Whirlpool Corporation: Q1 2011 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation, a global manufacturer of major home appliances, reported unaudited results for the three months ended March 31, 2011. Reportable segments are North America, Latin America, Europe, Middle East and Africa, and Asia. The filing compares results with the three months ended March 31, 2010.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $4.401 billion | $4.272 billion | +3.0% |
| Gross margin | $623 million; 14.1% | $639 million; 15.0% | Down 90 basis points |
| Operating profit | $228 million | $241 million | Down $13 million |
| Net earnings available to Whirlpool | $169 million | $164 million | +3.0% |
| Diluted earnings per share | $2.17 | $2.13 | +1.9% |
| Cash used in operating activities | $(224) million | $71 million provided | Down $295 million |
| Capital expenditures | $115 million | $146 million | Down $31 million |
| Cash and equivalents at March 31 | $1.026 billion | $1.191 billion | Down $165 million |
Net sales growth was driven by higher unit volume, favorable foreign currency effects, and higher BEFIEX credits, partly offset by unfavorable product price and mix. Unit volume increased 2.7% overall. Latin America sales increased 7.6%, Asia 8.4%, Europe, Middle East and Africa 0.6%, and North America 0.3%.
Gross margin declined primarily because of higher raw-material and oil-related costs and unfavorable price/mix. Productivity, cost reductions, foreign currency, and BEFIEX credits partly offset these pressures. Selling, general and administrative expense increased to $380 million from $371 million but declined slightly as a percentage of sales to 8.6% from 8.7%.
The reported effective income tax rate was a 15.5% benefit, compared with a 1.6% benefit in the prior-year quarter, primarily reflecting increased U.S. energy tax credits and favorable audits and settlements. Interest expense decreased to $54 million from $58 million, while interest and sundry expense increased to $19 million from $12 million.
Balance sheet, debt, liquidity, and cash flow
- Total assets were $15.609 billion at March 31, 2011, compared with $15.584 billion at December 31, 2010.
- Current assets were $7.201 billion, including $1.026 billion of cash and $2.938 billion of inventories. Inventories increased from $2.792 billion at year-end.
- Current liabilities were $5.937 billion, including $313 million of current maturities of long-term debt.
- Long-term debt was $2.193 billion; total debt, including current maturities, was approximately $2.506 billion. The filing reports a $2.731 billion fair value for long-term debt including current maturities.
- Whirlpool stockholders’ equity increased to $4.467 billion from $4.226 billion at December 31, 2010, aided by comprehensive income and retained earnings.
- Operating cash flow was negative because of international tax payments, receivable collection timing, lower accounts payable, and working-capital effects from production reductions. Investing cash use was $119 million and financing cash use was $29 million.
- No amounts were outstanding under the credit facility at March 31, 2011, and the company stated that it was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Sales and earnings improved modestly, but operating profit and gross margin declined because inflation in materials and oil-related costs exceeded pricing and productivity benefits.
- Operating cash flow deteriorated from $71 million provided to $224 million used, and quarter-end cash declined year over year.
- Restructuring charges declined to $8 million from $20 million. The company expects approximately $4 million of additional costs during the remainder of 2011 related to the Evansville facility closure.
- The prior-year comparison included a $75 million dishwasher recall charge and a $29 million postretirement-plan curtailment gain; the company revised the estimated total dishwasher recall cost from $75 million to $68 million in Q1 2011.
- The quarterly dividend was increased in April 2011 to $0.50 per share from $0.43 per share.
Guidance, outlook, commentary, and risks
Management projected 2011 diluted EPS of $12.00 to $13.00 and free cash flow of $400 million to $500 million. The free-cash-flow outlook assumes operating cash flow of $997 million to $1.1 billion, capital expenditures of $600 million to $650 million, and approximately $300 million of U.S. pension contributions. The EPS outlook includes approximately $200 million of BEFIEX credits and $300 million to $350 million of U.S. energy tax credits; the energy credits were not expected to be monetized during 2011.
Management expected industry demand growth of 2% to 3% in North America, 5% to 10% in Latin America, 2% to 4% in Europe, and 6% to 8% in Asia. Material-cost inflation was estimated at $400 million to $450 million, driven by component parts, steel, base metals, plastic resins, and oil-related materials. Whirlpool planned to offset the inflation through productivity, price increases, and new products.
- Legal contingencies: Embraco-related antitrust matters had generated approximately $217 million of cumulative charges, with $129 million accrued at March 31, 2011. Additional costs could materially affect results, liquidity, or financial position.
- Brazilian collection dispute: Whirlpool had accrued $164 million. Depending on judicial adjustments and the outcome of appeals, ultimate liability could be two to seven times the accrued amount.
- Product quality: Product warranty and recall reserves totaled $203 million at March 31, 2011, including $4 million of product-recall reserves.
- Other risks: Key exposures include intense competition, weak housing and consumer demand, commodity and component costs, foreign currency, supply-chain disruption, product liability and recalls, litigation, pensions, labor relations, cybersecurity, and regulatory changes.
- The company filed antidumping and countervailing-duty petitions concerning bottom-mount refrigerators imported from South Korea and Mexico.
Most important facts for investors to verify
- Whether pricing actions and productivity improvements offset the projected $400 million to $450 million of 2011 material-cost inflation.
- Whether the $400 million to $500 million free-cash-flow target is achievable despite the Q1 operating cash outflow, pension contributions, working-capital needs, and debt maturities.
- The timing and monetization of projected BEFIEX and U.S. energy tax credits, including the remaining $510 million of BEFIEX credits.
- The ultimate cost and timing of the Embraco antitrust matters and the Brazilian collection dispute, including potential liability above recorded accruals.
- Progress toward the projected demand growth and the effect of product price/mix and foreign currency on regional margins.
- Future recall, warranty, restructuring, pension, and other contingent liabilities.