Whirlpool Corporation 2014 Q3 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global manufacturer and marketer of major home appliances, operating through North America, Latin America, EMEA, and Asia. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company had 77.9 million common shares outstanding at October 24, 2014.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $4.824 billion | $4.683 billion | $13.869 billion | $13.679 billion |
| Gross margin | $827 million; 17.1% | $846 million; 18.1% | $2.369 billion; 17.1% | $2.389 billion; 17.5% |
| Operating profit | $335 million | $313 million | $907 million | $895 million |
| Net earnings available to Whirlpool | $230 million | $196 million | $569 million | $646 million |
| Diluted EPS | $2.88 | $2.42 | $7.16 | $7.97 |
| Cash from operating activities | Not separately provided for the quarter | $(128) million | $242 million |
- Q3 operating margin was approximately 6.9%, versus 6.7% in the prior-year quarter. The nine-month operating margin was approximately 6.5%, versus 6.5% in 2013.
- Cash and equivalents were $987 million at September 30, 2014, down from $1.380 billion at December 31, 2013. Current assets were $6.959 billion and current liabilities were $6.402 billion.
- Total debt, including notes payable and current maturities, was approximately $3.149 billion at September 30, 2014, compared with approximately $2.463 billion at year-end 2013. Long-term debt was $2.450 billion and notes payable were $486 million.
- Operating cash flow was negative for the first nine months, primarily because of seasonal working-capital investment and new product launches. Investing cash outflows were $748 million, including $422 million of capital expenditures, a $250 million Hefei Sanyo deposit, and a $75 million Indesit investment.
- Financing activities provided $511 million, including proceeds from the February debt offering and increased short-term borrowings. Dividends paid were $165 million, and the quarterly dividend was increased 20% to $0.75 per share.
Material changes versus the prior comparable period
- Q3 sales increased 3.0%; nine-month sales increased 1.4%. Excluding foreign currency and BEFIEX credits, sales increased 4.0% for Q3 and 3.3% for the nine-month period.
- North America was the principal growth driver, with sales up 6.3% in Q3 and 4.6% year to date. EMEA sales rose 1.0% and 3.4%, respectively.
- Latin America sales were essentially flat in Q3 and down 3.8% year to date. Asia sales declined 20.4% in Q3 and 15.2% year to date, reflecting lower unit volumes, Chinese trade-inventory transitions, product mix, and currency effects.
- Consolidated gross margin declined one percentage point in Q3 and 0.4 percentage points year to date, primarily because of higher material costs, currency effects, and lower BEFIEX credits.
- Restructuring costs declined to $38 million in Q3 from $68 million and to $101 million for nine months from $141 million. SG&A declined 2.4% in Q3 but increased 0.7% year to date.
- Q3 net earnings available to Whirlpool increased 17.1%, aided by lower income taxes and restructuring costs. Nine-month earnings declined 11.9%, principally because 2013 included substantially greater tax benefits.
Guidance, outlook, commentary, risks, and unusual items
- Management projected 2014 diluted EPS of $9.40 to $9.90, including estimated per-share effects of restructuring expense of approximately $1.45, investment expense of approximately $0.75, inventory purchase-accounting adjustments of $0.10, BEFIEX credits of $0.18, and antitrust resolutions of $0.04.
- Management forecast 2014 free cash flow of $650 million to $700 million, based on operating cash flow of $1.325 billion to $1.425 billion, capital spending of $675 million to $725 million, restructuring cash outlays of up to $150 million, and U.S. pension contributions of approximately $125 million.
- Expected 2014 industry demand was approximately 5% growth in North America, a 4% to 5% decline in Latin America, flat to 2% growth in EMEA, and flat demand in Asia.
- On October 24, 2014, after the reporting date, Whirlpool completed the acquisition of a 51% stake in Hefei Sanyo for approximately $551 million, funded with cash and debt financing. Whirlpool also completed acquisitions representing 66.8% of Indesit's voting stock for approximately $965 million and planned a mandatory tender offer for remaining shares.
- Whirlpool entered into a $2.0 billion long-term revolving facility, expandable to $2.5 billion, maturing in 2019, and a $1.0 billion 364-day facility maturing in 2015. No borrowings were outstanding under either facility at September 30, 2014. The company was in compliance with its financial covenants.
- Material contingencies include Brazilian BEFIEX tax assessments of approximately $520 million, other Brazilian tax assessments, product and front-load washing-machine litigation, a French competition investigation, and Embraco antitrust matters. The company had $46 million accrued for Embraco matters, with $41 million plus interest remaining payable through 2015.
- Whirlpool had $83 million of exposure to Alno AG, including approximately $39 million of overdue receivables, with amended payment terms requiring payment in January 2015. The filing identifies potential bankruptcy and distribution risks.
- Key operating risks include intense competition, demand and housing conditions, commodity prices, foreign currency, integration of Hefei Sanyo and Indesit, product liability and recalls, supply-chain disruption, litigation, pension obligations, labor relations, cybersecurity, and regulatory changes.
Important facts for investors to verify
- Whether management achieved the 2014 EPS and free-cash-flow outlook, particularly given negative operating cash flow through September.
- The financing, accounting treatment, integration costs, and post-closing performance of the Hefei Sanyo and Indesit acquisitions.
- The effect of higher material costs, currency movements, lower BEFIEX monetization, and regional volume weakness on future gross margins.
- The ultimate exposure and timing of Brazilian tax disputes, Embraco antitrust matters, washing-machine litigation, and the French competition investigation.
- Liquidity after acquisition financing, upcoming debt maturities, pension contributions, restructuring payments, dividends, and any Indesit tender-offer purchases.
- Alno AG’s ability to satisfy amended payment terms and the adequacy of related receivable reserves.