Whirlpool Corporation 2018 Form 10-K Summary
Business context and reporting period
Whirlpool Corporation manufactures and markets major home appliances and related products through four geographic segments: North America, Europe, Middle East and Africa (EMEA), Latin America, and Asia. The company operated in 14 countries, marketed products globally, and had approximately 92,000 employees and $21.0 billion of annual sales in 2018. This Form 10-K covers the fiscal year ended December 31, 2018, including fourth-quarter results.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $21.037 billion | $21.253 billion |
| Gross margin | $3.537 billion; 16.8% | $3.602 billion; 16.9% |
| Operating profit | $279 million; 1.3% margin | $1.136 billion; 5.3% margin |
| Net earnings available to Whirlpool | $(183) million | $350 million |
| Diluted earnings per share | $(2.72) | $4.70 |
| Ongoing EBIT | $1.319 billion; 6.3% margin | $1.364 billion; 6.4% margin |
| Cash from operating activities | $1.229 billion | $1.264 billion |
| Free cash flow | $853 million; 4.1% of sales | $707 million; 3.3% of sales |
- 2018 net sales declined 1.0%, primarily from lower unit volumes and unfavorable foreign currency, partly offset by favorable price/mix. Excluding currency, sales declined 0.1%.
- Reported results included approximately $850 million of non-recurring negative items, including $747 million of EMEA goodwill and intangible impairment charges, a $103 million French Competition Authority settlement, $30 million of trade customer insolvency expense, and $21 million of divestiture-related transition costs.
- Raw-material inflation, tariffs, freight costs, currency effects, and lower EMEA volumes pressured gross margin. SG&A increased to $2.189 billion, or 10.4% of sales, from 9.9%.
- Cash flow benefited from working-capital improvement and payment timing, but operating cash flow was reduced by a $350 million discretionary pension contribution.
- At December 31, 2018, cash and cash equivalents were $1.498 billion, while cash, cash equivalents, and restricted cash totaled $1.538 billion. Current assets were $7.898 billion versus current liabilities of $9.678 billion.
- Total debt was $6.027 billion, including $1.034 billion of notes payable and $947 million of current long-term debt maturities. Long-term debt was $4.046 billion.
- The company had approximately $3.5 billion of committed credit facilities, with no borrowings outstanding under those facilities at year-end.
- Whirlpool repurchased 7.5 million shares for approximately $1.2 billion and paid $306 million of dividends. Approximately $800 million remained authorized for repurchases at year-end.
Material changes versus the prior comparable period
- Whirlpool moved from $350 million of net earnings available to Whirlpool in 2017 to a $183 million net loss in 2018, primarily because of the EMEA impairment and other unusual charges.
- North America sales increased 2.8%, supported by price/mix, despite a 1.6% unit-volume decline.
- EMEA sales declined 7.1%, with unit volumes down 12.8%; segment EBIT declined to a $106 million loss from a $19 million loss.
- Latin America sales declined 8.3%, principally because of currency and price/mix; units increased 1.7%.
- Asia sales increased 3.2%, or 4.5% excluding currency, while units declined 0.7%.
- EMEA goodwill declined from $920 million to $309 million after the $579 million impairment. Consolidated goodwill declined from $3.118 billion to $2.451 billion.
- Total assets declined from $20.038 billion to $18.347 billion, and Whirlpool stockholders’ equity declined from $4.198 billion to $2.291 billion, reflecting the net loss, other comprehensive losses, and share repurchases.
- Capital expenditures declined to $590 million from $684 million, while free cash flow increased to $853 million from $707 million.
Guidance, outlook, risks, contingencies, and unusual items
- For 2019, management guided to diluted EPS of $12.75–$13.75, including an estimated $1.55 per-share restructuring impact and a $0.30 per-share tax impact.
- 2019 industry-demand assumptions were 0%–1% for North America, negative 1% to positive 1% for EMEA, approximately negative 2% to positive 5% for Latin America, and 1%–2% for Asia.
- Management expected 2019 operating cash flow of $1.425–$1.525 billion and free cash flow of approximately $800–$900 million, including up to $100 million of restructuring cash outlays and approximately $625 million of capital expenditures.
- Restructuring charges were $247 million in 2018; management expected up to $100 million in 2019, primarily related to EMEA cost reductions.
- Whirlpool agreed to sell its Embraco compressor business to Nidec for approximately $1.08 billion, subject to customary adjustments and regulatory approvals. The transaction was expected to close in early 2019, and the company retained certain tax, environmental, labor, and product liabilities.
- Approximately $947 million of long-term debt and approximately $1.0 billion of short-term bank borrowings were due in 2019. The company expected to address maturities through refinancing, free cash flow, cash on hand, and potentially Embraco sale proceeds.
- Material risks include intense competition, customer concentration, raw-material inflation, tariffs, foreign-currency volatility, supply-chain disruption, cybersecurity, product liability and recalls, impairment of goodwill and trademarks, pension and postretirement obligations, and global economic conditions.
- Legal and regulatory exposures include the continuing second phase of the French Competition Authority investigation, unresolved Brazilian tax assessments of approximately 1.8 billion Brazilian reais related to BEFIEX credits, a $64 million Brazilian IPI-related assessment, a $54 million Brazilian controlled-foreign-corporation tax exposure, Embraco antitrust matters, and other litigation.
- The company disclosed ongoing investigations concerning potential product quality and safety issues. It had a $268 million product warranty reserve at year-end. The Grenfell Tower investigation involving a Hotpoint-branded refrigerator remained unresolved, and no significant related charge had been recorded.
- Pension and postretirement benefit obligations exceeded plan assets by approximately $1.0 billion at year-end, including $0.6 billion for pensions and $0.4 billion for postretirement healthcare.
Most important facts for investors to verify
- Whether EMEA restructuring and commercial initiatives restore volumes, market share, and EBIT margins, given the limited remaining headroom in the EMEA goodwill and trademark valuations.
- The timing, final proceeds, tax effects, and retained liabilities associated with the Embraco divestiture.
- Whirlpool’s ability to refinance or repay approximately $2 billion of 2019 debt maturities while continuing dividends, share repurchases, capital expenditures, and pension funding.
- The ultimate cost and timing of the second phase of the French Competition Authority investigation and other legal proceedings.
- The outcome of Brazilian tax assessments and related guarantees, which could materially affect liquidity or earnings if unfavorable.
- The sustainability of reported free cash flow after excluding working-capital timing benefits, asset-sale proceeds, restructuring costs, and pension contributions.
- The sensitivity of future impairment charges to EMEA revenue, EBIT-margin, discount-rate, and brand royalty assumptions.