| MAYTAG CORP Item 1A Risk Factors |
| There are many factors that affect our business and the results of operations, many of which are beyond our control |
| Some of these factors relate to the fact that we have entered into the merger agreement with Whirlpool Corporation described under Item 1, while other factors are those that relate to our business generally |
| The following is a description of the most significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired |
| Risks Relating to the Pending Merger with Whirlpool We are subject to business uncertainties and contractual restrictions while the merger with Whirlpool is pending |
| Uncertainty about the effect of the pending merger with Whirlpool on our employees and customers may have an adverse effect on us |
| These uncertainties may impair our ability to retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to defer purchases or other decisions concerning us, or to seek to change existing business relationships with us |
| If key employees depart because of uncertainty about their future roles and the potential complexities of integration, the combined company’s business following the merger could be harmed |
| In addition, the merger agreement restricts us from making certain acquisitions or dispositions and taking other specified actions without the consent of Whirlpool until the merger occurs |
| These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger |
| For further information please refer to the section titled “Covenants” on page 89 of the proxy statement dated November 21, 2005, filed by Maytag with the SEC); Failure to complete the merger could negatively affect the stock price and the future business and financial results of Maytag |
| There is no assurance that Whirlpool and Maytag will receive the necessary regulatory approvals or satisfy the other conditions to the completion of the merger |
| If the merger is not completed for any reason, we will be subject to several risks, including the following: We may be required to pay and reimburse Whirlpool amounts of up to dlra100 million in the aggregate if the merger agreement is terminated under certain circumstances (for further information please refer to the section titled “Termination Fees and Reimbursement Obligations” on page 13 of the proxy statement dated November 21, 2005 filed by Maytag with the SEC); • The current market price of Maytag common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a negative perception by the market of Maytag generally and a resulting decline in the market price of Maytag common stock; • Many costs relating to the merger (such as legal, accounting, and a portion of its financial advisory fees) are payable by Maytag whether or not the merger is completed; • There may be substantial disruption to our business and a distraction of its management 4 ______________________________________________________________________ [34]Table of Contents and employees from day-to-day operations, because matters related to the merger (including integration planning) may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial; and • We would continue to face the risks that we currently face as a independent company, as further described herein |
| If the merger is not completed, the risks described above may materialize and materially adversely affect our business, financial results, financial condition, and stock price |
| Whirlpool must pay us a termination fee of dlra120 million if any governmental entity issues a final order preventing the merger as violative of any antitrust law and certain other conditions are met |
| In addition, Whirlpool must indemnify us for up to dlra15 million for the payment of retention bonuses to specified Maytag employees upon certain termination events (for further information please refer to the section titled “Termination Fees and Reimbursement Obligations” on page 13 of the proxy statement dated November 21, 2005, filed by Maytag with the SEC); The merger agreement limits our ability to pursue alternatives to the merger |
| Because our stockholders approved the merger agreement at the special meeting of stockholders held on December 22, 2005, we no longer have a right to terminate the merger agreement to accept an alternative transaction |
| Risks Related to Our Business Increased competition could reduce prices and profit margins, and materially adversely affect our results of operations |
| The home and commercial appliances industry is intensely competitive |
| Our principal competition is from other appliance manufacturers, including General Electric, Electrolux, Whirlpool, and from Kenmore-branded products, as well as several competitors from Asia and Europe, such as LG, Bosch-Siemens, Samsung, Fisher & Paykel, and Haier |
| Product quality, price and functionality are the important areas of competitive differentiation |
| Some of our competitors have greater financial resources, larger sales shares, superior distribution or purchasing arrangements or lower cost structures than we do |
| Our products face increasing competition from foreign manufacturers that have lower cost structures and that are actively expanding in the US, especially through the national retail chains that have become an increasingly important distribution channel |
| Sales of our floor care products have declined due to a decrease in unit market share, pricing decreases, and a product shift within the industry towards products in lower price categories |
| We cannot assure you that these or other competitive pressures will not adversely affect our profitability or performance |
| Our ability to respond to these pressures will depend in large part on our ability to control or reduce our cost structure, increase the efficiency of our manufacturing processes, and develop innovative products with which we can maintain our brand recognition, and there is no assurance we can achieve these objectives |
