E19.6. Credit Scoring for a Firm with a Ratings Downgrade: Maytag Corporation (Medium) Maytag Corporation is the established manufacturer of washing machines, dryers, dish- washers, and other home appliances-including the venerable Hoover vacuum cleaner. But in 2004 and 2005, the firm faced deteriorating profitability. Competitors had moved manu- facturing to low-cost countries while Maytag persisted with its bigh labor cost manufactur- ing in the United States. The following shows how Maytag's sales stalled over the period 2000-2004, with a neg- ative effect on income. 2004 2003 2002 2001 2000 Net sales In thousands, except per share data $4,721,538 $4,791,856 $4,666,031 $4,185,051 Gross profit 660,219 859,531 1,004,602 864,842 $3,891,500 985,481 Percent of sales 14.0% 17.9% 21.5% 20.7% 25.3% Operating income $ 40,348 $228,293 $399,495 $289,152 $439,715 Percent of sales 0.9% 4.8% Income (loss) from $ (9.345) $114,378 7.7% $191,401 6.9% 11.3% $162,367 $216,367 continuing operations Percent of sales -0.2% 2.1% 4.1% 3.9% 5.6% In April 2005, the firm's bonds were downgraded to junk statas by all three major bond rating agencies. Maytag's financial statements for 2004 are on the Web page for Chapter 15. If you worked Minicase M15.3, you will have reformulated these statements.

a. What aspects of the financial statements tell you about the declining credit quality from 2003 to 2004?

b. What scores might you develop from these statements that would indicate the declining credit quality? Real World Connection Exercise E6.17 and Minicase M15.3 also deal with Maytag.