items, was due to the decrease in net income partially offset by the impact of lower shares outstanding as a result of Maytag's share repurchase program.
Liquidity and Capital Resources
Maytag's primary sources of liquidity are cash provided by operating activities and borrowings. Detailed information on Maytag's cash flows is
presented in the Consolidated Statements of Cash Flows.
Net Cash Provided by Operating Activities: Cash flow provided by operating activities consists primarily of net income adjusted for certain non-cash items, changes in working capital items, changes in pension assets and liabilities and postretirement benefits. Non-cash items include depreciation and amortization and deferred income taxes. Working capital items consist primarily of accounts receivable, inventories, other current assets and other current liabilities.
Net cash provided by operating activities for 2001 increased $19 million compared to 2000 primarily due to a decrease in working capital requirements in 2001 compared to 2000 which more than offset decreases in net income.
In 2001, Maytag increased its pension contributions to $68 million from $42 million in 2000 and expects 2002 pension contributions to be approximately $115 million.
A portion of Maytag's accounts receivable is concentrated among major national retailers. A significant loss of business with any of these retailers could have an adverse impact on Maytag's ongoing operations.
Maytag has arrangements with certain finance companies to provide floor plan financing for certain customers. These arrangements provide liquidity for Maytag by financing customer purchases of Maytag products. Maytag sells accounts receivable to the finance companies to primarily accelerate cash flow and lower working capital needs. The accounts receivable are sold without recourse.
Total Investing Activities: Maytag's capital expenditures represent continual investments in its businesses for new product designs, cost reduction programs, replacement of equipment, capacity expansion and government mandated product requirements and similar items.
Capital expenditures in 2001 were $146 million compared to $153 million in 2000. Maytag plans to invest approximately $190 million in capital expenditures in 2002.
Effective December 2001, Maytag completed the sale of Blodgett that generated notes receivable of $21 million and net cash proceeds of $70.6 million after transaction costs of $3.4 million (see discussion in "Discontinued Operations" section in this Management's Discussion and Analysis). Effective August 2001, Maytag acquired the appliance business of Amana for $313.5 million in cash and $16.5 million in common stock (see discussion in "Business Acquisition" section in this Management's Discussion and Analysis).
Total Financing Activities: Dividend payments on Maytag's common stock in 2001 and 2000 were $55 million and $56 million, respectively or $0.72 per share. In connection with its previously outstanding put option contracts, during 2001, Maytag repurchased 0.4 million shares of common stock at a cost of $28 million and cash settled remaining put option contracts for $17 million.
Any funding requirements for future investing and financing activities in excess of cash on hand and generated from operations will be supplemented by borrowings. Maytag's commercial paper program is supported by two credit agreements with a consortium of lenders that provide revolving credit facilities of $200 million each, totaling $400 million. These agreements expire May 2, 2002 and May 3, 2004. Maytag had $148 million of commercial paper outstanding as of December 31, 2001. The credit agreements include financial covenants with respect to interest coverage and leverage and give the lenders a right to terminate the facilities upon the occurrence of an event of default, which include failure to comply with the financial covenants, failure to maintain an investment grade rating by both Moody's Investors Service, Inc. and Standard & Poors Rating Services Group on Maytag's senior unsecured long-term debt and the existency of defaults under other debt for borrowed money of Maytag. Maytag is in compliance with the financial covenants in the credit agreements as of December 31, 2001 and expects to be in compliance with these financial covenants through the end of 2002. The existence of an event of default under the credit agreements or the termination of the credit agreements because of an event of default would adversely impact Maytag's ability to borrow through the sale of commercial paper.
In April 2001, Maytag issued $185 million of notes due March 31, 2006 under an effective shelf registration statement. Maytag subsequently filed a new shelf registration with the Securities and Exchange Commission for $750 million of debt securities. In August 2001, Maytag issued $250 million of notes due August 1, 2031 and in November 2001, issued $200 million of notes due December 1, 2006 under this shelf registration statement.
Future obligations and commitments to make future payments under contracts consisted the following:
Notes of $194 million included in the long-term debt grant holders the right to require the Company to repurchase all or any portion of these notes at 100 percent of the principal amount thereof, together with accrued interest, following the occurrence of both a change of Company control and a credit rating decline to below investment grade.
Market Risks
Maytag is exposed to foreign currency exchange risk related to its transactions, assets and liabilities denominated in foreign currencies. To manage certain foreign exchange exposures, Maytag enters into foreign currency forward and option contracts. Maytag's policy is to hedge a portion of its anticipated foreign currency denominated export sales transactions, which are denominated primarily in Canadian dollars, for periods not exceeding twelve months. At December 31, 2001, a uniform 10 percent strengthening of the U.S. dollar relative to the foreign currencies in which Maytag's sales are denominated would result in a decrease in net income of approximately $14 million for the year ending December 31, 2002. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in potential changes in sales levels or local currency prices.
Maytag also is exposed to commodity price risk related to Maytag's purchase of selected commodities used in the manufacturing of its products. To reduce the effect of changing raw material prices for selected commodities, Maytag has entered into commodity swap agreements to hedge a portion of its anticipated raw material purchases on selected commodities. At December 31, 2001, a uniform 10 percent increase in the price of commodities covered by commodity swap agreements would result in a decrease in net income of approximately $4 million for the year ending December 31, 2002.
Maytag also is exposed to interest rate risk in the portfolio of Maytag's debt. Maytag uses interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. The swaps involve the exchange of fixed and variable rate payments without exchanging the notional principal amount. At December 31, 2001, a uniform 10 percent increase in interest rates would result in a decrease in net income of approximately $1 million for the year ending December 31, 2002.
Contingencies
Maytag has contingent liabilities arising in the normal course of business, including pending litigation, environmental remediation, taxes and other claims. Maytag's legal department estimates the costs to settle pending litigation, including legal expenses, based on its experience involving similar cases, specific facts known, and if applicable based on judgments of outside counsel. Maytag believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
As of December 31, 2001 Maytag had approximately $37 million in stand-by letters of credits primarily associated with the requirement to fund certain unqualified pension plans in the event of a change in control.
Business Acquisition
Effective August 1, 2001, Maytag acquired the major appliances and commercial microwave oven businesses of Amana Appliances ("Amana"). The annual sales of the Amana businesses acquired were approximately $900 million. The total purchase price of $330 million included $313.5 million in cash, subject to adjustments, and delivery of 500 thousand shares of Maytag common stock with a market value of $16.5 million. The $313.5 million in cash included approximately $4.5 million in transaction costs directly related to the acquisition as well as net cash acquired of $4.7 million. The net fair market value of the assets acquired exceeded the purchase price by approximately $14 million. The difference was allocated on a pro rata basis to the long-lived assets acquired. The purchase contract contains a price adjustment mechanism, that when ultimately settled, will result in a change in the amount of the excess described above.
