Annual Reports

 
Quarterly Reports

 
8-K

 
Other

  • 424B3 (Nov 6, 2017)
  • SC 13G (Aug 10, 2017)
  • Form 4 (Aug 2, 2017)
  • 11-K (Jun 23, 2017)
  • SD (May 31, 2017)
  • Form 4 (May 12, 2017)
Whirlpool DEF 14A 2005
Definitive Proxy Statement
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14 (a) of the Securities

Exchange Act of 1934 (Amendment No.     )

 

Filed by the Registrant  x

 

Filed by a Party other than the Registrant  ¨

 

Check the appropriate box:

 

¨        Preliminary Proxy Statement

¨        CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6 (E) (2))

 

x   Definitive Proxy Statement

 

¨   Definitive Additional Materials

 

¨   Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

 

WHIRLPOOL CORPORATION

(Name of Registrant as Specified In Its Charter)

 

(Name of Person (s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee  (Check the appropriate box) :

 

x   No fee required.

 

¨   Fee computed on table below per Exchange Act Rules 14a-6 (i) (4) and 0-11.

 

  (1)   Title of each class of securities to which transactions applies:

 

  (2)   Aggregate number of securities to which transaction applies:

 

  (3)   Per unit price or other underlying value of transactions computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined) :

 

  (4)   Proposed maximum aggregate value of transaction:

 

  (5)   Total fee paid:

 

¨   Fee paid previously with preliminary materials.

 

¨   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1)   Amount Previously Paid:

 

  (2)   Form, Schedule or Registration Statement No.:

 

  (3)   Filing Party:

 

  (4)   Date Filed:

 

Notes:

Reg. (S) 240.14a-101

SEC 1913 (3–99)


Table of Contents

LOGO

 

WHIRLPOOL CORPORATION

 

Administrative Center

2000 N. M-63

Benton Harbor, Michigan 49022-2692

 

To Our Stockholders:

 

It is my pleasure to invite you to attend the 2005 Whirlpool Corporation annual meeting of stockholders to be held on Tuesday, April 19, 2005, at 8:00 a.m., Chicago time, at 120 East Delaware Place, 8th Floor, Chicago, Illinois.

 

The formal notice of the meeting follows on the next page. At the meeting, stockholders will vote on the election of five directors and approval of a nonemployee director equity plan, and will transact any other business that may properly come before the meeting. In addition, we will discuss Whirlpool’s 2004 performance and the outlook for this year, and answer your questions.

 

A financial supplement containing important financial information about Whirlpool is contained in Part II of this booklet. We have also mailed with this booklet a summary annual report that includes summary financial and other important information.

 

Your vote is important. We urge you to please complete and return the enclosed proxy whether or not you plan to attend the meeting. Promptly returning your proxy will be appreciated, as it will save further mailing expense. You may revoke your proxy at any time prior to the proxy being voted by following the procedures described in Part I of this booklet.

 

Your vote is important and much appreciated!

 

LOGO

 

JEFF M. FETTIG

Chairman of the Board, President

and Chief Executive Officer

March 18, 2005


Table of Contents

NOTICE OF 2005 ANNUAL MEETING OF STOCKHOLDERS

 

The 2005 annual meeting of stockholders of WHIRLPOOL CORPORATION will be held at 120 East Delaware Place, 8th Floor, Chicago, Illinois on Tuesday, April 19, 2005, at 8:00 a.m., Chicago time, for the following purposes:

 

1. to elect five persons to the Company’s Board of Directors;

 

2. to approve a nonemployee director equity plan; and

 

3. to transact such other business as may properly come before the meeting.

 

A list of stockholders entitled to vote at the meeting will be available for examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for at least ten days prior to the meeting at EquiServe, One North State Street, 11th Floor, Chicago, Illinois 60602.

 

By Order of the Board of Directors

 

LOGO

 

ROBERT T. KENAGY

Associate General Counsel and

Corporate Secretary

 

March 18, 2005


Table of Contents

TABLE OF CONTENTS

 

     Page

Part I—Proxy Statement

    

Information about Whirlpool Corporation

   1

Information about the Annual Meeting and Voting

   1

Directors and Nominees for Election as Directors

   2

Board of Directors and Corporate Governance

   4

Compensation of Directors

   8

Security Ownership

   9

Beneficial Ownership

   11

Section 16(a) Beneficial Ownership Reporting Compliance

   11

Executive Compensation

   12

Stock Option Grants and Related Information

   13

Stock Option Exercises and Holdings

   14

Agreements with Executive Officers and Related Party Transactions

   14

Retirement Benefits

   15

Human Resources Committee Interlocks and Insider Participation

   16

Human Resources Committee Report on Compensation Awards

   16

Performance Graph

   21

Proposal to Approve the Nonemployee Director Equity Plan

   22

Equity Compensation Plan Information

   26

Miscellaneous

   26

Matters Relating to Auditors

   26

Stockholder Proposals and Director Nominations for 2006 Meeting

   28

Director Nominations to be Considered by the Board

   29

Exhibit A—Whirlpool Corporation Nonemployee Director Equity Plan

   A-1

Exhibit B—Audit Committee Charter

   B-1

Part II—Financial Supplement

    

Table of Contents

   F-1

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   F-2

Consolidated Statements of Operations

   F-21

Consolidated Balance Sheets

   F-22

Consolidated Statements of Cash Flows

   F-23

Consolidated Statements of Changes in Stockholders’ Equity

   F-24

Notes to Consolidated Financial Statements

   F-25

Eleven-Year Consolidated Statistical Review

   F-52

Reports of Management and Independent Registered Accounting Firm

   F-54

Schedule II—Valuation and Qualifying Accounts

   F-58


Table of Contents

PROXY STATEMENT

 

INFORMATION ABOUT WHIRLPOOL CORPORATION

 

Whirlpool is the world’s leading manufacturer and marketer of major home appliances. We manufacture in 12 countries and market products in more than 170 countries under major brand names such as Whirlpool, KitchenAid, Roper, Estate, Bauknecht, Ignis, Brastemp, Consul, and Acros. We are also the principal supplier to Sears, Roebuck and Co. of many major appliances marketed under the Kenmore brand name. We have approximately 68,000 employees worldwide. Our headquarters are located in Benton Harbor, Michigan, and our address is 2000 N. M-63, Benton Harbor, Michigan 49022-2692. Our telephone number is (269) 923-5000.

 

INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

 

Our 2005 annual meeting of stockholders will be held on Tuesday, April 19, 2005, at 8:00 a.m., Chicago time, at 120 East Delaware Place, 8th Floor, Chicago, Illinois. You are welcome to attend. If you attend, please note that you may be asked to present valid picture identification. Please also note that if you hold your shares in “street name” (that is, through a broker or other nominee), you will need to bring a copy of your voting instruction card or brokerage statement reflecting your stock ownership as of the record date and check in at the registration desk at the meeting.

 

Information about this Proxy Statement

 

We are sending the proxy materials because Whirlpool’s Board of Directors is seeking your permission (or proxy) to vote your shares at the annual meeting on your behalf. This proxy statement presents information we are required to provide to you under the rules of the Securities and Exchange Commission. It is intended to help you in reaching a decision on voting your shares of stock. Only stockholders of record at the close of business on February 28, 2005 are entitled to vote at the meeting. There were 66,866,282 outstanding shares of common stock as of the close of business on February 28, 2005. We have no other voting securities. Stockholders are entitled to one vote per share on each matter. This proxy statement and the accompanying proxy form are first being mailed to stockholders on or about March 18, 2005.

 

Information about Voting

 

If the shares of our common stock are held in your name, you can vote your shares on matters presented at the annual meeting in two ways.

 

1. By Proxy—If you sign and return the accompanying proxy form, your shares will be voted as you direct on the proxy form. If you do not give any direction on the proxy card, the shares will be voted FOR the nominees named for director, and FOR approval of the Nonemployee Director Equity Plan (which has been approved by the Board of Directors subject to shareholder approval). You may revoke your proxy at any time before it is exercised by providing a written revocation to Whirlpool’s Corporate Secretary, Robert T. Kenagy, by providing a proxy with a later date, or by voting in person at the meeting.

 

2. In Person—You may come to the annual meeting and cast your vote there.

 

Stockholders whose shares of common stock are held in “street name” must either direct the record holder of their shares as to how to vote their shares of common stock or obtain a proxy from the record holder to vote at the meeting. Street name stockholders should check the voting instruction cards used by their brokers or nominees for specific instructions on methods of voting, including by telephone or using the Internet. If your shares are held in street name, you must contact your broker or nominee to revoke your proxy.

 

1


Table of Contents

Whirlpool’s Board of Directors has adopted a policy requiring all stockholder votes to be kept permanently confidential and not disclosed except (i) when disclosure is required by law, (ii) when a stockholder expressly consents to disclosure, or (iii) when there is a contested election and the proponent filing the opposition statement does not agree to abide by this policy.

 

Stockholders representing at least 50% of the common stock issued and outstanding must be present at the annual meeting, either in person or by proxy, for there to be a quorum at the annual meeting. Abstentions and broker non-votes are counted as present for establishing a quorum. A broker non-vote occurs when a broker or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the broker or nominee does not have discretionary voting power and has not received instructions from the beneficial owner.

 

The five directors to be elected at the annual meeting will be elected by a plurality of the votes cast by the stockholders present in person or by proxy and entitled to vote. This means that the five nominees with the most votes will be elected. Votes may be cast for or withheld from each nominee, but a withheld vote or a broker non-vote will have no effect on the outcome of the election. For a stockholder to nominate an individual for director at the 2006 annual meeting, the stockholder must follow the procedures outlined below under the caption “Stockholder Proposals and Director Nominations for 2006 Meeting.” Stockholders may also designate a director nominee to be considered by the Board for recommendation to the stockholders in the Company’s proxy statement for the 2006 annual meeting by following the procedures outlined below under the caption “Director Nominations to be Considered by the Board.”

 

The affirmative vote of a majority of the outstanding common stock present in person or represented by proxy at the annual meeting and entitled to vote will be required to approve the Nonemployee Director Equity Plan and any other matter that may properly come before the meeting. Abstentions will be treated as being present and entitled to vote on the matter and, therefore, will have the effect of votes against the proposal. A broker non-vote is treated as not being entitled to vote on the matter and, therefore, is not counted for purposes of determining whether the proposal has been approved.

 

If any nominee named herein for election as a director is not available to serve, the accompanying proxy may be voted for a substitute person. Whirlpool expects all nominees to be available and knows of no matter to be brought before the annual meeting other than those covered in this proxy statement. If, however, any other matter properly comes before the annual meeting, we intend that the accompanying proxy will be voted thereon in accordance with the judgment of the persons voting such proxy.

 

DIRECTORS AND NOMINEES FOR ELECTION AS DIRECTORS

 

We currently have 11 directors on the Board. The directors are divided into three classes, with each class serving for a three-year period. The stockholders elect approximately one-third of the Board of Directors each year. The Board recommends a vote FOR the election of each of the directors nominated below.

 

Nominees for a Term to Expire in 2008

    

HERMAN CAIN, 59, Chief Executive Officer and President of T.H.E. New Voice, Inc. (leadership consulting). Director of the Company from 1992 to 2003 (when he left the Board to make a bid for political office), and Director of AGCO Corporation, Aquila, Inc., and The Reader’s Digest Association, Inc. Mr. Cain was recommended to the Corporate Governance and Nominating Committee by non-management directors who, after reviewing Mr. Cain’s qualifications, skills, experience, and past performance on the Board against the established criteria for nominees, recommended him as a director nominee.

 


   LOGO

 

2


Table of Contents

JEFF M. FETTIG, 48, Chairman of the Board, President and Chief Executive Officer of the Company. Director of the Company since 1999 and director of The Dow Chemical Company.

 


   LOGO

MILES L. MARSH, 57, former Chairman of the Board and Chief Executive Officer of Fort James Corporation (paper mills). Director of the Company since 1990 and director of GATX Corporation and Morgan Stanley.

 


   LOGO

PAUL G. STERN, 66, Partner, Arlington Capital Partners, L.L.P. and Thayer Capital Partners, L.L.P. (private investment companies), and Chairman of Claris Capital Partners (private investment banking). Director of the Company since 1990 and director of The Dow Chemical Company and ManTech International Corporation.

 


   LOGO
Nominee For A Term To Expire in 2007     

MICHAEL D. WHITE, 53, Chairman and Chief Executive Officer of PepsiCo International (beverages and snack foods). Director of the Company since 2004. Mr. White was recommended to the Corporate Governance and Nominating Committee by a third-party search firm. After reviewing his qualifications, skills, and experience against the established criteria for nominees, the Committee recommended and the Board subsequently appointed Mr. White to the Whirlpool Board in June 2004.

 


   LOGO
Directors Whose Terms Expire in 2007     

ALLAN D. GILMOUR, 70, former Vice Chairman of Ford Motor Company (cars and trucks, related parts and accessories, and financial services). Director of the Company since 1990 and director of DTE Energy Company.

 


   LOGO

MICHAEL F. JOHNSTON, 57, President and Chief Executive Officer of Visteon Corporation (motor vehicle parts & accessories). Director of the Company since 2003 and director of Flowserve Corporation and Visteon Corporation.

 


   LOGO

 

3


Table of Contents

JANICE D. STONEY, 64, former Executive Vice President, US WEST Communications Group, Inc. (telephone communications; retired 1992). Director of the Company since 1987 (except for part of 1994 during a bid for political office) and director of Bridges Investment Fund and Williams Companies Inc.

 


   LOGO
Directors Whose Terms Expire in 2006     

GARY T. DICAMILLO, 54, President and Chief Executive Officer of TAC Worldwide Companies (professional staffing services). Director of the Company since 1997 and director of 3Com Corporation, Pella Corporation, and The Sheridan Group.

 


   LOGO

KATHLEEN J. HEMPEL, 54, former Vice Chairman and Chief Financial Officer of Fort Howard Corporation (paper mills; retired 1997). Director of the Company since 1994 and director of Actuant Corporation and Oshkosh Truck Corporation.

 


   LOGO

ARNOLD G. LANGBO, 67, former Chairman of the Board and Chief Executive Officer of Kellogg Company (grain mill products; retired 2000). Director of the Company since 1994 and director of the International Youth Foundation, Johnson & Johnson, and Weyerhaeuser Company.

 


   LOGO

 

The directors have served their respective companies indicated above in various executive or administrative positions for at least the past five years, except for Messrs. Cain, DiCamillo, Gilmour, and Johnston. From 1999 to 2000, Mr. Cain was Chief Executive Officer and President of Digital Restaurant Solutions Corporation now known as RetailDNA, LLC (restaurant industry). From 1995 to 2002, Mr. DiCamillo was Chairman of the Board and Chief Executive Officer of Polaroid Corporation (photographic equipment & supplies). Mr. Gilmour returned to Ford Motor Company from 2002 to 2005 after retiring from Ford in 1995. From 1989 to 2000, Mr. Johnston served in various capacities at Johnson Controls, Inc. (automotive systems and building controls), including President E-Business. In addition, Mr. Marsh served as Chairman of the Board and Chief Executive Officer of Fort James Corporation from 1997 to 2000 at which time he left the company.

 

BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

 

Number of Meetings. The Board held six meetings during 2004. During 2004, each director attended at least 75% of the total number of meetings of the Board and the Board committees on which he or she served.

 

Attendance at Annual Meetings. All directors properly nominated for election are expected to attend the annual meeting of stockholders. At the 2004 annual meeting of stockholders, all of the directors

 

4


Table of Contents

nominated for election (Messrs. Gilmour, Johnston, and David R. Whitwam (former Chairman and Chief Executive Officer, retired June 30, 2004) and Ms. Stoney) attended the annual meeting. In addition, Mr. Fettig, a director and executive officer of Whirlpool, attended the 2004 annual meeting of stockholders.

 

Director Independence. The Corporate Governance and Nominating Committee conducts an annual review of the independence of the members of the Board and its committees and reports its findings to the full Board. Ten of the Company’s eleven directors are nonemployee directors. Although the Board has not adopted categorical standards of materiality for independence purposes (other than those set forth in the New York Stock Exchange listing standards), information provided by the directors and the Company did not indicate any material relationships (e.g., commercial, industrial, banking, consulting, legal, accounting, charitable, or familial) which would impair the independence of any of the nonemployee directors. Based on the report and recommendation of the Corporate Governance and Nominating Committee, the Board has determined that each of its nonemployee directors satisfies the independence standards set forth in the listing standards of the New York Stock Exchange.

 

Executive Sessions of Nonemployee Directors and Communications Between Stockholders and the Board. The Board holds executive sessions of its nonemployee directors generally at each regularly scheduled meeting. The Presiding Director serves as the chairperson for these executive sessions.

 

The Presiding Director is an independent director elected by the independent directors on the Board. In addition to presiding at executive sessions of nonemployee directors, the Presiding Director has the responsibility to: coordinate with the Chairman and CEO in establishing the annual agenda and topic items for Board meetings; retain independent advisors on behalf of the Board as the Board may determine is necessary or appropriate; assist the Human Resources Committee with the annual evaluation of the Chairman and CEO’s performance, and in conjunction with the Chair of the Human Resources Committee, meet with the Chairman and CEO to discuss the results of such evaluation; and perform such other functions as the independent directors may designate from time to time. Mr. Gilmour currently is serving as the Presiding Director.

 

Interested parties, including stockholders, may communicate directly with the Presiding Director, Chairman of the Audit Committee, or the nonemployee directors as a group by writing to those individuals or the group at the following address: Whirlpool Corp., 27 North Wacker Drive, Suite 615, Chicago, Illinois 60606-2800. This address is administered by an independent maildrop business that forwards the mail directly to the addressees. If correspondence is received by the Corporate Secretary, it will be forwarded to the appropriate person or persons in accordance with the procedures adopted by a majority of the independent directors of the Board. When reporting a concern, please supply sufficient information so that the matter may be addressed properly. Although you are encouraged to identify yourself to assist Whirlpool in effectively addressing your concern, you may choose to remain anonymous, and Whirlpool will use its reasonable efforts to protect your identity to the extent appropriate or permitted by law.

 

Corporate Governance Guidelines for Operation of the Board of Directors. The Company is committed to the highest standards of corporate governance. On the recommendation of the Corporate Governance and Nominating Committee, the Board adopted a set of Corporate Governance Guidelines for Operation of the Board of Directors, which, among other things, sets forth the qualifications and other criteria for director nominees. The desired personal and experience qualifications for director nominees is described in more detail below under the caption “Director Nominations to be Considered by the Board.”

 

Audit Committee. The Audit Committee (Mr. Gilmour (Chair), Mr. DiCamillo, Mr. James M. Kilts (a current Board member who is not standing for re-election), Mr. Langbo, Ms. Stoney, and Mr. White)

 

5


Table of Contents

provides independent and objective oversight of the Company’s accounting functions and internal controls and monitors the objectivity of the Company’s financial statements. The Committee assists Board oversight of (1) the integrity of the Company’s financial statements, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence, and (4) the performance of the Company’s internal audit function and independent auditor. In performing these functions, the Committee has the responsibility to review and discuss the annual audited financial statements and quarterly financial statements and related reports with management and the independent auditor, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to monitor the adequacy of financial disclosure; to retain and terminate the Company’s independent auditor and exercise the Committee’s sole authority to review and approve all audit engagement fees and terms and approve in advance the nature, extent, and cost of all internal control-related and permissible non-audit services provided by the independent auditor; and to review annual reports from the independent auditor regarding its internal quality control procedures. The Committee’s charter, which was amended by the Board on August 17, 2004, appears as Exhibit B to this proxy statement.

 

Under its charter, the Committee is comprised solely of three or more independent directors who meet the enhanced independence standards for audit committee members set forth in the New York Stock Exchange listing standards (which incorporates the standards set forth in the rules of the Securities and Exchange Commission). The Board has determined that each member of this Committee satisfies the financial literacy qualifications of the New York Stock Exchange listing standards and that Mr. Gilmore satisfies the “audit committee financial expert” criteria established by the Securities and Exchange Commission and has accounting and financial management expertise as required under the NYSE listing rules. The Audit Committee held eleven meetings in 2004.

 

Human Resources Committee. The Human Resources Committee (Mr. Kilts (Chair), Mr. Langbo, Mr. Marsh, Dr. Stern, and Ms. Stoney) assures the adequacy of the compensation and benefits of the officers and top management of the Company and compliance with any executive compensation disclosure requirements. In performing these functions the Committee has sole authority and responsibility to retain and terminate any consulting firm assisting in the evaluation of director, CEO, or senior executive compensation. Under its charter, the Committee is comprised solely of three or more independent directors who meet the independence standards under the New York Stock Exchange listing standards. This Committee held three meetings in 2004.

 

Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee (Mr. DiCamillo (Chair), Ms. Hempel, Mr. Johnston, Mr. Marsh, and Mr. White) provides oversight on the broad range of issues surrounding the composition and operation of the Board of Directors, including identifying individuals qualified to become Board members, recommending to the Board director nominees for the next annual meeting of shareholders, and recommending to the Board a set of corporate governance principles applicable to the Company. The Committee also provides recommendations to the Board in the areas of Committee selection and rotation practices, evaluation of the overall effectiveness of the Board and management, and review and consideration of developments in corporate governance practices. The Committee retains the sole authority to retain and terminate any search firm to be used to identify director candidates, including sole authority to approve the search firm’s fees and other retention terms. The Committee has retained a third party search firm to assist it in identifying potential director nominees who meet the criteria and priorities established from time to time and facilitate the screening and nomination process for such nominees. On an annual basis, the Committee solicits input from the full Board of Directors and conducts a review of the effectiveness of the operation of the Board and Board Committees, including reviewing governance and operating practices and the Corporate Governance Guidelines for Operation of the Board of Directors. Under its charter, the Committee is comprised solely of three or more independent directors who meet the independence standards under the New York Stock Exchange listing standards. This Committee held five meetings in 2004.

 

6


Table of Contents

Code of Ethics. All of the Company’s directors and employees, including its Chief Executive Officer, Chief Financial Officer, and other senior financial officers, are required to abide by the Company’s long-standing Code of Ethics, augmented to comply with the requirements of the New York Stock Exchange and Securities and Exchange Commission, to ensure that the Company’s business is conducted in a consistently legal and ethical manner. The Code of Ethics covers all areas of professional conduct, including employment policies, conflicts of interest, fair dealing, and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of the Company’s business. The Company intends to disclose future amendments to, or waivers from, certain provisions of the Code of Ethics for executive officers and directors on the Company’s website within four business days following the date of such amendment or waiver.

 

Available Information. The Company’s current Corporate Governance Guidelines, Code of Ethics, and written charters for its Audit, Finance, Human Resources, and Corporate Governance and Nominating Committees are posted on the Company’s website at www.whirlpoolcorp.com; click on the “Governance” tab. Stockholders may also request a free copy of these documents from: Larry Venturelli, Investor Relations, Whirlpool Corporation, 2000 North M-63, Mail Drop 2800, Benton Harbor, MI 49022-2692; (269) 923-4678.

