Notes To Consolidated Financial Statemetns
Contents || Corporate ListingsSummary 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 80 percent and 86 percent of the Company's inventories at December 31, 1998 and 1997, 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 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 40 years using the straight-line method and the carrying value is reviewed for impairment annually. If this review indicates that goodwill is not expected to be recoverable based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced.
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 five 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 and Product Warranty Costs: Revenue from sales of products is generally recognized upon shipment to customers. 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 and option contracts to manage certain foreign currency exchange rate risks associated with its international operations. The outstanding contracts are marked to market each period with the gains and losses included in income.
The Company has interest rate swap contracts outstanding which are marked to market each period with the gains and losses included in income.
The Company has a forward stock purchase contract outstanding in its own shares which allows the Company to determine whether the contract is settled in cash or shares. As such, the contract is considered an equity instrument and changes in fair value are not recognized in the Company's financial statements. If the Company determines to settle the contract in cash, the amount of cash paid or received would be reported as a reduction of, or an addition to, paid-in capital.
The Company has put option contracts outstanding in its own shares which allow the Company to determine whether the contracts are settled in cash or shares. As such, the contracts are considered equity instruments and changes in fair value are not recognized in the Company's financial statements. The premiums received from the sale of put options are recorded as an addition to paid-in capital. If the Company determines to settle the contracts in cash, the amount of cash paid would be reported as a reduction of paid-in capital.
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 the fair value (market price) 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, into common stock. All EPS amounts for all periods have been presented and, where necessary, restated to conform to Statement 128 requirements.
Comprehensive Income: In 1998, the Company adopted FASB Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and displaying of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareowners' equity. Statement 130 requires unrealized losses on the Company's available-for-sale securities, minimum pension liability adjustments and foreign currency translation adjustments to be included in accumulated other comprehensive income, which prior to adoption were reported separately in shareowners' equity. Prior-year financial statements have been reclassified and Consolidated Statements of Comprehensive Income have been added to conform to the requirements of Statement 130.
Impact of Recently Issued Accounting Standards: In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company expects to adopt the new Statement effective January 1, 2000. Statement 133 will require the Company to recognize all derivatives on the consolidated balance sheet at fair value. The Company does not anticipate that the adoption of Statement 133 will have a significant effect on its results of operations or financial position.
Business Acquisitions
In the fourth quarter of 1998, Rongshida-Maytag acquired all of the outstanding shares of Three-Gorges, a manufacturer of home laundry products in China. This business produces and markets home laundry equipment and has annual sales of approximately $15 million. In connection with the purchase, Rongshida-Maytag assumed $8 million in notes payable and long-term debt. This 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 (assumed notes payable and long-term debt) over the fair values of net assets acquired was approximately $2 million and has been recorded as Other intangibles (goodwill) in the Consolidated Balance Sheets and is being amortized on a straight-line basis over 40 years.
On October 1, 1997, the Company acquired all of the outstanding shares of G.S. Blodgett Corporation, 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 the 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. This business, which has annual sales of approximately $135 million, produces and markets commercial cooking equipment primarily under the Blodgett and Pitco Frialator brands. This 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 $120 million and has been recorded as Other intangibles (goodwill) in the Consolidated Balance Sheets and is being amortized on a straight-line basis over 40 years.
In the third quarter of 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, 1996, respectively. This 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 $33 million and has been recorded as Other intangibles (goodwill) in the Consolidated Balance Sheets and is being amortized on a straight-line basis over 40 years.
Assuming the 1998 and 1997 acquisitions had occurred January 1, 1997, consolidated net sales would have been $4.1 billion for 1998 and $3.5 billion for 1997. Consolidated pro forma income and earnings per share would not have been materially different from the reported amounts for 1998 and 1997. Assuming the 1997 and 1996 acquisitions had occurred January 1, 1996, consolidated net sales would have been $3.5 billion for 1997 and $3.1 billion for 1996. Consolidated pro forma income and earnings per share would not have been materially different from the reported amounts for 1997 and 1996. Such unaudited pro forma amounts are not indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of January 1, 1997 and January 1, 1996, respectively.
Restructuring Charge
During the first quarter of 1996, the Company announced the restructuring of its major appliance operations in an effort to strengthen its position in the industry and to deliver improved performance to both customers and shareowners. This included the consolidation of two separate organizational units into a single operation responsible for all activities associated with the manufacture and distribution of the Company's brands of major appliances and the closing of a cooking products plant in Indianapolis, Indiana, with transfer of that production to an existing plant in Cleveland, Tennessee.
