Whirlpool Corporation: Form 10-Q Summary
Business Context and Reporting Period
Whirlpool manufactures and markets home appliances globally through North America, EMEA, Latin America and Asia. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the same periods in 2017.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $5.326 billion | $5.418 billion | $15.377 billion | $15.551 billion |
| Gross margin | $895 million; 16.8% | $915 million; 16.9% | $2.587 billion; 16.8% | $2.617 billion; 16.8% |
| Operating profit (loss) | $299 million; 5.6% | $331 million; 6.1% | $(30) million | $869 million |
| Net earnings available to Whirlpool | $210 million | $276 million | $(353) million | $618 million |
| Diluted EPS | $3.22 | $3.72 | $(5.18) | $8.23 |
| Operating cash flow | Not separately provided for the quarter | $(615) million | $(33) million | |
| Free cash flow | Not separately provided for the quarter | $(874) million | $(348) million |
- Q3 sales declined 1.7%, while units declined 2.6%. Excluding foreign currency, sales increased 1.5%.
- Q3 SG&A rose to $550 million from $521 million, including $29 million of bad-debt expense related to a U.S. retailer and a Brazilian retailer.
- Q3 interest expense increased to $52 million from $42 million, primarily because of higher average debt balances.
- Nine-month results included a $747 million EMEA impairment charge, consisting of $579 million of goodwill impairment and $168 million of intangible-asset impairment.
- Cash and cash equivalents were $1.032 billion at September 30, 2018, compared with $1.196 billion at December 31, 2017; cash, cash equivalents and restricted cash totaled $1.082 billion.
- Total notes payable were $2.153 billion, versus $450 million at year-end 2017. Long-term debt was $4.768 billion, versus $4.392 billion.
- Capital expenditures were $330 million for the first nine months, compared with $371 million in 2017. Dividends paid were $232 million and share repurchases were $1.102 billion.
Material Changes Versus the Prior Comparable Period
- North America was the strongest region: Q3 sales increased 4.9% and EBIT increased to $343 million from $336 million.
- EMEA remained the principal weakness: Q3 sales declined 10.6%, units declined 9.5%, and EBIT was a loss of $39 million compared with a $2 million loss in 2017. Nine-month EMEA EBIT was a loss of $91 million.
- Latin America Q3 sales declined 9.2% despite 10.1% unit growth, primarily because of currency and unfavorable price/mix. Asia Q3 sales declined 9.3% on lower volumes and currency effects.
- Restructuring charges increased to $216 million for the first nine months from $150 million. The company expects approximately $250 million of restructuring charges for full-year 2018.
- Operating cash flow deteriorated principally because of the net loss, a $350 million discretionary pension contribution, working-capital needs, lower volumes and higher material costs.
- Share repurchases reduced weighted-average basic shares to 64.5 million in Q3 from 72.9 million in the prior-year quarter. The company repurchased 7.0 million shares for approximately $1.1 billion during the first nine months, with approximately $850 million remaining under the authorization.
Guidance, Outlook, Risks and Unusual Items
- Management’s full-year 2018 diluted EPS outlook was $(2.90) to $(2.60), including the effects of restructuring, trade-customer insolvency, the French antitrust settlement and EMEA impairments.
- Management expected approximately $1.2 billion of operating cash flow and approximately $600 million of free cash flow for 2018, including up to $300 million of restructuring cash payments, approximately $350 million of voluntary pension contributions and approximately $625 million of capital expenditures.
- Expected 2018 industry demand was approximately 1% in North America, 1% to 2% in EMEA, approximately 1% in Latin America and 2% to 4% in Asia.
- Whirlpool agreed to sell Embraco to Nidec for $1.08 billion, subject to customary adjustments and regulatory approvals; closing was expected by early 2019. Embraco assets of $813 million and liabilities of $479 million were classified as held for sale at September 30.
- Management announced EMEA actions including exiting Turkish domestic sales, exiting the Hotpoint branded small-appliance business and implementing a new $50 million fixed-cost reduction initiative.
- Key risks include raw-material inflation, tariffs, foreign-currency volatility, weak EMEA demand, customer insolvencies, competitive and retail pressure, supply-chain disruptions, cybersecurity, product liability, pension obligations and litigation.
- Material contingencies include a French Competition Authority settlement range of €95 million to €115 million, for which a €95 million reserve was recorded; an ongoing second phase of the French investigation; Brazilian tax assessments totaling approximately $480 million related to BEFIEX credits; and an €174.5 million clawback claim from the Alno insolvency trustee.
- Whirlpool disclosed ongoing investigations relating to the Grenfell Tower fire involving a Hotpoint-branded refrigerator and stated that no significant charge had been recorded for 2017 or 2018.
- The company expects adoption of the new lease standard in 2019 to materially increase reported right-of-use assets and lease liabilities, with no anticipated cash-flow impact.
Most Important Facts for Investors to Verify
- Whether EMEA operating performance and market-share trends improve sufficiently to avoid further goodwill or intangible-asset impairments.
- Whether the Embraco sale closes on expected terms and whether proceeds are used to reduce the elevated short-term debt balance.
- Actual full-year operating cash flow and free cash flow versus the $1.2 billion and $600 million outlooks.
- The effect of steel, aluminum and other tariffs and raw-material inflation on future margins.
- Final amounts and timing of the French antitrust settlement, Brazilian tax disputes and other litigation or regulatory matters.
- Compliance with debt covenants, including a debt-to-capitalization ratio of no more than 0.65 and a rolling interest-coverage ratio of at least 3.0.
- Whether Sears and other customer insolvencies produce additional bad-debt or inventory charges.