 

7


Table of Contents

COMPENSATION OF DIRECTORS

 

The Board of Directors believes that it is important to attract and retain outstanding nonemployee directors through a competitive compensation program. To that end, in 2004 the Corporate Governance and Nominating Committee, which is responsible for making director compensation recommendations to the Board of Directors, retained Hewitt Associates to evaluate the competitiveness of the Company’s compensation program for its nonemployee directors. After evaluating the competitive market data on nonemployee director compensation, Hewitt reported to the Committee that the Company’s compensation for its nonemployee directors was substantially below the median of the market and recommended increases in the annual retainer, annual committee chair fees, and equity compensation. After evaluating Hewitt’s report, the Committee recommended, and the Board of Directors approved for 2005 (i) an increase in the annual retainer from $45,000 to $60,000, (ii) an increase in the additional amount paid to a committee chair from $2,500 to $5,000 ($10,000 for the Chair of the Audit Committee), and (iii) subject to approval by the stockholders on April 19, 2005, a new Nonemployee Director Equity Plan that would replace the existing director equity plans (for additional information on this plan, see the section entitled Proposal to Approve the Nonemployee Director Equity Plan later in this proxy statement). In addition, the Board of Directors adopted an equity ownership guideline for nonemployee directors of four times the annual director cash retainer, with a five year timetable to obtain this objective. In 2004, directors who were not employees of Whirlpool were paid an annual retainer of $45,000 ($47,500 if also a committee chair).

 

Whirlpool has a Nonemployee Director Stock Ownership Plan. In 2004, this plan provided, effective on the date of each annual stockholders meeting, for an automatic grant to each nonemployee director of 400 shares of common stock and an option to purchase 600 shares of common stock if our earnings from continuing operations for the immediately preceding year increased by at least 10% over such earnings for the prior year. The exercise price under each option is the average fair market value (as defined) of the common stock for the third through fifth trading days after the public release of our earnings for such prior year. These options may be exercised for 20 years after issuance (except that they must be exercised within five years after ceasing to be a director and within one year after the death of the director). The exercise price may be paid in cash or common stock. In addition, each nonemployee director is awarded annually 400 shares of phantom common stock, payable on a deferred basis. The shares of phantom common stock earn phantom dividends and the total accumulated phantom stock awards and phantom dividends are converted into Whirlpool’s common stock on a one-for-one basis and paid out to the nonemployee director following completion of service on the Board.

 

Whirlpool also has a Nonemployee Director Treasury Stock Ownership Plan. In 2004, this plan provided, effective on the date of each annual stockholders meeting, for an automatic grant to each nonemployee director of 200 shares of common stock, payable in treasury shares only. No shares of common stock awarded under this plan may be sold within the first six months after they are awarded unless the death of the director occurs during such period.

 

On December 21, 2004, the Company’s Board of Directors approved a new Nonemployee Director Equity Plan. This plan, if approved by the stockholders on April 19, 2005, will replace the plans described in the two preceding paragraphs. If approved, the Nonemployee Director Equity Plan will provide (a) a one time grant of 1,000 shares of common stock upon joining the Board of Directors; (b) an annual grant of stock options valued at $36,000 with the number of options to be based on dividing $36,000 by the then current fair market value of the common stock and multiplying the result by 0.35; and (c) an annual grant of stock worth $54,000 with the number of shares to be issued to the director determined by dividing $54,000 by the then current fair market value of the common stock of the Company.

 

A nonemployee director may elect to defer any portion of the annual retainer and annual stock grant until he or she ceases to be a director, at which time payment of any deferred annual retainer is made

 

8


Table of Contents

in a lump sum or in monthly or quarterly installments, and payment of any deferred annual stock grant is made as soon as administratively feasible. Interest on deferred amounts accrues quarterly at a rate equal to the prime rate in effect from time to time.

 

Each director may elect to relinquish all or a portion of the annual fee, in which case Whirlpool may at its sole discretion then make an award of up to $1 million to a charitable organization upon the director’s death. Under the program, the election to relinquish compensation is irrevocable, and Whirlpool may choose to make contributions in the director’s name to as many as three charities. Each director may also elect to have a portion of the annual fee used to purchase term life insurance in excess of that described in the next paragraph.

 

Whirlpool provides each nonemployee director who elects to participate with term life insurance while serving as a director in an amount equal to one-tenth of the director’s annual retainer times such director’s months of service (not to exceed 120) and a related income tax reimbursement payment. We also provide each nonemployee director with travel accident insurance of $1 million with the premiums paid by the Company, and directors are reimbursed for the related income tax.

 

For evaluation purposes, appliances sold by us are made available to each nonemployee director for use at home, and the director receives an income tax reimbursement payment to compensate for any additional tax obligation. The cost to Whirlpool of this arrangement in 2004 (based on distributor price of products and delivery, installation, and service charges) did not exceed $10,000 for any one nonemployee director or $32,000 for all nonemployee directors as a group.

 

SECURITY OWNERSHIP

 

The following table presents the ownership of the only persons known by us as of February 28, 2005 to beneficially own more than 5% of our common stock based upon statements on Schedule 13G filed by such persons with the Securities and Exchange Commission.

 

Date of

13G Report


    

Name and Address of

Beneficial Owner


    

Shares

Beneficially Owned


    

Percent of

Class


 
2/14/2005     

Barclays Global Investors, NA(1)

45 Fremont Street

San Francisco, CA 94105

     9,774,754      14.62 %
2/10/2005     

Dodge & Cox(2)

555 California Street, 40th Floor

San Francisco, CA 94104

     8,953,110      13.39 %
2/11/2005     

Pzena Investment Management, LLC(3)

120 West 45th Street, 34th Floor

New York, NY 10036

     5,908,404      8.84 %
2/11/2005     

Marsh & McLennan Companies, Inc.(4)

1166 Avenue of the Americas

New York, NY 10036

     5,904,297      8.83 %

(1)  

Based solely on a Schedule 13G filed with the Securities and Exchange Commission by Barclays Global Investors, NA and the other entities listed below. Barclays Global Investors, NA is the beneficial owner of 7,519,746 shares with sole voting power with respect to 6,738,926 shares and sole dispositive power with respect to 7,519,746 shares. Barclays Global Fund Advisors is the beneficial owner of 915,037 shares with sole voting power with respect to 849,711 shares and sole dispositive power with respect to 915,037 shares. Barclays Global Investors, Ltd. is the beneficial owner with sole voting and dispositive power with respect to 1,282,893 shares. Barclays Global

 

9


Table of Contents
 

Investors Japan Trust and Banking Company Limited is the beneficial owner with sole voting and sole dispositive power with respect to 54,041 shares. Barclays Life Assurance Company Limited is the beneficial owner with sole voting and dispositive power with respect to 3,037 shares. Barclays Bank PLC, Barclays Capital Securities Limited, Barclays Capital Inc., Barclays Private Bank & Trust (Isle of Man) Limited, Barclays Private Bank and Trust (Jersey) Limited, Barclays Bank and Trust Company Limited, Barclays Bank (Suisse) SA, Barclays Private Bank Limited, BRONCO (Barclays Cayman) Limited, Palomino Limited, and HYMF Limited have neither voting nor dispositive power with respect to any such shares.

(2)   Based solely on a Schedule 13G/A filed with the Securities and Exchange Commission by Dodge & Cox, an investment advisor. Dodge & Cox has sole voting power with respect to 8,418,410 shares, shared voting power with respect to 125,900 shares, and sole dispositive power with respect to all such shares.
(3)   Based solely on a Schedule 13G filed with the Securities and Exchange Commission by Pzena Investment Management, LLC, an investment advisor. Pzena has sole voting power with respect to 3,176,154 shares and sole dispositive power with respect to 5,908,404 shares.
(4)   Based solely on a Schedule 13G/A filed with the Securities and Exchange Commission by Marsh & McLennan Companies, Inc. (“MMC”), Putnam LLC d/b/a Putnam Investments (“PI”), a wholly-owned subsidiary of MMC, and the other entities listed below. MMC has neither voting nor dispositive power with respect to any of the shares. PI has shared voting power with respect to 403,548 shares and shared dispositive power with respect to 5,904,297 shares. Putnam Investment Management, LLC (“PIM”), a registered investment advisor to the Putnam family of mutual funds, has shared voting power with respect to 173,476 shares and shared dispositive power with respect to 5,420,211 shares. The Putnam Advisory Company, LLC (“PAC”), a registered investment advisor to Putnam’s institutional clients, has shared voting power with respect to 230,072 shares and shared dispositive power with respect to 484,086 shares. Both subsidiaries have dispositive power over the shares as investment managers, but each of the mutual fund’s trustees have voting power over the shares held by each fund, and PAC has shared voting power over the shares held by the institutional clients.

 

10


Table of Contents

BENEFICIAL OWNERSHIP

 

The following table reports beneficial ownership of common stock by each director, nominee for director, Chief Executive Officers and the four other most highly compensated executive officers, and all directors and executive officers of Whirlpool as a group, as of February 28, 2005. Beneficial ownership includes, unless otherwise indicated, all shares with respect to which each director or executive officer, directly or indirectly, has or shares the power to vote or to direct the voting of such shares or to dispose or direct the disposition of such shares. The address of all directors and executive officers named below is c/o Whirlpool Corporation, 2000 N. M-63, Benton Harbor, MI 49022-2692.

 

    

Shares

Beneficially

Owned(1)


  

Shares Under

Exercisable

Options(2)


   Total

   Percentage

 

Herman Cain

   7,045    4,200    11,245    *  

Gary T. DiCamillo

   5,172    3,000    8,172    *  

Jeff M. Fettig

   41,058    408,334    449,392    *  

Allan D. Gilmour

   7,800    5,400    13,200    *  

Kathleen J. Hempel

   5,800    3,600    9,400    *  

Michael F. Johnston

   1,000    600    1,600    *  

James M. Kilts

   4,200    2,400    6,600    *  

Arnold G. Langbo

   6,107    3,600    9,707    *  

Miles L. Marsh

   8,180    4,800    12,980    *  

Paulo F. M. Periquito

   96,138    254,113    350,251    *  

Paul G. Stern

   7,400    4,800    12,200    *  

Janice D. Stoney

   6,100    6,000    12,100    *  

David L. Swift

   5,181    55,591    60,772    *  

Michael D. Thieneman

   10,881    63,775    74,656    *  

Michael A. Todman

   10,684    128,928    139,612    *  

Michael D. White

   1,400    -0-    1,400    *  

David R. Whitwam

   10,127    660,000    670,127    1.00 %

All directors and executive officers as a group (19 persons).

   236,294    1,626,705    1,862,999    2.79 %

*   Represents less than 1% of the outstanding common stock.
(1)   Does not include:
  (a)   shares subject to currently exercisable options, which information is set forth separately in the second column; or
  (b)   1,465,158 shares held by the Whirlpool 401(k) Trust (but does include 6,681 shares held for the accounts of executive officers); Executive Vice President and Chief Financial Officer Roy W. Templin serves as one of four individual trustees with shared voting and investment powers.
(2)   Includes shares subject to options that will become exercisable within 60 days.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires Whirlpool’s directors and executive officers and persons who own more than 10% of Whirlpool’s common stock to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Whirlpool’s common stock. Officers, directors, and greater than 10% stockholders are required by SEC regulation to furnish Whirlpool with copies of all Section 16(a) reports they file. Based solely on review of the copies of such reports furnished to Whirlpool and written representations that no other reports were required, Whirlpool believes that all Section 16(a) filing requirements applicable to its officers, directors, and greater than 10% stockholders were complied with during the fiscal year ended December 31, 2004.

 

11


Table of Contents

EXECUTIVE COMPENSATION

 

The table below provides a summary of annual and long-term compensation for the last three years of the Chief Executive Officers and the four other most highly compensated executive officers of the Company.

 

SUMMARY COMPENSATION TABLE (2002-2004)

 

                          Long-Term Compensation

   
                          Awards

  Payouts

   
    Principal Position

      Annual
Compensation


    Other
Annual
Comp.(2)


 

Restricted

Stock
Awards
($)(3)


  Securities
Underlying
Options
(#)


  LTIP
Payouts
($)(4)


  All Other
Compensation
($)(5)


Name


    Year

  Salary

  Bonus(1)

           

Jeff M. Fettig

  Chairman of the
Board, President and
Chief Executive
Officer
  2004
2003
2002
  $
 
 
837,500
715,833
661,667
  $
 
 
700,000
621,000
619,000
 
 
 
  $
 
 
74,449
—  
—  
  $
 
 
3,864,960
-0-
-0-
  40,000
70,000
70,000
  $
 
 
499,238
829,943
276,264
  $
 
 
1,215
513
468

David R. Whitwam

  Chairman of the
Board and Chief
Executive Officer
(retired June 30,
2004)
  2004
2003
2002
  $
 
 
606,667
1,170,833
1,119,000
  $
 
 
750,000
1,370,000
1,360,000
 
 
 
  $
 
 
76,422
76,561
—  
  $
 
 
854,145
-0-
-0-
  90,000
150,000
125,000
  $
 
 
772,154
1,772,183
643,842
  $
 
 
14,338
31,284
31,284

Paulo F. M. Periquito

  Executive Vice
President and
President, Latin
America
  2004
2003
2002
  $
 
 
623,751
597,504
575,000
  $
 
 
283,500
470,000
552,000
 
 
 
  $
 
 
136,613
152,249
100,665
  $
 
 
245,994
-0-
-0-
  12,339
33,000
33,000
  $
 
 
329,860
657,554
230,243
  $
 
 
33,720
30,580
23,001

David L. Swift

  Executive Vice
President, North
American Region
  2004
2003
2002
  $
 
 
544,167
508,333
475,000
  $
 
 
599,250
415,000
576,000
 
 
(6)
   
 
 
—  
—  
—  
  $
 
 
2,264,487
-0-
-0-
  10,772
30,000
27,000
  $
 
 
321,511
618,409
235,245
  $
 
 
3,618
3,330
2,220

Michael A. Todman

  Executive Vice
President and
President, Whirlpool
Europe
  2004
2003
2002
  $
 
 
520,833
495,833
475,000
  $
 
 
580,250
371,000
381,000
 
 
 
  $
 
 
1,714,070
993,337
163,929
  $
 
 
2,233,295
-0-
-0-
  10,282
27,000
27,000
  $
 
 
321,511
626,590
181,806
  $
 
 
3,510
3,330
2,719

Michael D. Thieneman

  Executive Vice
President and Chief
Technology Officer
  2004
2003
2002
  $
 
 
420,833
395,833
372,500
  $
 
 
463,375
337,000
373,000
 
 
 
   
 
 
—  
—  
—  
  $
 
 
1,534,671
-0-
-0-
  8,324
23,000
23,000
  $
 
 
243,628
461,498
160,209
  $
 
 
8,331
7,482
4,320

(1)   Unless otherwise indicated in this footnote, amounts in this column represent awards under the Company’s Performance Excellence Plan (“PEP”). Mr. Periquito did not receive a PEP award in 2004; the $283,500 was awarded under the Company’s Strategic Excellence Program (“SEP”) and 50% of this award will vest in 2006 and the remaining 50% will vest in 2007. PEP and SEP are both described later in this proxy statement in the Human Resources Committee Report on Compensation Awards. The SEP cash awards reflected in this column were earned in 2004 but will not vest until 2006 (50%) and 2007 (50%). Mr. Swift’s 2004 amount is comprised of $327,000 under PEP and $272,250 under SEP. Mr. Todman’s 2004 amount is comprised of $344,000 under PEP and $236,250 under SEP. Mr. Thieneman’s 2004 amount is comprised of $253,000 under PEP and $210,375 under SEP.
(2)   This column includes perquisites and personal benefits, all valued at the incremental cost to the Company, net of federal, state, and other applicable tax benefits (33.9% in 2004, 35% in 2003, and 39% in 2002). A dash in this column means the total perquisites and personal benefits for the individual for the year indicated is less than $50,000. Items that represent more than 25% of the total for any individual in any one year are described in this footnote. For Mr. Fettig, the 2004 amount includes $51,203 for his required personal use of company aircraft. For Mr. Whitwam, the amounts include $50,443 in 2004 and $45,499 in 2003 for his required personal use of company aircraft. For Mr. Periquito, the amounts include $49,575 in 2004, $48,750 in 2003, and $45,750 in 2002 to compensate him for increased living costs; in addition, the amounts for Mr. Periquito include $46,560 in 2004, $37,253 in 2003, and $35,642 in 2002 for a Company-provided automobile and driver; also, the 2003 amount includes $51,102 for premium costs and expenses incurred for medical, dental, and pharmaceutical benefits. For Mr. Todman, the amounts include $1,502,269 in 2004 and $818,362 in 2003 relating to foreign taxes paid by the Company on Mr. Todman’s behalf; also, the 2002 amount includes $158,027 for increased costs of living and other expenses related to Mr. Todman’s foreign service.
(3)  

In 2004, all of the awards reflected in this column were made in phantom restricted shares under either the Company’s Strategic Excellence Program (“SEP”) or Special Retention Program (“SRP”); both of these programs are described later in this proxy statement in

 

12


Table of Contents
 

the Human Resources Committee Report on Compensation Awards. SEP awards were made on February 14, 2005 when the closing price of the Company’s stock was $63.27. SRP awards were made on June 14, 2004 with an effective date of July 1, 2004 when the closing price of the Company’s stock was $67.61. Mr. Fettig’s total award reflected in this column is comprised of 13,000 shares under SEP and 45,000 shares under SRP. Mr. Whitwam’s figure is comprised of 13,500 shares under SEP. Mr. Periquito’s figure is comprised of 3,888 shares under SEP. Mr. Swift’s total award reflected in this column is comprised of 3,733 shares under SEP and 30,000 shares under SRP. Mr. Thieneman’s total award reflected in this column is comprised of 2,884 shares under SEP and 20,000 shares under SRP. Mr. Todman’s total award reflected in this column is comprised of 3,240 shares under SEP and 30,000 shares under SRP. All of the SEP phantom restricted shares described above will have time restrictions lapse on 50% of the shares in 2006 and on the remaining 50% of the shares in 2007. All of the SRP phantom restricted shares described above will have time restrictions lapse on 50% of the shares in 2007 and on the remaining 50% of the shares in 2011. Aggregate restricted stock holdings, all of which are phantom restricted shares, including dividend equivalent earnings, at December 31, 2004 were: Mr. Fettig, 158,604 shares valued at $10,976,978; Mr. Whitwam, none; Mr. Periquito, 90,606 shares valued at $6,270,818; Mr. Swift, 81,798 shares valued at $5,661,253; Mr. Todman, 86,041 shares valued at $5,954,866; and Mr. Thieneman, 59,142 shares valued at $4,093,216; all values in this sentence were calculated based on the closing price of Whirlpool common stock at the end of the year of $69.21. Any dividends payable on common stock of the company will result in the executives receiving dividend equivalents that are invested in additional shares of phantom restricted stock.

     In 2001, Messrs. Fettig, Periquito, Swift, and Todman each received an award of restricted stock under SRP. Mr. Fettig’s award was valued at the time of grant at $2,500,738; a portion of this award vested in 2004. Mr. Periquito’s award was valued at the time of grant at $4,146,295; a portion of this award vested in 2003 and was reported in last year’s proxy statement as an LTIP payout. Mr. Swift’s award was valued at the time of grant at $1,685,000; a portion of this award vested in 2004. Mr. Todman’s award was valued at the time of grant at $1,500,443; a portion of this award vested in 2004.
(4)   Amounts in this column represent payouts under long-term, equity-based compensation programs based on the Company’s financial performance as described later in this proxy statement under the caption Long-Term Incentives in the Human Resources Committee Report on Compensation Awards. For 2004, the amount represents a payout under the Company’s Executive Stock Appreciation and Performance Program for a three-year performance period from 2002-2004.
(5)   Amounts represent group term life insurance premiums.
(6)   This figure includes annual bonus payments plus amounts associated with Mr. Swift’s transition into the Company.

 

STOCK OPTION GRANTS AND RELATED INFORMATION

 

The table below provides information on grants of stock options during 2004 for the Chief Executive Officers and the four other most highly compensated executive officers of the Company.

 

OPTION GRANTS IN 2004

ASSUMED STOCK PRICE APPRECIATION

 

     Individual Grants in 2004

                  
     Number of
Securities
Underlying
Options
Granted


   % of Total
Options
Granted to
Employees(2)


    Exercise
Price(3)


    Expiration
Date(4)


   Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for 10-year
Option Term(1)


 

Name


             5%

    10%

 

Jeff M. Fettig

   40,000    6.01 %   $ 72.94     2-16-2014    $ 1,834,863 (5)   $ 4,649,903 (6)

David R. Whitwam

   90,000    13.51 %     72.94     2-16-2014      4,128,442 (5)     10,462,282 (6)

Paulo F.M. Periquito

   12,339    1.85 %     72.94     2-16-2014      566,009 (5)     1,434,379 (6)

David L. Swift

   10,772    1.62 %     72.94     2-16-2014      494,129 (5)     1,252,219 (6)

Michael A. Todman

   10,282    1.54 %     72.94     2-16-2014      471,652 (5)     1,195,258 (6)

Michael D. Thieneman

   8,324    1.25 %     72.94     2-16-2014      381,835 (5)     967,645 (6)

All Optionees(2)

   665,923    100 %     72.91 (avg)   2014      30,533,567 (7)     77,375,333 (8)

All Stockholders

   N/A    N/A       N/A     N/A      3,053,999,759       7,739,162,692  

All Optionee Gain as a % of all Stockholder Gain

                             1.00 %     1.00 %

(1)   Potential pre-tax realizable value is based on the assumption that the stock price appreciates from the exercise price at the annual rates of appreciation shown in the table over the option term (10 years). This is a theoretical value. The actual realized value depends on the market value of the Company’s stock at the exercise date. All calculations are based on shares outstanding as of December 31, 2004.
(2)   Based on 665,923 options granted to 379 employees in 2004. No gain to the optionees is possible without an increase in the common stock price.

 

13


Table of Contents
(3)   Fair market value on the date of grant.
(4)   Options generally become exercisable in installments of one-third one year after the date of grant, one-third two years after the date of grant, and the remaining one-third three years after the grant date, with all options becoming exercisable upon a Change in Control. A Change in Control is generally defined to include the acquisition by any person or group of 15% or more of Whirlpool’s voting securities, a change in the composition of the Board such that the existing Board or persons who were approved by a majority of such Board members or their successors on the existing Board cease to constitute a majority of the Board, and approval by the stockholders of an acquisition or liquidation of Whirlpool.
(5)   Using the option exercise price ($72.94), per share price of common stock would be $118.81 assuming no stock splits or stock dividends.
(6)   Using the option exercise price ($72.94), per share price of common stock would be $189.18 assuming no stock splits or stock dividends.
(7)   Using the average option exercise price for the year ($72.91), per share price of common stock would be $118.76 assuming no stock splits or stock dividends.
(8)   Using the average option exercise price for the year ($72.91), per share price of common stock would be $189.11 assuming no stock splits or stock dividends.

 

STOCK OPTION EXERCISES AND HOLDINGS

 

The table below provides information on shares underlying options exercisable at the end of 2004 and options exercised during 2004 for the Chief Executive Officers and the four other most highly compensated executive officers of the Company.

