Maytag to tackle manufacturing issues

Maytag to tackle manufacturing issues
 
Date October 21, 2005
Section(s) Local News
Brief  
 
By PETER HUSSMANN

Editor

The future of Maytag production operations in Newton dimmed today as the company said it planned to “urgently address” its excess manufacturing capacity issues.

In announcing a larger-than-expected $18.2 million third quarter loss, Maytag CEO Ralph Hake said the company plans to address its manufacturing operations in the laundry and floor care segments of its operations. The company has said its Newton operation is its highest cost facility. Maytag‘s North Canton, Ohio, Hoover vacuum facility and its Florence, S.C., operations have also been previously named as cost drains on its bottom line.

“Our performance demonstrates the need to urgently address our specific excess manufacturing capacity issues and eliminate these barriers to cost competitiveness and acceptable financial performance,” Hake said. “Our excess costs are concentrated in laundry, for which we have four plants, and in floor care, where we have three plants.”

The 23 cents per share loss for the quarter came despite a net sales increase of 6.5 percent, $1.26 billion this year compared to $1.19 billion for the third quarter 2004. The sales increases were driven largely by major appliances, washing machines and refrigerators. Sales of commercial products were up 2.5 percent, but net sales of floor-care products were down despite an increase in unit sales.

Hake said that despite disappointing third quarter results, he was not discouraged by indicators.

“Our overall financial performance for the third quarter was disappointing, disappointing but not discouraging,” he said. “During the quarter, we grew our top-line sales by 6.5 percent from year-earlier figures. Overall, we held our own in share year-over-year and improved sequentially.

“Clearly, customer and consumer demand for our brands and products continues to be strong. Winning in the market is the first necessary step to recovery; rapidly improving our cost structure is second.”

Despite the growth in sales, Hake said high cost manufacturing operations, higher raw material costs and transportation costs impacted results.

“Despite the top-line sales successes, our excess manufacturing capacity in some product categories continues to worsen as consumer demand shifts to our products that we source from lower cost manufacturers,” he said.

Sourced products in major appliances primarily comes within its laundry and refrigeration categories. Twenty percent of major appliance unit sales came from sourced products for the quarter. In floor-care, 30 percent of the products were sourced.

“Sourcing these newest product designs is a strategy that is enabling our growth and rapid innovation with reduced R &D and capital commitments by Maytag,” he said.

Hake said Maytag continues to work with the Justice Department in regard to the pending merger with Whirlpool. Whirlpool is offering to buy Maytag for $1.7 billion in a cash and stock offering. It also plans to assume nearly $1 billion in Maytag debt. Hake said he expects the deal to close in the first quarter of 2006. A shareholders meeting on the merger has been set for Dec. 16.

However, as an independent company, Hake said Maytag needs to continue with its business plan.

“Whether or not Maytag remains an independent company, we must significantly improve our overall performance to create value for our customers,” he said. “To accomplish this, we are working to address our excess manufacturing capacity issues in our laundry and floor-care categories. This fixed cost structure and under-utilized capacity remain barriers to acceptable financial performance.”

Hake noted that the company has already taken efforts to improve its laundry operations by concentrating its vertical-axis washer production in Herrin, Ill., and its dryer production in Searcy, Ark. He said more needs to be done.

“Our challenge is to replace the products and revenue stream from our underutilized facilities with improved products at dramatically lower costs,” he said. “This involves product redesign, some sourcing and migration of products from our high-cost laundry and floor-care facilities.

“When completed, we envision a manufacturing footprint with lower costs, higher utilization and fewer locations. However, achieving this transition successfully in two product categories without customer disruption is both a planning and execution challenge, so we are continuing to work through the necessary details. When our plans are finalized, we will announce the impacts and financial consequences.”

Maytag also said it will secure a new $600 million credit instrument early in the fourth quarter. It will allow Maytag to have in place the “required financing flexibility to achieve the necessary manufacturing restructuring.” Maytag may take additional restructuring charges, asset impairments and accelerated depreciation as part of its efforts to reduce excess manufacturing and improve profitability.

“As the third-quarter results show, we clearly have a lot of difficult work to do, but I expect that the initiatives we are reviewing will enable us to achieve a step change in our performance level,” Hake said.

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