Whirlpool Corporation 2016 Q1 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global major-appliance manufacturer operating through North America, EMEA, Latin America, and Asia. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the same period in 2015.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $4.616 billion | $4.846 billion | Down 4.8% |
| Gross margin | $821 million; 17.8% | $853 million; 17.6% | Margin up 0.2 points |
| Operating profit | $283 million | $303 million | Down 6.6% |
| Operating margin | 6.1% | 6.3% | Down 0.1 points |
| Net earnings available to Whirlpool | $150 million | $191 million | Down 21.2% |
| Diluted EPS | $1.92 | $2.38 | Down 19.2% |
| Cash used in operating activities | $661 million | $569 million | Greater use of $92 million |
| Capital expenditures | $85 million | $126 million | Down $41 million |
| Cash and cash equivalents at March 31 | $699 million | $704 million | Down $5 million |
Gross margin improved modestly despite lower sales, reflecting cost and capacity initiatives, productivity, and acquisition synergies. Net earnings were pressured by higher income tax expense of $59 million versus $9 million in the prior-year quarter; the 2015 period benefited from $58 million of valuation allowance releases.
Operating cash flow was negative primarily because of seasonal working-capital investment, including a $398 million increase in inventories, a $107 million increase in accounts receivable, and a $228 million decrease in accounts payable. Financing activities provided $670 million, including $966 million of net short-term borrowings, partially offset by $225 million of share repurchases and $69 million of dividends paid.
At March 31, 2016, notes payable were $998 million, current maturities of long-term debt were $760 million, and long-term debt was $3.251 billion. Total reported debt, including notes payable and current maturities, was approximately $5.009 billion. Whirlpool had approximately $2.8 billion of committed credit facilities with no borrowings outstanding under those facilities, and $868 million of commercial paper outstanding.
Material changes versus the prior comparable period
- Consolidated sales declined 4.8%, driven by lower volume and unfavorable foreign-currency effects. Excluding currency, sales increased 1.1%.
- North America sales increased 3.0%, while EMEA declined 7.8%, Latin America declined 21.6%, and Asia declined 2.0%.
- Consolidated units sold decreased 2.8%; Latin America units declined 21.8%, while North America and Asia units increased.
- Restructuring charges increased to $47 million from $33 million. The company expects approximately $250 million of restructuring charges in full-year 2016.
- Interest and sundry expense improved to $30 million from $53 million, primarily because of favorable currency effects and lower antitrust settlement expense. Interest expense declined to $38 million from $43 million.
- The company repurchased 1.507 million shares for approximately $225 million. On April 18, 2016, the board authorized a new $1 billion repurchase program.
- The quarterly dividend was increased in April 2016 by 11%, from $0.90 to $1.00 per share.
- Comprehensive income was $312 million versus a comprehensive loss of $13 million, mainly reflecting improved currency translation and pension-related items.
Guidance, outlook, commentary, and unusual items
- Full-year 2016 diluted EPS guidance is $11.25 to $12.00, including estimated per-share impacts of $2.50 from restructuring, $0.32 from acquisition-related transition costs, and $0.04 from legacy product warranty and liability expense.
- Management expects 2016 free cash flow of approximately $700 million to $800 million, based on operating cash flow of $1.4 billion to $1.55 billion and capital expenditures and related items of approximately $700 million to $750 million.
- Expected 2016 industry demand is North America up 5% to 6%, EMEA flat to up 2%, Latin America down 1% to 10% based on Brazilian demand, and Asia flat.
- Management expects $760 million of long-term debt to mature within the next twelve months and is evaluating repayment or refinancing alternatives.
- The company continues a legacy dryer corrective-action campaign related to Indesit-developed platforms in the United Kingdom and other EMEA markets. The recorded liability was approximately €245 million, or approximately $279 million as of March 31, 2016; projected legacy product warranty and liability costs for 2016 are $155 million.
- Italian restructuring and integration plans are expected to be completed by the end of 2018, with estimated total costs of approximately €241 million, of which approximately €209 million is expected to require future cash expenditures.
- Material contingencies include Brazilian BEFIEX tax assessments of approximately $443 million, IPI tax assessments of approximately $62 million, and CFC tax exposure of approximately $46 million. Whirlpool has not accrued amounts for these disputed assessments.
- Other significant matters include French competition investigations, pending product-related litigation, a proposed settlement of front-load washing-machine class actions requiring court approval, and an antidumping petition concerning large residential washers imported from China.
- The company identified no material changes in market-risk exposures or risk factors from the 2015 Form 10-K. Management concluded that disclosure controls and procedures were effective as of March 31, 2016.
Important facts for investors to verify
- Whether the expected full-year EPS and free-cash-flow ranges remain achievable given negative first-quarter operating cash flow and seasonal working-capital needs.
- The timing and funding plan for the $760 million of debt maturing within twelve months and the extent of reliance on commercial paper.
- The ultimate cost and cash requirements of the Indesit legacy dryer corrective-action program and other warranty matters.
- The potential financial impact and timing of the Brazilian tax disputes, French competition investigation, and other litigation.
- Whether the planned restructuring actions deliver the projected productivity and acquisition-synergy benefits.
- The outcome of the washer antidumping proceedings and any related effects on North American pricing, volume, and manufacturing.
- The effect of foreign-currency movements and weak Latin American demand on sales, margins, and liquidity.