 

AGGREGATED OPTION EXERCISES AND YEAR-END VALUE FOR 2004

 

Name


   Shares
Acquired
on
Exercise


   Value
Realized


   Securities Underlying
Unexercised Options Held
at Fiscal Year End


  

Value of Unexercised

In-the-Money Options Held

at Fiscal Year End


         Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Jeff M. Fettig

   13,000    $ 145,015    360,000    75,000    $ 5,002,775    692,825

David R. Whitwam

   110,000      2,345,083    825,000    0      10,037,175    0

Paulo F. M. Periquito

   0      0    233,500    28,839      3,516,793    326,618

David L. Swift

   0      0    67,000    25,772      423,135    296,925

Michael A. Todman

   0      0    112,000    23,782      1,450,715    267,233

Michael D. Thieneman

   98,800      2,089,434    49,500    19,824      370,033    227,643

 

AGREEMENTS WITH EXECUTIVE OFFICERS AND RELATED PARTY TRANSACTIONS

 

Whirlpool has agreements with its executive officers that provide severance benefits if, within two years following a Change in Control, the executive officer’s employment is terminated either by Whirlpool (other than for cause, as defined) or by the officer for good reason (as defined), or, voluntarily during the 13th month following a Change in Control. Benefits include severance pay equal to three times annual compensation (generally defined as base salary plus target annual bonus), plus an amount to compensate the individual for excise taxes, if any, arising out of the severance pay. Under certain circumstances, the agreements provide for continuing participation for up to three years in insurance and other employee welfare benefit plans and, in the case of defined benefit retirement plans, provide for three years additional age and service credits for purposes of vesting and computing benefits. After the initial term of less than two years, each agreement is automatically extended for consecutive subsequent two-year terms, but any agreement may be terminated as of the end of any term upon 90 days’ prior notice, but not for 24 months after a Change in Control. A Change in Control is generally defined to include the acquisition by any person or group of 15% or more of Whirlpool’s voting securities, a change in the composition of the Board such that the existing Board or persons who were approved by a majority of such Board members or their successors on the existing Board cease to constitute a majority of the Board, and approval by the stockholders of an acquisition or liquidation of Whirlpool. In addition, Whirlpool has entered into non-compete agreements with its executive officers that provide that they shall not directly or indirectly compete with the Company for a period of 12

 

14


Table of Contents

months after termination of employment. Finally, the Company has an agreement with Mr. Periquito relating to retirement benefits; the agreement is described at the end of the next section of this proxy statement.

 

In conjunction with the retirement of David R. Whitwam as Chairman and Chief Executive Officer on June 30, 2004, the Company accelerated the vesting of 75,000 options granted to Mr. Whitwam from their original vesting date of February 17, 2005 to June 30, 2004. The options were originally granted on February 17, 2003. In addition, the Company agreed to continue providing certain administrative and security services to Mr. Whitwam for three years to, among other things, support his work on behalf of the Company for a community non-profit organization. The cost of these services will not exceed $20,000 annually.

 

The Company leases residential and office space at The Boulevard Hotel in St. Joseph, Michigan, for business purposes. In 2004, the total rental payment for such space was $97,167. During 2004, the Company spent $277,261 to renovate the space to meet its requirements. In addition, in 2004 the Company purchased $150,023 in food, room, and hotel services. The hotel is owned and operated by the son of David R. Whitwam.

 

RETIREMENT BENEFITS

 

Whirlpool’s non-contributory defined benefit retirement plan (the “Retirement Plan”) covers substantially all of our U.S. based salaried employees. Upon reaching the normal retirement age of 65, each vested participant is eligible to receive an annual pension for life equal to 2% of annual base salary, averaged over the 60 consecutive calendar months during which pay was highest out of the last 120 months completed before age 65, for each year of credited service (up to a maximum of 30 years). For participants with five or more years of service, reduced benefits are payable upon early retirement or termination of employment after age 55. For five years following a Change in Control, Whirlpool may not terminate the retirement plan or amend or merge it with another plan in a manner that would reduce benefits. If the Retirement Plan is terminated (including a termination by operation of law) during this five-year period, any assets held under the plan in excess of the amount needed to fund accrued benefits would be used to provide additional benefits to plan participants. We also have supplemental retirement plans that (i) provide to certain employees, including executive officers, additional benefits generally similar to those under the Retirement Plan but based upon an average of the five highest total amounts of bonuses paid from our bonus plans during the ten years prior to retirement and (ii) maintain benefits at the levels set forth in the table below which are otherwise limited under the Retirement Plan by the Employment Retirement Income Security Act of 1974.

 

The following table sets forth the estimated annual pension benefits payable under the Retirement Plan and supplemental plans (as described above) upon retirement at age 65 after selected periods of service.

 

     Estimated Annual Pension Benefits at Age 65*

Covered Compensation


   5 Years
Service


   10 Years
Service


   15 Years
Service


   20 Years
Service


   25 Years
Service


   30 Years
Service


$   600,000

   $ 60,000    $ 120,000    $ 180,000    $ 240,000    $ 300,000    $ 360,000

     800,000

     80,000      160,000      240,000      320,000      400,000      480,000

  1,000,000

     100,000      200,000      300,000      400,000      500,000      600,000

  1,200,000

     120,000      240,000      360,000      480,000      600,000      720,000

  1,400,000

     140,000      280,000      420,000      560,000      700,000      840,000

  1,600,000

     160,000      320,000      480,000      640,000      800,000      960,000

  1,800,000

     180,000      360,000      540,000      720,000      900,000      1,080,000

  2,000,000

     200,000      400,000      600,000      800,000      1,000,000      1,200,000

*  

The amounts set forth in the table are on the basis of a straight life annuity and are not subject to reduction for Social Security benefits or other payments. The maximum number of years of service

 

15


Table of Contents
 

for which pension benefits accrue is 30. Messrs. Fettig, Whitwam, Swift, Todman, and Thieneman had approximately 24 years, 37 years, 3 years, 12 years, and 28 years respectively, of eligible service at December 31, 2004, and their covered compensation under the plans for 2004 was equal to the base salary and bonus set forth in the Summary Compensation Table above.

 

The Company has entered into an agreement with Mr. Periquito that, under Brazilian law, requires the Company to provide him with a retirement payment of 85% of his basic monthly salary at age 60 assuming he is a participant under the relevant Brazilian pension plan for 10 years. Under that plan, he would receive a disability retirement payment of 70% of the value of the retirement benefit, and if he dies, his widow would receive a pension payment of 50% of the value of the retirement benefit. In addition, underage children would receive 30% of the value of the retirement benefit in the event of his death. He is required to participate in the cost of his pension benefit at the rate of 15% of the monthly cost of the plan, up to a limit of 8% of his basic salary.

 

HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

No member of the Human Resources Committee was at any time during 2004 an officer or employee of Whirlpool and no member of the Committee has formerly been an officer of Whirlpool. In addition, no “compensation committee interlocks” existed during fiscal year 2004.

 

HUMAN RESOURCES COMMITTEE REPORT ON COMPENSATION AWARDS

 

The Human Resources Committee of the Board of Directors has furnished the following report on executive compensation for 2004.

 

Whirlpool is dedicated to global leadership and to delivering superior stockholder value. Whirlpool’s executive compensation philosophy is designed to support these objectives by attracting and retaining the best possible management talent and by motivating these employees to achieve business and financial goals that create value for stockholders in a manner consistent with Whirlpool’s focus on four enduring values: respect, integrity, diversity, and teamwork. Our “pay for performance” philosophy is centered around the following points:

 

    Compensation should be incentive driven with both short- and long-term focus;

 

    More pay should be at risk than with the average company;

 

    Components of compensation should be tied to increasing stockholder value; and

 

    Compensation should be tied to a balanced evaluation of corporate and individual performance measured against financial, customer, and employee related objectives—a “balanced scorecard” approach.

 

The Committee is responsible for the design, administration, and effectiveness of the compensation plans for management employees, including senior executives.

 

SALARY

 

Salary levels and salary increase guidelines are based on competitive market reviews conducted with the assistance of outside consultants retained by the Committee. Comparison companies are blue chip companies that are similar to Whirlpool in a variety of respects, such as companies that compete with Whirlpool; tend to have national and international business operations; or are similar in sales volumes, market capitalizations, employment levels, lines of business, and business organization and structure. This group of companies (“peer group”) is used to define the market for each component of pay as well as total compensation. The peer group companies chosen for the competitive market review are not

 

16


Table of Contents

entirely the same as those that comprise Standard & Poor’s Household Furniture and Appliance Group shown in the Performance Graph because the Committee believes that Whirlpool’s most direct competitors for executive talent are not necessarily limited to the companies included in the published industry index. Base salary for Mr. Fettig and other executive officers is targeted at the median of the base salaries for officers in the peer group companies, after adjusting for size of the companies. Annual base salary increases for the year ranged between 4.1% and 10.3% for the named executive officers. Mr. Fettig received a 10.3 % annual salary increase on March 1, 2004; in addition, Mr. Fettig received an increase of 12.5% on July 1, 2004 in connection with his promotion to Chairman of the Board, President, and Chief Executive Officer. Mr. Whitwam received a 4.2% salary increase on March 1, 2004 and retired from the Company on June 30, 2004. The increases reflected both moves in market salaries as well as the executives’ individual performance (as discussed below) against specific objectives. With respect to Mr. Fettig’s individual performance objectives during 2004, the Committee assessed his performance in the areas of leadership, managerial and organizational effectiveness, value creation, Whirlpool’s overall financial performance, and executive talent development. The Committee determined that Mr. Fettig had met his objectives on balance in these areas.

 

ANNUAL INCENTIVE COMPENSATION

 

The Performance Excellence Plan (“PEP”) provides all regular exempt and some non-exempt employees with an annual incentive designed to focus their attention on stockholder value creation, drive performance in support of this goal and other business goals, and reflect individual performance (except for designated executive officers subject to Section 162(m) of the Internal Revenue Code) as measured against financial, customer, and employee related objectives. For 2004, target awards ranging from 5% to 110% of base salary were established by the Committee. The PEP is designed to provide total direct compensation that is above the mean of the peer group when the target level of stretch performance is achieved.

 

For 2004, the Company established performance measures based on financial, customer, and employee factors. These performance measures were selected based on the Committee’s belief that improving such measures correlates to increasing value to stockholders. Achievement of individual business performance goals is also a factor in determining PEP payouts for all employees other than designated executive officers. In addition, up to 25% of PEP eligible employees (excluding officers) are eligible for an outstanding contributor bonus equal to 25%, 50%, or 75% of their target PEP bonus. For Messrs. Fettig, Whitwam, Swift, Todman, and Thieneman, a corporate performance target based on return on equity was established. Because the Company exceeded this financial performance target, these executive officers earned a PEP award for 2004 as set forth in the Summary Compensation Table based on the Committee’s evaluation of the Company’s performance measured against the financial, customer, and employee objectives and the individual performance of the officer under the Committee’s balanced scorecard approach.

 

In addition, the Company has established the Executive Officer Bonus Plan (“EOBP”) under which the Committee has the discretion to grant bonus payouts to designated executive officers in recognition of strong individual performance in the event that the Committee concludes such awards are appropriate. In 2004, no awards were granted under this plan.

 

LONG-TERM INCENTIVES

 

Our long-term incentive programs are comprised of the Executive Stock Appreciation and Performance Program, the Strategic Excellence Program, the Special Retention Program, and the Career Stock Program, all of which are authorized under one or more of Whirlpool’s Omnibus Stock and Incentive Plans. Grants under both the Executive Stock Appreciation and Performance Program and the Strategic Excellence Program are typically made each year. The long-term incentive programs are

 

17


Table of Contents

intended to provide rewards to executives only if significant additional value is created for stockholders over time. In addition, the Company has established the Key Employee Treasury Stock Ownership Plan under which awards similar to those established under the Omnibus Plans may be granted to key management employees by the Committee. These stock-based plans are designed to encourage a significant ownership interest in Whirlpool to help assure that the interests of the executives are closely aligned to those of other stockholders and to provide incentives for the executives to remain with Whirlpool.

 

Executive Stock Appreciation and Performance Program (“ESAP”). ESAP provides senior management with incentives to significantly improve the long-term performance of Whirlpool and increase stockholder value over time. The compensation opportunities under the program are tied directly to the financial performance of Whirlpool over a preset period, normally three years, beginning each January 1. In combination with other elements of compensation, award sizes are designed to provide competitive total compensation that exceeds the market when stretch target performance is met. A payout was earned by Mr. Fettig under the 2002-2004 ESAP cycle based on the Committee’s evaluation of the Company’s performance measured against the EVA improvement financial target established at the beginning of the performance period. The final payout of this grant, along with those of other named executive officers, is included in the column labeled “LTIP Payouts” in the Summary Compensation Table and is based on the Committee’s evaluation of Company performance against the financial, customer, and employee objectives established for the Company and the individual effort of each officer. The payout was made in 2005. ESAP has now terminated and the 2005 payout was the final one under the program.

 

Strategic Excellence Program (“SEP”). SEP provides senior management with incentives to significantly improve the long-term performance of the Company and increase stockholder value over time. The compensation opportunities under SEP are tied directly to the financial and strategic performance of the Company (such as EVA, free cash flow, earnings per share, innovation, and customer loyalty) over a preset period beginning each January 1 and continuing for one year or longer. These measures are established by the Human Resources Committee of the Board of Directors at the beginning of each performance period. Additionally, the compensation opportunities are tied to the participant’s performance against preset leadership objectives. Final individual awards may be adjusted upward (to a maximum of three times the original grant) or downward (to no award) based upon a determination of the Human Resources Committee. The Committee will make such adjustments after the completion of the performance period based on the Committee’s evaluation of the Company’s performance against the Company performance goals and each participant’s performance during the period. For participants subject to Section 162(m) of the Internal Revenue Code, the Committee may only adjust their award downward based on factors the Committee deems appropriate. After a performance period of one year or longer and a determination of performance by the Committee, awards will be paid in common stock and/or cash unless the Committee had included an additional time-based restriction period of up to two years as part of the original grant. Upon expiration of any time restriction periods, payment will be made in common stock of the registrant and/or cash as appropriate. In combination with other elements of compensation, award sizes are designed to provide competitive total compensation.

 

Under SEP, stock options are also typically granted each year under one or more of Whirlpool’s Omnibus Stock and Incentive Plans to executive officers and other key management employees. Stock option grants are issued with an exercise price equal to the fair market value of the stock at the time of grant. The option term is ten years and options vest in three equal installments, with the first installment (representing one-third of the number of shares granted) vesting on the first anniversary date of the option grant, one-third of the shares granted vesting on the second anniversary date of the option grant, and the final third of the shares granted vesting on the third anniversary date of the option grant.

 

18


Table of Contents

Special Retention Program (the “SRP Program”). The SRP Program was established to provide grants of phantom restricted shares of the Company’s common stock to up to 50 select officers of the Company as a means of motivating and retaining key leadership talent. Recipients and award sizes are based on subjective determinations relating to a broad range of leadership factors. Restrictions on 50% of the phantom restricted shares lapse at the end of the third year from the date of grant and the restrictions on the remaining 50% lapse at the end of the seventh year assuming, in each case, that the officer continues to exhibit strong leadership performance. The phantom restricted shares do not represent an equity interest in the Company, and no voting rights attach to the phantom restricted shares until and unless they are converted into common stock of the Company. The value of one phantom restricted share awarded is equal to the fair market value of a share of common stock on that date. Recipients of SRP Program phantom stock will receive one share of common stock for each share of phantom restricted stock on a one-for-one basis upon the lapse of restrictions and may defer receipt of vested shares until retirement.

 

Career Stock Program (the “Career Stock Program”). The Career Stock Program was established to provide one-time grants of phantom stock to select key executives as a means of retaining those executives and encouraging long-term employment. Recipients and award sizes are based on subjective determinations relating to a broad range of factors. The shares do not represent an equity interest in Whirlpool, and no voting rights attach to the shares until and unless they are distributed to the participant. Grants are made under one or more of Whirlpool’s Omnibus Stock and Incentive Plans. The value of a share of Career Stock on any given date is equal to the fair market value of a share of common stock on that date. Recipients of Career Stock will receive one share of common stock for each share of phantom stock on a one-for-one basis upon retirement after attaining the age of 60 or upon termination of employment, based on individual vesting schedules and subject to certain non-competition provisions. Phantom Career Stock dividends are invested in additional phantom shares to be awarded in the same manner as the original awards. In 2004, no grants were made under this program.

 

Key Employee Treasury Stock Ownership Plan (the “Key Employee Treasury Stock Plan”). The Key Employee Treasury Stock Plan was established to support the hiring and retention initiatives at key leadership positions in order to foster the long-term financial success of the Company. The plan provides key leaders with the opportunity to receive common stock of the Company and stock option, restricted stock, and phantom stock awards to be paid from the Company’s treasury stock, with the terms of such awards to be established by the Human Resources Committee. All awards granted under the Key Employee Treasury Stock Plan shall be paid in treasury shares of the Company’s common stock. The maximum number of shares of common stock that may be awarded for all purposes under the plan is 200,000.

 

When considering awards to be made under the long-term incentive programs described above, the Committee evaluates the grantee’s scope of responsibility, strategic and operational goals, opportunity to affect Whirlpool’s future success, and individual performance, as well as the number of awards previously granted and the competitiveness of the award in the marketplace. In 2004, Mr. Fettig received awards under SEP and the SRP Program, but did not receive awards under ESAP, the Career Stock Program, or the Key Employee Treasury Stock Plan. In 2004, Mr. Whitwam received awards only under SEP. The awards that were made to the Chief Executive Officers and the four other most highly compensated executive officers of the Company in 2004 are reflected in the Summary Compensation Table and Long-Term Incentive Plan Awards table.

 

OWNERSHIP GUIDELINES

 

In 1995, management adopted, with the Committee’s approval, stock ownership guidelines to support the objective of increasing the amount of stock owned by the most senior group of executives

 

19


Table of Contents

(approximately 100 individuals). The guidelines for stock ownership are based on an individual’s level in the organization and range from seven times base salary for the Chief Executive Officer to one times base salary for lower level executives.

 

TAX CODE LIMITATION ON EXECUTIVE COMPENSATION DEDUCTIONS

 

The Internal Revenue Code imposes a $1 million deduction limit on compensation paid to executives named in the compensation section of the proxy statements of public companies, subject to certain transition rules and exceptions for non-discretionary performance based plans approved by stockholders.

 

The Committee intends to preserve the tax deductibility of executive compensation to the extent practicable while focusing on consistency with its compensation policies, the needs of Whirlpool, and stockholder interests. The Committee retains the ability to make payments in one or more of the programs described in this report that may not qualify for tax deductibility under Section 162(m).

 

The Committee retains the discretion to reward strong individual performance of designated executive officers under the EOBP. The Committee believes this ability to exercise discretion is in the best interest of Whirlpool and its stockholders and outweighs the need to qualify the EOBP so that amounts paid from this plan are exempt from the deductibility limits of Section 162(m). Accordingly, pay for individual performance under the EOBP will generally not qualify under Section 162(m) and may not be fully deductible.

 

SUMMARY

 

We, the Human Resources Committee of Whirlpool, believe a strong link exists between executive pay and performance at Whirlpool.

 

James M. Kilts, Chair

Arnold G. Langbo

Miles L. Marsh

Paul G. Stern

Janice D. Stoney

 

20


Table of Contents

PERFORMANCE GRAPH

 

The graph below depicts the yearly dollar (and percentage) change in the cumulative total stockholder return on our common stock with the cumulative total return of Standard & Poor’s (“S&P”) Composite 500 Stock Index and the cumulative total return of the S&P Household Appliance Group Index for the years 2000 through 2004*. The graph assumes $100 was invested on December 31, 1999 in Whirlpool common stock, the S&P 500, and the S&P Household Appliance Group.

 

LOGO

 

     12/31/99

   12/31/00

   12/31/01

   12/31/02

   12/31/03

   12/31/04

Whirlpool

   $ 100    $ 75.51    $ 118.71    $ 86.39    $ 122.94    $ 120.20

S&P 500

   $ 100    $ 90.90    $ 80.09    $ 62.39    $ 80.29    $ 89.03

S&P Household

   $ 100    $ 79.34    $ 103.22    $ 88.87    $ 106.72    $ 131.87

*   Cumulative total return is measured by dividing: (1) the sum of (a) the cumulative amount of the dividends for the measurement period, assuming dividend reinvestment, and (b) the difference between share price at the end and the beginning of the measurement period by (2) the share price at the beginning of the measurement period.

 

21


Table of Contents

PROPOSAL TO APPROVE THE NONEMPLOYEE DIRECTOR EQUITY PLAN

 

The Board of Directors believes that a program fostering stock ownership by nonemployee directors promotes the long-term financial success of Whirlpool by attracting and retaining outstanding nonemployee directors and by providing incentives to such nonemployee directors through grants of stock and stock options. To that end, the Board of Directors has (i) adopted an equity ownership guideline for nonemployee directors of four times the annual director cash retainer, with a five year timetable to attain this objective and (ii) adopted a new Nonemployee Director Equity Plan (the “Plan”) to replace current stock equity compensation plans for nonemployee directors, with the Plan to be effective January 1, 2005 if it is approved by the stockholders at the annual meeting of stockholders on April 19, 2005. Under the current equity compensation plans for directors previously approved by shareholders, each nonemployee director is entitled on the date of each annual stockholders meeting to receive a grant of 400 shares of common stock and an option to purchase 600 shares of common stock if Whirlpool’s earnings from continuing operations for the immediately preceding year increase by at least 10% over such earnings for the prior year. In addition, Whirlpool has a nonemployee director treasury stock ownership plan that has not been approved by stockholders under which each nonemployee director receives 200 shares of common stock, payable in treasury shares, on the date of each annual meeting of stockholders. (For more details on these plans, see the discussion of current director compensation under the heading Compensation of Directors earlier in this proxy statement.)

 

If the Plan is approved by stockholders, it will replace the current equity compensation for nonemployee directors, and each nonemployee director will receive a one-time grant of 1,000 shares of common stock at the time the director joins the Board. In addition, each nonemployee director will receive on the date of each annual meeting of stockholders a grant of common stock valued at $54,000 and the grant of an option to purchase common stock of Whirlpool valued at $36,000 under the Plan. The number of shares of common stock to be issued to each director annually will be determined by dividing $54,000 by the fair market value of Whirlpool’s common stock on the date of the grant. The number of stock options received by each director under the Plan will be determined by dividing $36,000 by the product of the current fair market value of the common stock on the day before the grant date multiplied by 0.35, the estimated Black-Scholes value of the Company’s common stock. The Plan also provides nonemployee directors with the opportunity to defer receipt of their annual grant of stock if the director makes a valid, timely, and irrevocable election to make such a deferral. All deferred equity compensation will be credited to a bookkeeping reserve account pursuant to the deferred compensation plan established by the Company for that purpose and shall earn dividend equivalents until it is paid out. A director so deferring equity compensation will not have any rights as a stockholder with respect to the deferred equity compensation. All deferred compensation will be paid out in common stock of the Company issued to the director upon the director leaving the Board.

 

The Board believes that its equity compensation for nonemployee directors has been successful in increasing the stock ownership of directors and in closely aligning nonemployee director compensation to the interests of the stockholders. The Board also believes these purposes will be strengthened by replacing the current equity compensation plans for nonemployee directors with equity compensation provided by the Plan it is requesting stockholders to approve at the annual meeting.

