WHIRLPOOL CORP annual report, FY2017

Whirlpool Corporation 2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 10-K; fourth-quarter information is presented in the unaudited quarterly data. Whirlpool manufactures and markets major home appliances through North America, EMEA, Latin America and Asia. It operated in 15 countries, marketed products globally, had approximately 92,000 employees and generated approximately $21.3 billion of net sales.

Financial performance and position

Metric	2017	2016	Change
Net sales	$21,253 million	$20,718 million	+2.6%
Gross margin	$3,602 million; 16.9%	$3,692 million; 17.8%	Margin down 0.9 percentage points
Operating profit	$1,136 million; 5.3%	$1,368 million; 6.6%	Down 17.0%
Net earnings available to Whirlpool	$350 million	$888 million	Down 60.6%
Diluted earnings per share	$4.70	$11.50	Down 59.1%
Cash provided by operating activities	$1,264 million	$1,203 million	Up $61 million
Free cash flow	$707 million; 3.3% of sales	$630 million; 3.0% of sales	Up $77 million
Capital expenditures	$684 million	$660 million	Up $24 million

2017 net sales benefited from product price/mix and foreign currency; sales increased 1.5% excluding currency. North America sales increased 4.6%, Latin America 7.2% and Asia 3.0%, while EMEA sales declined 5.2%. EMEA unit volume fell 6.8%; North America unit volume increased 4.8%.

Raw-material inflation, particularly resins, was identified as a combined $600 million challenge for 2017 and 2018. The resulting pressure on gross margin, together with higher restructuring costs and a one-time tax charge, drove the substantial decline in reported earnings.

At December 31, 2017, cash and cash equivalents were $1,196 million, current assets were $7,930 million and current liabilities were $8,505 million. Total debt was approximately $5,218 million, including $450 million of notes payable, $376 million of current long-term debt maturities and $4,392 million of long-term debt. The company had approximately $3.6 billion of committed credit facilities and no borrowings outstanding under those committed facilities.

Material changes versus the prior comparable period

Net sales increased $535 million, but gross margin declined $90 million and operating profit declined $232 million.
Restructuring charges increased to $275 million from $173 million, primarily reflecting EMEA-related actions.
Income tax expense increased to $550 million from $186 million, including approximately $420 million of estimated Tax Cuts and Jobs Act impacts: $190 million of transition tax and $49 million from revaluation of U.S. deferred tax assets, with other related effects.
The company recorded a $40 million out-of-period adjustment, primarily related to prior-period trade-promotion accruals in Asia. The adjustment reduced 2017 net sales by approximately $35 million, reduced earnings available to Whirlpool by approximately $16 million and reduced diluted EPS by $0.22.
Inventory increased to $2,988 million from $2,623 million, while current liabilities increased to $8,505 million from $7,662 million.
Total debt increased to $5,218 million from $4,470 million. Whirlpool issued €600 million of 1.10% notes due 2027 and repaid $550 million of senior notes that matured in 2017.
Whirlpool repurchased approximately $750 million of common stock and paid $312 million of dividends. The quarterly dividend was increased 10% to $1.10 per share.
Cash from operations increased despite lower earnings, primarily due to improved working capital, effective credit management and lower cash expenditures for legacy product corrective action.

Fourth-quarter results and unusual items

Fourth-quarter 2017 net sales were $5,702 million versus $5,656 million in the fourth quarter of 2016. Net earnings available to Whirlpool were a loss of $268 million, or diluted EPS of negative $3.69, compared with earnings of $180 million, or $2.36 per diluted share, in the prior-year quarter. The filing attributes the quarterly loss primarily to tax-related effects and operating pressures; the source text does not provide a complete quarter-specific bridge.

During the fourth quarter, Whirlpool discontinued shipments of its branded products to Sears after failing to agree on terms. Sears represented approximately 1% of 2017 consolidated net sales.

The company reported that a Hotpoint-branded refrigerator manufactured by Indesit before Whirlpool’s 2014 acquisition was identified by London authorities as the initial source of the Grenfell Tower fire. Investigations and discussions with U.K. authorities remained ongoing, and Whirlpool had not recorded significant charges in 2017. Potential claims could affect future results, but the filing states that the ultimate impact could not be estimated.

Guidance, outlook and management commentary

2018 diluted EPS outlook: $12.45 to $13.45, including a projected restructuring expense effect of $2.76 per share and a $0.71 per-share tax impact.
2018 operating cash flow outlook: $1.675 billion to $1.775 billion.
2018 free cash flow outlook: approximately $1.0 billion to $1.1 billion, including approximately $675 million of capital expenditures, up to $300 million of acquisition-related restructuring cash outlays and $34 million of pension contributions.
Expected 2018 industry demand: North America 2% to 3%, EMEA 1% to 2%, Latin America 1% to 2% and Asia 2% to 4%.
Management implemented cost-based price increases in early 2018 and targeted $150 million of net fixed-cost reductions; more than 80% was stated to be implemented at the filing date.
The company expected up to $200 million of restructuring charges in 2018. Planned actions included EMEA dryer operations, Italian integration activities and restructuring of the Embraco compressor business, with approximately 500 positions potentially affected by each of two announced actions.

Key risks, contingencies and other matters

Significant exposure to raw-material and component costs, foreign currency movements, tariffs and changing trade policies.
Intense global competition, changing retail channels including e-commerce, and dependence on large trade customers.
Execution and integration risk related to the Indesit and China businesses; EMEA goodwill had only approximately 3% excess fair value over carrying value in the October 2017 test. A 50-basis-point increase in the discount rate or a 5% reduction in projected operating profit could have produced an estimated impairment charge of approximately $86 million or $98 million, respectively.
Product quality, warranty, recall and product-liability exposure. The legacy Indesit dryer corrective action was substantially complete in 2017, with $61 million of related cash settlements during the year; the remaining legacy warranty reserve was zero at year-end.
Brazilian tax disputes included approximately 1.9 billion Brazilian reais, or approximately $565 million, of assessments related to BEFIEX credits, plus other disputed assessments of approximately $73 million and $67 million. Whirlpool had not accrued amounts for these matters based on its legal and tax assessments.
Other legal matters include French competition proceedings, compressor antitrust matters, product-related class actions and post-retirement benefit litigation. Certain outcomes could materially affect a particular reporting period.
Pension and postretirement obligations exceeded plan assets by approximately $1.4 billion at year-end, comprising approximately $1.0 billion of pension obligations and $0.4 billion of postretirement health-care obligations.
Contractual obligations totaled approximately $8.9 billion, including $6.2 billion of long-term debt obligations, $976 million of operating leases, $614 million of purchase obligations, pension and postretirement commitments and legal settlements.

Most important facts for investors to verify

Whether price increases and the $150 million fixed-cost program offset raw-material inflation in 2018 without materially reducing volume or market share.
Progress and total cash cost of EMEA, Italian, China and Embraco restructuring and integration activities.
Actual 2018 earnings, operating cash flow and free cash flow compared with the stated guidance ranges.
Refinancing or repayment of the $376 million of term debt maturing within twelve months of December 31, 2017, and the effect of leverage on liquidity.
Resolution and potential cash exposure from Brazilian tax assessments, French competition proceedings, product claims and the Grenfell Tower investigation.
Performance and impairment sensitivity of the EMEA reporting unit and Indesit and Hotpoint trademarks.
Whether the reported 2017 out-of-period trade-promotion adjustment indicates broader control or accrual issues despite management’s conclusion that prior periods were not materially misstated.