Whirlpool Corporation 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 and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $5.248 billion | $5.277 billion | $15.062 billion | $15.331 billion |
| Gross margin | $938 million; 17.9% | $930 million; 17.6% | $2.727 billion; 18.1% | $2.688 billion; 17.5% |
| Operating profit | $370 million | $329 million | $1.019 billion | $905 million |
| Net earnings available to Whirlpool | $238 million | $235 million | $708 million | $603 million |
| Diluted EPS | $3.10 | $2.95 | $9.16 | $7.54 |
| Cash used in operating activities | Not provided for the quarter | $(175) million | $(157) million |
- Q3 sales declined 0.5%; nine-month sales declined 1.8%. Excluding foreign currency, sales increased 0.2% and 1.3%, respectively.
- Approximate operating margins were 7.0% in Q3 and 6.8% for the first nine months, versus approximately 6.2% and 5.9% in the comparable 2015 periods.
- Operating profit benefited from improved gross margin, lower selling, general and administrative expense, and lower restructuring costs.
- Nine-month cash used in operations reflected working-capital investment and legacy product corrective-action expenditures. Investing cash use was $303 million, while financing activities provided $729 million.
- Cash and cash equivalents were $1.025 billion at September 30, 2016, compared with $772 million at December 31, 2015. Inventories increased to $3.208 billion from $2.619 billion.
- Debt included $1.408 billion of notes payable, $263 million of current maturities of long-term debt, and $3.718 billion of long-term debt. The company had approximately $3.1 billion of committed credit facilities and no borrowings under those committed facilities at quarter-end.
- The quarterly dividend increased 11% to $1.00 per share. Whirlpool repurchased approximately $425 million of common stock during the first nine months and had approximately $800 million remaining under its $1 billion authorization at September 30.
Material changes versus the prior comparable period
- Net earnings available to Whirlpool increased 1.2% in Q3 and 17.4% for the first nine months; diluted EPS increased 5.2% and 21.5%, respectively, aided by lower average shares outstanding.
- Gross margin expanded 30 basis points in Q3 and 60 basis points for the first nine months, primarily from productivity, acquisition synergies, higher volumes, and cost and capacity initiatives.
- Restructuring costs fell to $29 million in Q3 and $116 million for the first nine months, from $54 million and $145 million, respectively, in 2015.
- Regional sales were mixed: Q3 North America increased 2.1% and Latin America increased 6.5%, while EMEA declined 9.1% and Asia declined 2.1%. Nine-month EMEA, Latin America, and Asia sales declined, while North America increased 2.6%.
- Unit volumes increased 2.9% in Q3 and 1.4% for the first nine months, but foreign exchange and unfavorable product price/mix reduced reported sales.
- Income tax expense increased to $61 million in Q3 from $17 million, but declined to $64 million for the first nine months from $116 million. The filing attributes the changes primarily to tax planning, valuation allowance releases, and favorable audits and settlements.
- Whirlpool issued $500 million of 4.50% notes due 2046, repaid $494 million of maturing notes, and entered into a new $2.5 billion long-term credit facility maturing in 2021.
Guidance, outlook, commentary, risks, and unusual items
- 2016 diluted EPS guidance was $11.50 to $11.75, including estimated per-share impacts of restructuring expense of $2.60, acquisition-related transition costs of $0.42, legacy product warranty and liability expense of $0.09, and a $0.59 income-tax benefit.
- Management expected 2016 operating cash flow of $1.350 billion to $1.400 billion and free cash flow of approximately $700 million, including capital expenditures of approximately $650 million to $700 million.
- Management anticipated approximately $200 million of restructuring charges for 2016. The Italian restructuring plan is expected to be substantially complete in 2018, with estimated total costs of approximately $241 million, of which approximately $235 million is expected to require cash expenditures.
- A legacy Indesit dryer corrective-action campaign generated a $274 million liability in 2015. Whirlpool reported $124 million of related cash expenditures during the first nine months of 2016 and subsequently reached an agreement with the Indesit seller to recover a portion of acquisition-related costs.
- Brazilian tax disputes remain significant. Outstanding BEFIEX-related assessments were approximately $508 million, with additional disputed IPI and CFC tax assessments of approximately $71 million and $49 million, respectively; no reserves were recorded for these matters based on management’s legal and tax assessments.
- Other contingencies include a French competition investigation, product-liability and consumer litigation, post-retirement benefit litigation, remaining antitrust claims, and potential warranty or product-safety actions. The filing states that outcomes could materially affect a particular reporting period.
- Whirlpool had approximately $95 million of exposure to European customer Alno AG, including approximately $58 million overdue, and identified potential bankruptcy and distribution risks.
- Key operating risks include intense competition, foreign currency volatility, material and component costs, global demand conditions, acquisition integration, regulatory and legal matters, product recalls, cybersecurity, labor relations, pensions, and supplier disruptions.
Important facts for investors to verify
- Whether reported sales and margins continue to be affected by foreign exchange and unfavorable product price/mix, particularly in EMEA and Asia.
- The conversion of negative nine-month operating cash flow into management’s full-year operating cash flow and free-cash-flow targets.
- Progress, cash costs, and final liability exposure related to the Indesit dryer corrective action and Italian restructuring program.
- Potential cash and earnings effects of the unresolved Brazilian tax assessments and French competition investigation.
- Working-capital trends, commercial paper balances, upcoming debt maturities, and compliance with the new credit facility’s leverage and interest-coverage covenants.
- Whether the company completes the planned Brazilian subsidiary tender offers and the resulting effects on liquidity, ownership, and corporate structure.