 

The affirmative vote of the holders of a majority of the shares of Common Stock present at the annual meeting of stockholders, in person or by proxy, is necessary for approval of the Plan. The Plan will not be adopted unless this vote is received. If the Plan is not adopted, the existing equity compensation plans for nonemployee directors will remain in place.

 

The complete text of the Plan is set forth in Exhibit A to this proxy statement. You should read the complete text of the Plan for more detail.

 

22


Table of Contents

ADMINISTRATION, ELIGIBILITY, ADJUSTMENT, AMENDMENT, AND TERMINATION

 

The Plan is largely self-administered because the awards are automatic and nondiscretionary. To the extent necessary, the Board is authorized to administer the Plan. If there is a stock dividend, stock split, stock combination, or other reduction in issued shares, merger, consolidation, recapitalization, or sale or exchange of all of the assets of or dissolution of Whirlpool, the Board generally is required to adjust the number and type of shares authorized by the Plan to prevent enlargement or dilution of rights. No stock, stock option, or deferred equity compensation will be granted under the Plan after December 31, 2014. The Board may suspend or terminate the Plan at any time or amend the Plan from time to time without stockholder approval, but no amendment, suspension, or termination shall impair the rights of any director under outstanding grants of stock or stock options. However, no amendment made without stockholder approval (to the extent required by law, agreement, or the rules of any exchange upon which the common stock is listed) shall (a) materially, increase the number of shares of common stock issuable under the Plan (other than pursuant to the adjustment provisions described above), (b) materially modify the requirements as to eligibility for participation, (c) materially increase the benefits accruing to directors under the Plan, or (d) extend the termination date of the Plan.

 

Awards under the Plan are limited to directors of the Company who are not, and have not been for at least one year, either an employee or officer of the Company or any of its subsidiaries. If all director nominees are elected at the annual meeting, there will be ten nonemployee directors on the Board. The aggregate number of shares of common stock issuable under the Plan is 300,000 (subject to adjustments in order to prevent enlargement or dilution as described above). On February 28, 2005 the closing price of the Company’s common stock was $63.75.

 

STOCK GRANTS

 

The Plan provides for the initial unrestricted grant of 1,000 shares of common stock to each nonemployee director who joins the Board. In addition, the Plan provides for the annual unrestricted grant of common stock valued at $54,000 to each nonemployee director at the conclusion of the annual meeting of stockholders. The number of shares of common stock to be issued to the director will be determined by dividing $54,000 by the then current fair market value of the common stock of the Company. Each director has all rights accruing to an owner of common stock, including the right to vote the shares at stockholders meetings, receive dividends, and sell, assign, transfer, or otherwise encumber the common stock (subject to restrictions imposed on insider trading under the federal securities laws).

 

STOCK OPTIONS

 

The Plan provides that effective on the date of each annual meeting of stockholders, each nonemployee director automatically is awarded a stock option to purchase shares of common stock of the Company valued at $36,000. The number of options to be issued to the directors will be determined by dividing $36,000 by the product of the current fair market value of the common stock on the day before the grant date multiplied by 0.35, the estimated Black-Scholes value of the Company’s common stock. Generally, the fair market value of the common stock for any date shall be determined by adding the high and low sales prices of the Company’s common stock as reported by the Composite Tape of the New York Stock Exchange for that date and dividing the sum by two. The exercise price of the options so granted will be the fair market value of the common stock as of the final trading day before the annual meeting of stockholders.

 

Stock options granted under the Plan are exercisable for 20 years or, if earlier, two years after a nonemployee director ceases to serve on Whirlpool’s Board of Directors, provided that no option is exercisable within the first six months of its term, unless death or disability of the director occurs. In the event of a nonemployee director’s death, such stock options will be exercisable for one year from the

 

23


Table of Contents

date of death. Payment of the exercise price may be made in cash or, if permitted by law, Whirlpool common stock, valued at its market price at the time of exercise.

 

DEFERRED EQUITY COMPENSATION

 

The Plan provides for deferral of the annual equity grant valued at $54,000 by a nonemployee director if the director makes a valid, timely, and irrevocable deferral election. All deferrals under the Plan will be made pursuant to the Whirlpool Corporation Deferred Compensation Plan II for Nonemployee Directors (the “Deferred Compensation Plan”). Under the Deferred Compensation Plan, a nonemployee director will receive deferred stock units on a one-for-one basis for each share of common stock deferred. Deferred stock units granted to a director shall be credited to a bookkeeping reserve account solely for accounting purposes and shall not require a segregation of any of the Company’s assets. A deferred stock unit shall earn phantom dividends equal to the dividends paid on actual shares of common stock (“dividend equivalents”) and shall be settled in common stock at the time of distribution under the Deferred Compensation Plan. A director to whom deferred stock units has been credited will not have any rights as a stockholder with respect to such deferred stock units or dividend equivalents until the director becomes the record holder of common stock following the issuance of the common stock upon the director ceasing to serve on the Board of Directors.

 

FEDERAL TAX CONSEQUENCES

 

The following discussion is intended only as a brief summary of the federal income tax rules relevant to stock, stock options, and deferred equity compensation. These rules are highly technical and subject to change. The following discussion is limited to the federal income tax rules relevant to the Company and to nonemployee directors who are citizens or residents of the United States. The discussion does not address the state, local, or foreign income tax rules relevant to stock and stock options.

 

Stock Grants. Unless deferred, a nonemployee director will recognize ordinary compensation income on the date shares of common stock are granted to the nonemployee director in an amount equal to the fair market value of the shares on that date. Whirlpool receives a deduction equal to the ordinary compensation income recognized by the nonemployee director.

 

A nonemployee director’s tax basis in the shares of common stock granted pursuant to the Plan equals the fair market value of the shares on the date such director’s ordinary compensation income is determined under the foregoing rules, and the director’s holding period begins on such date. Upon a subsequent sale or exchange of the shares, the nonemployee director recognizes capital gain or loss equal to the difference between the proceeds received and the director’s basis in the shares. Such capital gain will be short- or long-term, depending upon whether the nonemployee director has held the shares for more than twelve months. The Company will not receive a deduction for any capital gain recognized by the nonemployee director.

 

Stock Options. A nonemployee director who is granted a stock option will recognize no income upon grant of the option. The nonemployee director will recognize ordinary compensation income on the date the option is exercised, in an amount equal to the difference between the fair market value of the shares of common stock received pursuant to the option exercise on such date and the option exercise price. Whirlpool is entitled to an income tax deduction corresponding to the income recognized by the nonemployee director.

 

If a nonemployee director pays the exercise price for a stock option entirely in cash, the director’s basis in the common stock received will equal the stock’s fair market value on the exercise date, and the director’s holding period begins on the day after the exercise date. If, however, a nonemployee director pays the exercise price of a stock option in whole or in part with previously-owned shares of common

 

24


Table of Contents

stock, then the director’s tax basis in and holding period for the previously-owned shares will carry over to an equivalent number of the newly-acquired shares on a share-for-share basis; as to each remaining newly-acquired share, the director’s basis will equal the share’s value on the exercise date, and the director’s holding period for capital gains treatment will begin on the day after the exercise date.

 

When a nonemployee director disposes of common stock received upon the exercise of a stock option, the nonemployee director will recognize capital gain or loss equal to the difference between the sales proceeds and the director’s basis in the stock sold. The nonemployee director’s capital gain will be long- or short-term, depending upon whether the stock sold was held more than twelve months. Whirlpool will not receive a deduction for any capital gain recognized by the nonemployee director.

 

Deferred Equity Compensation. A nonemployee director will recognize ordinary compensation income on the date the nonemployee director ceases to be a director of the Company and thereby becomes entitled to receive the shares of common stock held in his or her deferred compensation account. The rules for determining the amount of income recognized by the nonemployee director, the nonemployee director’s basis and holding period in the shares received, and the Company’s deduction are similar to those described above under the heading “Stock Grants.”

 

The ordinary compensation income a nonemployee director recognizes under the foregoing rules is not subject to withholding. However, a nonemployee director must take such income into account in determining the estimated tax payment such director is required to make.

 

NEW PLAN BENEFITS

 

As described above, each nonemployee director receives an annual unrestricted grant of common stock valued at $54,000 and a stock option to purchase shares of common stock valued at $36,000. The award disclosures included in the following table are estimated assuming (1) the Plan is approved by the stockholders at the 2005 annual meeting, (2) ten nonemployee directors serve as of the date of the Company’s 2005 annual stockholders meeting, (3) the fair market value of the Company’s common stock applicable to the grant will be the same as it was on February 28, 2005, $63.57, and (4) no nonemployee director is entitled to receive the one-time grant of 1,000 shares of common stock during fiscal 2005. Only nonemployee directors are eligible to participate in the Nonemployee Director Equity Plan. Executive officers and employees will not be eligible to participate and, therefore, are not included in the table below.

 

Name and Position


   Dollar Value

   Shares of
Unrestricted
Stock


   Shares
Underlying
Stock Options


Non-Executive Director Group

   $ 900,000    8,490    16,180

 

BOARD RECOMMENDATION

 

The Board of Directors recommends a vote FOR the Whirlpool Corporation Nonemployee Director Equity Plan appearing at Item 2 on the accompanying proxy form.

 

25


Table of Contents

EQUITY COMPENSATION PLAN INFORMATION

 

The following table presents information relating to securities authorized under equity compensation plans as of December 31, 2004.

 

Equity Compensation Plan Information

 

     (a)

   (b)

   (c)

Plan category


   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights


   Weighted-average
exercise price of
outstanding options,
warrants and rights


   Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))


Equity compensation plans approved by security holders

   5,368,975    $ 58.40    3,212,734

Equity compensation plans not approved by security holders

   0      0    171,500
    
  

  

Total

   5,368,975    $ 58.40    3,384,234
    
  

  

 

The only plan reflected above that was not approved by the Company’s security holders is the Key Employee Treasury Stock Ownership Plan. This plan, the terms of which are substantially similar to the Company’s Omnibus Stock and Incentive Plans, was established to support the hiring and retention initiatives at key leadership positions by providing key leaders with the opportunity to receive common stock of the Company and stock option, restricted stock, and phantom stock awards to be paid from the Company’s treasury stock. For more information, see the discussion of this plan in the Human Resources Committee Report on Compensation Awards above. In 2004, an award of 10,000 shares was made under this plan.

 

MISCELLANEOUS

 

Whirlpool will pay the expenses of the solicitation of proxies. We expect to pay fees of approximately $10,500 plus certain expenses for assistance by Georgeson Shareholder Communications Inc. in the solicitation of proxies. Proxies may be solicited by directors, officers, and employees of the Company and by Georgeson Shareholder Communications Inc. personally and by mail, telegraph, telephone, or other electronic means.

 

MATTERS RELATING TO AUDITORS

 

Ernst & Young LLP has been appointed by the Audit Committee to be the independent auditor for the Company for fiscal year 2005. Representatives of Ernst & Young LLP are expected to be present at the annual meeting to respond to appropriate questions and may make a statement if they so desire.

 

FEES

 

The Company paid Ernst & Young the following fees (in millions):

 

     Year ended December 31,

         2003    

       2004    

•  Audit Fees

   $ 4.3    $ 9.0

•  Audit-Related Fees

     0.5      0.3

•  Tax Fees

     3.7      5.0

•  All Other Fees

     0.0      0.0
    

  

Total

   $ 8.5    $ 14.3
    

  

 

26


Table of Contents

Audit-related fees are principally comprised of fees for services provided in connection with employee benefit plan audits, assistance with implementation of various rules and standards promulgated pursuant to Section 404 of the Sarbanes-Oxley Act, and consultation with management as to the accounting or disclosure treatment of various transactions or events. Tax fees are principally comprised of fees for services provided in connection with worldwide tax planning and compliance services, expatriate tax services, and assistance with tax audits and appeals.

 

ADVANCE APPROVAL POLICY FOR INDEPENDENT AUDITOR SERVICES

 

Pursuant to its written charter (included in this proxy statement as Exhibit B), the Audit Committee, or a subcommittee thereof comprised of one or more independent directors, is responsible for approving in advance all audit, internal control-related, and permitted non-audit services to be performed for the Company by its independent auditor. In recognition of this responsibility, the Audit Committee has established a policy to approve in advance all audit, internal control-related, and permissible non-audit services provided by the Company’s independent auditor. Prior to engagement of the independent auditor for the next year’s audit, management or the independent auditor submits to the Audit Committee for approval a request of services expected to be rendered during that year for each of the four categories of services outlined in the table above. Prior to engagement, the Audit Committee approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original advance approval. In those instances, the Audit Committee requires specific approval in advance before engaging the independent auditor. The Audit Committee may delegate authority to make advance approval to one or more of its members. The member or members to whom such authority is delegated must report, for information purposes only, any such approval decisions to the Audit Committee at its next scheduled meeting. A copy of the Audit Committee Pre-Approval Policy for Independent Auditor Services appears on the Company’s website at www.whirlpoolcorp.com; click on the “Governance” tab, and then “Board of Directors.”

 

AUDIT COMMITTEE REPORT

 

The Audit Committee provides independent oversight of the Company’s accounting functions and monitors the objectivity of the financial statements prepared under the direction of Whirlpool’s management. In addition, the Committee retains the Company’s independent auditor (now known as the “independent registered public accounting firm”), reviews major accounting policy changes by Whirlpool, reviews and approves the scope of the annual internal and independent audit processes, approves in advance non-audit services provided by the independent registered public accounting firm, approves all audit and non-audit service fees paid to the independent registered public accounting firm, and monitors Company activities designed to assure compliance with the Company’s ethical standards. The Committee is composed of six directors who have been determined by the Board of Directors to be “independent” and “financially literate” pursuant to the New York Stock Exchange listing requirements. The Committee operates under a written charter (included in this proxy statement as Exhibit B) adopted by the Company’s Board of Directors.

 

The Committee has reviewed the audited consolidated financial statements of the Company for 2004 with management, and management has represented to the Committee that these financial statements were prepared in accordance with accounting principles generally accepted in the United States. The Committee discussed with management the quality and the acceptability of the accounting principles employed including all critical accounting policies used in the preparation of the financial statements and related notes, the reasonableness of judgments made, and the clarity of the disclosures included in the statements.

 

27


Table of Contents

The Committee also reviewed the consolidated financial statements of the Company for 2004 with Ernst & Young, the Company’s independent registered public accounting firm for 2004 (“Ernst & Young”), who is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States. Further, the Committee reviewed with Ernst & Young its judgment as to the quality, not just the acceptability, of the Company’s accounting principles. In addition, the Committee met with Ernst & Young, with and without management present, to discuss the results of its examinations, its evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

 

For the fiscal year 2004, management completed its documentation, testing, and evaluation of the adequacy of the internal control structure and procedures for financial reporting established and maintained by management of the Company as required in Section 404 of the Sarbanes-Oxley Act of 2002 and relevant regulations. The Committee was apprised of the progress of the evaluation by both management and Ernst & Young, and the Committee provided oversight and advice to management during the process. At the conclusion of this evaluation, management provided the Committee with and the Committee reviewed management’s report on the effectiveness of the internal control structure and procedures of the Company for financial reporting, and the Committee also received the report from Ernst & Young thereon. The Committee also discussed with Ernst & Young the matters required to be discussed by Section 204 of the Sarbanes-Oxley Act of 2002 and the Statement on Auditing Standards No. 61, Communication with Audit Committees.

 

The Committee has received the written disclosures and the letter from Ernst & Young required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees) and has discussed with Ernst & Young its independence. The Committee considered the compatibility of non-audit services provided by Ernst & Young to the Company with Ernst & Young’s independence.

 

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, the inclusion of the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2004 for filing with the Securities and Exchange Commission. The Committee has selected Ernst & Young as the Company’s independent registered public accounting firm for 2005.

 

Allan D. Gilmour, Chair

Gary T. DiCamillo

James M. Kilts

Arnold G. Langbo

Janice D. Stoney

Michael D. White

 

STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS FOR 2006 MEETING

 

Our annual meeting of stockholders is generally held the third Tuesday in April. Assuming our 2006 annual meeting is held on that date, we must receive notice of your intention to introduce a nomination for director or other item of business at that meeting by January 18, 2006. This notice must be received by the Corporate Secretary of Whirlpool personally or by registered or certified mail and satisfy the procedures set forth in the Company’s by-laws. In addition, any proposal that you intend to have us include in a proxy statement for the annual meeting of stockholders in 2006 must be received by us by November 11, 2005, and must otherwise comply with the Securities and Exchange Commission’s rules, in order to be eligible for inclusion in the proxy statement and proxy form relating to this meeting.

 

28


Table of Contents

DIRECTOR NOMINATIONS TO BE CONSIDERED BY THE BOARD

 

Nominations for the election of directors may be made at times other than at the annual meeting by the Board of Directors or by a stockholder entitled to vote generally in the election of directors. For a nomination to be properly made by any stockholder and be considered for recommendation by the Board to the stockholders and included in the Company’s proxy statement for the 2006 annual meeting, written notice of such stockholder’s nomination must be given, either by personal delivery or by registered or certified United States mail, postage prepaid, to the Corporate Secretary of the Company (and must be received by the Corporate Secretary) by November 11, 2005. Such notice shall set forth: (1) the name and address of the stockholder making the nomination and of the person to be nominated; (2) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting; (3) a description of all arrangements or understandings between the stockholder and the nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is being made by the stockholder; (4) such other information regarding the nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the then current proxy rules of the Securities and Exchange Commission; and (5) the consent of the nominee to serve as a director of the Company if so recommended by the Board and duly elected at the annual meeting by the stockholders. In order for a stockholder nomination to be included in the proxy statement, the nominee must meet the selection criteria as determined by the Corporate Governance and Nominating Committee.

 

Whirlpool evaluates director nominees recommended by stockholders in the same manner in which it evaluates other director nominees. Whirlpool has established through its Corporate Governance and Nominating Committee selection criteria that identify desirable skills and experience for prospective Board members, including those properly nominated by stockholders, and address the issues of diversity and background. The Board, with the assistance of the Corporate Governance and Nominating Committee, selects potential new Board members using the criteria and priorities established from time to time. Desired personal qualifications for potential director nominees include: intelligence, integrity, strength of character, and sense of timing required to assess and challenge the way things are done and recommend alternative solutions to problems; the independence necessary to make an unbiased evaluation of management performance and effectively carry out responsibilities of oversight; an awareness of both the business and social environment in which today’s corporation operates; and commitment and a sense of urgency and spirit of cooperation that will enable them to interface with other Board members in directing the future, profitable growth of the Company. Desired experience qualifications for potential director nominees include: at least ten years of experience in a senior executive role with a major business organization and, preferably, be either Chief Executive Officer or Chairman (equivalent relevant experience from other backgrounds such as academic or government, as well as higher potential senior level business executives, may also be considered); proven records of accomplishment and line operating (or equivalent) experience; first-hand experience with international operations; a working knowledge of corporate governance issues and the changing role of the board of directors; exposure to the numerous programs a corporation employs relative to creating shareholder value, while balancing the needs of all stakeholders; and not be employed by or affiliated with organizations that have competitive lines of business or other conflicts of interest. The composition, skills, and needs of the Board change over time and will be considered in establishing the desirable profile of candidates for any specific opening on the Board of Directors.

 

29


Table of Contents

EXHIBIT A

 

WHIRLPOOL CORPORATION

NONEMPLOYEE DIRECTOR EQUITY PLAN

(As Effective January 1, 2005)

 

ARTICLE I

GENERAL

 

1.1   PURPOSE

 

Whirlpool Corporation, a Delaware corporation (the “Corporation”), hereby adopts this Nonemployee Director Equity Plan (the “Plan”). The purpose of the Plan is to foster and promote the long-term financial success of the Corporation by attracting and retaining outstanding nonemployee directors by enabling them to participate in the Corporation’s growth through automatic, nondiscretionary awards of Common Stock (as defined in Section 1.3), Options (as defined in Section 3.1), and Deferred Stock Units (as defined in Section 2.3). Common Stock awards, Options, and Deferred Stock Units are collectively and interchangeably referred to herein as “Awards.”

 

1.2   PARTICIPATION

 

Only members of the Board of Directors of the Corporation (the “Board”) who, at the time an Award is made, are not employees of the Corporation or any subsidiary or affiliate of the Corporation (“Directors”) will receive Awards under the Plan.

 

1.3   SHARES SUBJECT TO THE PLAN

 

Shares of stock covered by Awards under the Plan may be in whole or in part authorized and unissued or treasury shares of the Corporation’s common stock, $1.00 par value per share, or such other shares as may be substituted pursuant to Section 4.3 (“Common Stock”). The maximum number of shares of Common Stock that may be issued for all purposes under the Plan shall be 300,000 (subject to adjustment pursuant to Section 4.3). Any shares of Common Stock subject to an Option which for any reason is canceled or terminated without having been exercised shall again be available for Awards under the Plan. No fractional shares shall be issued.

 

1.4   GENDER AND NUMBER

 

Except when otherwise indicated by the context, words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular.

 

ARTICLE II

STOCK AWARDS

 

2.1   INITIAL AWARD OF COMMON STOCK

 

On the date a Director first joins the Board, either as a result of being elected by shareholders or being appointed to a vacancy or newly created directorship by the Board, such Director shall automatically be entitled (subject to adjustment pursuant to Section 4.3) to a grant of 1,000 shares of Common Stock (the “Initial Stock Award”). The Initial Stock Award shall be granted immediately in shares of Common Stock. The shares of Common Stock awarded pursuant to this Section 2.1 will not be subject to any restriction under the Plan, provided that no such shares of Common Stock may be sold within the first six months after they are awarded, unless the death or disability of the Director occurs during such period.

 

A-1


Table of Contents
2.2   ANNUAL AWARD OF COMMON STOCK

 

Effective on the date of each annual meeting of the stockholders of the Corporation (each, an “Annual Meeting”), each Director in office at the conclusion of such meeting will automatically be entitled (subject to adjustment pursuant to Section 4.3) to an Award of Common Stock (the “Annual Stock Award”), except as provided in Section 2.3 hereof. The number of shares granted pursuant to each Annual Stock Award shall be determined by dividing: (a) $54,000; by (b) the average Fair Market Value (as determined under Section 4.6 hereof) of a single share of Common Stock for the final three trading days before the Annual Meeting. In the event fractional shares would otherwise result from the grant of any Award of Common Stock, the number of shares of Common Stock granted shall be reduced to the next lowest whole share so as to eliminate such fractions. The Annual Stock Award shall be granted immediately in shares of Common Stock unless such Director has filed an election with the Corporation to receive such Award as Deferred Stock Units under Section 2.3 hereof. The shares of Common Stock awarded pursuant to this Section 2.2 will not be subject to any restriction under the Plan, provided that no such shares of Common Stock may be sold within the first six months after they are awarded, unless the death or disability of the Director occurs during such period.