The following table summarizes the estimated fair market values of the assets acquired and liabilities assumed at the date of acquisition net of the $14 million allocation.
As a result of the acquisition, Maytag expects to be more cost effective and operationally efficient in its major appliance business. To achieve these synergies Maytag formulated a plan to restructure certain parts of the Amana business that included elimination of duplicate positions and relocating employees of the acquired Amana operations. Approximately $8.7 million of costs related to the reorganization are included in the current liabilities of the net assets acquired of which $1.8 million was expended in cash during 2001.
Forward-Looking Statements
This Management's Discussion and Analysis contains statements that are not historical facts and are considered "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by their use of the terms: "expect," "intend," "may impact," "plan," "should" or similar terms. These forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from expected results. These risks and uncertainties include, but are not limited to, the following: business conditions and growth of industries in which Maytag competes, including changes in economic conditions in the geographic areas where Maytag's operations exist or products are sold; timing, start-up and customer acceptance of newly designed products; shortages of manufacturing capacity; competitive factors, such as price competition and new product introductions; significant loss of business from a major national retailer; the cost and availability of raw materials and purchased components; union labor negotiations; progress on capital projects; the impact of business acquisitions or dispositions; the ability of Maytag to integrate the operations from acquisitions into its operations; the costs of complying with governmental regulations; litigation and other risk factors.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
See discussion of quantitative and qualitative disclosures about market risk in "Market Risks" section of this Management's Discussion and Analysis.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
Shareowners and Board of Directors Maytag Corporation
We have audited the accompanying consolidated balance sheets of Maytag Corporation as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, shareowners' equity, and cash flows for each of three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(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 auditing standards generally accepted in the 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 Maytag Corporation at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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.
ERNST & YOUNG LLP
Chicago, Illinois January 22, 2002
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts and transactions of the Company and its wholly owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Exchange rate fluctuations from translating the financial statements of subsidiaries located outside the United States into U.S. dollars are recorded in accumulated other comprehensive income in shareowners' equity. All other foreign exchange gains and losses are included in income.
Reclassifications: Certain previously reported amounts have been reclassified to conform with the current period presentation.
Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents: Highly liquid investments with a maturity of three months or less when purchased are considered by the Company to be cash equivalents.
Inventories: Inventories are stated at the lower of cost or market. Inventory costs are determined by the last-in, first-out (LIFO) method for approximately 91 percent and 90 percent of the Company's inventories at December 31, 2001 and 2000, respectively. Costs for other inventories have been determined principally by the first-in, first-out (FIFO) method.
Income Taxes: Income taxes are accounted for using the asset and liability approach in accordance with Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes." Such approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities.
Intangibles: Intangibles principally represent goodwill, which is the cost of business acquisitions in excess of the fair value of identifiable net tangible assets acquired. Goodwill is amortized over 20 to 40 years using the straight-line method. On an ongoing basis the Company reviews intangible assets and other long-lived assets for impairment whenever events and circumstances indicate the carrying amounts may not be recoverable. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset (or acquired business) are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value using discounted cashflows. No such adjustments have been required to date.
In June 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangibles," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but subject to annual impairment tests in accordance with the Statements. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income from continuing operations of approximately $9.1 million ($0.12 per share) for the year 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets. The Company has not determined what the effect of these tests will be on earnings and the financial position of the Company.
Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost. Depreciation expense is calculated principally on the straight-line method to amortize the cost of the assets over their estimated economic useful lives. The estimated useful lives are 15 to 45 years for buildings and improvements and 3 to 20 years for machinery and equipment.
Environmental Expenditures: The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
Revenue Recognition, Shipping and Handling and Product Warranty Costs: Revenue from sales of products is recognized upon shipment to customers. Shipping and handling fees charged to customers are included in net sales, and shipping and handling costs incurred by the Company are included in cost of sales. Estimated product warranty costs are recorded at the time of sale and periodically adjusted to reflect actual experience.
Advertising and Sales Promotion: All costs associated with advertising and promoting products are expensed in the period incurred.
Financial Instruments: The Company uses foreign exchange forward contracts to manage certain foreign currency exchange exposure related to sales denominated in foreign currency. The fair values of the contracts are recognized in Other current assets in the Consolidated Balance Sheets. The forward contracts are designated as cash flow hedges, and changes in the fair value of the contracts are recognized in Other comprehensive income until the hedged item is recognized in Net sales of the Consolidated Statements of Income. Hedge ineffectiveness related to these contracts is recognized through earnings over the terms of the contract and is not significant.
The Company has a trading program of interest rate swap contracts outstanding that are marked to market each period. The fair values of the swap positions are reflected in Other noncurrent liabilities in the Consolidated Balance Sheets. The payments made or received, as well as the mark to market adjustment, are recognized in interest expense.
The Company uses interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swap contracts are designated as fair value hedges and the fair value of the contracts and the underlying debt obligations are recorded as Other noncurrent assets and Long-term debt on the Consolidated Balance Sheets, respectively, with equal and offsetting unrealized gains and losses in the interest expense component of the Consolidated Statements of Income. As the terms, interest rates and payment dates match exactly with the underlying debt there is no hedge ineffectiveness. Payments made or received are recognized in interest expense.
The Company uses commodity swap agreements to manage certain commodity price exposure related to components used in the manufacture of home and commercial appliances. The fair value of the contracts is recognized in Other current assets in the Consolidated Balance Sheets. The swap contracts are designated as cash flow hedges, and changes in the fair value of the contracts are recognized in Other comprehensive income until the hedged item is recognized in Cost of sales of the Consolidated Statements of Income. Hedge ineffectiveness related to these contracts is recognized through earnings over the terms of the contract and is not significant.
Stock-Based Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options and awards. Under APB 25, no compensation expense is recognized when the exercise price of options equals or is greater than the fair market value of the underlying stock on the date of grant.
Earnings Per Common Share: Basic and diluted earnings per share are calculated in accordance with FASB Statement No. 128, "Earnings Per Share." Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities, such as stock options and put options, into common stock.
Comprehensive Income: Comprehensive Income is calculated in accordance with FASB Statement No. 130, "Reporting Comprehensive Income." Statement 130 requires that unrealized gains (losses) on the Company's available-for-sale securities, hedges, minimum pension liability adjustments and foreign currency translation adjustments be included in accumulated other comprehensive income as a component of shareowners' equity.
