Management's Discussion and Analysis
Contents || Corporate ListingsCOMPARISON OF 1998 WITH 1997
The Company has three reportable segments: home appliances, commercial appliances and international appliances. (See further discussion and financial information about the Company's reportable segments in "Segment Reporting" section of the Notes to Consolidated Financial Statements.)
Net Sales: The Company's consolidated net sales for 1998 increased 19 percent compared to 1997. Net sales in 1998 included sales of G.S. Blodgett Corporation ("Blodgett"), a manufacturer of commercial cooking equipment, which was acquired by the Company on October 1, 1997. Excluding Blodgett, the Company's net sales increased 16 percent in 1998 compared to 1997.
Home appliances net sales increased 15 percent in 1998 compared to 1997. Net sales were up from the prior year due to the introduction of new products, including new lines of Maytag Neptune laundry products, Maytag refrigerators, Maytag cooking products, Hoover upright vacuum cleaners and Hoover upright deep carpet cleaners. In addition, net sales were up from the prior year due to the volume associated with shipments to Sears, Roebuck and Co. in connection with the CompanyÕs agreement to begin selling the full line of Maytag brand major appliances through Sears stores in the U.S. beginning in February 1998. The CompanyÕs net sales also benefited from the significant volume growth in industry shipments of major appliances in 1998 compared to 1997
Net sales of commercial appliances were up 84 percent from 1997. This net sales increase was primarily driven by a significant increase in the sales volume of Dixie-Narco enhanced capacity venders introduced in 1997 and the inclusion of Blodgett's results for a full year. Excluding Blodgett, net sales increased 48 percent from 1997.
International appliances net sales increased 5 percent in 1998 compared to 1997. The sales increase was primarily attributable to higher unit volume partially offset by price reductions on selected models in response to competitive conditions in China.
Gross Profit: The Company's consolidated gross profit as a percent of sales increased to 29 percent in 1998 from 27.5 percent in 1997.
Home appliances gross margins increased in 1998 compared to 1997, due to the increase in sales volume, favorable brand and product sales mix, lower raw material costs and the absence of production start-up costs associated with the Company's new line of refrigerators which were incurred in 1997.
Commercial appliances gross margins increased in 1998 compared to 1997, due to the increase in sales volume, partially offset by inefficiencies from the reorganization of manufacturing operations at Blodgett.
International appliances gross margins decreased in 1998 compared to 1997 primarily from the decrease in selling prices on selected models.
The Company realized slightly lower raw material prices in 1998 compared to 1997 and expects raw material prices in 1999 to be approximately the same to slightly lower than 1998 levels.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were 16.2 percent of sales in 1998 compared to 17 percent of sales in the same period in 1997. The decrease as a percent of sales was primarily due to the operating leverage obtained on fixed expenses with the increase in net sales despite the increase in expenses incurred in 1998 compared to 1997.
Operating Income: Consolidated operating income increased 46 percent to $523 million, or 12.8 percent of sales, compared to $358 million, or 10.5 percent of sales in 1997.
Home appliances operating income increased 44 percent in 1998 compared to 1997. Operating margin for 1998 was 14.5 percent of sales compared to 11.6 percent of sales in 1997. The increase in operating margin was due to the increase in gross profit margins and decrease in selling, general and administrative expenses as a percent of sales discussed above.
Commercial appliances operating income, which includes Blodgett for all of 1998, increased 156 percent in 1998 compared to 1997. Operating margin for 1998 was 10.9 percent of sales compared to 7.8 percent of sales in 1997. The increase in operating margins was primarily due to the increase in gross profit margins described above.
International appliances operating income decreased 49 percent in 1998 compared to 1997. Operating margin for 1998 was 4.6 percent of sales compared to 9.4 percent of sales in 1997. The decrease in operating margins was due to the decrease in gross profit margins discussed above and an increase in selling, general and administrative expense due to both spending increases and an additional provision for accounts receivable. There are many uncertainties associated with the economic environment in China and the entire Asian region which may adversely impact future operations.
Interest Expense: Interest expense increased 6 percent in 1998 compared to 1997 primarily due to lower capitalized interest. The Company's higher average borrowings were offset by lower interest rates.