 

2.3   DEFERRED STOCK UNITS

 

If a Director files a timely election with the Corporation to receive stock-equivalent units (“Deferred Stock Units”) in lieu of all or a portion of any Annual Stock Award pursuant to the Whirlpool Corporation Deferred Compensation Plan II for Nonemployee Directors (the “Deferred Compensation Plan”), all or such portion as elected of such Director’s Annual Stock Award shall be granted (subject to adjustment pursuant to Section 4.3) in Deferred Stock Units. Deferred Stock Units granted to a Director shall be credited to a bookkeeping reserve account pursuant to the Deferred Compensation Plan solely for accounting purposes and shall not require a segregation of any of the Corporation’s assets. A Deferred Stock Unit shall be settled in Common Stock (unless otherwise provided in Section 4.3 hereof) at the time provided in the Deferred Compensation Plan. A Director to whom Deferred Stock Units have been credited will not have any rights as a stockholder with respect to such Deferred Stock Units or any Common Stock distributable with respect to such Deferred Stock Units until the Director becomes the record holder of Common Stock following the issuance of the Common Stock to the Director in redemption of Deferred Stock Units.

 

2.4   DEFERRED STOCK UNIT CERTIFICATES

 

The award of Deferred Stock Units shall be evidenced by a certificate executed by an officer of the Corporation.

 

ARTICLE III

STOCK OPTION AWARDS

 

3.1   AWARD OF STOCK OPTIONS

 

Effective on the date of each Annual Meeting, each Director in office at the conclusion of such meeting will automatically be awarded a stock option (an “Option”) under the Plan to purchase (subject to adjustment pursuant to Section 4.3) shares of Common Stock. The number of shares subject to such Option shall be determined by dividing $36,000 by the product of the Fair Market Value (as determined under Section 4.6 hereof) of a single share of Common Stock on the final trading day before the Annual Meeting multiplied by 0.35. In the event fractional shares would otherwise result from the grant of any Option, the number of shares subject to the Option shall be reduced to the next lowest whole share so as to eliminate such fractions.

 

A-2


Table of Contents
3.2   STOCK OPTION CERTIFICATES

 

The award of an Option shall be evidenced by a certificate executed by an officer of the Corporation.

 

3.3   OPTION PRICE

 

The purchase price for Common Stock under each Option (the “Option Price”) granted under this Plan shall be the Fair Market Value (as determined under Section 4.6 hereof) of the Common Stock as of the final trading day before the Annual Meeting.

 

3.4   EXERCISE AND TERM OF OPTIONS

 

  (a)   Options may be exercised by the delivery of written notice of exercise and the Option Price for the shares to be purchased to the Corporate Secretary of the Corporation. The Option Price may be paid in cash (including check, bank draft or money order) or, unless in the opinion of counsel to the Corporation to do so may result in a possible violation of any law, by delivery of Common Stock already owned by the Director, valued at Fair Market Value on the date of the exercise. As soon as practicable after receipt of each notice and full payment, the Corporation shall deliver to the Director a certificate or certificates representing the acquired shares of Common Stock.

 

  (b)   Each Option may be exercised at any time after the date it is awarded until (subject to Section 4.1) the first to occur of the twentieth anniversary of the date such Option was awarded or the second anniversary of the date the Director ceases to be a Director, provided that no Option shall be exercisable within the first six months after it is awarded, unless death or disability of the Director occurs during such period. In the event that the death or disability of the Director does occur and an Option is exercised in that period, any shares of Common Stock issued on such exercise may not be sold until the sixth month anniversary of the date of the grant of the Option.

 

ARTICLE IV

MISCELLANEOUS PROVISIONS

 

4.1   NON TRANSFERABILITY; BENEFICIARIES

 

All Awards shall be exercisable or received during the Director’s lifetime only by the Director or his legal representative. Any transfer contrary to this Section 4.1 will nullify the Option. In the event of a Director’s death prior to the exercise of any Options which were then exercisable, such Options may be exercised within one year after the Director’s death (regardless of the expiration date of such Options under Section 3.4 (b)) by the, Director’s beneficiary, designated as provided below, or, in the absence of any such designation, his estate. Each Director may name, from time to time, any beneficiary or beneficiaries (who may be named contingently or successively) who may exercise such Options and receive such certificates. Each designation with respect to Options will revoke all prior designations with respect to Options by such Director, will be in writing and will be effective only when filed with the Corporate Secretary of the Corporation during his lifetime. A Director’s beneficiary designation with respect to any outstanding Deferred Stock Unit shall be made pursuant to the terms of the Deferred Compensation Plan.

 

4.2   DIVIDEND EQUIVALENTS

 

In the event that a Director elects to receive Deferred Stock Units pursuant to the Deferred Compensation Plan in lieu of any Annual Stock Award, such Director shall be granted additional

 

A-3


Table of Contents

shares of Deferred Stock Units in the event any dividend is paid with respect to the Common Stock of the Corporation. The number of additional Deferred Stock Units granted pursuant to this Section 4.2 shall be determined by multiplying: (a) the number of Deferred Stock Units held by the Director on the dividend declaration date; by (b) the dividend paid per share by the Corporation on Common Stock; and dividing the result by (c) the Fair Market Value of a single share of Common Stock on the dividend payment date.

 

4.3   ADJUSTMENT UPON CERTAIN CHANGES

 

In the event of a reorganization, recapitalization, stock split or reverse stock split, combination of shares, merger, spin-off, split-up, share exchange, consolidation, rights offering or other similar change in the capital structure or shares of the Corporation, or an unusual or nonrecurring event affecting the Corporation or its financial statements or resulting from changes in applicable laws, regulations or accounting principles, adjustments in the number and kind of shares subject to Options and Deferred Stock Units and the Option Price of outstanding Options under this Plan as well as the treatment of fractional shares and fractional cents that arise as a result of such adjustments shall be made if, and in the same manner as, such adjustments are made to equity awards issued under the Corporation’s 2002 Omnibus Stock and Incentive Plan or any replacement or successor equity plan, subject to any required action by the Board or the stockholders of the Corporation and compliance with applicable securities laws.

 

In the event of any transaction resulting in a Change in Control (as defined in this Section 4.3) of the Corporation, the Corporation, in its sole discretion, may elect to change the form of payment in order to make payments with respect to outstanding Options and Deferred Stock Units in cash in lieu of Common Stock. For the purposes of payments made with respect to this Section 4.3, outstanding Options and Deferred Stock Units shall be valued at Fair Market Value (as defined in Section 4.6 hereof) determined as of the date of the consummation of the transaction resulting in the Change in Control. For purposes of this Section 4.3, Change in Control shall have the same meaning ascribed to such term in the Deferred Compensation Plan.

 

4.4   TAX WITHHOLDING

 

The Corporation shall have the power to withhold, or require a Director to remit to the Corporation, an amount sufficient to satisfy any withholding or other tax due from the Corporation with respect to any Award under the Plan, and the Corporation may defer such payment or issuance unless indemnified to its satisfaction.

 

4.5   AMENDMENT, SUSPENSION AND TERMINATION OF PLAN

 

The Board may suspend or terminate the Plan or any portion thereof at any time and may amend it from time to time in such respects as the Board may deem advisable in order that any Awards thereunder shall conform to or otherwise reflect any change in applicable laws or regulations, or to permit the Corporation or the Directors to enjoy the benefits of any change in applicable laws or regulations, or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without stockholder approval to the extent required by law, agreement or the rules of any exchange upon which the Common Stock is listed, (a) except as provided in Section 4.3, materially increase the number of shares of Common Stock which may be issued under the Plan, (b) materially modify the requirements as to eligibility for participation in the Plan, (c) materially increase the benefits accruing to Directors under the Plan or (d) extend the termination date of the Plan. No such amendment, suspension or termination shall (x) impair the rights of Directors under any outstanding Option without the consent of the Directors affected thereby or (y) make any change that would disqualify the Plan, or

 

A-4


Table of Contents

any other plan of the Corporation intended to be so qualified, from the exemption provided by Rule 16b-3. No provision of the Plan which states the amount and price of securities to be awarded, specifies the timing of awards or sets forth the formula that determines the amount, price and timing of awards may be amended more than once every six months, except to comport with changes in the Internal Revenue Code of 1986, as amended.

 

4.6   DEFINITION OF FAIR MARKET VALUE

 

The term “Fair Market Value” as it relates to Common Stock on any given date means (a) the mean of the high and low sales prices of the Corporation’s Common Stock as reported by the Composite Tape of the New York Stock Exchange (or, if not so reported, on any domestic stock exchanges on which the Common Stock is then listed) ; or (b) if the Common Stock is not listed on any domestic stock exchange, the mean of the high and low sales prices of the Corporation’s Common Stock as reported by the National Association of Securities Dealers Automated Quotation System (or, if not so reported, by the system then regarded as the most reliable source of such quotations) or, if there are no reported sales on such date, the mean of the closing bid and asked prices as so reported; or (c) if the Common Stock is listed on a domestic exchange or quoted in the domestic over-the-counter market, but there are not reported sales or quotations, as the case may be, on the given date, the value determined pursuant to (a) or (b) above using the reported sale prices or quotations on the last previous date on which so reported; or (d) if none of the foregoing clauses apply, the fair value as determined in good faith by the Board.

 

4.7   PLAN NOT EXCLUSIVE

 

The adoption of the Plan shall not preclude the adoption by appropriate means of any other stock option or other incentive plan for Directors.

 

4.8   REPORTS

 

The Corporation shall supply each Director, not less frequently than once each year, a report stating the number of shares of Common Stock covered by Options held by such Director and the Option Prices thereof and Deferred Stock Units held by such Director.

 

4.9   LISTING, REGISTRATION AND LEGAL COMPLIANCE

 

Each Option shall be subject to the requirement that if at any time counsel to the Corporation shall determine that the listing, registration or qualification thereof or of any shares of Common Stock or other property subject thereto upon any securities exchange or under any foreign, federal or state securities or other law or regulation, or the consent or approval of any governmental body or the taking of any other action to comply with or otherwise with respect to any such law or regulation, is necessary or desirable as a condition to or in connection with the award of such Option or the issue, delivery or purchase of shares of Common Stock or other property thereunder, no such Award may be exercised or paid in Common Stock or other property unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained free of any conditions not acceptable to the Corporation, and the holder of the Award will supply the Corporation with such certificates, representations and information as the Corporation shall request and shall otherwise cooperate with the Corporation in effecting or obtaining such listing, registration, qualification, consent, approval or other action. The Corporation may at any time impose any limitations upon the exercise, delivery or payment of any Award which, in the opinion of the Board, are necessary or desirable in order to cause the Plan or any other plan of the Corporation to comply with Rule 16b-3. If the Corporation, as part of an offering of securities or otherwise, finds it desirable because of foreign, federal or state legal or regulatory requirements to

 

A-5


Table of Contents

reduce the period during which Options may be exercised, the Board may, without the holders’ consent, so reduce such period on not less than 15 days’ written notice to the holders thereof.

 

4.10   RIGHTS OF DIRECTORS

 

Nothing in the Plan shall confer upon any Director any right to serve as a Director for any period of time or to continue his present or any other rate of compensation.

 

4.11   REQUIREMENTS OF LAW; GOVERNING LAW

 

The granting of Awards and the issuance of shares of Common Stock shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. The provisions of this Plan shall be interpreted so as to comply with the conditions or requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, unless a contrary interpretation of any such provision is otherwise required by applicable law.

 

4.12   EFFECTIVE DATE; TERM OF PLAN

 

The Plan shall, subject to the approval of the holders of a majority of the shares of Common Stock present at the 2005 Annual Meeting, be deemed effective as of January 1, 2005. No Awards shall be made under the Plan after December 31, 2014.

 

A-6


Table of Contents

EXHIBIT B

 

WHIRLPOOL CORPORATION

BOARD OF DIRECTORS

AUDIT COMMITTEE CHARTER

 

Approved 8/17/04

 

I.   PURPOSE    To fulfill responsibilities to the Company’s shareholders, potential shareholders, and the investment community, the Audit Committee will provide independent and objective oversight of the Company’s accounting functions and internal controls and will monitor the objectivity of the Company’s financial statements. The Committee will assist Board oversight of (1) the integrity of the Company’s financial statements, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence, and (4) the performance of the Company’s internal audit function and independent auditor. In addition, the Committee will prepare all the Committee reports required under the law and will provide an open avenue of communication between the financial management, internal auditor, independent auditor, and the Board of Directors.

 

II.   COMMITTEE MEMBERS    The Committee shall be composed of at least three Directors appointed by the Board of Directors. Committee members shall not be officers or employees of the Company or one of its subsidiaries and shall, in the opinion of the Board, meet the independence and financial experience and financial literacy and expertise requirements of the New York Stock Exchange and relevant law. Under these requirements, each member of the Committee shall be free from any relationship that would interfere with the exercise of independent judgment as a Committee member. All members of the Committee shall have an understanding of basic finance and accounting practices, and at least one member of the Committee shall have accounting or related financial management experience. Committee members shall not simultaneously serve on the audit committees of more than three public companies (including the Company).

 

III.   COMMITTEE MEETINGS    The Committee shall meet at least four times a year, or more frequently as appropriate. The Committee shall meet with management, internal audit, and the independent auditor in separate executive sessions to discuss matters privately. All meetings shall be conducted pursuant to the applicable provisions of the Company’s by-laws. Meeting agendas will be prepared and provided in advance to Committee members, along with appropriate briefing materials. Minutes of meetings will be prepared and the Committee will report to the Board the results of its meetings. The Committee may form one or more sub-committees, each of which may take such actions as may be delegated by the Committee.

 

IV.   DUTIES and RESPONSIBILITIES    While the Committee has the responsibilities and powers set forth in the Company’s by-laws and this charter, the Committee does not have the duty to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor. However, the Committee does have the following duties and responsibilities in addition to any similar matter that may be referred to the Committee from time to time by the full Board, the Chairman, or which the Committee raises on its own initiative:

 

  1.  

Review and approve in advance the annual audit and its scope for the Company and its wholly-owned or majority-owned subsidiaries; monitor the annual audit and its scope for affiliates; and review the annual audit results with respect to (a) the Company’s financial statements, including appropriately addressing risks related to litigation, foreign exchange,

 

B-1


Table of Contents
 

taxes, contingent liabilities, and similar matters, and (b) the Company’s internal controls, including electronic data processing controls, and the extent to which such controls are evaluated by the independent auditor for adequacy and protection.

 

  2.   Review and discuss the annual audited financial statements and quarterly financial statements and related reports with management and the independent auditor, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to monitor adequacy of disclosure. The Committee shall discuss earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies with management and the independent auditor prior to the release of earnings as appropriate. The Committee’s discussion of earnings releases as well as financial information and earnings guidance may be general (i.e., discussion of the types of information to be disclosed and the type of presentations to be made). The Committee need not discuss in advance each earnings release or each instance in which the Company may provide earnings guidance.

 

  3.   Review the independent auditor’s management letter and recommendations (or any audit problems, difficulties, or disagreements) and management’s response.

 

  4.   Retain and terminate the Company’s independent auditor and exercise the Committee’s sole authority to review and approve all audit engagement fees and terms and approve in advance the nature, extent, and cost of all non-audit services provided by the independent auditor in accordance with relevant NYSE listing rules and law.

 

  5.   Obtain and review a report by the independent auditor describing the auditor’s internal quality control procedures and all material issues raised by the most recent internal quality control review, or peer review of the firm, or by any inquiry of investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and all steps to deal with such issues.

 

  6.   Review, evaluate, and discuss with the independent auditor all relationships between the independent auditor and the Company to assess the auditor’s independence. Review and evaluate the lead partner of the independent auditor, assure regular rotation of the lead partner as required by law, and consider whether there should be regular rotation of the audit firm itself. Present its conclusions with respect to the independent auditor to the full Board.

 

  7.   Review major accounting policy changes adopted by the Company. Maintain current knowledge on major new or proposed technical requirements, regulations, or legislation affecting the Company.

 

  8.   Review codes of conduct and management reports on employee compliance, including compliance with the Foreign Corrupt Practices Act, to guard against significant conflicts of interest and dishonest, unethical, or illegal activities. Monitor Company activities that are designed to assure compliance with such codes and review management findings involving significant lapses of ethical conduct, fraud, or criminal conduct.

 

  9.   Review with management situations where new activities, major changes in operations, or other developments may create significant financial exposure for the Company. Review policies and guidelines with respect to risk assessment and risk management, including management reports on the Company’s processes to manage and report risks related to litigation, foreign exchange, taxes, contingent liabilities, and similar matters that may constitute significant financial risk exposures.

 

  10.   Review activities of the Company’s internal audit function, audit plans, procedures and results, and coordination with the independent auditor. Regularly review the continued overall effectiveness of the internal audit function as required under relevant NYSE listing rules and law.

 

B-2


Table of Contents
  11.   Annually review the Committee’s charter and operations and recommend any proposed changes to the Board for its approval. Prepare any reports required under relevant NYSE listing rules and law.

 

  12.   Set an appropriate hiring policy for employees or former employees of the independent auditor with due regard for the continuing independence of the independent auditor.

 

  13.   Establish and maintain procedures for (a) the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal controls, and auditing matters, and (b) the confidential and anonymous submission by employees of the Company of concerns with questionable accounting or auditing matters in accordance with relevant NYSE listing rules and law.

 

  14.   Annually prepare and cause to be filed in the Company’s annual proxy statement a report to stockholders as may required by the Securities and Exchange Commission.

 

  15.   The Committee may conduct or authorize investigations into any matters within the Committee’s scope of responsibilities and, in connection therewith, may retain independent counsel, accountants, or others to assist it.

 

  16.   Make regular reports to the Board and evaluate annually its performance in accordance with relevant NYSE listing rules and law.

 

B-3


Table of Contents

WHIRLPOOL CORPORATION

 

FINANCIAL SUPPLEMENT

TO 2004 ANNUAL REPORT ON FORM 10-K, AND

TO 2005 PROXY STATEMENT

 

TABLE OF CONTENTS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   F-2

Consolidated Statements of Operations

   F-21

Consolidated Balance Sheets

   F-22

Consolidated Statements of Cash Flows

   F-23

Consolidated Statements of Changes in Stockholders’ Equity

   F-24

Notes to Consolidated Financial Statements

   F-25

Eleven-Year Consolidated Statistical Review

   F-52

Reports of Management and Independent Registered Public Accounting Firm

   F-54

Schedule II—Valuation and Qualifying Accounts

   F-58

 

F-1


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

EXECUTIVE LEVEL OVERVIEW

 

Whirlpool Corporation is the largest global manufacturer of major appliances worldwide with 2004 revenues of $13.2 billion and net earnings of $406 million. The Company’s four reportable segments are based on geography and consist of North America (61% of revenue), Europe (23% of revenue), Latin America (13% of revenue), and Asia (3% of revenue). The Company is the market share leader in North America and Latin America and has significant market presence in Europe, India and China. Whirlpool’s brands and operations worldwide have received recognition for accomplishments in a variety of business and social efforts, including energy efficiency leadership, community involvement, support of women’s issues, and excellence in design.

 

The Company’s growth strategy over the past several years has been to introduce innovative new products, strengthen customer loyalty for its brands, continue to expand its global footprint, add or enhance distribution channels and, where appropriate, make strategic acquisitions which enhance the Company’s innovative global product offering.

 

The Company monitors country economic factors such as gross domestic product, consumer interest rates, consumer confidence, housing starts, existing home sales and mortgage refinancing as key indicators of industry demand. Management also focuses on country, brand, product and channel market share, average sales values, and profitability when assessing and forecasting financial results. The Company intends to leverage its global manufacturing, procurement and technology footprint to strengthen Whirlpool’s brand leadership position in the global appliance industry.

 

Management’s Discussion and Analysis discusses the results of operations, cash flows, financial condition and liquidity, contractual obligations and forward-looking cash requirements, other matters, critical accounting policies and estimates, new accounting pronouncements, market risk and forward-looking statements.

 

Included within the results of operations and financial condition and liquidity section is management’s forward-looking perspective. In addition, the Company has included comments regarding regional business unit performance, where appropriate.

 

RESULTS OF OPERATIONS

 

The Consolidated Statements of Operations summarize operating results for the last three years. This section of Management’s Discussion and Analysis highlights the main factors affecting changes in the Company’s financial condition and results of operations and should be read along with the Consolidated Financial Statements.

 

NET SALES

 

The total number of units sold in 2004 increased 4.9% over 2003. Consolidated net sales increased 8.6% over 2003, which includes a positive impact from currency fluctuations. Excluding currency, net sales increased approximately 6%. Total number of units sold in 2003 increased 5.6% over 2002. Consolidated net sales increased 10.5% over 2002, which includes a positive impact from currency fluctuations. Excluding currency fluctuations and the acquisitions of Vitromatic (“Whirlpool Mexico”) and Polar, as described in Note 4 to the Consolidated Financial Statements, the total number of units and

 

F-2


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

 

dollars sold increased approximately 4% and 5%, respectively. The tables below provide the breakdown of units and sales by region.

 

In thousands    2004

    Change

    2003

    Change

    2002

 

Units Sold

                                    

North America

     27,353     4.6 %     26,146     7.5 %     24,324  

Europe

     12,100     4.4       11,591     5.1       11,024  

Latin America

     4,904     14.9       4,269     (2.7 )     4,386  

Asia

     2,145     (8.6 )     2,346     2.9       2,279  

Other/eliminations

     (17 )   —         (37 )   —         (31 )
    


 

 


 

 


Consolidated

     46,485     4.9 %     44,315     5.6 %     41,982  
    


 

 


 

 


Millions of dollars    2004

    Change

    2003

    Change

    2002

 

Net Sales

                                    

North America

   $ 8,254     4.8 %   $ 7,875     7.8 %   $ 7,306  

Europe

     3,062     13.8       2,691     22.4       2,199  

Latin America

     1,674     24.0       1,350     6.7       1,266  

Asia

     382     (8.2 )     416     6.6       391  

Other/eliminations

     (152 )   —         (156 )   —         (146 )
    


 

 


 

 


Consolidated

   $ 13,220     8.6 %   $ 12,176     10.5 %   $ 11,016  
    


 

 


 

 


 

Significant regional trends were as follows:

 

    In 2004, North American unit volumes increased 4.6% versus 2003 due to higher Whirlpool and KitchenAid brand growth combined with strong Canadian performance. Sales improved 4.8% to a record $8.3 billion. Currency did not materially impact sales comparisons. In 2003, North American unit volumes increased 7.5% versus 2002. Volume increases were driven by the full year acquisition impact of Whirlpool Mexico, strong performance in Canada, and volume gains in Whirlpool and KitchenAid brands. Excluding the acquisition of Whirlpool Mexico, North American unit volumes increased 5%. The North American net sales increase adjusted for the acquisition and currency impact was slightly greater than growth in unit volumes due to favorable brand mix as well as the introduction of higher sales value innovative products.

 

    Record European unit volumes increased 4.4%, ahead of industry growth, when compared to 2003 driven largely by strong Whirlpool brand performance and expansion of the Company’s built-in appliance business. European net sales increased 13.8%, and were approximately 3% higher excluding currency. Overall market share improved due to Whirlpool brand performance and the introduction of new products. During 2003, European unit volumes increased 5.1% versus 2002. Excluding the acquisition of Polar, unit volumes increased 4%. Net sales increased 22.4% due primarily to positive currency impact. Excluding currency impact and the Polar acquisition, net sales increased approximately 3%, lagging unit growth due to marketplace pricing pressures. The region experienced improvement in industry volumes as overall economic indicators and consumer confidence edged up in several key markets within the region.