Impact of Recently Issued Accounting Standards: FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was effective January 1, 2001. Statement 133 required the Company to recognize all derivatives on the consolidated balance sheet at fair value. The adoption of Statement 133 did not have a significant
effect on the Company's results of operations or financial position.
The Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) issue No. 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying EITF Issue No. 96-13," was effective June 30, 2001. EITF 00-19 required the Company to record the put options related to the Maytag Trusts (see "Company Obligated Manditorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Debentures and Minority Interests" section in the Notes to Consolidated Financial Statements) as a liability at fair market value beginning June 30, 2001. This is because the Company had determined the put options contained certain contract features that limited the Company's ability to determine a net share settlement. EITF 00-19 also required the recording of an asset at fair market value for the stock purchase contract feature within the Maytag Trusts beginning June 30, 2001 as the stock purchase contract also contained features that limit the Company's ability to determine a net share settlement. The Company recognized a cumulative effect of a change in accounting principle loss of $3.7 million for the establishment of the assets and liabilities related to the purchase contracts and put options. Pro forma amounts have not been presented as the adoption would have no significant impact on net income for each period presented. As the put options were reflected as liabilities, the $200 million maximum potential obligation related to the Maytag Trust put options established at the end of 2000 as temporary equity was transferred back into paid-in capital. The Company cash settled the purchase contracts and put options in September 2001 and they are no longer reflected on the Consolidated Balance Sheets as of December 31, 2001.
The FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001 that the Company early adopted in the fourth quarter of 2001. It establishes a single accounting method for long-lived assets to be disposed of including those that are part of discontinued operations and broadens the presentation requirements of discontinued operations to include components of an entity disposed of rather than a segment of a business (see "Discontinued Operations" section in the Notes to Consolidated Financial Statements).
In November 2001, the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) reached consensus on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." This guidance is effective for periods beginning after December 15, 2001. EITF 01-9 requires companies to classify certain sales incentive offers as a reduction to sales that were previously classified in selling, general and administrative expense. Prior periods are required to be restated. Upon adoption in 2002, there will be no impact on the Company's operating income or net income as a result of the new accounting policy.
Business Acquisitions
Effective August 1, 2001, Maytag acquired the major appliances and commercial microwave oven businesses of Amana Appliances ("Amana"). The annual sales of the Amana businesses acquired were approximately $900 million. The total purchase price of $330 million included $313.5 million in cash, subject to adjustments, and delivery of 500 thousand shares of Maytag common stock with a market value of $16.5 million. The $313.5 million in cash included approximately $4.5 million in transaction costs directly related to the acquisition as well as net cash acquired of $4.7 million. The net fair market value of the assets acquired exceeded the purchase price by approximately $14 million. The difference was allocated on a pro rata basis to the long-lived assets acquired. The purchase contract contains a price adjustment mechanism, that when ultimately settled, will result in a change in the amount of the excess described above.
The following table summarizes the estimated fair market values of the assets acquired and liabilities assumed at the date of acquisition net of the $14 million allocation.
As a result of the acquisition, the Company expects to be more cost effective and operationally efficient in its major appliance business. To achieve these synergies the Company formulated a plan to restructure certain parts of the Amana business that included elimination of duplicate positions and relocating employees of the acquired Amana operations. Approximately $8.7 million of costs related to the reorganization are included in the current liabilities of the net assets acquired, of which $1.8 million was expended in cash during 2001.
The acquired intangible assets of $35 million represent trademarks that will be amortized over their estimated useful life of 40 years. The Company accounted for the acquisition as a purchase, and the acquired operations are included in the consolidated financial statements as a part of the home appliances segment beginning August 1, 2001. Assuming the purchase of Amana had been effective as of January 1, 2000, the pro forma consolidated net sales would have been $4.8 billion and $4.9 billion for 2001 and 2000, respectively. Assuming the purchase had been effective as of January 1, 2000, pro forma impact on income before extraordinary item and cumulative effect of accounting change, net income and earnings per share would not have been materially different from the reported amounts for 2001 and 2000.
Effective January 1, 1999, the Company acquired all of the outstanding shares of a manufacturer of commercial ranges, and refrigerators and residential ranges for $19.2 million. In connection with the purchase, the Company retired debt and incurred transaction costs of $3.6 million and delivered 289 thousand shares of Maytag common stock with a market value of $15.6 million. The acquisition has been accounted for as a purchase, and the results of its operations have been included in the consolidated financial statements since the date of acquisition. The excess of purchase price over the fair values of net assets acquired was approximately $17 million and has been recorded as Other intangibles (goodwill) in the Consolidated Balance Sheets.
Discontinued Operations
The Company early adopted FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in the fourth quarter of 2001 and classified its Blodgett foodservice operations and its 50.5 percent owned joint venture in China ("Rongshida-Maytag") as discontinued operations. All prior periods presented have been reclassified to reflect these results as discontinued operations. Previously, Blodgett was included in the commercial appliances segment and the international segment consisted solely of Rongshida-Maytag.
During the third quarter of 2001, a $59.5 million net loss was recognized on the then pending sale of Blodgett that was subsequently completed in December 2001. No tax benefit was recorded on the $59.5 million capital loss as the future tax benefit from such loss is uncertain. The sale of Blodgett generated notes receivable of $21 million and net cash proceeds of $70.6 million after transaction costs of $3.4 million.
The Company has committed to a plan to dispose of its interest in Rongshida-Maytag during 2002. A charge was recognized in the fourth quarter of 2001 of approximately $42.3 million to write down the Company's interest in the net assets of Rongshida-Maytag to its fair value less cost to dispose. The estimated fair value was calculated using expected future cash flows discounted at a ten percent rate, as there was no observable market price. The fair value of the Company's interest in Rongshida-Maytag will be evaluated in each subsequent period. No tax benefit was recorded on the $42.3 million capital loss as the future tax benefit from such loss is uncertain.
Revenues from discontinued operations consisted of the following:
Special Charges and Loss on Securities
During the fourth quarter of 2001, the Company recorded special charges and loss on securities totaling $17.0 million, or $13.5 million after-tax. Special charges of $9.8 million, or $6.2 million after-tax, were associated with a salaried workforce reduction of approximately 250 employees. Cash expenditures for 2001 related to this charge were $3.7 million. Loss on securities of $7.2 million resulted from the write-down of the remaining investment in a privately held Internet-related company.
During the fourth quarter of 2000, the Company recorded special charges and loss on securities totaling $57.5 million, or $36.5 million after-tax. Special charges of $39.9 million, or $25.3 million after-tax, were associated with terminated product initiatives, asset write-downs and executive severance costs related to management changes. Loss on securities of $17.6 million, or $11.2 million after-tax, resulted from a lower market valuation of securities of TurboChef Technologies, Inc. and investments in privately held Internet-related companies.
