Whirlpool Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Whirlpool is a global major-appliance manufacturer operating through North America, EMEA, Latin America and Asia segments. This Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $4.786 billion | $4.616 billion | 3.7% increase |
| Gross margin | $826 million; 17.3% | $823 million; 17.8% | Margin declined |
| Operating profit | $264 million; 5.5% of sales | $285 million; 6.2% | 7.4% decrease |
| Net earnings available to Whirlpool | $153 million | $150 million | 1.8% increase |
| Diluted EPS | $2.01 | $1.92 | 4.6% increase |
| Cash used in operating activities | $435 million | $661 million | $226 million improvement |
| Capital expenditures | $88 million | $85 million | Increase |
| Cash and cash equivalents | $951 million | $1.085 billion at Dec. 31, 2016 | Decrease of $134 million |
Interest expense increased to $41 million from $38 million, primarily because of higher outstanding debt, partly offset by lower average interest rates. Income tax expense decreased to $40 million from $59 million, reflecting first-quarter tax planning strategies and anticipated foreign earnings distributions. The effective tax rate was approximately 20% in 2017 versus approximately 27% in 2016.
Total debt, including notes payable and current maturities, was approximately $5.033 billion at March 31, 2017, compared with approximately $4.470 billion at December 31, 2016. The increase was primarily attributable to $800 million of net short-term borrowings. Whirlpool had approximately $3.1 billion of committed credit facilities, with no borrowings outstanding under those committed facilities. Current maturities of long-term debt were $309 million.
Material changes versus the prior comparable period
- Sales growth was led by North America, Latin America and Asia, while EMEA sales declined materially.
- North America sales increased 6.4%; Latin America increased 15.9%; Asia increased 13.0%; EMEA decreased 12.0%. Excluding currency, consolidated sales increased 3.0%.
- EMEA performance was adversely affected by headquarters integration, legal-entity mergers, systems implementation, supply-chain disruption, product availability issues, Brexit-related U.K. demand weakness and currency effects.
- Gross margin was pressured by unfavorable product price and mix and raw-material inflation, partly offset by productivity improvements.
- SG&A increased to $499 million from $473 million, but remained broadly stable as a percentage of sales at 10.4% versus 10.3%.
- Operating profit declined despite higher sales, while lower tax expense and fewer shares outstanding supported higher net income and EPS.
- Whirlpool repurchased 843,300 shares for approximately $150 million during the quarter. Approximately $550 million remained authorized under the $1 billion program.
- Restructuring charges were $46 million, compared with $47 million. EMEA accounted for $37 million of the 2017 charge.
- Cash used in operations improved year over year, primarily due to working-capital efficiency initiatives, but remained negative because of seasonal working-capital needs.
Guidance, outlook, commentary and risks
Management’s 2017 outlook calls for diluted EPS of $12.65 to $13.40, including an estimated $2.63 per share of restructuring expense and a $0.53 per share income-tax impact. Expected 2017 industry demand ranges are 4% to 6% in North America, flat to 2% in EMEA, flat in Brazil and flat to 2% in Asia.
Whirlpool expects 2017 operating cash flow of $1.7 billion to $1.75 billion and free cash flow of approximately $1 billion. Capital expenditures are expected to be approximately $700 million to $750 million. The outlook includes up to $165 million of acquisition-related restructuring cash outlays, $69 million of legacy product warranty and liability costs and $42 million of pension contributions. Management expects up to $200 million of restructuring charges for the full year.
The company is restructuring EMEA dryer manufacturing operations, including ending production in Amiens, France, concentrating non-U.K. dryer production in Lodz, Poland and refocusing the Yate, U.K. facility. Approximately 500 positions may be affected, with completion expected in 2018. Italian legacy-operation integration is expected to be substantially complete in 2019.
Key contingencies include Brazilian tax assessments totaling approximately $567 million related to BEFIEX credits, approximately $74 million related to IPI tax credits and approximately $68 million related to controlled-foreign-corporation tax matters. Whirlpool has not accrued amounts for these disputed assessments based on advice from tax and legal counsel. The filing states that unfavorable outcomes could materially affect results in a particular reporting period.
Other significant risks include competition, raw-material inflation, foreign-currency volatility, international operating conditions, supply-chain disruptions, product liability and recalls, cybersecurity, litigation, pension and postretirement obligations, regulatory changes and the French competition investigation. The company also incurred $23 million of cash expenditures during the quarter for the Indesit dryer corrective-action program.
Important facts for investors to verify
- Whether EMEA integration and dryer-restructuring actions improve product availability, margins and demand performance.
- The sustainability of the 2017 EPS and cash-flow outlook given raw-material inflation, restructuring costs and seasonal working-capital requirements.
- The refinancing or repayment plan for the $309 million of long-term debt maturing within the next twelve months.
- Potential cash and earnings exposure from Brazilian tax disputes, antitrust matters, product claims and other litigation.
- The timing and ultimate cost of the Indesit dryer corrective-action program and remaining warranty reserves.
- Whether share repurchases and the increased quarterly dividend remain consistent with leverage and liquidity objectives.
- The assumptions underlying the lower first-quarter effective tax rate, including planned foreign earnings distributions.