| These competitive pressures may lead to declines in our sales shares or in the prices of our products, which could in turn have materially adverse effects on our results of operations and financial condition |
| We may be unable to realize the expected cost savings from our restructuring initiatives |
| Our ability to compete effectively depends in part on our ability to control or reduce our cost structure and increase the efficiency of our manufacturing processes |
| Although we have implemented several restructuring initiatives, including the relocation of manufacturing facilities, and have others that we may implement in the future, there is inherent risk related to relocation of manufacturing facilities, including disruption of business operations, inability to meet customer demand, higher costs than anticipated, environmental issues associated with closed facilities and a failure to complete these initiatives in the time frames contemplated |
| Even if we are able to successfully restructure our operations, we cannot assure you that our past or future restructuring initiatives will achieve the full expected benefits of the cost savings or revenue enhancements within the expected time frame or at all |
| The cost savings may be offset by costs incurred in restructuring our operations, as well as by increases in other expenses unrelated to the restructuring |
| 5 ______________________________________________________________________ [35]Table of Contents We are subject to risks relating to the relocation of manufacturing capacity |
| As part of our strategy of continued reduction of costs and rationalization of our production activities, we have, and may in the future, relocate some of our manufacturing capacity to low-cost locations |
| The transfer of production from one facility to another is costly and presents the possibility of additional disruptions and delays during the transition period |
| We may not be able to successfully transition production to different facilities |
| Any prolonged disruption in the operations of any of our manufacturing facilities or any unforeseen delay in shifting manufacturing operations to new facilities, whether due to technical or labor difficulties or delays in regulatory approvals, could result in delays in shipments of products to our customers, increased costs and reduced revenues |
| Our future success depends on our ability to develop new and innovative products |
| Product innovation and development are critical factors in maintaining sales share in all our product lines |
| To meet our customers’ needs, we must continuously design new, and update existing, products and services and invest in and develop new technologies |
| Product development is also driven by criteria for better environmental performance and lower cost of use |
| In addition, although the life cycle of most home appliances is over ten years, manufacturers are introducing new, innovative product lines to encourage upgrades since consumers will select at the time of purchase, and may be willing to pay a premium for the most efficient, best performing, and most aesthetically appealing appliances |
| Accordingly, the effective life cycle of appliances is becoming shorter requiring us to develop innovative products in a shorter time frame |
| If we fail to develop and introduce new innovative products, the reputation of our brands could be adversely affected and we may experience declines in sales share and prices and incur increased capital expenditures to bring new products to market |
| Introducing new products also requires significant management time and a high level of financial and other commitments to research and development, which may not result in success |
| During 2005, we invested dlra91 million in research and development, primarily related to product development in the Home Appliances segment |
| Our sales and net income may suffer if investments are made in technologies that do not function as expected or are not accepted in the marketplace |
| Concentration of retail distribution in large retail chains has resulted in increased dependence on a number of large customers |
| A loss of any of these large customers or of significant floor space at any such customer could adversely affect us |
| Major customers account for a large and increasing percentage of our sales |
| This trend is particularly significant in the Home Appliances segment, as most products in this business area are sold through major retail chains |
| In 2005, our two largest customers, Home Depot and Sears Holdings, represented approximately 14prca and 10prca of our consolidated net sales, respectively |
| This dependence on a number of large customers has resulted in greater commercial and credit exposures to a limited number of customers |
| If we were to experience a material reduction in orders or become unable to collect fully our accounts receivable from a major customer, our net sales and financial results would suffer |
| In addition, if a major customer were to decide not to carry our products, or to reduce significantly the floor space devoted to our products, we could be adversely affected |
| We are dependent on third party suppliers to deliver key components and materials for our products and we intend to increase sourcing of finished products |
| Our manufacturing processes depend on the availability and timely supply of components and raw materials, generally from third party suppliers, many of which are located outside the United States |
| We are also increasing our supply of sourced finished products |
| We work closely with our suppliers to avoid supply-related problems but there can be no assurances that we will not experience supply problems in the future |
| We cannot assure you that our suppliers will continue to provide products to us at attractive prices, or at all, or that we will be able to obtain such products in the future from these or other providers on the scale and within the time frames we require |
| Such problems could have material adverse effects on our business, results of operations or financial condition |
