Whirlpool Corporation 2020 Q2 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation manufactures and markets kitchen and laundry appliances through four geographic segments: North America, EMEA, Latin America, and Asia. The filing covers the three and six months ended June 30, 2020. Results were materially affected by COVID-19-related demand, production, supply-chain, and distribution disruptions. The Embraco compressor business, sold on July 1, 2019, was no longer included in 2020 revenue.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $4.042 billion | $5.186 billion | $8.367 billion | $9.946 billion |
| Gross margin | $631 million; 15.6% | $932 million; 18.0% | $1.331 billion; 15.9% | $1.744 billion; 17.5% |
| Operating profit | $77 million | $191 million | $337 million | $454 million |
| Net earnings available to Whirlpool | $35 million | $67 million | $187 million | $538 million |
| Diluted EPS | $0.55 | $1.04 | $2.97 | $8.35 |
| Operating cash flow | Not separately provided | Not separately provided | $(745) million | $(821) million |
| Free cash flow | Not separately provided | Not separately provided | $(873) million | $(997) million |
Q2 net sales decreased 22.1%, net earnings available to Whirlpool decreased 48.2%, and diluted EPS decreased 46.9%. Six-month net sales decreased 15.9%, while net earnings available to Whirlpool decreased 65.2%. Q2 ongoing EBIT was $210 million, with a 5.2% ongoing EBIT margin versus 7.0% in the prior-year quarter. Six-month ongoing EBIT was $476 million, with a 5.7% margin versus 6.6%.
- Cash and cash equivalents were $2.546 billion at June 30, 2020, compared with $1.952 billion at December 31, 2019.
- Total debt, including current maturities and notes payable, was approximately $6.896 billion at June 30, 2020, compared with approximately $4.993 billion at year-end 2019.
- Notes payable increased to $1.712 billion from $294 million, and long-term debt increased to $4.886 billion from $4.140 billion.
- Committed credit facility availability was approximately $2.5 billion at June 30, 2020. The company reported compliance with its debt-to-capitalization and interest-coverage covenants.
- Capital expenditures were $155 million for the six months, compared with $197 million in 2019. Dividends paid were $155 million.
Material changes versus the prior comparable period
- Organic net sales, excluding foreign currency and Embraco, declined 13.8% in Q2 and 7.4% for the six-month period.
- All regions experienced significant COVID-19 effects. Q2 sales declined 12.5% in North America, 19.0% in EMEA, 51.1% in Latin America, and 37.1% in Asia.
- North America remained profitable, with a Q2 EBIT margin of 12.6%. EMEA, Latin America, and Asia reported Q2 EBIT margins of negative 7.9%, 2.5%, and negative 6.7%, respectively.
- Gross margin contracted due to lower volume, unfavorable product price and mix, lost fixed-cost leverage, and foreign currency effects, partly offset by raw-material deflation.
- Restructuring costs increased to $118 million in Q2 and $123 million for the six months, compared with $60 million and $86 million, respectively, in 2019.
- Cash used in operating activities improved by $76 million year over year, primarily because of working-capital management, lower inventory builds, reduced promotional activity, and cost controls. Cash remained negative because of seasonal and operating requirements.
- Financing activities provided $1.605 billion of cash, primarily reflecting new borrowings and debt-management actions taken to preserve liquidity.
Guidance, outlook, risks, and unusual items
Whirlpool withdrew its 2020 guidance on March 24, 2020 for sales, GAAP and ongoing EPS, ongoing EBIT margin, regional industry outlook, operating cash flow, and free cash flow. Management expects COVID-19-related demand and production disruptions to continue affecting results throughout 2020 and stated that the ultimate impact remains inherently unpredictable.
- In May 2020, Whirlpool issued $500 million of 4.60% senior notes due 2050. It also issued approximately $540 million of euro-denominated senior notes in February 2020.
- The company entered into a $500 million 364-day credit facility and maintained a $3.5 billion revolving facility. It borrowed approximately $2.2 billion under the revolving facility in March, repaying portions with proceeds from the notes offering and the 364-day facility.
- Share repurchases were suspended to protect liquidity. The company repurchased 902,000 shares for approximately $121 million during the first quarter, with approximately $531 million remaining under the authorization at June 30.
- Management expects 2020 restructuring charges of approximately $260 million to $280 million. A U.S. workforce reduction plan is expected to cost approximately $95 million, and the Naples, Italy facility exit is expected to have total costs of approximately $135 million.
- Goodwill in the EMEA reporting unit and the Indesit, Hotpoint, and Maytag trademarks remained at risk of future impairment. No impairment-triggering event was identified in Q2.
- Product warranty reserves were $288 million at June 30. Approximately $50 million of settlements were incurred during the first six months for the ongoing Indesit washer recall in the United Kingdom and Ireland.
- Whirlpool is defending significant Brazilian tax assessments, including approximately $360 million related to BEFIEX credits and other disputed assessments. The company has not accrued amounts for these matters based on its legal and tax advice.
- The U.S. Tax Court ruled against Whirlpool in a dispute involving the tax treatment of income from a Luxembourg subsidiary and Mexican branch. Whirlpool intends to appeal and has not recorded an impact from the decision.
- Other risks include customer insolvency, supplier disruption, tariffs and trade actions, foreign-currency volatility, litigation, product liability, cybersecurity, Brexit-related disruption, and potential future impairment charges.
Important facts for investors to verify
- Whether demand, production levels, and supply-chain conditions recover or deteriorate during the remainder of 2020.
- Whirlpool’s ability to maintain liquidity while repaying $1.7 billion of notes payable expected within the next twelve months and meeting debt covenants.
- The scale and timing of restructuring cash costs, including the U.S. workforce actions and Naples facility closure.
- Potential impairment exposure in EMEA and for the Indesit, Hotpoint, and Maytag trademarks.
- Outcomes and accrued amounts, if any, related to Brazilian tax matters, Embraco antitrust matters, product liability claims, and other litigation.
- Whether the company reinstates share repurchases or changes its $1.20-per-share quarterly dividend policy as operating cash flow and leverage evolve.