 

   

Strong demand for appliances in Latin America during 2004 resulted in a 14.9% increase in unit volumes versus 2003. Economic conditions within Brazil were strong during 2004 driven by

 

F-3


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

 

GDP expansion, lower unemployment and positive real wage growth. Sales increased 24% in the region during 2004, and were up approximately 20% excluding currency, due to market share gains, strong volume, price increases and favorable product mix. During 2003, appliance unit volumes in Latin America declined 2.7% versus 2002 due primarily to the weak economic environment in the region. Overall industry demand in Brazil declined by 11% for the year. In 2003, the region’s sales increased 6.7% and increased approximately 9% excluding currency impact when compared to 2002, mainly the result of price increases necessitated by higher material costs.

 

    During 2004, Asia’s unit volumes declined 8.6% versus 2003 with a corresponding decline in net sales of 8.2%. Excluding currency, net sales declined approximately 12%. The decision by management to implement the trade inventory reduction strategy in India negatively impacted 2004 volume and sales. The strategy change will improve the speed, flexibility and overall efficiency within sales and distribution processes, and will enable the Company to launch new product introductions more frequently and faster to the market. During 2003, Asia’s unit volumes increased 2.9% over 2002, while net sales increased by 6.6%. Excluding currency impact, net sales increased approximately 1%. The region experienced a number of challenges, which negatively impacted its performance, including significant pricing pressures in China and India.

 

GROSS MARGIN

 

The consolidated gross margin percentage in 2004 decreased 90 basis points versus 2003 primarily due to second half material cost increases and global pricing pressures. These costs were somewhat mitigated by higher volume and record levels of controllable productivity. The consolidated gross margin percentage declined 60 basis points in 2003 versus 2002 due primarily to higher U.S. pension and medical expenses coupled with reduced Befiex credits (See Forward Looking Perspective), an increase in expense due to the decline of the U.S. dollar and higher material costs in Latin America. The higher expense was partially offset by productivity improvements in North America and Europe and lower restructuring and related expense. The table below outlines the gross margin percentages by region, excluding the impact of the 2004, 2003 and 2002 restructuring related charges of $6 million, $7 million and $43 million, respectively, from the regional percentages. The Company believes this comparison of gross margin percentages excluding restructuring related charges provides management and shareholders a better understanding of the ongoing performance of the regions. The Company evaluates segment performance based upon each segment’s operating income, which excludes, among others, one-time charges (See Note 17). The restructuring related charges are included in the consolidated percentages in each of the three years presented.

 

     2004

    Change

    2003

    Change

    2002

 

Gross Margin

                              

North America

   21.9 %   (0.7 ) pts   22.6 %   (1.0 ) pts   23.6 %

Europe

   23.7     0.1     23.6     1.4     22.2  

Latin America

   17.0     (2.6 )   19.6     (3.8 )   23.4  

Asia

   16.9     (3.8 )   20.7     (3.0 )   23.7  
    

 

 

 

 

Consolidated(1)

   21.7 %   (0.9 ) pts   22.6 %   (0.6 ) pts   23.2 %
    

 

 

 

 


(1)   Restructuring charges included in consolidated, excluded from regions.

 

Significant regional trends were as follows:

 

   

North American gross margin decreased 70 basis points compared to 2003 primarily due to elevated material costs for steel and resins. In addition, the market continued to experience

 

F-4


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

 

competitive pricing during 2004. Margin declines were partially offset by higher volume, productivity improvements and some price increases. The decline in 2003 versus 2002 was due to increased pension and medical expense partially offset by productivity improvements.

 

    European gross margin improved slightly in 2004 versus 2003 as productivity improvements and volume leverage more than offset pricing pressure. In 2003, the gross margin increased from 2002 levels due to an improvement in the product and brand mix and productivity improvements, partially offset by pricing pressures. European operations continue to realize savings from ongoing restructuring efforts in Europe.

 

    In 2004, Latin American gross margin declined versus 2003 primarily due to increased material costs for steel and resins. Higher costs were partially offset by increased volume and price increases on both appliances and compressors and favorable product mix. The 2003 gross margin declined over 2002 due to significantly higher material costs, and reduced Befiex credits. The decline was partially offset by higher appliance pricing. Price increases throughout the year helped mitigate the margin erosion but were not enough to offset the increase in material costs.

 

    Asian gross margin declined versus 2003 primarily due to the trade inventory reduction strategy in India and regional pricing pressures. Asian gross margin decreased in 2003 versus 2002 due to significant pricing pressure across the region and unfavorable product mix.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Consolidated selling, general and administrative expenses in 2004, as a percent of consolidated net sales, remained relatively unchanged versus 2003 and 2002. Higher freight rates in North and Latin America were partially offset by productivity in other non-logistic areas. Europe benefited from leverage on higher sales and lower administrative costs. The increase in Asia’s selling, general and administrative expenses as a percent of sales was due primarily to lower overall sales and higher administrative support costs. In 2003, higher pension and freight costs in North America were partially offset by cost controls on discretionary spending. The European increase in 2003 was a result of expense reclassification into selling, general and administrative expenses while Latin America’s improvement was primarily driven by lower bad debt expense in 2003. Asia’s higher selling, general and administrative expenses as a percent of sales in 2003 and 2002 were due to higher operating reserves. The table below outlines the selling, general and administrative expenses as a percentage of sales by region, excluding the impact of 2004, 2003 and 2002 restructuring related charges of $1 million, $4 million and $17 million, respectively, from the regional amounts. The Company believes this comparison of selling, general and administrative expenses excluding restructuring related charges provides management and shareholders a better understanding of the ongoing performance of the regions. The Company evaluates segment performance based upon each segment’s operating income, which exclude, among others, one time charges (See Note 17). The restructuring related charges are included in the Corporate/Other line below.

 

Millions of dollars    2004

   As a %
of Sales


    2003

   As a %
of Sales


    2002

   As a %
of Sales


 

Selling, General & Administrative expenses

                                       

North America

   $ 1,031    12.5 %   $ 970    12.3 %   $ 894    12.2 %

Europe

     560    18.3       510    19.0       407    18.5  

Latin America

     220    13.1       175    13.0       189    15.0  

Asia

     89    23.4       79    19.0       70    17.8  

Corporate/Other(1)

     187    —         182    —         176    —    
    

  

 

  

 

  

Consolidated

   $ 2,087    15.8 %   $ 1,916    15.7 %   $ 1,736    15.8 %
    

  

 

  

 

  


(1)   Restructuring related charges included in Corporate/Other, excluded from regions.

 

F-5


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

 

RESTRUCTURING AND RELATED CHARGES

 

Restructuring initiatives resulted in pre-tax restructuring charges of $15 million, $3 million and $101 million in 2004, 2003 and 2002, respectively. These amounts have been identified as a separate component of operating profit. As a result of the Company’s restructuring activity, it also recognized $7 million, $11 million and $60 million, respectively, in pre-tax restructuring related charges during 2004, 2003 and 2002, respectively, which were recorded primarily within cost of products sold. (See Note 13 to the Consolidated Financial Statements for a more detailed description of these charges and the Company’s restructuring program.)

 

During the fourth quarter of 2002, the Company recognized the vast majority of remaining charges for the global restructuring plan that was originally announced in December of 2000. The plan, which had a total restructuring and related pre-tax cost of $387 million, is expected to result in more than $200 million in annualized savings. At December 31, 2004, a liability of $13 million remains for actions yet to be completed under the plan. Actions under the plan include the elimination of over 7,500 positions worldwide, of which approximately 7,100 had been eliminated as of December 31, 2004.

 

OTHER INCOME AND EXPENSE

 

Interest income and sundry expense decreased approximately 66% compared to 2003. The improvement is primarily attributable to lower losses of $17 million on foreign currency balance sheet positions, primarily in Europe, and a $9 million gain on the sale of a partial interest in an equity investment in Latin America. Interest income and sundry expense in 2003 decreased approximately 24% as compared to 2002. The improvement is largely attributable to lower foreign currency losses as well as lower losses in asset dispositions and the absence of a 2002 fire loss within a Mexican facility.

 

Interest expense reductions during 2004 and 2003 of $9 million and $6 million, respectively, are attributable to a lower overall U.S. interest rate environment, a decrease in borrowings in countries with higher interest rates, primarily Europe, and maturity of the $200 million 9% Debentures in March 2003, which was replaced with lower rate debt.

 

INCOME TAXES

 

The effective income tax rate was 33.9% in 2004, 35% in 2003 and 39% in 2002. The impact of audit settlements and tax planning, as well as the dispersion of global income, has contributed to changes in the Company’s effective tax rate over the periods presented. (See the income tax rate reconciliation included in Note 15 to the Consolidated Financial Statements for a description of the significant items impacting the consolidated effective income tax rate.)

 

EQUITY IN LOSS OF AFFILIATED COMPANIES AND MINORITY INTERESTS

 

Changes in equity in loss of affiliated companies and minority interests reflect lower earnings in Latin America and India during 2004. The 2003 results improved $30 million versus 2002. The 2002 results were reduced by a $22 million after-tax impairment charge related to the Company’s minority investments in and advances to Wellmann, a German kitchen cabinet manufacturer. During 2003, the

 

F-6


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

Company’s investment in the equity of Wellmann was sold to Alno, a prominent German kitchen cabinet manufacturer. The sale did not have a material impact to the Company’s financial position or results of operations. The 2002 results were also impacted by a $4 million charge incurred related to a minority interest in an Asian entity.

 

EARNINGS FROM CONTINUING OPERATIONS

 

Earnings from continuing operations were $406 million in 2004 versus $414 million and $262 million in 2003 and 2002, respectively. Full year 2004 earnings were significantly impacted by increases in material and logistics costs, particularly in the second half of 2004. These higher costs were partially offset by productivity improvements, lower foreign currency losses on balance sheet positions, an effective tax rate reduction, lower financing costs, and reduced minority interest earnings. The significant increase in 2003 relates primarily to approximately $147 million of higher restructuring and related charges in 2002, the full year impact of acquisitions, strong volume growth, productivity improvements and absence of an equity investment write-off, partially offset by an increase in expense due to the decline of the U.S. dollar.

 

Millions of dollars, except per share data    2004

   2003

   2002

 

Earnings from continuing operations

   $ 406    $ 414    $ 262  

Diluted earnings per share from continuing operations

   $ 5.90    $ 5.91    $ 3.78  

Net earnings (loss)

   $ 406    $ 414    $ (394 )

Diluted net earnings (loss) per share

   $ 5.90    $ 5.91    $ (5.68 )

 

DISCONTINUED OPERATIONS

 

As a result of the United Airlines bankruptcy filing in December 2002, the Company wrote off its related investment in leveraged aircraft leases during the fourth quarter of 2002. The write-off resulted in a non-cash charge to discontinued operations of approximately $68 million, or $43 million after-tax. These leveraged lease assets were part of the Company’s previously discontinued finance company, Whirlpool Financial Corporation.

 

Although most of its assets have been divested, Whirlpool Financial Corporation remains a legal entity with assets consisting primarily of a leveraged lease portfolio. As of December 31, 2004 and 2003, the portfolio totaled $15 million and $42 million, respectively, net of related reserves. (See Note 5 to the Consolidated Financial Statements.) The Company continues to monitor its arrangements with the lessees and the value of the underlying assets.

 

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE

 

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. As a result of this adoption, the Company recorded a non-cash after-tax charge of $613 million in 2002.

 

(See Note 3 to the Consolidated Financial Statements for a more detailed description of this change in accounting principle.)

 

FORWARD-LOOKING PERSPECTIVE

 

During 2004, the Company incurred approximately $300 million of higher material and oil related costs. The Company expects higher material costs, primarily within North and Latin America, of $500 to $550

 

F-7


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

million during 2005, primarily due to higher prices for steel and resins. To address this challenging environment, the Company has implemented global price increases of approximately 5-to-10%, effective January 2005, in most key markets around the world. The Company has also initiated actions to drive record levels of controllable productivity, leverage its global operating platform, reduce non-product related spending and accelerate the rate of new product innovation to the market. The full effect of these cost increases will be reflected in the Company’s cost structure from the start of 2005, while benefits of both price increases and productivity improvements will build throughout the year.

 

North America and Europe, the Company’s two largest segments expect 2005 industry growth of approximately 2% and 1%, respectively. The Company’s efforts in these two regions during 2005 will be to execute previously announced price increases, drive record levels of controllable productivity, and expand its market share through leveraging its strong brand portfolio, expanding key market leadership and introducing continuous relevant branded innovations to the market.

 

Macro-economic conditions in Latin America are expected to remain positive during 2005 and the Company expects industry shipments to increase 4-to-5%. Price increases implemented throughout 2004, and additional increases enacted for 2005, are expected to offset significant material cost increases. Manufacturing and supply chain productivity is anticipated to contribute to improved operating profit margin performance and exports to the Company’s global operations are expected to increase.

 

Asia results will benefit from new product introductions, improved product mix and favorable comparisons to last year’s inventory trade reduction strategy in India. The Company will continue to expand its China procurement and technology base to support its global operations, expand domestic sales within China and India, and increase global exports of components and finished product.

 

In December 1996, Multibras and Empresa Brasileira de Compressores S.A. (“Embraco”), Brazilian subsidiaries, were granted additional export incentives in connection with the Brazilian government’s export incentive program (“Befiex”). These incentives allowed the use of credits as an offset against current Brazilian federal excise tax on domestic sales. The Company did not recognize any credits in 2004 and recognized credits of $5 million in 2003 and $42 million in 2002 as a reduction of current excise taxes payable and therefore, an increase in net sales. The Company’s remaining credits are approximately $316 million at December 31, 2004. The Company does not expect to recognize additional Befiex credits until the calculation of the credit, which is currently under review, is confirmed by the Brazilian courts.

 

CASH FLOWS

 

The statements of cash flows reflect the changes in cash and equivalents for the last three years by classifying transactions into three major categories: operating, investing and financing activities.

 

OPERATING ACTIVITIES

 

Whirlpool’s main source of cash flow is from operating activities consisting of net earnings adjusted for changes in operating assets and liabilities such as receivables, inventories and payables and for non-cash operating items, such as depreciation.

 

The Company’s 2004 cash provided by operating activities benefited from lower after-tax pension contributions of approximately $62 million and lower restructuring spending of approximately $56

 

F-8


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

million. Cash flow was negatively impacted by higher working capital requirements of about $70 million, driven largely by material cost increases and higher inventory levels to support higher volumes and increased trans-regional shipments. The Company’s 2003 cash provided by operating activities benefited from higher earnings, primarily within our European and North American business segments, as well as continued improvement in working capital management. Cash flow was negatively impacted by a voluntary after-tax pension contribution to the Company’s U.S. pension plans of $97 million. In comparison, after-tax U.S. pension contributions made during 2002 were $5 million. The 2003 results were also negatively impacted by restructuring spending, primarily related to 2002 projects, as well as the timing of promotional payments. Combined, these negative 2003 cash outflows were essentially offset by the absence of $239 million in product recall spending which occurred during 2002. Cash provided by operating activities was also negatively impacted in 2002 by a one-time tax payment of $86 million on a cross-currency interest rate swap gain, which occurred during 2001.

 

INVESTING ACTIVITIES

 

The principal recurring investing activities are capital expenditures, which were $511 million, $423 million and $430 million in 2004, 2003 and 2002, respectively. Capital expenditures are incurred to support distinctive and innovative solutions for consumers which lead to new revenue growth. Expenditures are also made to support the Company’s global operating platform footprint moves to lower cost locations as well as replacement, regulatory and infrastructure changes. Higher capital spending in 2004 reflects increased investment in product innovation and the Company’s global operating platform.

 

During 2004 and 2003, Whirlpool entered into separate sale-leaseback transactions whereby the Company sold and leased back its owned properties. Proceeds related to the sale-leaseback of six properties in 2004, net of related fees, were approximately $66 million. In 2003, proceeds related to the sale-leaseback of four properties, net of related fees, were approximately $65 million.

 

On November 18, 2002, the Company acquired the remaining 20% interest in Whirlpool Narcissus Shanghai Company Limited (“Narcissus”) for $9 million. Subsequent to the purchase, Narcissus was renamed Whirlpool Home Appliance (Shanghai) Co. Ltd. In accordance with the purchase agreement, 40% of the purchase price was paid during 2002, 40% was paid during 2003 and the remaining 20% was paid during 2004.

 

On July 3, 2002, Whirlpool acquired the remaining 51% ownership in Vitromatic S.A. de C.V. (“Whirlpool Mexico”), an appliance manufacturer and distributor in Mexico. The aggregate purchase price was $151 million in cash plus assumption of outstanding debt at the time of acquisition, which totaled $143 million.

 

On June 5, 2002, the Company acquired 95% of the shares of Polar S.A. (“Polar”), a leading major home appliance manufacturer in Poland. The aggregate purchase price was $27 million in cash plus outstanding debt at the time of acquisition, which totaled $19 million. During 2003, Whirlpool acquired the remaining 5% of the shares of Polar.

 

FINANCING ACTIVITIES

 

Total repayments of short-term and long-term debt, net of new borrowings, were $58 million, $208 million and $236 million in 2004, 2003 and 2002, respectively.

 

F-9


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

During March 2003, the Company redeemed its $200 million 9% Debentures using short-term notes payable.

 

Dividends paid to stockholders totaled $116 million, $94 million and $91 million in 2004, 2003 and 2002.

 

Under its stock repurchase program, Whirlpool purchased approximately 3.7 million shares ($251 million) in 2004, approximately 1 million shares ($65 million) in 2003 and 0.7 million shares ($46 million) in 2002. See Note 11 to the Consolidated Financial Statements for additional detail on the Company’s stock repurchase program.

 

The Company also redeemed $33 million and $25 million in 2003 and 2002, respectively, in preferred stock of its discontinued finance company, Whirlpool Financial Corporation. See Note 8 to the Consolidated Financial Statements for additional detail on the Whirlpool Financial Corporation preferred stock.

 

Whirlpool received proceeds of $64 million in 2004, $65 million in 2003 and $80 million in 2002 related to the exercise of Company stock options. The Company’s stock option program is discussed in Notes 1 and 12 to the Consolidated Financial Statements.

 

FINANCIAL CONDITION AND LIQUIDITY

 

The Company’s objective is to finance its business through the appropriate mix of long-term and short-term debt. By diversifying its maturity structure, the Company avoids concentrations of debt, reducing liquidity risk. Whirlpool has varying needs for short-term working capital financing as a result of the nature of its business. The volume and timing of refrigeration and air conditioning production impact the Company’s cash flows, with increased production in the first half of the year to meet increased demand in the summer months. The Company finances its working capital needs primarily through the commercial paper markets in the U.S., Europe and Canada. These commercial paper programs are supported by committed bank lines. In addition, outside the U.S., short-term funding is also provided by bank borrowings on uncommitted lines. The Company has access to long-term funding in the U.S., European and other public bond markets.

 

The Company’s financial position remains strong. At December 31, 2004, Whirlpool’s total assets were $8.2 billion versus $7.4 billion at December 31, 2003. Stockholders’ equity increased from $1.3 billion at the end of 2003 to $1.6 billion at the end of 2004. The increase in equity is primarily attributed to net earnings retention and a $174 million increase in equity through foreign currency translation adjustments offset by share repurchases of $251 million.

 

The Company’s overall debt levels have remained relatively unchanged versus 2003. Cash flows from operations have been used to repurchase stock, fund higher capital expenditures and pay increased dividends.

 

In May 2004, Whirlpool allowed its $400 million committed 364 day credit facility to expire. Simultaneously, the Company increased the size of its $800 million committed credit facility to $1.2 billion and extended its maturity from 2006 to 2009. This committed facility supports commercial paper programs and other operating needs. There were no borrowings under these facilities during 2004 or 2003. Whirlpool was in full compliance with its bank covenants throughout both 2004 and 2003. None of the Company’s material debt agreements requires accelerated repayment in the event of a decrease in credit ratings.

 

F-10


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

In 2004, the Company announced that it plans to invest approximately $180 million to strengthen Whirlpool’s brand leadership position in the global appliance industry. The Company plans to continue its comprehensive worldwide effort to optimize its regional manufacturing facilities, supply base, product platforms and technology resources to better support its global brands and customers. Approximately $100 million of the investment will fund initiatives at the Company’s manufacturing facilities in the United States and the remainder will be used to begin work on the expansion of the Company’s washer production facility in Monterrey, Mexico, and the construction of a new refrigeration facility in Ramos Arispe, Coahuilla, Mexico.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has guarantee arrangements in place in a Brazilian subsidiary. As a standard business practice in Brazil, the subsidiary guarantees customer lines of credit at commercial banks, supporting purchases from the Company, following its normal credit policies. In the event that a customer were to default on its line of credit with the bank, the subsidiary would be required to satisfy the obligation with the bank, and the receivable would revert back to the subsidiary. As of December 31, 2004 and December 31, 2003, these amounts totaled $184 million and $109 million, respectively. The only recourse the Company has related to these agreements would be legal or administrative collection efforts directed against the customer.

 

CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS

 

The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments.

     Payments due by period

Millions of dollars    Total

   2005

   2006 &
2007


   2008 &
2009


   Thereafter

Debt obligations(1)

   $ 1,167    $ 7    $ 423    $ 129    $ 608

Operating lease obligations

     281      86      119      60      16

Purchase obligations

     176      34      88      44      10

Long-term liabilities(2)

     98      98      —        —        —  
    

  

  

  

  

Total

   $ 1,722    $ 225    $ 630    $ 233    $ 634
    

  

  

  

  


(1)   The amounts in debt obligations do not include an estimate of future interest payments.
(2)   The amounts in long-term liabilities include the Company’s expected 2005 voluntary U.S. pension and foreign pension fund contributions, and expected benefit payments under the postretirement health care benefit plans. Required contributions for future years depend on certain factors that cannot be determined at this time.

 

The goal of the Company’s global operating platform is to strengthen Whirlpool’s brand leadership position in the global appliance industry. The Company plans to continue its comprehensive worldwide effort to optimize its regional manufacturing facilities, supply base, product platforms and technology resources to better support its global brands and customers. The Company intends to make additional investments to strengthen its competitiveness and brand leadership position in fiscal 2005. Capital spending is expected to be between $500 million and $550 million in 2005 in support of the Company’s investment in innovative product technologies and its global operating platform initiatives. The Company expects that higher cash flow from operations will more than offset increased capital spending.

 

F-11


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

During 2004, Whirlpool’s Board of Directors increased the quarterly dividend from 34 cents per share to 43 cents per share. This increased the Company’s annual dividend payment by approximately $22 million to $116 million.

 

The Company believes that its capital resources and liquidity position at December 31, 2004, coupled with its planned cash flow generated from operations in 2005, are adequate to support higher capital spending, continued dividend payments and meet anticipated business needs to fund future growth opportunities. Currently, the Company has access to capital markets in the U.S. and internationally.

 

OTHER MATTERS

 

On February 25, 2005, the Company announced the recall of approximately 162,000 under-the-counter plastic tall tub dishwashers due to a potential safety issue. There have been no reports of personal injury or property damage associated with these dishwashers. The Company also is undertaking the repair of up to an additional 223,000 of these dishwashers for a separate quality issue. The Company accrued $17.1 million related to the quality issue within cost of products sold during the fourth quarter of 2004. Two purported national class action lawsuits have been filed against the Company, one in a Missouri state court and one in an Illinois state court, each alleging breach of warranty, fraud, and violation of state consumer protection acts in selling these tall tub dishwashers. There are no allegations of any personal injury or property damage and the complaints seek unspecified compensatory damages. The Company believes these suits are without merit, intends to vigorously defend these actions, and at this point cannot reasonably estimate a possible range of loss, if any.