| As we continue to purchase more finished goods from our suppliers, our dependence on such suppliers increases |
| 6 ______________________________________________________________________ [36]Table of Contents Significant increases in the cost of raw materials and components have reduced our operating margins and may continue to do so |
| We are exposed to commodity price risks because our operations depend on the supply of various commodities, including steel, copper, aluminum, resin, rubber and petroleum-based products from domestic and foreign suppliers, as well as oil and other energy costs which affect our manufacturing and transportation costs |
| We cannot assure you that increases in the costs of raw materials, and in particular commodities, will not have a material adverse effect on our results of operations or financial condition |
| We may not be able to pass on the entire amount of commodity price increases or reduce our costs to offset the higher commodity prices |
| Even if we can pass on some of these increased costs to our customers, we may be prevented from doing so during the time lag between changes in prices under our purchase contracts and changes in prices under our sales contracts |
| We may incur material losses and costs as a result of product liability, warranty, recall claims or other lawsuits or claims that may be brought against us |
| We are exposed to product liability and warranty claims in the normal course of business in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage |
| Accordingly, we could experience material warranty or product liability costs in the future and incur significant costs to defend against these claims |
| In addition, under certain circumstances any such issues could give rise to an investigation by the Consumer Product Safety Commission, or CPSC, which could result in the need for remedial actions such as a recall requiring the repair or replacement of our products |
| We currently carry insurance and maintain reserves for product liability claims |
| However, we cannot assure you that our insurance coverage will be adequate if such claims do arise, and any liability not covered by insurance could have a material adverse impact on our business |
| A future claim could involve the imposition of punitive damages, the award of which, pursuant to state laws, may not be covered by insurance |
| In addition, warranty claims are not covered by our product liability coverage |
| Any product liability or warranty issues may adversely impact our reputation as a manufacturer of high quality, safe products and may have a material adverse effect on our business |
| Further, other lawsuits or claims relating to non-product issues may result in judgments or awards against us that could materially adversely impact our results |
| Our pension plans are currently underfunded and we may have to make significant cash payments to the plans, reducing the cash available for our business |
| We are required to make cash contributions to our pension plans to the extent necessary to comply with minimum funding requirements imposed by employee benefit and tax laws |
| The amount of any such required contributions will be determined annually based on an annual actuarial valuation of plans as performed by the plans’ actuaries |
| The annual actuarial valuation will depend upon numerous factors, including future asset returns, discount rates and other actuarial factors such as life expectancies |
| As of December 31, 2005, our pension plans were underfunded by dlra580 million (based on actuarial assumptions used for FAS 87 purposes) |
| Our pension plans are subject to the Employee Retirement Income Security Act of 1974, or ERISA Under ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded pension plan under limited circumstances |
| In the event our pension plans were terminated for any reason while the plans are underfunded, we may incur a liability to the PBGC that could be equal to the entire amount of the underfunding |
| Also, pension reform proposals pending in the US Congress, if they become law, could result in the requirement for higher contributions to our pension plan in the future |
| As noted above, the unfunded status of our pension plans may increase or decrease depending on our plan asset returns in the future and interest rates as our liabilities are measured based upon the market interest rates on an annual basis |
| Changes in these assumptions, which are utilized to value the liability, will also affect our annual expense |
| The liability for underfunded pension plans may also affect shareholders’ equity |
| In the event of a decline in interest rates or a deterioration of the fair value of 7 ______________________________________________________________________ [37]Table of Contents plan assets, or in the event actual experience differs from other actuarial assumptions, we may be required to make a liability adjustment, which would be recorded as a reduction to shareholders’ equity, after tax |
| The equity would be restored to the balance sheet in future periods only if the fair value of plan assets exceeded the accumulated benefit obligation |
| Our postretirement medical liability may also adversely affect future results and will require benefit payments to cover the medical costs of retired employees who are covered under these plans |
| As of December 31, 2005, our liability for postretirement medical costs is dlra522 million |
| This amount is not funded and there are no regulatory requirements to fund this liability |
| Although we have taken actions to reduce our liability for retiree medical benefits, this liability has continued to increase due to the significant increases in medical costs |
| As in the case of our pension liability and expense, the liability and expense for postretirement medical benefits is determined by our actuaries on an annual basis based on assumptions as to discount rates and future medical cost trends |
