Whirlpool Corporation: Q1 2014 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global manufacturer and marketer of major home appliances, operating through North America, Latin America, EMEA, and Asia. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparison to the same period in 2013.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $4.363 billion | $4.248 billion | 2.7% increase |
| Gross margin | $755 million; 17.3% | $726 million; 17.1% | 0.2 percentage-point increase |
| Operating profit | $281 million | $254 million | 10.6% increase |
| Net earnings available to Whirlpool | $160 million | $252 million | 36.3% decrease |
| Diluted EPS | $2.02 | $3.12 | 35.3% decrease |
| Cash used in operating activities | $339 million | $305 million | Higher use of $34 million |
Net sales growth was primarily volume-driven. Excluding foreign currency, consolidated sales increased 5.9%. Units sold increased 6.6% to 12.622 million. Regional sales changes were North America +4.3%, Latin America -0.8%, EMEA +7.9%, and Asia -11.3%.
Gross margin improved modestly due to productivity and favorable product price/mix, partly offset by foreign currency and material costs. Selling, general and administrative expense increased 4.3% to $439 million, reflecting higher brand investment. Restructuring costs declined to $29 million from $42 million.
Reported earnings declined principally because Q1 2013 included a $94 million U.S. government tax incentive, whereas Q1 2014 had $50 million of income tax expense. The effective tax rate was approximately 23% in Q1 2014 versus a tax benefit in Q1 2013. Interest expense declined to $44 million from $46 million, while interest and sundry expense increased to $23 million from $18 million, primarily due to foreign currency effects.
Cash and equivalents were $1.672 billion at March 31, 2014, compared with $1.380 billion at December 31, 2013. Current assets were $7.583 billion and current liabilities were $6.454 billion. Inventories increased to $2.666 billion from $2.408 billion. Long-term debt, including current maturities, was $3.272 billion, compared with $2.453 billion at year-end, following an $800 million debt offering. The filing reports $610 million of term debt maturing within the next twelve months and no commercial paper borrowings outstanding.
Investing cash use was $138 million, including $123 million of capital expenditures and a $20 million deposit related to the pending Hefei Sanyo acquisition. Financing activities provided $770 million, primarily from the debt offering. The company expects 2014 capital spending of $625 million to $675 million and U.S. pension contributions of approximately $160 million.
Material changes versus the prior comparable period
- Sales, units, gross margin, and operating profit improved, but net earnings and EPS fell due largely to the unfavorable year-over-year tax comparison.
- North America, EMEA, and Latin America unit volumes increased; Asia units and sales declined.
- Restructuring charges decreased year over year, while SG&A increased because of brand investment.
- Operating cash use worsened modestly, driven by higher working-capital requirements, including inventory growth and increased funding for volumes and brand investment.
- Debt increased following the February 2014 issuance of $800 million of notes due 2017, 2019, and 2024. Proceeds were intended primarily to fund upcoming maturities and general corporate purposes.
- On April 14, 2014, the board authorized a share repurchase program of up to $500 million. In April, Whirlpool also announced a 20% increase in the quarterly dividend to $0.75 per share from $0.625.
Guidance, outlook, risks, and unusual items
Management's 2014 outlook calls for diluted EPS of $11.05 to $11.55, including estimated impacts of $0.18 from BEFIEX credits, $(0.95) from restructuring, $(0.21) from investment expense, and $(0.01) from antitrust resolutions. Industry demand is expected to increase 5% to 7% in North America, remain flat in Latin America, increase 0% to 2% in EMEA, and increase 0% to 3% in Asia.
Management expects 2014 operating cash flow of $1.325 billion to $1.375 billion and free cash flow of approximately $700 million after capital expenditures and asset-sale proceeds. Restructuring cash outlays could reach $150 million. The company expects approximately $100 million of restructuring charges in 2014, including costs related to closing an EMEA microwave facility.
Whirlpool expects to acquire a 51% stake in Hefei Rongshida Sanyo Electric for approximately $552 million, subject to remaining regulatory approvals and other closing conditions. Closing was expected between the end of Q2 and year-end 2014. A $20 million breakup fee could be retained by the sellers under specified circumstances.
Material contingencies include Embraco antitrust matters, Brazilian tax disputes, product litigation, and product warranty issues. Embraco antitrust matters had approximately $99 million accrued at March 31, 2014, with $47 million of installment payments plus interest remaining through 2015. Brazilian BEFIEX-related tax assessments totaled approximately $553 million, while other disputed Brazilian tax exposures included approximately $88 million for IPI matters and $48 million for CFC tax matters; no additional reserves were recorded for these disputed assessments. The company also faces front-load washing-machine class-action litigation for which a loss range could not be estimated.
Key operating risks include intense competition, volatile material and commodity costs, foreign currency movements, uncertain global demand, housing and interest-rate trends, international operations, product liability and recalls, litigation and tax outcomes, supplier disruptions, pension and health-care costs, labor relations, cybersecurity, and the ability to achieve productivity and restructuring plans.
Important facts for investors to verify
- Whether the tax-driven decline in EPS is nonrecurring and whether the $11.05 to $11.55 full-year EPS outlook remains achievable.
- Progress toward the Hefei Sanyo acquisition, remaining approvals, funding source, closing date, and potential $20 million breakup fee.
- Debt maturities, refinancing plans, interest costs, and liquidity after the $800 million debt issuance and planned acquisition.
- Execution of the EMEA facility closure and the company’s approximately $100 million 2014 restructuring-charge forecast.
- Resolution and cash requirements associated with Embraco antitrust claims and the Brazilian tax assessments.
- Working-capital trends, particularly inventory growth and the company’s ability to convert expected operating cash flow into approximately $700 million of free cash flow.