Income Taxes: The effective tax rate for 1998 was 37.4 percent compared to 36.5 percent in 1997. The increase in the effective tax rate was primarily due to 1997 including a $2 million one-time benefit from the resolution of certain Internal Revenue Service issues as well as a reduced benefit in 1998 from Rongshida-Maytag's tax holiday in China due to lower income before taxes. These increases in the 1998 effective tax rate were partially offset by other tax initiatives.
Extraordinary Item: In 1998, the Company retired $71.1 million of long-term debt at a cost of $5.9 million after-tax. In 1997, the Company retired $61.8 million of long-term debt at a cost of $3.2 million after-tax.
Net Income: Net income for 1998 was $281 million, or $2.99 diluted earnings per share, compared to net income of $180 million, or $1.84 diluted earnings per share in 1997. Net income and diluted earnings per share were impacted by special charges for the early retirement of debt in both years. The after-tax charges for the early retirement of debt were $5.9 million and $3.2 million for 1998 and 1997, respectively.
Excluding these special charges in both years, income for 1998 would have been $287 million, or $3.05 diluted earnings per share, compared to $183 million, or $1.87 diluted earnings per share for 1997. The increase in net income was primarily due to the increase in operating income. The increase in diluted earnings per share was due to the increase in net income and the positive impact of $0.15 per share from the Company's share repurchase program. (See discussion of the share repurchase program in "Liquidity and Capital Resources" section of this Management's Discussion and Analysis.)
Comparison of 1997 with 1996
Net Sales: The Company's consolidated net sales for 1997 increased 14 percent compared to 1996. Net sales in 1997 included a full year of sales of Rongshida-Maytag compared to four months of sales included in 1996 when the Company entered into the joint venture. In addition, net sales in 1997 included three months of Blodgett which was acquired by the Company on October 1, 1997. Excluding the impact of these acquisitions, the Company's net sales increased 10 percent in 1997 compared to 1996.
Home appliances net sales increased 9 percent in 1997 compared to 1996. Net sales of major appliances were up from the previous year primarily due to the introduction of a newly designed line of Maytag Neptune laundry products, the redesigned line of Maytag top-mount refrigerators, strong sales of Performa by Maytag laundry products and an increase in sales of exports of major appliances partially offset by a decrease in private label sales. Net sales of floor care products were up from 1996 primarily due to the introduction of a newly designed line of Hoover upright vacuum cleaners and new models of Hoover upright deep carpet cleaners.
Net sales of commercial appliances were up 54 percent from 1996. Excluding Blodgett, net sales increased 34 percent from 1996. The increase in sales was driven by a significant increase in domestic vender sales partially offset by a decrease in export vender sales and glass front merchandiser sales. The increase in domestic vender sales was due to the introduction of a new extended depth vender in addition to depressed sales volume in 1996 resulting from product transition difficulties.
Gross Profit: The Company's consolidated gross profit as a percent of sales increased to 27.5 percent in 1997 from 27.4 percent in 1996.
Home appliances gross margins increased in 1997 primarily due to favorable brand and product sales mix and manufacturing cost savings resulting from the 1996 restructuring of the Company's major appliance operations. (See discussion of the restructuring in "Restructuring Charge" section of this Management's Discussion and Analysis.) These increases in gross margins were partially offset by production start-up costs associated with the Company's redesigned line of top-mount refrigerators and an increase in distribution costs related to the transition to regional distribution centers.
Commercial appliances gross margins increased in 1997 compared to 1996 due to the increase in production volume from the increase in net sales and the additional manufacturing start-up costs associated with the new Dixie-Narco extended depth vender incurred in 1996.
Selling, General and Administrative Expenses: Consolidated selling, general and administrative expenses were 17 percent of sales in 1997 compared to 17.1 percent of sales in 1996. The decrease was driven by the operating leverage obtained on fixed expenses with the increase in sales in 1997 partially offset by additional advertising and sales promotion expenses to support new product introductions and from an increase in the provision for accounts receivable.
Restructuring Charge: During the first quarter of 1996, the Company recorded a restructuring charge of $40 million, or $24.4 million after-tax, primarily related to the costs associated with the consolidation of activities and facilities related to the manufacture of cooking products and consolidation of activities of two separate major appliance organizational units. (See discussion of the restructuring in "Restructuring Charge" section of the Notes to Consolidated Financial Statements.)
The Company incurred $10.5 million of additional restructuring costs during 1996, not included in the restructuring charge, which were charged to operations as incurred.
