Whirlpool Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global manufacturer of major home appliances, operating through North America, Latin America, EMEA, and Asia segments. This unaudited report covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $4.248 billion | $4.348 billion | Down 2.3% |
| Gross margin | $726 million; 17.1% | $650 million; 15.0% | Up 210 basis points |
| Operating profit | $254 million | $204 million | Up 24.5% |
| Net earnings available to Whirlpool | $252 million | $92 million | Up 173.8% |
| Diluted EPS | $3.12 | $1.17 | Up 166.1% |
| Cash used in operating activities | $305 million | $423 million | Improved by $118 million |
| Capital expenditures | $74 million | $92 million | Down $18 million |
| Cash and equivalents at March 31 | $750 million | $583 million | Prior-year comparison |
Gross-margin expansion reflected favorable price/mix, productivity, and restructuring benefits, partly offset by higher material costs. Selling, general and administrative expense increased to $421 million from $405 million, primarily because of increased consumer advertising. Restructuring charges were $42 million versus $34 million.
The Q1 2013 income tax benefit was $67 million, compared with $36 million of expense in Q1 2012. The benefit was primarily attributable to U.S. energy tax credits of $75 million related to 2012 production and $9 million related to estimated 2013 production. The tax benefit was a major contributor to the increase in net earnings.
Cash used in operating activities improved year over year, partly because the $275 million Brazilian collection-dispute settlement payment made in January 2012 did not recur. Working capital remained a cash use, including a $223 million increase in inventories. Cash declined by $418 million during the quarter to $750 million.
At March 31, 2013, total debt included $10 million of current maturities and $2.441 billion of long-term debt. Whirlpool issued $500 million of notes in February 2013 and used the proceeds to repay $500 million of notes maturing in March. The company reported no borrowings under committed credit facilities, no commercial paper borrowings, and compliance with financial covenants.
Material changes versus the prior comparable period
- Consolidated sales declined 2.3%, primarily because of lower unit volume and unfavorable foreign currency effects. Excluding currency and BEFIEX credits, management stated that sales were comparable with the prior year.
- Units sold declined 3.0% overall, with decreases in North America, Latin America, EMEA, and Asia.
- North America operating profit increased to $218 million from $151 million, while Latin America operating profit increased to $130 million from $121 million. EMEA operating profit declined to a loss of $8 million from profit of $4 million, and Asia operating profit declined to $3 million from $9 million.
- Consolidated gross-margin percentage increased to 17.1% from 15.0%, led by North America and Latin America.
- Restructuring activity continued under the 2011 plan. Cumulative charges reached $357 million against expected total charges of up to $500 million; $78 million remained accrued at March 31, 2013.
- Long-term debt increased by $497 million from year-end, while current maturities declined by $500 million, reflecting debt refinancing.
- In April 2013, Whirlpool announced an increase in its quarterly dividend from $0.50 to $0.625 per share.
Guidance, outlook, risks, contingencies, and unusual items
Management’s 2013 outlook called for diluted EPS of $9.80 to $10.30, including approximately $0.81 per share from BEFIEX credits, a $1.75 per-share restructuring expense, and a $1.50 per-share benefit from U.S. energy tax credits. Expected industry demand was 2% to 3% in North America, 3% to 5% in Latin America, flat in EMEA, and 3% to 5% in Asia.
Whirlpool forecast 2013 free cash flow of $600 million to $650 million, based on operating cash flow of $1.2 billion to $1.3 billion and capital expenditures of $600 million to $650 million. Planned liquidity uses included up to $245 million of restructuring cash expenditures and up to $140 million of U.S. pension contributions.
Key risks include intense industry competition, uncertain global and developed-market demand, slower emerging-market growth, material-cost inflation, foreign-currency volatility, supplier and labor disruption, product liability and recalls, information-technology failures, pension and health-care cost trends, and legal and regulatory matters.
- Embraco antitrust matters: aggregate charges were approximately $360 million; $111 million remained accrued, including $74 million of installment payments to government authorities through 2015. A proposed settlement of up to $30 million with direct purchasers was subject to court approval, while indirect-purchaser claims remained pending.
- Brazilian tax matters: the company was disputing a $93 million IPI-related assessment and had not recorded a reserve. Outstanding BEFIEX-related income and social-tax assessments were approximately $600 million, excluding potential monetary adjustments.
- Product litigation: Whirlpool faced lawsuits, including class-action allegations, concerning certain front-load washing machines and other product claims. The company could not estimate a loss range for the washing-machine matters.
- Warranty and recall reserves: reserves were $182 million at March 31, 2013, compared with $184 million at March 31, 2012.
- Customer exposure: Whirlpool reported $116 million of trade and other receivables associated with Alno AG. In April 2013, approximately $38 million of past-due receivables was converted into a note receivable.
Important facts for investors to verify
- Separate recurring operating performance from the substantial one-time or unusual tax benefit supporting Q1 earnings and 2013 EPS guidance.
- Assess whether restructuring, productivity, and price/mix benefits can offset material-cost inflation and continued unit-volume weakness.
- Monitor cash conversion, inventory growth, pension contributions, capital spending, restructuring payments, and the $600 million to $650 million free-cash-flow target.
- Review debt maturities, refinancing costs, credit ratings, covenant compliance, and liquidity following the February debt issuance.
- Track the resolution and potential cash impact of Embraco antitrust claims and Brazilian tax assessments, particularly the unreserved BEFIEX assessments.
- Evaluate regional performance, especially the operating losses in EMEA and the decline in Asia.
- Confirm the sustainability and timing of BEFIEX credits and U.S. energy tax credits included in management’s outlook.