Of the $39.9 million special charges, $14.8 million involved cash expenditures related to executive severance costs ($7.0 million), contractual obligations associated with terminated product initiatives and lease commitments, of which $10.9 million and $1.3 million were expended in 2001 and 2000, respectively. The remaining $25.1 million of special charges were non-cash primarily related to the write down of fixed assets and inventory related to terminated product initiatives. The loss on securities charge of $17.6 million was non-cash.
Inventories
Inventories consisted of the following:
Income Taxes
Deferred income taxes reflect the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities consisted of the following:
During 2001, the valuation allowance for deferred tax assets decreased by $37.9 million due to an Internal Revenue Service audit settlement covering the recognition of capital gains in prior year tax returns that were offset by available capital loss carryforwards. Also during 2001, a deferred tax asset and corresponding valuation allowance, both in the amount of $2.5 million, were established as a result of capital losses totaling $7.2 million from the write-down of securities as future tax benefit is uncertain (see "Special Charges and Loss on Securities" section in the Notes to consolidated Financial Statements).
For discontinued operations, $35.6 million of deferred tax assets and corresponding valuation allowances were established for capital losses totaling $101.8 million recorded in 2001. The valuation allowances were required as future tax benefit is uncertain. The components of the capital losses were $59.5 million from the sale of Blodgett and $42.3 million from the write down of the Company's interest in the net assets of Rongshida-Maytag. The deferred tax asset and corresponding valuation allowance were recorded in Discontinued noncurrent assets of the Consolidated Balance Sheets (see "Discontinued Operations" section in the Notes to the Consolidated Financial Statements).
Components of the provision for income taxes consisted of the following:
The reconciliation of the United States federal statutory tax rate to the Company's effective tax rate consisted of the following:
Since the Company plans to continue to finance expansion and operating requirements of subsidiaries outside the United States through reinvestment of the undistributed earnings of these subsidiaries (approximately $11 million at December 31, 2001), taxes that would result from potential distributions have only been provided on the portion of such earnings projected to be distributed in the future. If such earnings were distributed beyond the amount for which taxes have been provided, additional taxes payable would be eliminated substantially by available tax credits arising from taxes paid outside the United States.
Income taxes paid net of refunds received, during 2001, 2000 and 1999 were $31 million, $135 million and $170 million, respectively.
The tax effect of the minimum pension liability adjustment component of comprehensive income was $100.2 million and $0.5 million in 2001 and 2000, respectively. The tax effect of the unrealized gains on hedges was $0.5 million in 2001. The tax effects of the foreign currency translation adjustment and unrealized gains (losses) on securities components of comprehensive income were recorded as deferred tax assets with corresponding valuation allowances.
Notes Payable
Notes payable at December 31, 2001 consisted of commercial paper borrowings of $148.2 million.
The weighted-average interest rate on commercial paper borrowings was 3.2 percent at December 31, 2001. Notes payable at December 31, 2000 consisted of commercial paper borrowings of $299.6 million. The weighted-average interest rate on commercial paper borrowings was 7.1 percent at December 31, 2000.
The Company's commercial paper program is supported by two credit agreements with a consortium of lenders that provide revolving credit facilities of $200 million each, totaling $400 million. These agreements expire May 2, 2002 and May 3, 2004, respectively. The agreements include covenants for interest coverage and leverage that the Company was in compliance with at December 31, 2001.
Long-Term Debt
Long-term debt consisted of the following:
The $125.4 million of notes payable and $68.2 million of medium-term notes grant the holders the right to require the Company to repurchase all or any portion of these notes at 100 percent of the principal amount thereof, together with accrued interest, following the occurrence of both a change of Company control and a credit rating decline to below investment grade.
Interest paid during 2001, 2000 and 1999 was $70.1 million, $66.1 million and $58.2 million, respectively. When applicable, the Company capitalizes interest incurred on funds used to construct property, plant and equipment. Interest capitalized during 2001 was $1.1 million. Interest capitalized in 2000 and 1999 was not significant.
The aggregate maturities of long-term debt in each of the next five years and thereafter are as follows (in thousands): 2002--$133,585; 2003--$204,582; 2004--$25,326; 2005--$3,365; 2006--$410,562; thereafter--$288,231.
In 2001, the Company issued $185 million in medium-term notes with a fixed interest rate of 6.875 percent due March 31, 2006; $200 million in medium-term notes with a fixed interest rate of 6.875 percent due December 1, 2006; and $250 million in Public Income NotES with a fixed interest rate of 7.875 percent due August 1, 2031. The Public Income NotES grant the Company the right to call the notes, at par, upon 30 days notice, after August 6, 2006.
In 2000, the Company issued a $150 million medium-term note with a fixed interest rate of 7.61 percent due March 3, 2003 and a $25 million medium-term note with a fixed interest rate of 8 percent due February 28, 2010.
The Company enters into interest rate swap contracts to exchange the interest rate payments associated with long-term debt to variable rate payments based on LIBOR plus an agreed upon spread. For additional disclosures regarding the Company's interest rate swap contracts, see "Financial Instruments" section in the Notes to Consolidated Financial Statements.
Accrued Liabilities
Accrued liabilities consisted of the following:
Pension Benefits
The Company provides noncontributory defined benefit pension plans for most employees. Plans covering salaried, management and some nonunion hourly employees generally provide pension benefits that are based on an average of the employee's earnings and credited service. Plans covering union hourly and other nonunion hourly employees generally provide benefits of stated amounts for each year of service. The Company's funding policy for the plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts which the Company may determine to be appropriate.
The reconciliation of the beginning and ending balances of the projected benefit obligation, reconciliation of the beginning and ending balances of the fair value of plan assets, funded status of plans and amounts recognized in the Consolidated Balance Sheets consisted of the following:
Assumptions used in determining net periodic pension cost for the plans in the United States consisted of the following:
For the valuation of projected benefit obligation at December 31, 2001 and for determining net periodic pension cost in 2002, the discount rate decreased to 7.5 percent, the rate of increase in compensation decreased to 4.75 percent and the expected long-term rate of return on assets decreased to 9 percent. Assumptions for plans outside the United States are comparable to the above in all periods.
The actuarial loss of $38.1 million in the reconciliation of the 2001 projected benefit obligation primarily represents the impact of the decrease in the discount rate from 7.75 percent to 7.5 percent. The primary reasons for the $300 million increase in the underfunded status of the plans were the $194 million loss incurred on the plan assets during 2001 as well as the $38.1 million actuarial loss.