As a result of these actions, the Company recorded a restructuring charge of $40 million, or $24.4 million after-tax, in the first quarter of 1996. This charge is primarily related to the costs associated with the consolidation of cooking products manufacturing activities and consolidation of activities of the two separate organizational units.
The $40 million restructuring charge was comprised of cash expenditures of $22 million, primarily related to severance, and non-cash charges of $18 million, primarily related to write-offs of property, plant and equipment. During 1998, the Company incurred $3 million of costs which were primarily cash expenditures charged to the restructuring reserve. During 1997, the Company incurred $18 million of costs, of which $5 million were cash expenditures charged to the restructuring reserve. During 1996, the Company incurred $18 million of costs, of which $13 million were cash expenditures charged to the restructuring reserve.
The remaining costs to be incurred are holding costs associated with the Indianapolis, Indiana plant pending the sale of the facility by the Company.
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:
Income before income taxes, minority interest and extraordinary item consisted of the following:
Components of the provision (benefit) 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 $14 million at December 31, 1998), taxes which would result from distribution have only been provided on the portion of such earnings estimated 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 1998, 1997 and 1996, were $154 million, $107 million and $102 million, respectively.
The tax effects of the components of comprehensive income, unrealized losses on securities and foreign currency translation adjustments were recorded as deferred tax assets with a corresponding valuation allowance. The Company believes the realization of unrealized losses on securities and foreign currency translation adjustments would be classified as capital losses for tax purposes and no capital gain would be available to the Company to utilize the losses.
Notes Payable
Notes payable at December 31, 1998 consisted of notes payable to foreign banks of $59.8 million and commercial paper borrowings of $53.1 million. The weighted average interest rate on all notes payable to foreign banks and commercial paper borrowings was 7.0 percent at December 31, 1998. Notes payable at December 31, 1997 consisted of notes payable to foreign banks of $38.9 million and commercial paper borrowings of $73.9 million. The weighted average interest rate on all notes payable to foreign banks and commercial paper borrowings was 7.4 percent at December 31, 1997.
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.
Long-Term Debt
Long-term debt consisted of the following:
The 9.75 percent notes due in 2002, the 8.875 percent notes due in 1999 and the medium-term notes grant the holders the right to require the Company to repurchase all or any portion of their 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 1998, 1997 and 1996 was $64 million, $65.1 million and $51.1 million, respectively. When applicable, the Company capitalizes interest incurred on funds used to construct property, plant and equipment. Interest capitalized during 1997 and 1996 was $4.2 million and $8.9 million, respectively. Interest capitalized during 1998 was not significant.
The aggregate maturities of long-term debt in each of the next five years and thereafter are as follows (in thousands): 1999 - $140,176; 2000 - $95,444; 2001 - $24,508; 2002 - $133,489; 2003 - $43,290; thereafter - $149,774.
In 1998, the Company issued a $16 million medium-term note with a fixed interest rate of 5.30 percent due September 29, 2000. The Company also issued a $70 million medium-term note with a floating rate based on LIBOR with the interest rate reset quarterly due May 10, 2000. The Company also issued a $15 million medium-term note with a floating rate based on LIBOR due December 3, 1999. The three-month LIBOR rate as of December 31, 1998 was 5.07 percent.
In 1998, the Company made early retirements of debt of $71.1 million at an after-tax cost of $5.9 million (net of income tax benefit of $3.5 million). Included in this amount was $22.1 million of the 9.75 percent notes due May 15, 2002, $31.7 million of the 8.875 percent notes due July 15, 1999 and $17.3 million of medium-term notes.
In 1997, the Company issued a $75 million medium-term note maturing in 2009 which has an interest rate based on LIBOR through November 1999. In 1999, the interest rate for the remaining 10 years of the note will be established at the Company's then borrowing rate for 10-year notes based on the greater of the then current year treasury rate or 5.91 percent. In 1997, the Company also reissued $49.3 million of 5.13 percent employee stock ownership plan notes.
In 1997, the Company made early retirements of debt of $61.8 million at an after-tax cost of $3.2 million (net of income tax benefit of $2.0 million). Included in this amount was $12.5 million of the 9.75 percent notes due May 15, 2002 and $49.3 million of 9.35 percent employee stock ownership plan notes.
In 1996, the Company made early retirements of debt of $17.5 million of the 9.75 percent notes due May 15, 2002 at an after-tax cost of $1.5 million (net of income tax benefit of $1.0 million). In 1996, the Company also issued $25 million of 7.22 percent medium-term notes maturing in 2006.
The 1998, 1997 and 1996 charges for the early retirement of debt have been reflected in the Consolidated Statements of Income as extraordinary items.
Accrued Liabilities
Accrued liabilities consisted of the following:
Pension Benefits
The Company provides noncontributory defined benefit pension plans for most employees. Plans covering salaried and management employees generally provide pension benefits that are based on an average of the employee's earnings and credited service. Plans covering 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, 1998 set forth in the table above, and for determining net periodic pension cost in 1999, the discount rate was decreased to 6.75 percent and the rate of compensation was decreased to 4.5 percent. Assumptions for plans outside the United States are comparable to the above in all periods. 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 $1,085,044, $1,006,848 and $937,283, respectively, as of December 31, 1998, and $954,300, $891,378 and $860,207, respectively, as of December 31, 1997.
The Company acquired all of the outstanding shares of G.S. Blodgett Company on October 1, 1997, including its pension plans. The Company consolidated G.S. Blodgett Corporation's pension plans with its existing plans in 1998. (See discussion of this acquisition in "Business Acquisitions" section of the Notes to Consolidated Financial Statements.)
The Company amended its pension plans in 1998 to include several benefit improvements for plans covering salaried and hourly employees.
Postretirement Benefits
The Company provides postretirement health care and life insurance benefits for certain employee groups in the U.S. 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:
For the valuation of accumulated benefit obligation at December 31, 1998 set forth in the previous table, and for determining net postretirement benefit costs in 1999, the discount rate was decreased to 6.75 percent and the health care cost trend rates were assumed to be 6.0 percent for 1999 decreasing gradually to 5.0 percent in the year 2001 and remaining thereafter.
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. A one-percentage change in assumed health care cost trend rates effect consisted of the following:
Leases
The Company leases buildings, machinery, equipment and automobiles under operating leases. Rental expense for operating leases amounted to $25.9 million, $23.3 million and $22.1 million for 1998, 1997 and 1996, respectively. Future minimum lease payments for operating leases as of December 31, 1998 consisted of the following:
Financial Instruments
The Company's foreign currency exchange rate risk includes anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar. The Company uses foreign exchange forward and option contracts to manage certain foreign currency exchange rate risks associated with its international operations. The counterparties to the contracts are high credit quality international financial institutions. During 1998, 1997 and 1996, the Company used foreign exchange forward and option contracts for the exchange of Canadian dollars to U.S. dollars to hedge the sale of appliances manufactured in the U.S. and sold to Canadian customers. Gains and losses recognized from these contracts were not significant. As of December 31, 1998, the Company had open foreign currency forward contracts for the exchange of Canadian dollars, all having maturities less than 12 months, in the amount of U.S. $70.4 million. The fair market value of these contracts, which is estimated by using the applicable spot or forward rates, was not significant. Open contracts as of December 31, 1997 were not significant.
In 1996, the Company initiated a trading program of interest rate swaps which it marks to market each period. The swap transactions involve the exchange of Canadian variable interest and fixed interest rate instruments. The counterparty is a single financial institution of the highest credit quality. All swaps are executed under an International Swap and Derivatives Association, Inc. (ISDA) master netting agreement. In 1996, the Company realized $38 million of gains which were offset by unrealized losses of $40.6 million related to the interest rate swaps. The net losses of $2.6 million are reflected in Other - net in the Consolidated Statements of Income. In 1997, the Company incurred $7.6 million of interest expense in payment on the exchange position of these swap transactions. Additionally, the Company recognized unrealized gains of $5.4 million which are reflected in Other - net in the Consolidated Statements of Income. In 1998, the Company incurred $7.5 million of interest expense in payment on the exchange position of these swap transactions. Additionally, the Company recognized unrealized gains of $5.6 million which are reflected in Other - net in the Consolidated Statements of Income.
As of December 31, 1998, the Company had five swap transactions outstanding with a total notional amount of $80.1 million which mature by 2003. The fair value of the swap positions of $29.7 million at December 31, 1998 and $35.3 million at December 31, 1997 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, 1998 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.