 

During 2001, the Company recognized a total of $295 million of pre-tax charges ($181 million after-tax) related to two separate product recalls. During 2002, Whirlpool recognized additional recall related pre-tax charges of approximately $9 million for one of these recalls. Additionally, in 2003, the Company recognized pre-tax charges of $16 million primarily for final expenses related to the 2001 recall of microwave oven hood units. See Note 14 to the Consolidated Financial Statements for a more detailed description of these charges.

 

While lower discount rates increased Whirlpool’s pension obligations during 2004, improvement in equity market performance during the year increased the value of pension fund assets. Whirlpool also contributed approximately $49 million pre-tax ($31 million to funded plans) to its U.S. pension plans during 2004, of which $31 million was a voluntary contribution and $18 million was required. The Company also contributed $21 million to its foreign plans during 2004. At December 31, 2004, the Company’s defined benefit pension plans still remain underfunded on a combined basis.

 

The Company recognized consolidated pre-tax pension cost (credits) of $91 million, $78 million and $(37) million in 2004, 2003 and 2002, respectively. The Company currently expects that U.S. pension cost for 2005 will be approximately $66 million based on a plan amendment, an expected rate of return on assets assumption of 8.75% and a lower discount rate of 5.80%. The $66 million compares to pension cost of $68 million in 2004. Consolidated pension cost in 2005 is anticipated to be approximately $91 million, relatively unchanged from 2004.

 

F-12


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

U.S. pension plans comprise 86% of the Company’s projected benefit obligation. The discount rate and expected return on asset assumptions used in determining the Company’s U.S. pension benefit obligations and costs are as follows:

 

     Discount rate

    Expected return on assets

 

Benefit obligation—December 31

            

2004

   5.80 %   N/A  

2003

   6.00 %   N/A  

Pension cost

            

2005

   5.80 %   8.75 %

2004

   6.00 %   8.75 %

2003

   6.75 %   8.75 %

 

The Company’s expected return on assets assumption of 8.75% was based on historical asset returns for publicly traded equity and fixed income securities tracked between 1926 and 2003 and the historical returns for private equity. The historical equity returns were adjusted downward to reflect future expectations. This adjustment was based on published academic research. The expected returns are weighted by the targeted asset allocations. The resulting weighted average return was rounded up to the nearest quarter of one percent. The Company uses a measurement date of December 31.

 

In January 2005, the Company amended the Whirlpool Employees Pension Plan. The effect of this amendment will be to reduce the projected benefit obligation (“PBO”) by approximately $80 million. The accumulated benefit obligation (“ABO”) will not be affected by the amendment.

 

In addition, the Company sponsors plans to provide postretirement health care benefits for eligible retired U.S. employees. Eligible retirees are those who were full-time employees with 10 years of service who attained age 55 while in service with the Company. The postretirement health care plans are generally contributory with participants’ contributions adjusted annually and include cost-sharing provisions that limit the Company’s exposure for recent and future retirees. The plans are unfunded. In June 2003, the Company announced a modification to its U.S. retiree health care plans that affects future retirees and is based on a Retiree Healthcare Savings Account (“RHSA”), where notional accounts will be established for most active U.S. paid employees. The notional account reflects each year of service beginning at age 40 and is designed to provide employees who retire after December 31, 2003 from Whirlpool with notional funds to apply towards health care premiums. In June 2003, the Company recorded a one-time curtailment gain of $13.5 million, net of tax, related to the modification of its retiree health care plan. The Company provides no significant postretirement medical benefits to non-U.S. employees.

 

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act established a prescription drug benefit program under Medicare, known as Part D, and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Part D. At year-end 2003, the Company elected to defer recognition of the accounting effects of the Act, as permitted by FASB Staff Position (“FSP”) 106-1. However, the requirement to remeasure its retiree medical plan caused the deferral to expire. The Company measured the effects of the Act following the guidance in FSP 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Company believes that benefits provided to certain participants will be at least actuarially equivalent to Part D and, accordingly, the Company will be entitled to a subsidy. The Company

 

F-13


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

adopted FSP 106-2 retroactively to the beginning of 2004. Accordingly, the Company has reflected the estimated federal subsidy under the Act as an actuarial gain as required by FSP 106-2, which reduced the existing unrecognized net loss. These changes caused the accumulated other postretirement benefit obligation to decrease by $104 million, and reduced the cost recognized by approximately $15 million for the year ended December 31, 2004.

 

During 2004, the Company’s independent auditor, Ernst & Young LLP (“E&Y”), disclosed to the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board, and the Audit Committee of the Company’s Board of Directors that certain non-audit work performed by an E&Y affiliate in China for a subsidiary of the Company has raised possible concerns regarding E&Y’s independence with respect to E&Y’s performance of audit services for the Company.

 

E&Y disclosed that from 1995 through June 2002, its affiliate in China held de minimus funds owned by a subsidiary of the Company and used these funds to make employment tax related payments to the applicable tax authority for several expatriate and foreign employees of the Company’s subsidiary. E&Y recently informed the Company that a Malaysian affiliate was also holding de minimus funds, transferred through a former Arthur Andersen affiliate acting as a court appointed liquidator. Maintaining custody of the assets of an audit client is not permitted under the auditor independence rules set forth in Regulation S-X promulgated by the SEC. In addition, E&Y provided certain expatriate tax services in Italy from approximately 1997 through 1999. The Company made deposits to an E&Y account for payment of taxes, and that account has been inactive since 1999. The balance in the account was refunded to the Company in 2005. These actions in China, Malaysia and Italy are not permitted under the SEC rules and regulations. The activities were discontinued in China in 2002, the activities in Malaysia have been suspended pending appointment of a successor liquidator and the services in Italy were discontinued in 1999. The Audit Committee of the Board of Directors of the Company met and considered the effect of all three matters on the independence of E&Y as external auditor for the Company. Both the Audit Committee and E&Y have considered the impact that the holding and paying of these funds may have had on E&Y’s independence with respect to the Company and each has independently concluded that there has been no impairment of E&Y’s independence. In making its determination, the Audit Committee considered the de minimus amounts involved, the ministerial nature of the activities, and the fact that the financial position or results of operations of the subsidiaries involved were not material to the consolidated financial position and consolidated results of operations.

 

In September 2003, the Company completed the sale of Wellmann to Alno, a prominent German kitchen cabinet manufacturer. Previously, the Company held a 49.5% ownership interest in Wellmann. The Company has a 13% interest in Alno. The sale did not have a material impact to the Company’s financial position or results of operations. The Company analyzed the provisions of FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities”, with respect to its 13% interest in Alno and determined that Alno did not meet the definition of a variable interest entity under FIN 46.

 

The Company is currently a defendant in 11 purported class action lawsuits in 11 states related to its Calypso clothes washing machine. Two of the original purported class actions have been dismissed. The complaints in these lawsuits generally allege violations of state consumer fraud acts, unjust enrichment, and breach of warranty based on the allegations that the washing machines have various defects. There are no allegations of any personal injury, catastrophic property damage, or safety risk. The complaints generally seek unspecified compensatory, consequential, and punitive damages. The Company believes these suits are without merit and intends to vigorously defend these actions. At this point, the Company cannot reasonably estimate a possible range of loss, if any.

 

F-14


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

In early 2004, Maytag Corporation filed a claim against the Company for patent infringement. The claim also seeks unspecified damages and an injunction against the continued production or sale of the alleged infringed patented product. A trial date has been set for July 11, 2005. The Company believes this suit is without merit, intends to vigorously defend this suit and at this point cannot reasonably estimate a possible range of loss, if any.

 

In 1989, a Brazilian affiliate (now a subsidiary) of the Company brought an action against a financial institution in Brazil seeking a “Declaration of Non-Enforceability of Obligations” relating to loan documentation entered into without authority by a senior officer of the affiliate. The original amount in dispute was approximately $25 million. In September 2000, a decision in the declaratory action adverse to the Company became final. In 2001, the financial institution began a collection action, and the Company responded with a counterclaim. The lower court dismissed the counterclaim in 2002 and a discretionary appeal of this dismissal was requested in 2003, but no decision on this request has been made. A final decision in the collection action is not expected for several years. The Company plans to continue to aggressively defend this matter, and at this point cannot reasonably estimate a possible range of loss.

 

The Company is involved in various other legal actions arising in the normal course of business. Management, after taking into consideration legal counsel’s evaluation of such actions, is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

 

The Brazilian Constitution provides for a tax credit on raw materials used in production. The credit allows for both the seller and the purchaser of raw materials to be tax exempt or to have a zero tax rate on sales or purchases of finished product. Several court decisions supported the tax credit and, during 2003 and 2004, the Company calculated tax credits under this provision. The amount recorded as tax credits as of December 31, 2004 is approximately $22 million. The recorded tax credits are currently being challenged in Brazilian courts and at this point, the Company cannot reasonably estimate the potential impact, if any, to its consolidated financial position or consolidated results of operations.

 

On February 13, 2003 the European Union adopted the Waste Electrical and Electronic Equipment (“WEEE”) directive. Among other provisions, the directive stipulates that “producers” will be responsible for the cost of collection, disposal and recycling of waste (“recycling schemes”) for many electrical and electronic products as of August 13, 2005. The directive required all European Union member states to introduce it into national law by no later than August 2004. However, as of February 2005 many member states were still in the drafting stage and had not passed national legislation. As a consequence many of the details concerning responsibilities, costs of the recycling schemes and ability to recover through a visible fee to the end consumer are yet to be determined. The Company is, therefore, presently unable to estimate the potential cost of complying with the directive.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management has evaluated the accounting policies used in the preparation of the accompanying Consolidated Financial Statements and related notes and believes those policies to be reasonable and appropriate. The Company’s accounting policies are described in Note 1 to the Consolidated Financial Statements. Certain of these accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company’s critical accounting policies include the following:

 

F-15


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

Pension and Other Postretirement Benefits

 

Accounting for pensions and other postretirement benefits involves estimating the costs of future benefits and attributing the cost over the employee’s expected period of employment with the Company. The determination of the Company’s obligation and expense for these costs requires the use of certain assumptions. Those assumptions are included in Note 16 to the Consolidated Financial Statements and include, among others, the discount rate, expected long-term rate of return on plan assets and health care cost trend rates. These assumptions are subject to change based on stock and bond market returns, interest rates on high quality bonds and medical cost inflation, respectively. As permitted by generally accepted accounting principles, actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and therefore, generally affect its recognized expense and accrued liability in such future periods. While the Company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the Company’s assumptions may materially affect its pension and other postretirement obligations and related future expense. As required by SFAS No. 87, SFAS No. 132 (revised 2003) and SFAS No. 106, Whirlpool’s pension and other postretirement benefit obligations as of December 31, 2004 and preliminary retirement benefit costs for the 2005 fiscal year were prepared using the assumptions that are determined as of December 31, 2004. The following table highlights the sensitivity of Whirlpool’s December 31, 2004 retirement obligations and 2005 retirement benefit costs of its U.S. plans to changes in the key assumptions used to determine those results:

 

Change in assumption


   Estimated
increase
(decrease) in
2005
pension cost


    Estimated
increase
(decrease)
in Projected
Benefit Obligation
for the year ended
December 31, 2004


    Estimated
increase
(decrease)
in 2005
Other
Postretirement
Benefits cost


    Estimated
increase
(decrease)
in Other
Postretirement
Benefit Obligation
for the year ended
December 31, 2004


 
Millions of dollars                         

0.25% increase in discount rate

   $ (4.7 )   $ (53.0 )   $ (1.0 )   $ (15.6 )
    


 


 


 


0.25% decrease in discount rate

   $ 4.7     $ 54.5     $ 1.0     $ 16.0  
    


 


 


 


0.25% increase in long-term return on assets

   $ (4.4 )     N/A       N/A       N/A  
    


 


 


 


0.25% decrease in long-term return on assets

   $ 4.4       N/A       N/A       N/A  
    


 


 


 


0.50% increase in discount rate

   $ (9.3 )   $ (104.7 )   $ (2.1 )   $ (30.8 )
    


 


 


 


0.50% decrease in discount rate

   $ 9.5     $ 110.6     $ 2.0     $ 32.5  
    


 


 


 


0.50% increase in long-term return on assets

   $ (8.8 )     N/A       N/A       N/A  
    


 


 


 


0.50% decrease in long-term return on assets

   $ 8.8       N/A       N/A       N/A  
    


 


 


 


 

The analysis is an estimate only. These sensitivities may not be appropriate to use for other years’ financial results. Furthermore, the impact of assumption changes outside of the ranges shown above may not be approximated by using the above results.

 

F-16


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

Income Taxes

 

As part of the process of preparing its Consolidated Financial Statements, the Company estimates its income taxes in each of the taxing jurisdictions in which its operates. This process involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes in accordance with SFAS No. 109, “Accounting for Income Taxes.” These differences may result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company is required to assess the likelihood that its deferred tax assets, which include net operating loss carryforwards and temporary differences that are expected to be deductible in future years, will be recoverable. Realization of the Company’s net operating loss deferred tax assets is supported by specific tax strategies and consider planned projections of future profitability. If recovery is not likely, the Company provides a valuation allowance based on its estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. If future taxable income was lower than expected or if tax-planning strategies were not available as anticipated, the Company may record additional valuation allowances through income tax expense in the period such determination is made. Likewise, if the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax asset would increase income in the period such determination is made. As of December 31, 2004 and 2003, the Company had total deferred tax assets of $851 million and $703 million, net of valuation allowances of $94 million and $88 million, respectively (see Note 15 to the Consolidated Financial Statements). The Company’s effective tax rate has ranged from 33.9% to 46.2% over the past five years and has been influenced by audit settlements, tax planning strategies, enacted legislation, and dispersion of global income. A 1% change to the Company’s effective tax rate would have decreased earnings by approximately $6.2 million based on 2004 earnings. Future changes in the effective tax rate will be subject to several factors, including enacted laws, tax planning strategies, and business profitability.

 

In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In the opinion of management, adequate provisions for income taxes have been made for all years.

 

Product Recall

 

The establishment of a liability for product recall expenses is occasionally required and is impacted by several factors such as customer response rate, consumer options, field repair costs, inventory repair costs, extended warranty costs, communication structure and other miscellaneous costs such as legal, logistics and consulting. The customer response rate, which represents an estimate of the total number of units to be serviced as a percentage of the total number of units impacted by the recall, is the most significant factor in estimating the total cost of each recall. This rate is impacted by several factors, including the type of product, the year manufactured, age of the product sold and current and past experience factors. Significant differences between the Company’s assumptions and its actual experience or significant changes in its assumptions could have a material impact on the Company’s product recall reserves.

 

Befiex Credits

 

As discussed above, prior to 2004, the Company’s Brazilian subsidiaries had been recognizing benefits under the Brazilian government’s export incentive program (“Befiex”) as an offset against Brazilian

 

F-17


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

federal excise tax on domestic sales. Since the initial granting of these credits in 1996, it has been the Company’s policy to recognize these credits as they have been monetized. There have, however, been ongoing legal proceedings relating to this program and it is presently under review within the Brazilian court system. The Company has chosen not to recognize any of our remaining credits of approximately $316 million under the program until the Brazilian courts have confirmed the method used to calculate those remaining credits.

 

Warranty Obligations

 

The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and reflects management’s best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available. Future events and circumstances could materially change the Company’s estimates and require adjustments to the warranty obligation. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. See Note 9 to the Consolidated Financial Statements for a summary of the activity in the Company’s product warranty accounts for 2004 and 2003.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

The American Jobs Creation Act of 2004 (the “Act”) was signed into law on October 22, 2004. The Company is considering the implications of the Act on repatriation of foreign earnings, which reduces the Federal income tax rate on dividends from non-U.S. subsidiaries. The Financial Accounting Standards Board (“FASB”) issued FSP 109-2 in December 2004 which requires the recording of tax expense if and when an entity decides to repatriate foreign earnings subject to the Act. As of December 31, 2004, management has not decided whether, and to what extent, the Company would repatriate foreign earnings under the Act, and accordingly, the financial statements do not reflect any provision for tax on undistributed foreign earnings which may be repatriated subject to the provisions of the Act. See Note 15 of the Notes to Consolidated Financial Statements for further discussion of the potential impact of the Act on the financial statements.

 

In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payments”. SFAS No. 123(R) would require the Company to measure all employee stock-based compensation awards using a fair-value method and record such expense in its consolidated financial statements. SFAS No. 123(R) is effective for periods beginning after June 15, 2005. SFAS No. 123(R) provides alternative methods of adoption which include prospective application and a modified retroactive application. The Company is currently evaluating the adoption alternatives and does not expect the adoption to have a material impact on its results of operations or financial position.

 

MARKET RISK

 

The Company is exposed to market risk from changes in foreign currency exchange rates, domestic and foreign interest rates, and commodity prices, which can affect the Company’s operating results and overall financial condition. Whirlpool manages its exposure to these market risks through its operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are entered into with a diversified group of investment grade counterparties to reduce its exposure to nonperformance on such instruments. The Company’s sensitivity analysis reflects the effects of changes in market risk but does not factor in potential business risks of the counterparties or appropriate use of instruments.

 

F-18


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

 

Whirlpool uses foreign currency forward contracts, currency options and currency swaps to hedge the price risk associated with firmly committed and forecasted cross-border payments and receipts related to its ongoing business and operational financing activities. Foreign currency contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2004, a 10% unfavorable exchange rate movement in each currency in the Company’s portfolio of foreign currency contracts would have resulted in an incremental unrealized loss of approximately $121 million, while a 10% favorable shift would have resulted in an incremental unrealized gain of approximately $112 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying exposures.

 

The Company enters into commodity swap contracts to hedge the price risk associated with firmly committed and forecasted commodities purchases that are not fixed directly through supply contracts. As of December 31, 2004, a 10% unfavorable shift in commodity prices would have resulted in an incremental loss of approximately $2 million in the commodity swap contracts, while a 10% favorable shift would have resulted in an incremental gain of approximately $2 million.

 

Whirlpool utilizes interest rate swaps to hedge the Company’s interest rate risk. As of December 31, 2004, a 10% shift in interest rates would have resulted in an incremental $1 million gain or loss related to these contracts.

 

FORWARD-LOOKING STATEMENTS

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management’s Discussion and Analysis and other sections of this report may contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance.

 

Certain statements contained in this Financial Supplement, including those within the forward-looking perspective section within this Management’s Discussion and Analysis, and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast,” and similar words or expressions. The Company’s forward-looking statements generally relate to its growth strategies, financial results, product development, and sales efforts. These forward-looking statements should be considered with the understanding that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.

 

Many factors could cause actual results to differ materially from the Company’s forward-looking statements. Among these factors are: (1) the cost of raw materials and components, especially steel and the impact of rising oil prices; (2) the financial impact of the Company’s announced price increases will be dependent upon such factors as the strength of the Company’s brands in the market place, the strength of consumer demand for the Company’s products, and other factors outside of the Company’s control such as the general economic conditions prevailing at the time the new pricing goes into effect; (3) rising worldwide transportation costs due to record oil prices, capacity constraints, and other factors; (4) the ability to gain or maintain market share in an intensely competitive global market; (5) the success of the Company’s global strategy to develop brand differentiation and brand loyalty; (6) the

 

F-19


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS—(Continued)

 

Company’s global operating platform initiatives; (7) the success of the Latin American business operating in challenging and volatile environments; (8) continuation of the Company’s strong relationship with Sears, Roebuck and Co. (anticipated to merge with Kmart Holdings to form Sears Holdings Corporation) in North America, which accounted for approximately 17% of consolidated net sales of $13 billion in 2004; (9) currency exchange rate fluctuations; (10) social, economic, and political volatility in developing markets; (11) continuing uncertainty in the North American, Latin American, Asian and European economies; (12) the effectiveness of the series of restructuring actions the Company has announced and/or completed through 2004; (13) U.S. interest rates; (14) new Asian competitors; (15) changes to the obligations as presented in the contractual obligations table; (16) changes in the funded position of the U.S. pension plans; (17) continued strength of the U.S. builder industry; and (18) the threat of terrorist activities or the impact of war.

 

The Company undertakes no obligation to update every forward-looking statement, and investors are advised to review disclosures in the Company’s filings with the Securities and Exchange Commission. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. Therefore, investors should not consider the foregoing factors to be an exhaustive statement of all risks, uncertainties, or factors that could potentially cause actual results to differ.