The Company amended its pension plans in 2001, 2000 and 1999 to include several benefit improvements for plans covering salaried and hourly employees.
The components of net periodic pension cost consisted of the following:
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $1,324,352, $1,224,027 and $871,276, respectively, as of December 31, 2001, and $1,188,080, $1,082,689 and $1,032,424, respectively, as of December 31, 2000.
Postretirement Benefits
The Company provides postretirement health care and life insurance benefits for certain employee groups in the United States. Most of the postretirement plans are contributory and contain certain other cost sharing features such as deductibles and coinsurance. The plans are unfunded. Employees do not vest and these benefits are subject to change. Death benefits for certain retired employees are funded as part of, and paid out of, pension plans.
The reconciliation of the beginning and ending balances of the accumulated benefit obligation, reconciliation of the beginning and ending balances of the fair value of plan assets, funded status of plans and amounts recognized in the Consolidated Balance Sheets consisted of the following:
Assumptions used in determining net periodic postretirement benefit cost consisted of the following:
(1) Weighted-average annual assumed rate of increase in the per capita cost of covered benefits.
For the valuation of accumulated benefit obligation at December 31, 2001 set forth in the table above, and for determining net postretirement benefit costs in 2002, the discount rate decreased to 7.5 percent and the health care cost trend rates were assumed to be 7 percent for 2001, 6.5 percent for 2002, decreasing gradually to 5 percent in 2005 and remaining thereafter.
The actuarial loss of $54.1 million in the reconciliation of the 2001 accumulated benefit obligation primarily represents the impact of the change in assumptions described above. The plans were amended in 2001 to include additional cost sharing features for salaried employees.
The components of net periodic postretirement cost consisted of the following:
The assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of a one-percentage change in assumed health care cost trend rates consisted of the following:
Leases
The Company leases buildings, machinery, equipment and automobiles under operating leases. Rental expense for operating leases amounted to $27.3 million, $23.8 million and $22.8 million for 2001, 2000 and 1999, respectively.
Future minimum lease payments for operating leases as of December 31, 2001 consisted of the following:
Financial Instruments
The Company uses foreign exchange forward contracts to manage certain foreign currency exchange exposures. The counterparties to the contracts are high credit quality international financial institutions. Forward contracts used by the Company include contracts for the exchange of Canadian and Australian dollars to U.S. dollars to hedge the sale of appliances manufactured in the United States and sold to customers in Canada and Australia. In addition, the Company uses forward contracts for the exchange of U.S. dollars to Mexican pesos to hedge amounts earned by employees paid in Mexico. The fair values of the contracts as of December 31, 2001 and 2000, which were recognized in other current assets in the Consolidated Balance Sheets, were $0.8 million and $0.6 million, respectively. The forward contracts are designated as hedges, and changes in the fair value of the contracts are recognized in other comprehensive income until the hedged item is recognized through earnings. For 2001, 2000 and 1999, the gains and losses recorded from these contracts were not significant. The hedge ineffectiveness related to these transactions was not significant in 2001. As of December 31, 2001 and 2000, the Company had open foreign currency forward contracts, all with maturities of less than twelve months, in the amount of U.S. $50.4 million and U.S. $12.6 million, respectively.
The Company uses commodity swap agreements to manage certain commodity price exposures involving components used in the manufacture of home and commercial appliances.
The fair value of the contracts as of December 31, 2001, which is recognized in Other current assets in the Consolidated Balance Sheets, was $0.6 million. The swap contracts are designated as hedges, and changes in the fair value of the contracts are recognized in Other comprehensive income until the hedged item is recognized through earnings. For 2001, the losses recorded from these contracts were $0.9 million. In 2000, the gains recorded from these contracts were $5.7 million. The hedge ineffectiveness related to these transactions was not significant in 2001. Gains and losses recorded in 1999 were not significant. As of December 31, 2001 and 2000, the Company had open commodity swap contracts in the amount of U.S. $10.5 million and U.S. $22.9 million, respectively. Open contracts as of December 31, 2001 have maturities ranging between one month and three years.
The Company has a trading program of interest rate swaps that it marks to market each period. The swap transactions involve the exchange of Canadian variable interest and fixed interest rate instruments. As of December 31, the Company had five swap transactions outstanding which mature on June 10, 2003 with a total notional amount of $61 million and $67.7 million as of December 31, 2000. The fair value of the swap positions of $14.9 million at December 31, 2001 and $24.2 million at December 31, 2000 is reflected in Other noncurrent liabilities in the Consolidated Balance Sheets. The value of these individual swaps is dependent upon movements in the Canadian and U.S. interest rates. As the portfolio of interest rate swaps outstanding at December 31, 2001 is configured, there would be no measurable impact on the net market value of the swap transactions outstanding with any future changes in interest rates. In 2001, 2000 and 1999 the Company incurred net interest expense of $1.3 million, $1.5 million and $1.5 million, respectively in connection with these swap transactions. The payments made or received as well as the mark to market adjustment are recognized in interest expense.
The Company uses interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. To manage associated cost of this debt, the Company enters into interest rate swaps, in which the Company agrees to exchange, at specified intervals, the difference between interest amounts calculated by reference to an agreed upon notional principal amount. These swap contracts are used to hedge the fair value of certain medium term notes. As the terms, interest rates and payment dates match exactly with the underlying debt there is no hedge ineffectiveness. At December 31, 2001 and 2000, the Company had outstanding interest rate swap agreements with notional amounts totaling $250 million and $299 million, respectively. Under these agreements, the Company receives weighted average fixed interest rates of 7.32 percent and pays floating interest rates based on LIBOR rates plus an agreed upon spread, or a weighted average interest rate of 2.78 percent, as of December 31, 2001. At December 31, 2001, Maytag had interest rate swaps with a fair market value of $10.9 million designated as fair value hedges of underlying fixed rate debt obligations. The fair value of the hedge instruments and the underlying debt obligations are recorded as Other noncurrent assets and Long-term debt on the Consolidated Balance Sheets, respectively, with equal and offsetting unrealized gains and losses in the interest expense component of the Consolidated Statements of Income. Payments made or received are recognized in interest expense.
Financial instruments that subject the Company to concentrations of credit risk primarily consist of accounts receivable from customers. The majority of the Company's sales are derived from the home appliances segment that sells predominantly to retailers. These retail customers range from major national retailers to independent retail dealers and distributors. In some instances, the Company retains a security interest in the product sold to customers. While the Company has experienced losses in collection of accounts receivables due to business failures in the retail environment, the assessed credit risk for existing accounts receivable is provided for in the allowance for doubtful accounts.
The Company used various assumptions and methods in estimating fair value disclosures for financial instruments. The carrying amounts of cash and cash equivalents, accounts receivable and notes payable approximated their fair value due to the short maturity of these instruments. The fair values of long-term debt were estimated based on quoted market prices, if available, or quoted market prices of comparable instruments. The fair values of interest rate swaps, foreign currency contracts, commodity swaps, forward stock purchase contracts and put option contracts were estimated based on amounts the Company would pay to terminate the contracts at the reporting date.
The carrying amounts and fair values of the Company's financial instruments, consisted of the following:
For additional disclosures regarding the Company's notes payable, see the "Notes Payable" section in the Notes to Consolidated Financial Statements. For additional disclosures regarding the Company's long-term debt, see the "Long-Term Debt" section in the Notes to Consolidated Financial Statements. For additional disclosures regarding the Company's forward stock purchase contracts and put option contracts, see the "Shareowners' Equity" section in the Notes to Consolidated Financial Statements.
Company Obligated Manditorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Debentures and Minority Interests
In 1999, the Company together with two newly established business trusts, issued units comprised of preferred securities of each Maytag Trust that provided for per annum distributions and a purchase contract requiring the unitholder to purchase shares of Maytag common stock from the Company. An outside investor purchased the units for a noncontrolling interest in the Maytag Trusts in the aggregate for $200 million. The Maytag Trusts used the proceeds from the sale of the units to purchase Maytag debentures. The terms of the debentures paralleled the terms of the preferred securities issued by the Maytag Trusts. For financial reporting purposes, as of December 31, 2000, the outside investor's noncontrolling interest in the Maytag Trust of $200 million was reflected in "Company obligated manditorily redeemable preferred capital securities of subsidiary trust holding solely the Company's debentures" in the Consolidated Balance Sheets. For the year ended December 31, 2000, income attributed to such noncontrolling interest was reflected in Minority Interests in the Consolidated Statements of Income. Effective June 30, 2001 the outside investor's noncontrolling interest in the Maytag Trust of $200 million was reflected in long-term debt. The income attributable to such noncontrolling interest was reflected as Interest expense in the third quarter of 2001. In September 2001, the Company terminated the Maytag Trusts in a transaction that included an early retirement of $200 million of this long-term debt at an after-tax cost of $5.2 million (net of an income tax benefit of $2.9 million) that was reflected as an extraordinary item on the Consolidated Statements of Income (see "Impact of Recently Issued Accounting Standards" section in the Notes to Consolidated Financial Statements regarding the accounting for the purchase contracts).
In the third quarter of 1997, the Company and a wholly-owned subsidiary of the Company contributed intellectual property and know-how with an appraised value of $100 million and other assets with a market value of $54 million to Anvil Technologies LLC ("LLC"), a newly formed Delaware limited liability company. An outside investor purchased from the Company a noncontrolling, member interest in the LLC for
$100 million. The Company's objective in this transaction was to raise low-cost, equity funds. For financial reporting purposes, the results of the LLC (other than those which are eliminated in consolidation) are included in the Company's consolidated financial statements. The Credit Facility underlying the structure matures on June 30, 2002.
The income attributable to the noncontrolling interests reflected in Minority interests in the Consolidated Statements of Income consisted of the following:
The outside investors' noncontrolling interest reflected in Minority interests in the Consolidated Balance Sheets consisted of the following:
Stock Plans
In 2000, the shareowners approved the 2000 Employee Stock Incentive Plan that authorizes the issuance of up to 3.9 million shares of common stock of which no more than 0.5 million shares may be granted as restricted stock. The vesting period and terms of stock options granted are established by the Compensation Committee of the Board of Directors. Generally, the options become exercisable one to three years after the date of grant and have a maximum term of 10 years. There are stock options and restricted stock outstanding that were granted under previous plans with terms similar to the 2000 plan.
In 1998, the shareowners approved the 1998 Non-Employee Directors' Stock Option Plan that authorizes the issuance of up to 500,000 shares of Common stock to the Company's non-employee directors. Stock options under this plan are immediately exercisable upon grant and generally have a maximum term of five years.
In the event of a change of Company control, all outstanding stock options become immediately exercisable under the above described plans. There were 1,427,240 and 2,620,086 shares available for future stock grants at December 31, 2001 and 2000, respectively.
The Company has elected to follow APB 25, "Accounting for Stock Issued to Employees," and recognizes no compensation expense for stock options as the option price under the plan equals or is greater than the fair market value of the underlying stock at the date of grant. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of these stock options was estimated at the date of grant using a Black-Scholes option pricing model.
The Company's weighted-average assumptions consisted of the following:
For purposes of pro forma disclosures, the estimated fair value of options granted is amortized to expense over the options' vesting period.
The Company's pro forma information consisted of the following:
Stock option activity consisted of the following:
Information with respect to stock options outstanding and stock options exercisable as of December 31, 2001 consisted of the following:
The Company issued restricted stock and stock units to certain executives that vest over a three-year period based on achievement of pre-established financial objectives. Restricted stock is paid out in shares and the stock units are paid out in cash. Restricted stock shares outstanding at the end of 2001, 2000 and 1999 were 39,235, 120,966 and 253,290, respectively. Restricted stock units outstanding at the end of 2001, 2000 and 1999 were 27,655, 84,199 and 175,016, respectively. The expense for the anticipated restricted stock and stock unit payout is amortized over the three-year vesting period and is adjusted based on actual performance compared to the pre-established financial objectives. The expense/(income) was $(2.2) million and $8.2 million in 2000 and 1999, respectively and was not material in 2001. No restricted stock was granted in 2000 or 2001 as the Company adopted a Performance Incentive Award Program with a cash payout that replaces the restricted stock program.
Employee Stock Ownership Plan
The Company established an Employee Stock Ownership Plan (ESOP) and a related trust issued debt and used the proceeds to acquire shares of the Company's stock for future allocation to ESOP participants. ESOP participants generally consist of all United States employees except certain groups covered by a collective bargaining agreement. The Company guarantees the ESOP debt and reflects it in the Consolidated Balance Sheets as Long-term debt with a related amount shown in the Shareowners' equity section as part of Employee stock plans. Dividends earned on the allocated and unallocated ESOP shares are used to service the debt. The Company is obligated to make annual contributions to the ESOP trust to the extent the dividends earned on the shares are less than the debt service requirements. As the debt is repaid, shares are released and allocated to plan participants based on the ratio of the current year debt service payment to the total debt service payments over the life of the loan. If the shares released are less than the shares earned by the employees, the Company contributes additional shares to the ESOP trust to meet the shortfall. All shares held by the ESOP trust are considered outstanding for earnings per share computations and dividends earned on the shares are recorded as a reduction of retained earnings.
The ESOP shares held in trust consisted of the following:
The components of the total contribution to the ESOP trust consisted of the following:
The components of expense recognized by the Company for the ESOP contribution consisted of the following:
Shareowners' Equity
The share activity of the Company's common stock consisted of the following:
During 2001 and 2000, the Company repurchased 0.4 million and 6.5 million shares associated with its share repurchase program at a cost of $28 million and $358 million, respectively.
In connection with its previous share repurchase program, the Company sold put options which give the purchaser the right to sell shares of the Company's common stock to the Company at specified prices upon exercise of the options on the designated expiration date. In 2000, the Company paid $1 million to extend put option terms and in 1999 received $47 million in premium proceeds from the sale of put options. As of December 31, 2001, there were no put options outstanding as the Company settled the remaining put options for $17 million.
As of December 31, 2000, the Company established $200 million of Temporary equity, representing the maximum potential obligation for put options associated with the Maytag Trust, through a reduction in additional paid-in capital. As the put options were reflected as liabilities in accordance with EITF 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying EITF Issue No.96-13," effective June 30, 2001, the $200 million temporary equity was transferred back into paid-in capital. The Company cash settled the put options in September 2001 and they are no longer reflected on the Consolidated Balance Sheet as of December 31, 2001 (see "Company Obligated Manditorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Debentures and Minority Interests" and "Impact of Recently Issued Accounting Standards" sections in the Notes to Consolidated Financial Statements for more information on the Maytag Trusts).
In the fourth quarter of 1999, the Company entered into forward stock purchase agreements to repurchase shares of Maytag stock in the first quarter of 2000 and 2001 at an average price of $39. These forward stock purchase contracts required a net cash settlement. The Company recorded losses of $3.1 million in 2000 and gains of $2.6 million in 1999 associated with these contracts in Other-net in the Consolidated Statements of Income.
Pursuant to a Shareholder Rights Plan approved by the Company in 1998, each share of common stock carries with it one Right. Until exercisable, the Rights are not transferable apart from the Company's common stock. When exercisable, each Right entitles its holder to purchase one one-hundredth of a share of preferred stock of the Company at a price of $165. The Rights will only become exercisable if a person or group acquires 20 percent (which may be reduced to not less than 10 percent at the discretion of the Board of Directors) or more of the Company's common stock. In the event the Company is acquired in a merger or 50 percent or more of its consolidated assets or earnings power are sold, each Right entitles the holder to purchase common stock of either the surviving or acquired company at one-half its market price. The Rights may be redeemed in whole by the Company at a purchase price of $.01 per Right. The preferred shares will be entitled to 100 times the aggregate per share dividend payable on the Company's common stock and to 100 votes on all matters submitted to a vote of shareowners. The Rights expire May 2, 2008.
Supplementary Expense Information
Advertising costs and research and development expenses consisted of the following:
Earnings Per Share
The computation of basic and diluted earnings per share consisted of the following:
FASB Statement No. 128, "Earnings Per Share," requires that income from continuing operations before extraordinary item and cumulative effect of accounting change be used as the control number in determining whether potential common shares are dilutive or anti-dilutive to earnings per share.
The cumulative effect of accounting change has two components: $63.1 million expense related to the recognition of the put option obligation and $59.4 million income related to the recognition of the purchase contracts asset (see "Impact of Recently Issued Accounting Standards" section in the Notes to the Consolidated Financial Statements).
The common shares related to the purchase contracts asset were excluded from diluted average shares outstanding as they were anti-dilutive to earnings per share from continuing operations before extraordinary item and cumulative effect of accounting change. The common shares related to the put option obligation were included in diluted average shares outstanding as they were dilutive to earnings per share from continuing operations before extraordinary item and cumulative effect of accounting change. Therefore, the expense associated with the put option obligation was excluded from the numerator in the calculation of diluted earnings per share for the cumulative effect of accounting change as the associated common shares were required to be included in the denominator.
For additional disclosures regarding stock plans, see the "Stock Plans" section in the Notes to Consolidated Financial Statements. For additional disclosures regarding the Company's put options and forward stock purchase contract, see the
"Shareowners' Equity" section in the Notes to Consolidated Financial Statements.
Environmental Remediation
The operations of the Company are subject to various federal, state and local laws and regulations intended to protect the environment, including regulations related to air and water quality and waste handling and disposal. The Company also has received notices from the U.S. Environmental Protection Agency, state agencies and/or private parties seeking contribution, that it has been identified as a "potentially responsible party" (PRP), under the Comprehensive Environmental Response, Compensation and Liability Act, and may be required to share in the cost of cleanup with respect to such sites. The Company's ultimate liability in connection with those sites may depend on many factors, including the volume of material contributed to the site, the number of other PRPs and their financial viability, and the remediation methods and technology to be used. The Company also has responsibility, subject to specific contractual terms, for environmental claims for assets or businesses that have previously been sold.
While it is possible the Company's estimated undiscounted obligation of approximately $9 million for future environmental costs may change in the near term, the Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows. The accrual for environmental liabilities is reflected in Other noncurrent liabilities in the Consolidated Balance Sheets.
Commitments and Contingencies
The Company has contingent liabilities arising in the normal course of business, including pending litigation, environmental remediation, taxes and other claims. The Company's legal department estimates the costs to settle pending litigation, including legal expenses, based on their experience involving similar cases, specific facts known, and if applicable based on judgements of outside counsel. The Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
At December 31, 2001, the Company has outstanding commitments for capital expenditures of $68.4 million. As of December 31, 2001 the Company had approximately $37 million in stand-by letters of credit primarily associated with the requirement to fund certain unqualified pension plans in the event of a change in control.
Segment Reporting
The Company has two reportable segments: home and commercial appliances. The Company's home appliances segment manufactures and sells major appliances (laundry products, dishwashers, refrigerators, cooking appliances) and floor care products. These products are sold primarily to major national retailers and independent retail dealers in North America and targeted international markets.
The Company's commercial appliances segment manufactures and sells commercial cooking and vending equipment. These products are sold primarily to distributors, soft drink bottlers, restaurant chains and dealers in North America and targeted international markets.
The Company's reportable segments are distinguished by the nature of products manufactured and sold and types of customers.
The Company evaluates performance and allocates resources to reportable segments primarily based on operating income. The accounting policies of the reportable segments are the same as those described in the summary of significant policies except that the Company allocates pension expense associated with its pension plan to each reportable segment while recording the pension assets and liabilities at corporate. In addition, the Company records its federal and state deferred tax assets and liabilities at corporate. Intersegment sales are not significant.
Financial information for the Company's reportable segments consisted of the following:
In 2001, the Company recorded special charges in operating income of $9.8 million with $7.9 million, $0.7 million and $1.2 million recorded in home appliances, commercial appliances and Corporate, respectively. In 2000, the Company recorded special charges in operating income of $39.9 million with $19.7 million and $20.2 million recorded in home appliances and Corporate, respectively. For additional disclosures regarding the special charges, see the "Special Charges and Loss on Securities" section in the Notes to Consolidated Financial Statements. Corporate assets include such items as deferred tax assets, intangible pension assets and other assets.
The reconciliation of segment profit to consolidated income from continuing operations before income taxes, minority interests, extraordinary items and cumulative effect of accounting change consisted of the following:
Financial information related to the Company's continuing operations by geographic area consisted of the following:
Net sales are attributed to countries based on the location of customers. Long-lived assets consist of total property, plant and equipment. Sales to Sears, Roebuck and Co. represented 18%, 12% and 11% of consolidated net sales in 2001, 2000 and 1999, respectively.
Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations consisted of the following:
- -------- (1) The third and fourth quarter of 2001 include net sales of Amana of $148.0 million and $156.5 million, respectively that was acquired effective August 1, 2001. The results of operations were not significant to the periods presented.
(2) The fourth quarter of 2001 includes $6.2 million after-tax special charges associated with a salaried workforce reduction and a $7.2 million special charge for loss on securities. The first quarter of 2001 includes a one-time tax credit of $42 million.
(3) Includes the results of discontinued operations that were a $2.3 million loss, $2.1 million loss, $62.0 million loss and $44.5 million loss for the first, second, third and fourth quarters of 2001, respectively. The fourth quarter 2001 discontinued loss of $44.5 million includes a $42.3 million provision for impairment of China joint venture. The third quarter 2001 discontinued loss of $62.0 million includes a $59.5 million loss on sale of Blodgett.
The third quarter of 2001 includes $5.2 million extraordinary item-loss on early retirement of debt. The second quarter of 2001 includes a $3.7 million loss on cumulative effect of accounting change.
(4) In the second quarter of 2001, the calculation of diluted earning per share as prescribed by Statement No. 128, "Earning Per Share" resulted in a $63.1 million adjustment to the numerator that significantly increased diluted earnings per share. The adjustment was related to the adoption of EITF 00-19 that required the put options associated with the Maytag Trusts to be recorded as liabilities on the balance sheet (see "Earnings Per Share" and "Impact of Recently Issued Accounting Standards" in the Notes to Consolidated Financial Statements).
(5) The fourth quarter of 2000 includes $25.3 million after-tax special charges associated with terminated product initiatives, asset write downs and severance costs related to management changes and an $11.2 million after-tax special charge for loss on securities.
(6) Includes the results of discontinued operations that were a $2.4 million loss, $0.5 million loss, $4.1 million loss and $8.3 million loss for the first, second, third and fourth quarters of 2000, respectively. The fourth quarter 2000 discontinued loss of $8.3 million includes a $5.9 million after-tax special charge associated with terminated product initiatives and asset write downs.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information concerning directors and officers on pages 1 through 8 of the Proxy Statement of the Company is incorporated herein by reference. Additional information concerning executive officers of the Company is included under "Executive Officers of the Registrant" included in Part I, Item 4.
Item 11.
Item 11. Executive Compensation.
Information concerning executive compensation on pages 26 through 34 of the Proxy Statement, is incorporated herein by reference; provided that the information contained in the Proxy Statement under the heading "Compensation Committee Report on Executive Compensation" is specifically not incorporated herein by reference. Information concerning director compensation on page 8 of the Proxy Statement is incorporated herein by reference, provided that the information contained in the Proxy Statement under the headings "Shareholder Return Performance" and "Other Matters" is specifically not incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The security ownership of certain beneficial owners and management is incorporated herein by reference from pages 8 through 10 of the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions is incorporated herein by reference from pages 5 through 7 of the Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report in the "List of Financial Statements and Financial Statement Schedules" on page 52.
(3) The response to this portion of Item 14 is submitted as a separate section of this report in the "List of Exhibits" on pages 53 through 55.
(b) The Company filed a Form 8-K dated October 30, 2001 containing agreements relating to Medium-Term notes that it might issue.
(c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report in the "List of Exhibits" on pages 53 through 55.
(d) Financial Statement Schedules--The response to this portion of Item 14 is submitted as a separate section of this report in the "List of Financial Statements and Financial Statement Schedules" on page 52.
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.
MAYTAG CORPORATION (Registrant)
/s/ Ralph F. Hake ----------------------------- Ralph F. Hake Chairman and Chief Executive Officer Director
Pursuant to the requirement 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.
/s/ Steven H. Wood /s/ Vitas A. Stukas -------------------------- ------------------------- Steven H. Wood Vitas A. Stukas Executive Vice President Vice President and and Controller Chief Financial Officer
/s/ Barbara R. Allen /s/ Howard L. Clark, Jr. -------------------------- ------------------------- Barbara R. Allen Howard L. Clark, Jr. Director Director
/s/ Lester Crown /s/ Wayland R. Hicks -------------------------- ------------------------- Lester Crown Wayland R. Hicks Director Director
/s/ William T. Kerr /s/ Bernard G. Rethore -------------------------- ------------------------- William T. Kerr Bernard G. Rethore Director Director
/s/ W. Ann Reynolds /s/ Fred G. Steingraber -------------------------- ------------------------- W. Ann Reynolds Fred G. Steingraber Director Director
/s/ Neele E. Stearns, Jr. -------------------------- Neele E. Stearns, Jr. Director
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1), (2) and (3), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
LIST OF EXHIBITS
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 2001
MAYTAG CORPORATION NEWTON, IOWA
FORM 10-K--ITEM 14(a)(1), (2) AND ITEM 14(d)
MAYTAG CORPORATION
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and supplementary data of Maytag Corporation and subsidiaries are included in Part II, Item 8:
All other schedules for which provision is 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.
FORM 10-K--ITEM 14(a) (3) AND ITEM 14(c)
MAYTAG CORPORATION
LIST OF EXHIBITS
The following exhibits are filed herewith or incorporated by reference. Items indicated by (1) are considered a compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
MAYTAG CORPORATION
THOUSANDS OF DOLLARS
Prior year results have been restated to reflect Blodgett and Rongshida-Maytag as discontinued operations - -------- Footnotes:
(1) Uncollectible accounts written off (2) Effect of foreign currency translation (3) Result of acquisition of Amana effective August 1, 2001 (4) Result of acquisition of Jade effective January 1, 1999