Financial instruments which 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 which 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, the forward stock purchase contract 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 Notes Payable section in the Notes to Consolidated Financial Statements. For additional disclosures regarding the Company's long-term debt, see Long-Term Debt section in the Notes to Consolidated Financial Statements. For additional disclosures regarding the Company's forward stock purchase contract and put option contracts, see Shareowners' Equity section in the Notes to Consolidated Financial Statements.
Minority Interest
In 1996, the Company invested approximately $35 million and committed additional cash investments of approximately $35 million to acquire a 50.5 percent ownership in Rongshida-Maytag, a manufacturer of home appliances in China. 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. The results of this majority-owned joint venture in China are included in the Company's consolidated financial statements. The noncontrolling interest attributable to the joint venture as of December 31, 1998 and 1997 was $74 million and $73.7 million, respectively, and is reflected in Minority interest in the Consolidated Balance Sheets. The income attributable to the noncontrolling interest in the joint venture in 1998, 1997 and 1996 was $0.8 million, $4 million and $1.3 million, respectively, and is reflected in Minority interest in the Consolidated Statements of Income.
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 outside investor's noncontrolling interest of $100 million as of December 31, 1998 and 1997 is reflected in Minority interest in the Consolidated Balance Sheets. The income attributable to the noncontrolling interest in 1998 and 1997 was $7.5 million and $3.3 million, respectively, and is reflected in Minority interest in the Consolidated Statements of Income.
Stock Plans
The 1996 Employee Stock Incentive Plan provides that the Company may grant to eligible employees stock options, restricted stock and other incentive awards. Up to 6.5 million shares of common stock may be granted under the plan, of which no more than 2.5 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 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 1996 plan.
The Maytag Corporation 1989 Non-Employee Directors Stock Option Plan authorizes the issuance of up to 250,000 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 2,404,563 and 3,384,284 shares available for future stock grants at December 31, 1998 and 1997, 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 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 pro forma effect on net income is not representative of the pro forma effect on net income in future years because grants made in 1996 and later years have an increasing 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, 1998 consisted of the following:
Some stock options were granted with stock appreciation rights (SAR) which entitle the employee to surrender the right to receive up to one-half of the shares covered by the option and to receive a cash payment equal to the difference between the stock option price and the market value of the shares being surrendered. Stock options with a SAR outstanding were 69,465 at December 31, 1998, 122,850 at December 31, 1997 and 234,680 at December 31, 1996. The Company issues 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 December 31, 1998, 1997 and 1996 were 311,960, 409,634 and 462,253, respectively. Restricted stock units outstanding at December 31, 1998, 1997 and 1996 were 217,186, 289,272 and 283,600, respectively. The expense for the anticipated restricted stock and stock unit payout is amortized over the three-year vesting period and was $11.8 million, $7.6 million and $4.8 million in 1998, 1997 and 1996, respectively. The number of shares of restricted stock issued in 1998 was 76,230 with a fair value at date of grant of $2.8 million. The number of stock units issued in 1998 was 50,827 with a fair value at date of grant of $1.9 million.
Employee Stock Ownership Plan
The Company established an Employee Stock Option 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 U.S. employees except a select group 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:
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. 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).
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 will not be transferable apart from the Company's common stock. When exercisable, each Right will entitle 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:
For additional disclosures regarding stock option plans and restricted stock awards, see Stock Plans section in the Notes to Consolidated Financial Statements. For additional disclosures regarding the Company's forward stock purchase contract, see 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 which have previously been sold.
While it is possible the Company's estimated undiscounted obligation of approximately $8 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 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, 1998, the Company has outstanding commitments for capital expenditures of $22 million.
Segment Reporting
The Company has three reportable segments: home appliances, commercial appliances and international appliances. 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.
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.
The international appliances segment consists of the Company's 50.5 percent owned joint venture in China, Rongshida-Maytag, which manufactures laundry products and refrigerators. These products are primarily sold to department stores and distributors in China.
The Company's reportable segments are distinguished by the nature of products manufactured and sold and types of customers. The Company's home appliances segment has been further defined based on distinct geographical locations.
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 1996, the Company's home appliances segment recorded a restructuring charge of $40 million. For additional disclosures regarding the Restructuring Charge, see the Restructuring Charge section in the Notes to Consolidated Financial Statements.
Corporate assets includes such items as deferred tax assets, intangible pension asset and other assets.
The reconciliation of segment profit to consolidated income before income taxes and minority interest consisted of the following:
Financial information related to the Company's 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.