Operating Income: The Company's consolidated operating income for 1997 was 10.5 percent of sales compared to 9 percent of sales in 1996. However, excluding the $40 million restructuring charge, operating income in 1996 was 10.3 percent of sales.
Excluding the $40 million restructuring charge recorded in 1996, operating income for the home appliances segment was 11 percent higher in 1997 than 1996. Operating income for 1997 was 11.6 percent of sales compared to 11.3 percent of sales in 1996. The increase in operating margin is primarily due to the increase in gross profit margins discussed previously.
Commercial appliances operating income increased to 7.8 percent of sales in 1997 compared to 6.6 percent of sales in 1996. Operating income increased from the previous year primarily due to the increase in gross profit discussed previously.
Interest Expense: Interest expense increased 37 percent from 1996 due to an increase in short-term borrowings, interest expense related to Rongshida-Maytag, lower capitalized interest and interest expense associated with the Company's interest rate swap program. The interest rate swap interest expense is partially offset by marked to market unrealized gains which are reflected in Other-net in the Consolidated Statements of Income.
Income Taxes: The effective tax rate for 1997 was 36.5 percent compared to 39 percent in 1996. The decrease is primarily due to savings from the Company's state and local tax initiatives, a lower tax rate for Rongshida-Maytag as a result of its qualification for a tax holiday in China in 1997 and a $2 million one-time benefit in 1997 from the resolution of certain Internal Revenue Service issues.
Extraordinary Item: In 1997, the Company retired $61.8 million of long-term debt at a cost of $3.2 million after-tax. In 1996, the Company retired $17.5 million of long-term debt at a cost of $1.5 million after-tax.
Net Income: Net income for 1997 was $180.3 million, or $1.84 diluted earnings per share, compared to net income of $136.4 million, or $1.33 diluted earnings per share in 1996. Net income and diluted earnings per share were impacted by special charges in both years. Special charges in 1997 included the $3.2 million after-tax charge for the early retirement of debt. Special charges in 1996 included the $24.4 million after-tax restructuring charge and the $1.5 million after-tax charge for the early retirement of debt.
Excluding these special charges in both years, income for 1997 would have been $183.5 million, or $1.87 diluted earnings per share, compared to $162.4 million, or $1.58 diluted earnings per share for 1996. The increase in income is primarily due to the increase in operating income partially offset by the increase in interest expense. The increase in diluted earnings per share in 1997 compared to 1996, excluding special charges, was due to the increase in income and the positive impact of $0.12 per share from the Company's share repurchase program. (See discussion of the share repurchase program in "Liquidity and Capital Resources" section of this Management's Discussion and Analysis.)
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash provided by operating activities and borrowings. Detailed information on the Company's cash flows is presented in the Consolidated Statements of Cash Flows.
Net Cash Provided by Operating Activities: Cash flow provided by operating activities primarily consists of net income adjusted for certain non-cash items, changes in working capital items, changes in pension assets and liabilities, and changes in the liability for postretirement benefits. Certain non-cash items include depreciation and amortization and deferred income taxes. Working capital items consists primarily of accounts receivable, inventories, other current assets and other current liabilities.
Net cash provided by operating activities in 1998 increased from 1997 as a result of an increase in net income and a decrease in working capital.
A portion of the Company's accounts receivable is concentrated among major national retailers. A significant loss of business with any of these national retailers could have an adverse impact on the Company's ongoing operations.
Total Investing Activities: The Company continually invests in its businesses for new product designs, cost reduction programs, replacement of equipment, capacity expansion and government mandated product requirements.
Capital expenditures in 1998 were $161 million compared to $230 million in 1997. The lower capital spending was due to the completion of several major capital projects in 1997. Planned capital expenditures for 1999 are approximately $190 million.
In 1997, the Company acquired all of the outstanding shares of Blodgett, a manufacturer of commercial ovens, fryers and charbroilers for the food service industry, for $96.4 million. In connection with the purchase, the Company also incurred transaction costs of $4.2 million and retired debt of approximately $53.2 million. As a result, the total cost of business acquired was $148.3 million, net of cash acquired of $5.5 million. The Company funded this acquisition through cash provided by operating activities and borrowings. The results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition.
In 1996, the Company invested $35 million ($29.6 million, net of cash acquired) to acquire a 50.5 percent ownership in Rongshida-Maytag, a manufacturer of home appliances in China. The Company also committed additional cash investments of approximately $35 million, of which $7 million, $19 million and $9 million were contributed in 1998, 1997 and 1996, respectively. The results of its operations have been included in the consolidated financial statements since the date of acquisition. The Company's joint venture partner also committed additional cash investments of approximately $35 million, of which $7 million, $19 million and $9 million were contributed in 1998, 1997 and 1996, respectively.
Total Financing Activities: Dividend payments on the Company's common stock in 1998 were $62.6 million, or $.68 per share, compared to $61.7 million, or $.64 per share in 1997.
In 1997, the Company's board of directors authorized the repurchase of up to 15 million additional shares beyond the previous share repurchase authorizations totalling 15.8 million shares. Under these authorizations, the Company has repurchased 22.1 million shares at a cost of $675 million, which includes 6.3 million shares purchased at a cost of $318 million during 1998. As of December 31, 1998, of the 8.7 million shares which may be repurchased under then existing board authorization, the Company is committed to purchase 4 million shares under put options contracts, if such options are exercised. (See discussion of these put option contracts below.) The Company plans to continue the repurchase of shares over a non-specified period of time.
During the first quarter of 1998, the Company amended the forward stock purchase agreement associated with the repurchase of 4 million shares by the Company during 1997. The future contingent purchase price adjustment included in the forward stock purchase agreement was amended to provide for settlement based on the difference in the market price of the Company's common stock at the time of settlement compared to the market price of the Company's common stock as of March 24, 1998 rather than as of August 20, 1997. The net cost of the amendment was $64 million. During the third quarter of 1998, the Company further amended the forward stock purchase agreement to establish the future settlement price on 1 million of the total 4 million shares. The forward stock purchase contract allows the Company to determine the method of settlement. The Company's objective in this transaction is to reduce the average price of repurchased shares.
In connection with the share repurchase program, the Company sells 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. The put option contracts allow the Company to determine the method of settlement. The Company's objective in selling put options is to reduce the average price of repurchased shares. In 1998 and 1997, the Company received $30 million and $10 million, respectively, in premium proceeds from the sale of put options. As of December 31, 1998, there were put options outstanding for 4 million shares with strike prices ranging from $43.25 to $56.838 (the weighted-average strike price was $51.92).
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 non-controlling, 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 outside investor's noncontrolling interest is reflected in Minority interest in the Consolidated Balance Sheets. The income attributable to the noncontrolling interest is reflected in Minority interest in the Consolidated Statements of Income.
Any funding requirements for future investing and financing activities in excess of cash on hand and generated from operations are planned to be supplemented by borrowings. (See discussion of long-term debt issuances in "Long-Term Debt" section of the Notes to Consolidated Financial Statements.) The Company's commercial paper program is supported by a credit agreement with a consortium of banks which provides revolving credit facilities totalling $400 million. This agreement expires June 29, 2001 and includes covenants for interest coverage and leverage, with which the Company was in compliance at December 31, 1998.
Market Risks
The Company is exposed to foreign currency exchange risk inherent in its anticipated sales and assets and liabilities denominated in foreign currencies. To mitigate the short-term effects of changes in exchange rates on the Company's foreign currency denominated export sales, the Company enters into foreign currency forward and option contracts. The Company's policy is to hedge a portion of its anticipated foreign currency denominated export sales transactions, which are primarily denominated in Canadian dollars, for periods not exceeding twelve months.
At December 31, 1998, the result of a uniform 10 percent strengthening of the U.S. dollar relative to the foreign currencies in which the Company's sales are denominated would result in a decrease in net income of approximately $3 million for the year ended December 31, 1999. The Company's 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.
The Company also is exposed to interest rate risk in the Company's debt and the commodity price risk inherent in the Company's purchase of certain commodities used in the manufacture of its products. The Company has performed sensitivity analyses assuming a hypothetical adverse movement in interest rates and commodity prices. These analyses indicated that such market movements would not have a material effect on the Company's financial position or results of operations.
Year 2000
The much publicized "Year 2000 problem," affecting most companies, arises because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, these computer applications could fail or create erroneous results. The global extent of the potential impact of the Year 2000 problem is not yet known, and if not timely corrected, it could affect the economy and the Company. The Company uses computer information systems and manufacturing equipment which may be affected. It also relies on suppliers and customers who are also dependent on systems and equipment which use date dependent software.
In 1996, the Company began its effort for the conversion or replacement of North American computer information systems which did not properly address the Year 2000. This effort involved both plans for creating replacement systems for those computer information systems which were developed internally as well as obtaining versions of software purchased from third parties which are Year 2000 ready. The Company estimates that this effort is approximately 85 percent complete as of December 31, 1998. The Company essentially has converted or replaced its critical computer information systems for its North American business operations. The remaining effort primarily relates to the conversion or replacement of Blodgett's computer information systems and other non-critical computer information systems which the Company expects to complete by mid-1999.
In mid-1997, the Company began to review the manufacturing equipment used in the Company's North American operations as well as the systems related to the infrastructure of the North American manufacturing and office facilities. The Company is continuing to inventory and verify Year 2000 readiness of computer controlled manufacturing equipment and computer controls for the North American manufacturing and office facilities. The Company estimates that this effort is approximately 75 percent complete as of December 31, 1998. The Company expects to complete the remediation efforts of its production equipment and systems related to its infrastructure for its North American business operations by mid-1999.
In 1997, the Company also began to assess the Year 2000 problem remediation efforts of third parties in North America who have material relationships with the Company including, but not limited to: providers of services such as utilities, suppliers of raw materials and customers where there is a significant business relationship. However, there is no assurance that the Company will not be affected by the Year 2000 problems of other organizations.
Rongshida-Maytag, the Company's joint venture in China, is currently reviewing the implications of the Year 2000 problem on computer information systems and equipment used in the manufacture of its products or facilities. The remediation effort required for the computer information systems and equipment for Rongshida-Maytag has not yet been identified.
The costs associated with the Company's Year 2000 remediation are being expensed as incurred, are not material to the performance of the Company for previous periods and are not expected to be material relative to the future performance of the Company. The company estimates it has spent approximately $12 million to date on the Year 2000 issue and expects to spend not more than $20 million in total on the Year 2000 issue. As previously identified, the Company utilizes software which was acquired from third parties. The Company has maintenance agreements with certain of its software vendors which, in return for annual contractual payments, enable it to obtain new software releases, including versions which are Year 2000 ready.
If the Company is unsuccessful, or if the remediation efforts of its key suppliers or customers are unsuccessful with regard to Year 2000 remediation, there may be a material adverse impact on the Company's financial position and results of operations. If the Company's Year 2000 remediation effort is not successful, the most likely worst case scenario is that the Company will be unable to manufacture and distribute its products. The Company is unable to estimate the financial impact of Year 2000 issues because it cannot predict the magnitude or time length of potential Year 2000 business interruptions. The Company's contingency plan continues to be under development and includes such precautionary measures as an anticipated increased level of inventory to minimize the potential disruption in the Company's ability to manufacture and distribute products.
While the Company expects its Year 2000 issues to be remedied successfully, it cannot guarantee that Year 2000 issues, including those of third parties, will not have an adverse effect on the Company's consolidated financial position or results of operations.
Contingencies
The Company has contingent liabilities arising in the normal course of business, including pending litigation, environmental remediation, taxes and other claims. (See discussion of these contingent liabilities in "Commitments and Contingencies" section of the Notes to Consolidated Financial Statements.)
Subsequent Events
In February 1999, the Company's board of directors authorized the repurchase of up to 10 million additional shares beyond the previous share repurchase authorizations totalling 30.8 million shares. The Company plans to continue the repurchase of shares over a non-specified period of time. (See discussion of previous share repurchase authorizations in "Liquidity and Capital Resources" section of this Management's Discussion and Analysis.)
In the first quarter of 1999, the Company acquired all of the outstanding shares of Jade Range, a manufacturer of commercial ranges and refrigerators and residential ranges for approximately $20 million in cash and stock. This business has annual sales of approximately $20 million. The acquisition will be accounted for as a purchase and the results of its operations will be included in the consolidated financial statements from the date of acquisition.
Forward-Looking Statements
This Management's Discussion and Analysis contains statements which 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 terms such as "expects," "intends," "may impact," "plans" or "should." 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 the Company competes, including changes in economic conditions in the geographic areas where the Company's operations exist or products are sold; timing and start-up 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 ability of the Company and customers and suppliers to become Year 2000 ready in a timely manner; the cost and availability of raw materials and purchased components; progress on capital projects; the impact of business acquisitions or dispositions; the costs of complying with governmental regulations; level of share repurchases; litigation and other risk factors.