 

F-20


Table of Contents

WHIRLPOOL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31

(Millions of dollars, except per share data)

 

     2004

    2003

    2002

 

Net sales

   $ 13,220     $ 12,176     $ 11,016  

Expenses

                        

Cost of products sold

     10,358       9,423       8,473  

Selling, general and administrative

     2,087       1,916       1,736  

Intangible amortization

     2       4       14  

Restructuring costs

     15       3       101  
    


 


 


Operating profit

     758       830       692  

Other income (expense)

                        

Interest and sundry income (expense)

     (14 )     (41 )     (54 )

Interest expense

     (128 )     (137 )     (143 )
    


 


 


Earnings from continuing operations before income taxes and other items

     616       652       495  

Income taxes

     209       228       193  
    


 


 


Earnings from continuing operations before equity earnings and minority interests

     407       424       302  

Equity in loss of affiliated companies

     (1 )     —         (27 )

Minority interests

     —         (10 )     (13 )
    


 


 


Earnings from continuing operations

     406       414       262  

Discontinued operations, net of tax

     —         —         (43 )

Cumulative effect of change in accounting principle, net of tax

     —         —         (613 )
    


 


 


Net earnings (loss)

   $ 406     $ 414     $ (394 )
    


 


 


Per share of common stock

                        

Basic earnings from continuing operations

   $ 6.02     $ 6.03     $ 3.86  

Discontinued operations, net of tax

     —         —         (0.62 )

Cumulative effect of change in accounting principle, net of tax

     —         —         (9.03 )
    


 


 


Basic net earnings (loss)

   $ 6.02     $ 6.03     $ (5.79 )
    


 


 


Diluted earnings from continuing operations

   $ 5.90     $ 5.91     $ 3.78  

Discontinued operations, net of tax

     —         —         (0.62 )

Cumulative effect of change in accounting principle, net of tax

     —         —         (8.84 )
    


 


 


Diluted net earnings (loss)

   $ 5.90     $ 5.91     $ (5.68 )
    


 


 


Dividends

   $ 1.72     $ 1.36     $ 1.36  

Weighted-average shares outstanding: (millions)

                        

Basic

     67.4       68.7       67.9  

Diluted

     68.9       70.1       69.3  

 

See Notes to Consolidated Financial Statements

 

F-21


Table of Contents

WHIRLPOOL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Millions of dollars)

 

     December 31  
     2004

    2003

 

ASSETS

                

Current Assets

                

Cash and equivalents

   $ 243     $ 249  

Trade receivables, less allowances (2004: $107; 2003: $113)

     2,032       1,913  

Inventories

     1,701       1,340  

Prepaid expenses

     74       62  

Deferred income taxes

     189       129  

Other current assets

     275       172  
    


 


Total Current Assets

     4,514       3,865  
    


 


Other Assets

                

Investment in affiliated companies

     16       11  

Goodwill, net

     168       165  

Other intangibles, net

     108       85  

Deferred income taxes

     323       268  

Prepaid pension costs

     329       357  

Other assets

     140       154  
    


 


       1,084       1,040  

Property, Plant and Equipment

                

Land

     91       84  

Buildings

     1,073       1,004  

Machinery and equipment

     5,933       5,391  

Accumulated depreciation

     (4,514 )     (4,023 )
    


 


       2,583       2,456  
    


 


Total Assets

   $ 8,181     $ 7,361  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current Liabilities

                

Notes payable

   $ 244     $ 260  

Accounts payable

     2,297       1,944  

Employee compensation

     300       303  

Deferred income taxes

     57       48  

Accrued expenses

     811       701  

Restructuring costs

     13       45  

Income taxes

     110       95  

Other current liabilities

     146       174  

Current maturities of long-term debt

     7       19  
    


 


Total Current Liabilities

     3,985       3,589  
    


 


Other Liabilities

                

Deferred income taxes

     240       236  

Pension benefits

     367       298  

Postemployment benefits

     499       489  

Other liabilities

     256       251  

Long-term debt

     1,160       1,134  
    


 


       2,522       2,408  
    


 


Minority Interests

     68       63  

Stockholders’ Equity

                

Common stock, $1 par value:

     90       88  

Authorized—250 million shares

                

Issued—90 million shares (2004); 89 million shares (2003)

                

Outstanding—67 million shares (2004); 69 million shares (2003)

                

Paid-in capital

     737       659  

Retained earnings

     2,596       2,276  

Accumulated other comprehensive loss

     (601 )     (757 )

Treasury stock—23 million shares (2004); 20 million shares (2003)

     (1,216 )     (965 )
    


 


Total Stockholders’ Equity

     1,606       1,301  
    


 


Total Liabilities and Stockholders’ Equity

   $ 8,181     $ 7,361  
    


 


 

See Notes to Consolidated Financial Statements

 

F-22


Table of Contents

WHIRLPOOL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31

(Millions of dollars)

 

     2004

    2003

    2002

 

Operating Activities

                        

Net earnings (loss)

   $ 406     $ 414     $ (394 )

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

                        

Cumulative effect of a change in accounting principle

     —         —         613  

Equity in losses of affiliated companies, less dividends received

     1       —         27  

(Gain) loss on disposition of assets

     (7 )     6       5  

Loss on discontinued operations

     —         —         43  

Depreciation and amortization

     445       427       405  

Changes in assets and liabilities, net of business acquisitions:

                        

Trade receivables

     (16 )     4       (67 )

Inventories

     (266 )     (127 )     101  

Accounts payable

     253       163       63  

Product recalls

     12       6       (239 )

Restructuring charges, net of cash paid

     (33 )     (89 )     33  

Taxes deferred and payable, net

     (18 )     55       157  

Tax paid on cross currency interest rate swap gain

     —         —         (86 )

Accrued pension

     6       (109 )     (37 )

Other—net

     11       (6 )     161  
    


 


 


Cash Provided By Operating Activities

   $ 794     $ 744     $ 785  
    


 


 


Investing Activities

                        

Capital expenditures

   $ (511 )   $ (423 )   $ (430 )

Proceeds from sale of assets

     74       75       27  

Acquisitions of businesses, less cash acquired

     (2 )     (4 )     (179 )
    


 


 


Cash Used For Investing Activities

   $ (439 )   $ (352 )   $ (582 )
    


 


 


Financing Activities

                        

Net (repayments) proceeds of short-term borrowings

   $ (37 )   $ 7     $ (165 )

Proceeds of long-term debt

     —         6       6  

Repayments of long-term debt

     (21 )     (221 )     (77 )

Dividends paid

     (116 )     (94 )     (91 )

Purchase of treasury stock

     (251 )     (65 )     (46 )

Redemption of WFC preferred stock

     —         (33 )     (25 )

Common stock issued under stock plans

     64       65       80  

Other

     3       (10 )     (5 )
    


 


 


Cash Used For Financing Activities

   $ (358 )   $ (345 )   $ (323 )
    


 


 


Effect of Exchange Rate Changes on Cash and Equivalents

   $ (3 )   $ 10     $ (4 )
    


 


 


(Decrease) Increase in Cash and Equivalents

   $ (6 )   $ 57     $ (124 )

Cash and Equivalents at Beginning of Year

     249       192       316  
    


 


 


Cash and Equivalents at End of Year

   $ 243     $ 249     $ 192  
    


 


 


 

See Notes to Consolidated Financial Statements

 

F-23


Table of Contents

WHIRLPOOL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Year ended December 31

(Millions of dollars)

 

    Retained
Earnings


    Accumulated
Other
Comprehensive
Income (Loss)


   

Treasury Stock/

Paid-in-Capital


    Common
Stock


  Total

 

Balances, December 31, 2001

  $ 2,470     $ (697 )   $ (401 )   $ 86   $ 1,458  

Comprehensive loss

                                     

Net loss

    (394 )     —         —         —       (394 )

Unrealized loss on derivative instruments

    —         (3 )     —         —       (3 )

Minimum pension liability adjustment, net of tax of $100

    —         (151 )     —         —       (151 )

Foreign currency items, net of tax of $0

    —         (148 )     —         —       (148 )
                                 


Comprehensive loss

                                  (696 )
                                 


Common stock repurchased, net of reissuances

    —         —         (35 )     —       (35 )

Common stock issued

    —         —         102       1     103  

Dividends declared on common stock

    (91 )     —         —         —       (91 )
   


 


 


 

 


Balances, December 31, 2002

  $ 1,985     $ (999 )   $ (334 )   $ 87   $ 739  
   


 


 


 

 


Comprehensive income

                                     

Net earnings

    414       —         —         —       414  

Unrealized loss on derivative instruments

    —         (5 )     —         —       (5 )

Minimum pension liability adjustment, net of tax of $75

    —         118       —         —       118  

Foreign currency items, net of tax of $5

    —         129       —         —       129  
                                 


Comprehensive income

                                  656  
                                 


Common stock repurchased, net of reissuances

    —         —         (49 )     —       (49 )

Common stock issued

    —         —         77       1     78  

Dividends declared on common stock

    (123 )     —         —         —       (123 )
   


 


 


 

 


Balances, December 31, 2003

  $ 2,276     $ (757 )   $ (306 )   $ 88   $ 1,301  
   


 


 


 

 


Comprehensive income

                                     

Net earnings

    406       —         —         —       406  

Unrealized gain on derivative instruments

    —         13       —         —       13  

Minimum pension liability adjustment, net of tax of $14

    —         (31 )     —         —       (31 )

Foreign currency items, net of tax of $14

    —         174       —         —       174  
                                 


Comprehensive income

                                  562  
                                 


Common stock repurchased, net of reissuances

    —         —         (251 )     —       (251 )

Common stock issued

    —         —         78       2     80  

Dividends declared on common stock

    (86 )     —         —         —       (86 )
   


 


 


 

 


Balances, December 31, 2004

  $ 2,596     $ (601 )   $ (479 )   $ 90   $ 1,606  
   


 


 


 

 


 

See Notes to Consolidated Financial Statements

 

F-24


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

 

Nature of Operations

 

Whirlpool Corporation is the world’s leading manufacturer and marketer of major home appliances. The Company manufactures in 12 countries under nine major brand names and markets products to distributors and retailers in more than 170 countries.

 

Principles of Consolidation

 

The Consolidated Financial Statements include all majority-owned subsidiaries. Investments in affiliated companies consists of a 40% voting interest in an international company engaged in the sale of major home appliances and a 30% interest in an international company engaged in the sale of extended warranty contracts. Both companies are accounted for by the equity method. All intercompany transactions have been eliminated upon consolidation.

 

Use of Estimates

 

Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Revenue Recognition

 

Sales are recorded when title passes to the customer. The point at which title passes is determined by the shipping terms. For the majority of the Company’s sales, title is transferred to the customer as soon as the product is shipped. For a portion of the Company’s sales, primarily in Europe, title is transferred to the customer upon receipt at the customer’s location. Allowances for estimated returns are made on sales of certain products based on historical return rates for the products involved.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company carries its accounts receivable at their face amounts less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions and based on a history of write-offs and collections. The Company’s policy is generally to not charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms.

 

Freight and Warehousing Costs

 

Freight-out and warehousing costs included in selling, general and administrative expenses in the statements of operations were $723 million, $576 million and $520 million in 2004, 2003 and 2002, respectively.

 

Cash and Equivalents

 

All highly liquid debt instruments purchased with an initial maturity of three months or less are considered cash equivalents.

 

Inventories

 

Inventories are stated at first-in, first-out (“FIFO”) cost, except U.S. production inventories, which are stated at last-in, first-out (“LIFO”) cost and Brazilian inventories, which are stated at average cost. Costs do not exceed realizable values.

 

F-25


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Depreciation of plant and equipment is computed using the straight-line method based on the estimated useful lives of the assets. Useful lives for buildings range from 25 to 40 years and machinery and equipment range from 3 to 10 years. Assets recorded under capital leases are included in property, plant and equipment.

 

Research and Development Costs

 

Research and development costs are charged to expense as incurred. Such costs were $315 million, $285 million and $259 million in 2004, 2003 and 2002, respectively.

 

Advertising Costs

 

Advertising costs are charged to expense as incurred. Such costs were $221 million, $170 million and $176 million in 2004, 2003 and 2002, respectively.

 

Contingent Tax Matters

 

The Company establishes liabilities for probable and estimable assessments by taxing authorities resulting from known tax exposures. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and may need to be adjusted over time as more information becomes known.

 

Foreign Currency Translation

 

The functional currency for the Company’s international subsidiaries and affiliates is typically the local currency. Certain international subsidiaries utilize the U.S. dollar as the functional currency.

 

Derivative Financial Instruments

 

The Company recognizes all of its derivative instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Changes in the fair value of hedge assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether a hedge has been designated. For those derivative instruments that are designated and qualify as hedging instruments, the Company must further designate the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, fair value hedge, or a hedge of a net investment in a foreign operation.

 

Cash flow hedges are hedges that use derivatives to offset the variability of expected future cash flows. The effective portion of the unrealized gain or loss on a derivative instrument designated as a cash flow hedge is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the unrealized gain or loss on the derivative instrument, if any, is recognized in other income (expense) in current earnings during the period of change.

 

Fair value hedges are hedges that mitigate the risk of changes in the fair values of assets, liabilities and certain types of firm commitments. The gain or loss on a derivative instrument designated as a fair value hedge and the offsetting loss or gain on the hedged item are recognized in the same line item associated with the hedged item in current earnings during the period of the change in fair values.

 

F-26


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Net investment hedge designation refers to the use of derivative contracts or cash instruments to hedge the foreign currency exposure of a net investment in a foreign operation. For those derivatives that qualify as net investment hedges, the effective portion of any unrealized gain or loss is reported in accumulated other comprehensive income as part of the cumulative translation adjustment. Any ineffective portion of net investment hedges is recognized in other income (expense) in current earnings during the period of change.

 

For derivative instruments not designated as hedging instruments, the unrealized gain or loss is recognized in other income (expense) in current earnings during the period of change.

 

Stock-Based Employee Compensation

 

Stock option and incentive plans are accounted for under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The Company has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” but has not adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended. Had the Company elected to adopt the recognition provisions of SFAS No. 123, pro forma net earnings (loss) and diluted net earnings (loss) per share would be as follows:

 

Year ended December 31 (Millions of dollars, except per share data)


   2004

   2003

   2002

 

Compensation cost included in earnings as reported (net of tax benefits)

   $ 9    $ 13    $ 12  

Pro-forma total fair value compensation cost (net of tax benefits)

   $ 17    $ 25    $ 25  

Net earnings (loss):

                      

As reported

   $ 406    $ 414    $ (394 )

Pro-forma

     398      402      (407 )

Basic net earnings (loss) per share:

                      

As reported

   $ 6.02    $ 6.03    $ (5.79 )

Pro-forma

     5.90      5.86      (5.99 )

Diluted net earnings (loss) per share:

                      

As reported

   $ 5.90    $ 5.91    $ (5.68 )

Pro-forma

     5.78      5.74      (5.87 )

 

Net Earnings Per Common Share

 

Diluted net earnings per share of common stock includes the dilutive effect of stock options and stock based compensation plans. For the years ended December 31, 2004, 2003 and 2002, a total of approximately 1,831,000 options, 1,803,000 options and 1,885,000 options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices would render them anti-dilutive.

 

Basic and diluted earnings (loss) per share were calculated as follows:

 

Millions of dollars and shares


   2004

   2003

   2002

 

Numerator for basic and diluted earnings (loss) per share—net earnings

   $ 406    $ 414    $ (394 )
    

  

  


Denominator for basic earnings (loss) per share—weighted-average shares

     67.4      68.7      67.9  

Effect of dilutive securities—stock-based compensation

     1.5      1.4      1.4  
    

  

  


Denominator for diluted earnings per share—adjusted weighted-average shares

     68.9      70.1      69.3  

 

F-27


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Reclassifications

 

Certain reclassifications have been made to prior year data to conform to the current year presentation which had no effect on net income reported for any period.

 

(2) NEW ACCOUNTING STANDARDS

 

The American Jobs Creation Act of 2004 (the “Act”) was signed into law on October 22, 2004. The Company is considering the implications of the Act on repatriation of foreign earnings, which reduces the Federal income tax rate on dividends from non-U.S. subsidiaries. The Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 109-2 in December 2004 which requires the recording of tax expense if and when an entity decides to repatriate foreign earnings subject to the Act. As of December 31, 2004, management has not decided whether, and to what extent, the Company would repatriate foreign earnings under the Act, and accordingly, the financial statements do not reflect any provision for tax on undistributed foreign earnings which may be repatriated subject to the provisions of the Act. See Note 15 of the Notes to Consolidated Financial Statements for further discussion of the potential impact of the Act on the financial statements.

 

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payments.” SFAS No. 123(R) would require the Company to measure all employee stock-based compensation awards using a fair-value method and record such expense in its consolidated financial statements. SFAS No. 123(R) is effective for periods beginning after June 15, 2005. SFAS No. 123(R) provides alternative methods of adoption which include prospective application and a modified retroactive application. The Company is currently evaluating the adoption alternatives and does not expect the adoption to have a material impact on its results of operations or financial position.

 

(3) GOODWILL AND OTHER INTANGIBLES

 

Goodwill

 

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” and recorded a non-cash after-tax charge of $613 million, or $8.84 per diluted share, as a cumulative effect of a change in accounting principle. An additional impairment of $9 million, after-tax, was recognized as a charge to operations during the fourth quarter of 2002 relating to goodwill associated with an acquisition in Asia (see Note 4).

 

Under SFAS No. 142, goodwill and indefinite-lived intangibles are no longer amortized and are subject to an annual impairment analysis, performed during the fourth quarter of each year. The Company determines the fair value of each reporting unit using a discounted cash flow approach. The Company has determined its reporting units are: North America, Europe, Multibras and Embraco (which combined are Latin America), and Asia. The Company performed the annual impairment tests and determined there to be no impairment of remaining goodwill or indefinite-lived intangibles for the years ended December 31, 2004 and 2003.

 

The following table summarizes the changes in the carrying amount of goodwill for the year ended December 31, 2004:

 

Reporting Unit—Millions of dollars


   Beginning
of Year


   Other

   End
of Year


North America

   $ 161    $ 3    $ 164

Latin America

     4      —        4
    

  

  

Total

   $ 165    $ 3    $ 168
    

  

  

 

F-28


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The $3 million increase in the carrying value of North America goodwill is related to the effects of currency translation for its Canadian subsidiary.

 

Other Intangible Assets

 

Other intangibles are comprised of the following:

 

December 31—Millions of dollars


   2004

   2003

Trademarks (indefinite-lived)

   $ 53    $ 51

Patents and non-compete agreements

     3      1

Pension related

     52      33
    

  

Total other intangible assets, net

   $ 108    $ 85
    

  

 

The balances include trademarks acquired as part of the Whirlpool Mexico and Polar acquisitions (see Note 4) and intangible assets related to minimum pension liabilities (see Note 16). Accumulated amortization totaled $3 million and $25 million at December 31, 2004 and 2003. During 2004, fully amortized intangible assets were removed from the Company’s Consolidated Balance Sheet.

 

(4) BUSINESS ACQUISITIONS / DISPOSITIONS

 

Whirlpool Mexico

 

On July 3, 2002, the Company acquired the remaining 51% ownership in Vitromatic S.A. de C.V. (“Whirlpool Mexico”), an appliance manufacturer and distributor in Mexico. Prior to that date, the Company’s 49% ownership in Whirlpool Mexico was accounted for as an equity investment. Whirlpool Mexico has been included in the Consolidated Financial Statements within the North American operating segment since the acquisition date. The aggregate purchase price was $151 million in cash plus outstanding debt at the time of acquisition, which totaled $143 million. The transaction generated goodwill of $89 million. The transaction also generated approximately $15 million in indefinite-lived intangible assets related to trademarks owned by Whirlpool Mexico.

 

The Whirlpool Mexico opening balance sheet is summarized (in millions) as follows:

 

ASSETS

            LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current assets

           

Current liabilities

     

Trade receivables, net

  $ 130      

Accounts payable

  $ 112

Inventories

    60      

Notes payable

    132

Other current assets

    15              
   

 
     

Total Current Assets

    205      

Total Current Liabilities

    244
   

 
     

Other assets

           

Other liabilities

     

Property, plant and equipment

    245      

Other liabilities

    80
                 

Goodwill

    89      

Total Other Liabilities

    80
                 

Other intangibles

    15              
             

Total Stockholders’ Equity

    230
   

 
     

Total Assets

  $ 554       Total Liabilities and Stockholders’ Equity   $ 554
   

 
     

 

F-29


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Polar

 

On June 5, 2002, the Company acquired 95% of the shares of Polar S.A. (“Polar”), a leading major home appliance manufacturer in Poland. The results of Polar’s operations have been included in the Consolidated Financial Statements within the European operating segment since that date. The aggregate purchase price was $27 million in cash plus outstanding debt at the time of acquisition, which totaled $19 million. The transaction also generated $17 million in indefinite-lived intangible assets related to trademarks owned by Polar. During 2003, Whirlpool acquired the remaining 5% of the shares of Polar.

 

Other

 

On September 30, 2003, the Company completed the sale of its interest in Wellmann to Alno, a prominent German kitchen cabinet manufacturer. Previously, the Company held a 49.5% ownership interest in Wellmann. The Company has a 13% interest in Alno. The sale did not have a material impact to the Company’s financial position or results of operations. The Company analyzed the provisions of FASB Interpretation No. (“FIN”) 46 with respect to its interest in Alno and determined that Alno did not meet the definition of a variable interest entity under FIN 46.

 

On November 18, 2002, the Company acquired the remaining 20% interest in Whirlpool Narcissus Shanghai Company Limited (“Narcissus”) for $9 million. Subsequent to the purchase, the Company was renamed Whirlpool Home Appliance (Shanghai) Co. Ltd. (“Whirlpool Shanghai”). Whirlpool Shanghai is a home appliance manufacturing Company located in Shanghai, China. The transaction was largely necessitated by the exercise of a put option by the minority partner arising out of an amendment to the joint venture contract agreed to in February 1998. The purchase resulted in $9 million of goodwill which was subsequently written off as impaired goodwill under the requirements of SFAS No. 142, “Goodwill and Other Intangible Assets.” The entity is now a wholly owned subsidiary of the Company.

 

(5) DISCONTINUED OPERATIONS

 

In 1997, the Company discontinued its financing operations, Whirlpool Financial Corporation (“WFC”), and sold the majority of its assets. The remaining assets consist primarily of non-airline investments in a portfolio of leveraged leases which are recorded in other non-current assets in the balance sheets and totaled $15 million and $42 million, net of related reserves, at December 31, 2004 and 2003, respectively. During 2004, a lessee elected to exercise its purchase option for an asset under lease, and the sale of the asset did not have a material impact to the Consolidated Statements of Operations or Consolidated Balance Sheets as of and for the year ended December 31, 2004.

 

During the fourth quarter of 2002, the Company wrote off WFC’s investment in leveraged aircraft leases relating to United Airlines (“UAL”) as a result of UAL’s filing for bankruptcy protection. The write-off resulted in a non-cash charge of $68 million, or $43 million after-tax.

 

(6) INVENTORIES

 

December 31—Millions of dollars


   2004

    2003

 

Finished products

   $ 1,410     $ 1,118  

Work in process

     57       64  

Raw materials

     353       284  
    


 


       1,820       1,466  

Less excess of FIFO cost over LIFO cost

     (119 )     (126 )
    


 


Total inventories

   $ 1,701     $ 1,340  
    


 


 

F-30


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

LIFO inventories represent approximately 23% and 31% of total inventories at December 31, 2004 and 2003, respectively.

 

(7) ASSET IMPAIRMENTS

 

During the fourth quarter of 2003, the Company determined a production line would no longer be utilized in its Mexican operations. Accordingly, an impairment analysis was performed, and the total non-discounted future cash flows of the equipment was less than its carrying value. As a result, the Company recorded a $5 million after-tax impairment charge for the year ended December 31, 2003. The impairment charge is reflected in cost of products sold in the Company’s Consolidated Statements of Operations.

 

The Company recorded a $22 million after-tax impairment charge in the second quarter of 2002 related to its minority investments in and advances to Wellmann. The Company acquired its initial investment in this entity with its purchase of the appliance operations of Philips Electronics N.V. in 1989. Continued deterioration in the marketplace led to overcapacity in the wood cabinet industry, which resulted in the business revising its estimated future cash flows. These circumstances prompted the Company to conduct an impairment review, resulting in the above charge, which is reflected in equity earnings (loss) in the Consolidated Statements of Operations. See Note 4 regarding the sale of the Company’s interest in Wellmann.

 

(8) FINANCING ARRANGEMENTS

 

Notes Payable and Debt

 

At December 31, 2004, the Company had committed unsecured revolving lines of credit available from banks totaling $1.2 billion. In May 2004, Whirlpool allowed its $400 million committed 364 day credit facility to expire. Simultaneously, the Company increased the size of its $800 million committed credit facility to $1.2 billion and extended its maturity from 2006 to 2009. This committed facility supports commercial paper programs and other operating needs. The interest rate for borrowing under the credit agreements is generally based on the London Interbank Offered Rate plus a spread that reflects the Company’s debt rating. The credit agreements require that the Company maintain a maximum debt to earnings before interest, taxes, depreciation and amortization ratio and a minimum interest coverage ratio. At December 31, 2004 and 2003, the Company was in compliance with its financial covenants. The credit agreements provide the Company with access to adequate and competitive funding under usual or unusual market conditions. During 2004, there were no borrowings outstanding under these credit agreements.

 

Notes payable consist of the following:

 

December 31—Millions of dollars


   2004

   2003

Payable to banks

   $ 244    $ 170

Commercial paper

     —        90
    

  

Total notes payable

   $ 244    $ 260
    

  

 

The fair value of the Company’s notes payable approximates the carrying amount due to the short maturity of these obligations. The weighted average interest rate on notes payable was 3.5% and 4.3% for the years ended December 31, 2004 and 2003, respectively.

 

F-31


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Long-term debt consists of the following: