Whirlpool Corporation — 2016 Q2 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 six months ended June 30, 2016, compared with the corresponding 2015 periods. The filing was dated July 22, 2016.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $5.198 billion | $5.208 billion | $9.814 billion | $10.054 billion |
| Gross margin | $968 million; 18.6% | $905 million; 17.4% | $1.789 billion; 18.2% | $1.758 billion; 17.5% |
| Operating profit | $366 million | $273 million | $649 million | $576 million |
| Net earnings available to Whirlpool | $320 million | $177 million | $470 million | $368 million |
| Diluted earnings per share | $4.15 | $2.21 | $6.06 | $4.60 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $(404) million | $(397) million |
- Q2 net sales declined 0.2%; six-month sales declined 2.4%. Excluding foreign-currency effects, sales increased 2.7% in Q2 and 1.9% year to date.
- Q2 gross margin expanded 120 basis points, primarily from cost and capacity-reduction initiatives, productivity, acquisition synergies and higher volume. Six-month gross margin expanded 70 basis points.
- Q2 net earnings available to Whirlpool increased 80.5%, while six-month earnings increased 27.8%. The effective tax rate benefited from valuation allowance releases, favorable audits and settlements, and tax planning.
- Q2 restructuring expense was $40 million, compared with $58 million in the prior year; six-month expense was $87 million versus $91 million.
- Six-month capital expenditures were $206 million versus $268 million. Cash used in investing activities was $152 million versus $243 million.
- Cash and cash equivalents were $959 million at June 30, 2016, compared with $772 million at December 31, 2015. The six-month increase in cash was $187 million, supported by $742 million of financing cash flow.
- At June 30, 2016, notes payable were $997 million, including $853 million of commercial paper, versus $20 million at year-end. Current maturities of long-term debt were $510 million, and long-term debt was $3.712 billion.
- Total current assets were $8.373 billion and total current liabilities were $8.526 billion. Inventories increased to $3.204 billion from $2.619 billion at year-end, while accounts receivable increased to $2.797 billion from $2.530 billion.
Material changes versus the prior comparable period
- Unit volume increased 3.8% in Q2 and 0.6% for the first six months. North America was the strongest region, with Q2 sales up 2.7% and six-month sales up 2.8%.
- EMEA sales declined 2.9% in Q2 and 5.3% year to date; Latin America declined 3.3% and 12.7%, respectively; Asia declined 4.7% and 3.3%, respectively. Foreign-currency translation was a major adverse factor.
- Operating profit increased by $93 million in Q2 and $73 million year to date, despite lower reported sales. The improvement reflected gross-margin expansion, lower restructuring costs and lower SG&A.
- Interest and sundry expense was $39 million in Q2 versus $42 million of income in the prior year, primarily because 2015 included a $65 million gain related to a Brazilian business investment.
- Income tax benefit was $56 million in Q2 versus $90 million of tax expense in Q2 2015. The six-month tax expense was $3 million versus $99 million in the prior year.
- Whirlpool issued $500 million of 4.50% notes due 2046 and repaid $250 million of 6.50% notes. It also replaced prior facilities with a $2.5 billion long-term credit facility maturing in 2021. No borrowings were outstanding under the committed credit facilities at June 30, 2016.
- The quarterly dividend increased 11% to $1.00 per share. Whirlpool repurchased approximately $325 million of stock during the first six months, including approximately $100 million under a new $1 billion authorization.
Guidance, outlook, commentary and risks
- Management’s 2016 diluted EPS outlook was $11.50 to $12.00. The outlook included estimated per-share impacts of restructuring expense of $(2.58), acquisition-related transition costs of $(0.77), legacy product warranty and liability expense of $(0.08), and a tax impact of $0.68.
- Management expected 2016 operating cash flow of $1.4 billion to $1.55 billion and free cash flow of approximately $700 million to $800 million, including up to $200 million of acquisition-related restructuring cash outlays, $155 million of legacy product warranty costs and $700 million to $750 million of capital expenditures.
- Industry-demand assumptions were 5% to 6% growth in North America, flat to 2% growth in EMEA, a 10% decline in Latin America, and flat demand in Asia.
- Italian restructuring actions were expected to cost up to approximately €241 million and be substantially complete in 2018. Whirlpool anticipated approximately $200 million of restructuring charges for 2016.
- A legacy Indesit dryer corrective-action campaign remained ongoing. The company had a $398 million product warranty and legacy product warranty reserve at June 30, 2016, including $153 million related to the legacy product warranty; six-month cash expenditures for the corrective action were $83 million.
- Material contingencies included Brazilian tax assessments of approximately $502 million related to BEFIEX credits, approximately $70 million related to IPI tax credits and approximately $52 million related to controlled-foreign-company taxes. Whirlpool had not accrued amounts for these assessments based on its legal and tax assessments.
- Other risks included the French competition investigation, product liability and class-action litigation, a proposed settlement involving front-load washing machines subject to court approval, foreign-exchange and commodity-price volatility, intense competition, acquisition integration, customer credit exposure and potential product recalls.
- Whirlpool had approximately €101 million of exposure to European customer Alno AG, including approximately €47 million of overdue receivables, and was monitoring potential financing and bankruptcy risks.
- On July 12, 2016, Brazilian subsidiaries announced proposed tender offers to acquire publicly held shares of WHR SA and BMT. The estimated purchase price was approximately $62.4 million, subject to regulatory and exchange approvals.
Important facts for investors to verify
- Whether the unusually low Q2 and six-month effective tax rates, including the $105 million valuation allowance release and $32 million benefit from audits and settlements, are recurring.
- Progress toward the $11.50–$12.00 EPS, $1.4–$1.55 billion operating-cash-flow and $700–$800 million free-cash-flow guidance ranges.
- Working-capital trends, particularly the $585 million increase in inventories and the negative six-month operating cash flow.
- Execution and final cost of the Indesit dryer corrective action and Italian restructuring program.
- Potential cash, earnings and liquidity exposure from Brazilian tax disputes, the French competition investigation, product litigation and other contingencies for which no or limited reserves were recorded.
- Leverage and liquidity following the increase in commercial paper and other short-term borrowings, including compliance with the credit facility’s debt-to-capitalization and interest-coverage covenants.
- Impact of currency movements and regional demand weakness, especially in EMEA, Latin America and Asia.