Whirlpool Corporation 2014 Form 10-K Summary
Business context and reporting period
Whirlpool Corporation is a global manufacturer and marketer of major home appliances, including laundry appliances, refrigerators, cooking appliances, dishwashers and portable appliances. It operated in 14 countries, marketed products globally under brands including Whirlpool, Maytag, KitchenAid, Consul, Brastemp, Bauknecht and Indesit, and had approximately 100,000 employees at December 31, 2014. Reportable segments were North America, Latin America, EMEA and Asia.
The filing covers the fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Whirlpool completed the acquisitions of Hefei Sanyo in China and Indesit in Europe during the fourth quarter.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $19.872 billion | $18.769 billion | +5.9% |
| Gross margin | $3.395 billion; 17.1% | $3.298 billion; 17.6% | Margin down 50 basis points |
| Operating profit | $1.188 billion; 6.0% | $1.249 billion; 6.7% | Down $61 million |
| Earnings before taxes | $881 million | $917 million | Down $36 million |
| Net earnings available to Whirlpool | $650 million | $827 million | Down 21.3% |
| Diluted earnings per share | $8.17 | $10.24 | Down 20.2% |
| Cash flow from operations | $1.479 billion | $1.262 billion | Up $217 million |
| Capital expenditures | $720 million | $578 million | Up $142 million |
Operating performance benefited from higher shipments, favorable product price and mix, productivity, restructuring benefits and the acquisitions. Profitability was pressured by higher material costs, foreign currency effects, acquisition-related costs, product transition costs and lower Brazilian BEFIEX credits. Income tax expense increased to $189 million from $68 million, principally because 2013 included significant U.S. energy tax credits that did not recur in 2014.
Regional sales were $10.634 billion in North America, $4.686 billion in Latin America, $3.905 billion in EMEA and $816 million in Asia. EMEA sales increased 29.1%, primarily from Indesit. Latin America sales declined 4.9%, reflecting lower unit shipments, foreign currency and lower BEFIEX credits. North America sales rose 4.5% and Asia sales rose 1.2%.
At December 31, 2014, cash and equivalents were $1.026 billion, including approximately $0.9 billion held outside the United States. Current assets were $8.098 billion versus current liabilities of $8.403 billion. Total debt was $4.347 billion, including $569 million of notes payable, $234 million of current maturities and $3.544 billion of long-term debt. Total debt represented 42.9% of invested capital, compared with 33.0% in 2013.
Operating cash flow was partly offset by $2.456 billion of investing cash use, including $1.356 billion for Indesit, $453 million for Hefei Sanyo and $720 million of capital expenditures. Financing activities provided $705 million, primarily to fund the acquisitions. Dividends paid were $224 million, and Whirlpool repurchased $25 million of common stock.
Material changes versus the prior comparable period
- Net sales increased 5.9%, but net earnings available to Whirlpool declined 21.3% and diluted EPS declined 20.2%.
- Gross margin declined from 17.6% to 17.1%, while SG&A increased from $1.828 billion to $2.038 billion, reflecting acquisition-related and investment expenses.
- Indesit was acquired for approximately $1.4 billion net of cash acquired, and Hefei Sanyo was acquired for approximately $551 million. The acquisitions added $994 million of reported sales and $15 million of reported net earnings in 2014.
- Goodwill increased by approximately $1.1 billion to $2.8 billion, and other intangible assets increased to $2.8 billion. The purchase price allocations remained preliminary.
- Total debt increased substantially from $2.463 billion to $4.347 billion, primarily due to acquisition financing. Whirlpool issued $650 million of senior notes in November 2014 and used commercial paper and credit facilities.
- Restructuring charges declined to $136 million from $196 million, but management expected up to $300 million of additional restructuring charges in 2015.
- Other comprehensive loss was $546 million, primarily due to foreign currency translation and pension-related losses, compared with other comprehensive income of $230 million in 2013.
Guidance, outlook, commentary and unusual items
Management described 2014 as a year of record revenue, strong margins and continued productivity, while emphasizing product innovation, restructuring and integration of the two acquisitions. Management expected continued opportunities from recovering U.S. demand and longer-term growth in Brazil, China, India and Russia.
| 2015 outlook | Range |
|---|---|
| Diluted EPS | $10.75 to $11.75 |
| Industry demand: North America | +4% to +6% |
| Industry demand: Latin America | (3%) to 0% |
| Industry demand: EMEA | 0% to +2% |
| Industry demand: Asia | +1% to +3% |
| Free cash flow | $700 million to $800 million |
| Cash provided by operating activities | $1.500 billion to $1.650 billion |
| Capital expenditures | $800 million to $850 million |
The 2015 EPS outlook included approximately $2.85 per share of restructuring expense, $0.24 of acquisition-related transition costs, $0.11 of pension settlement charges and $0.01 of acquisition purchase-price accounting inventory adjustments. Free cash flow guidance included restructuring cash outlays of up to $250 million and U.S. pension contributions of approximately $80 million.
Key contingencies include Brazilian tax assessments, Embraco antitrust matters, product liability and front-load washing-machine litigation, a French competition investigation, potential product quality and safety actions, and customer credit exposure. Whirlpool had approximately $94 million of receivables and notes due from Alno AG, including approximately $47 million overdue, with the overdue balance scheduled to be paid by the end of the first quarter of 2016.
The company reported a $1.6 billion aggregate deficit between benefit obligations and plan assets for pension and postretirement health benefits. It also had approximately $7.497 billion of contractual cash obligations, including debt, leases, purchase obligations, pension contributions, postretirement benefits and settlements.
Whirlpool maintained $2.0 billion of long-term revolving capacity, expandable to $2.5 billion, and a $1.0 billion 364-day facility; neither facility had borrowings outstanding at year-end. The company was in compliance with its financial covenants. Management identified competition, commodity costs, foreign exchange, international operations, acquisition integration, economic conditions, supply-chain disruption, litigation, tax matters, cybersecurity, product recalls and pension assumptions as significant risks.
Management and Ernst & Young concluded that internal control over financial reporting was effective. However, management’s assessment and the auditor’s internal-control audit excluded Hefei Sanyo and Indesit, which together represented $5.6 billion of total assets and $2.9 billion of net assets at year-end.
Important facts for investors to verify
- Whether Indesit and Hefei Sanyo integration delivers the expected cost, scale, product and distribution synergies.
- The effect of increased debt, commercial paper reliance and planned public debt financing on leverage, interest expense and refinancing risk.
- Progress against the 2015 EPS, free cash flow, capital spending and restructuring outlook.
- Potential exposure from Brazilian BEFIEX, IPI and CFC tax assessments, including approximately $533 million of BEFIEX-related assessments and approximately $67 million of CFC tax exposure, none of which was accrued based on management’s assessment.
- Resolution and potential costs of Embraco antitrust matters, product litigation, front-load washer class actions and the French competition investigation.
- Collection of Alno receivables and the risk of customer bankruptcy or further payment delays.
- Goodwill and trademark impairment sensitivity, particularly following the acquisitions and the pressure on certain European and North American brands.
- Whether the company’s international cash can remain permanently reinvested without creating future U.S. tax or liquidity constraints.