| Changes in these assumptions or actual experience that is different from these assumptions will result in changes to our liability and expense and could result in higher than anticipated benefit costs for our retired employees |
| We may be adversely affected by environmental and safety regulations or concerns |
| We are subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants to the air and water, the use, management and disposal of regulated materials, employee health and safety and the amount of energy and water consumed by our major appliances in consumer use |
| As an owner and operator of real property and a generator of regulated waste materials, we may also be subject to strict, and under certain circumstances, joint and several liability for the remediation of contaminated sites and for related damages to natural resources |
| We cannot assure you that we have been or will be at all times in complete compliance with all environmental, health and safety requirements |
| These requirements are complex, change frequently and have tended to become more stringent over time |
| Therefore, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, and be subject to third party property damage or personal injury claims, as a result of violations of, or liabilities under environmental laws or non-compliance with environmental permits required at our facilities |
| Contaminants have been detected at some of our present and former sites |
| In addition, we have been named as a potentially responsible party at certain Superfund or other off-site disposal sites |
| We estimate our undiscounted obligation for future environmental costs is approximately dlra8 million |
| While we accrue for costs associated with environmental remediation and litigation when such costs are probable and reasonably estimable, the discovery of new conditions such as additional contaminants or the imposition of additional cleanup obligations at these or other sites could result in substantial liability above our current accruals |
| Moreover, the ultimate costs under environmental laws and the timing of these costs are difficult to predict |
| Liability under some environmental laws relating to contaminated sites, including the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and analogous state laws, can be imposed retroactively and without regard to fault |
| Further, under certain circumstances, one responsible party can be held liable for all costs at a site if other responsible parties are unable to pay |
| We cannot assure you that environmental liabilities and expenditures will not have a material adverse effect on our business, results of operations or financial condition |
| Labor disputes with our employees could interrupt our operations and adversely affect our business |
| We are party to several collective bargaining agreements |
| As of December 31, 2005, approximately 40 percent of the employees in our Home Appliances segment were covered by collective bargaining agreements |
| If we are unable to successfully negotiate acceptable terms with the unions, our operating costs could increase as a result of higher wages or benefits paid to union members, or if we fail to reach an agreement with the unions, our operations could be disrupted |
| Either event could have a material adverse effect on our business, results of operations or financial condition |
| In addition, there have been in the past, and may be in the future, attempts to unionize our non-union facilities |
| If employees at our non-union facilities unionize in the future, our operating costs could increase |
| 8 ______________________________________________________________________ [38]Table of Contents A slowdown in the US economy and in particular in the United States housing market could adversely affect demand for our products |
| Most of our products are sold in the United States, and, therefore, a general slowdown in domestic consumer spending could have an adverse effect on our business |
| In addition, a slowdown in housing starts in the United States could adversely affect us because demand for new appliances is partly driven by the pace of new home construction |
| If demand for home appliances were to slacken, this might further accelerate price competition among manufacturers which could in turn adversely affect our net sales, sales shares or margins |
| Such a slowdown could, therefore, have an adverse effect on our results of operations and financial condition |
| Economic conditions in international areas A slow down or significant change in economic conditions outside the United States where we sell products or where our operations are located could adversely affect our sales and, ultimately, operating results |
| Our ability to operate our Company effectively could be impaired if we fail to attract and retain key personnel |
| Our ability to operate our businesses and implement our strategies depends, in part, on the efforts of our executive officers and other key employees |
| In addition, our future success will depend on, among other factors, our ability to attract and retain qualified personnel, particularly research professionals, technical sales professionals and engineers |
| The loss of the services of any key employee or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects |
| Our business operations and competitive position could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights |
| We rely on the patent, trademark, copyright and trade secret laws of the United States and other countries to protect our intellectual property rights |
| However, we may be unable to prevent third parties from using our intellectual property without authorization |
| The use of our intellectual property by others could reduce any competitive advantage we have developed or otherwise harm our business |
| If we had to litigate to protect these rights, any proceedings could be costly, and we may not prevail |
| Although we have numerous United States and foreign patents and numerous pending patents, our patents, issued or pending, may not provide us with any competitive advantage or enable us to protect the intellectual property rights that these applications were intended to cover |
| Our competitors may attempt to reverse-engineer our products or design around our patents and thereby avoid infringement liability |
| Moreover, the expiration of our patents may lead to increased competition |
| We have obtained and applied for several United States and foreign trademarks, as appropriate |
| Our pending applications may not be approved by the applicable governmental authorities and, even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations |
| A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our trademarks and impede our marketing efforts in those jurisdictions |
| In addition, we face the risk of claims that we are infringing third parties’ intellectual property rights |
| Litigating any such claim, even if it is without merit, could be expensive and time-consuming; could cause us to cease making, using or selling certain products that incorporate the disputed intellectual property; could require us to redesign our products, if feasible; could divert management time and attention; and could require us to enter into costly royalty or licensing arrangements |
| Our reported results of operations from our international business will be reduced if the US dollar strengthens |
| Our business is exposed to foreign currency exchange risks related to transactions, assets and liabilities denominated in foreign currencies |
| Although we attempt to mitigate this exposure with forward and option contracts that hedge a portion of our foreign currency denominated export sales transactions, adverse changes in currency exchange rates could negatively affect the competitiveness of our products, our operating results and overall financial condition |
| At December 31, 2005, a uniform 10prca strengthening of the US dollar relative to 9 ______________________________________________________________________ [39]Table of Contents foreign currencies in which our sales are denominated, all other factors being equal, would have resulted in a decrease in net income of approximately dlra18 million for the year ended December 30, 2006 |
| Our liquidity will depend on the availability of borrowings under our credit facility and our ability to comply with the covenants contained in our credit facility |
| The availability of borrowings under our credit facility is subject to a borrowing base limitation and other conditions |
| The components of the borrowing base are certain of our inventories and accounts receivable, and these will be affected by market and business conditions |
| In addition, certain of the components of the borrowing base will be subject to the commercially reasonable discretion of the administrative agent |
| The administrative agent will have the customary ability to reduce, in its reasonable business judgment, the availability of borrowings at any time by, for example, reducing advance rates, imposing or changing collateral value limitations or collateral eligibility requirements or establishing availability reserves |
| Our credit facility also contains a number of covenants with which we must comply |
| These covenants include restrictions on our ability to incur indebtedness for borrowed money in addition to borrowings under the credit facility, restrictions on our ability to pay dividends or repurchase our common stock, restrictions on investments that we may make, and restrictions on our ability to sell our assets |
| In addition, if average availability under the credit facility is less than dlra60 million, we must comply with a covenant to maintain a fixed charge coverage ratio of 1dtta1 to 1 |
| If we fail to comply with the covenants contained in the credit facility, we could be precluded from borrowing under the credit facility and could be required to repay all amounts outstanding |
| We may not be able to realize benefits from our deferred tax assets if we continue to record operating losses in the future |
| Deferred taxes reflect the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities |
| Maytag assesses the probability of realizing its deferred taxes and records a valuation allowance against balances recorded for which no benefit is reasonably expected |
| The establishment of the valuation allowance is recorded as a reduction to the deferred tax asset and an increase to income tax expense or a reduction to comprehensive income |
| As of December 31, 2005, the valuation allowance against deferred tax assets was dlra54dtta5 million largely for deferred tax assets associated with capital loss carryforwards and net operating losses |
| If Maytag is not able to generate sufficient future taxable income, it may not be able to realize the full benefits of its remaining deferred tax assets and would record a valuation allowance against current and noncurrent deferred tax assets reflected on the December 31, 2005, consolidated balance sheet of dlra73dtta0 million and dlra290dtta9 million, respectively |
| The recording of the valuation allowance would have an adverse effect on our results of operations and financial condition |
| Please also refer to risk factors in the proxy statement dated November 21, 2005, filed by Maytag with the SEC, under “Risk Factors” on page 24 and also the documents referenced under “Additional Information for Stockholders” beginning on page 114 |
| These considerations may not constitute all the factors that could cause actual results to differ materially from those discussed in any forward-looking statement |
| Our Company operates in a continually changing business environment and new factors emerge from time to time |
| We cannot identify all such factors nor can we assess the impact, if any, of such factors on our financial position or our results of operations |
| Accordingly, forward-looking statements should not be relied upon as a predictor of actual results |
| We disclaim any responsibility to update any forward-looking statement provided in this document |