Whirlpool Corporation — Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global manufacturer 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, 2013, with comparisons to the corresponding 2012 periods.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $4.683 billion | $4.494 billion | $13.679 billion | $13.352 billion |
| Gross margin | $846 million; 18.1% | $703 million; 15.6% | $2.389 billion; 17.5% | $2.081 billion; 15.6% |
| Operating profit | $313 million | $213 million | $895 million | $611 million |
| Net earnings available to Whirlpool | $196 million | $74 million | $646 million | $279 million |
| Diluted EPS | $2.42 | $0.94 | $7.97 | $3.53 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $242 million | $(161) million |
- Q3 net sales increased 4.2%; nine-month sales increased 2.5%. Excluding foreign currency and BEFIEX credits, sales increased 5.3% in Q3 and 3.7% year to date.
- Q3 operating margin was approximately 6.7%, versus 4.7% in 2012; the nine-month operating margin was approximately 6.5%, versus 4.6%.
- Higher gross margin reflected productivity and cost/capacity-reduction initiatives, partly offset by higher material costs.
- Cash and equivalents were $826 million at September 30, 2013, down from $1.168 billion at December 31, 2012. The nine-month decrease in cash was $342 million.
- Inventories increased to $2.667 billion from $2.354 billion at year-end, while accounts receivable increased to $2.226 billion from $2.038 billion.
- Total debt, including current maturities, was approximately $2.445 billion at September 30, 2013, compared with approximately $2.454 billion at December 31, 2012. The reported fair value of long-term debt, including current maturities, was $2.6 billion.
- Whirlpool had no commercial paper borrowings and no borrowings under committed credit facilities at September 30, 2013. Approximately $600 million of term debt was scheduled to mature within the next twelve months.
- Capital expenditures were $317 million for the first nine months, compared with $276 million in 2012. Dividends paid were $139 million, and $140 million was used to repurchase 1.06 million shares.
Material changes versus the prior comparable period
- Net earnings available to Whirlpool increased 164% in Q3 and 131% for the first nine months.
- Gross margin expanded by 2.5 percentage points in Q3 and 1.9 percentage points year to date.
- Restructuring costs declined to $141 million for the first nine months from $175 million in 2012, although Q3 restructuring costs increased to $68 million from $62 million.
- Interest expense declined 10.4% in Q3 and 11.3% year to date, primarily because of lower average long-term debt rates.
- Nine-month income tax expense fell to $27 million from $87 million, benefiting from U.S. energy tax credits of $115 million, including $75 million related to 2012 production and $40 million related to estimated 2013 production.
- North America and EMEA sales increased year to date by 4.6% and 4.7%, respectively. Latin America declined 2.0% and Asia declined 2.3%, principally due to currency effects and regional operating conditions.
- Operating profit improved in North America to $769 million from $613 million and in Latin America to $398 million from $342 million. EMEA improved to a $14 million operating loss from a $59 million loss; Asia declined to $24 million from $30 million.
- Whirlpool issued $500 million of notes in February 2013 and used the proceeds, together with other funding, to repay $500 million of notes maturing in March 2013.
Guidance, outlook, management commentary, risks and unusual items
- Management forecast 2013 diluted EPS of $10.45 to $10.65 and free cash flow of $690 million to $710 million, based on projected operating cash flow of $1.290 billion to $1.360 billion and capital expenditures and asset-sale spending of $600 million to $650 million.
- The outlook incorporated estimated per-share impacts of restructuring expense of $1.75, BEFIEX tax credits of $0.91, U.S. energy tax credits of $1.50, antitrust and contract resolutions of $0.02, and acquisition-related investment expenses of $(0.14).
- Expected 2013 industry demand was approximately 9% growth in North America, 1% growth in Latin America, flat demand in EMEA, and a 2% decline in Asia.
- The 2011 restructuring plan remained expected to cost approximately $500 million in total, with substantial completion by year-end 2013. The company expected approximately $185 million of 2013 charges, $175 million of 2013 benefits, and approximately $150 million of future cash expenditures.
- Whirlpool agreed to acquire a 51% stake in Hefei Rongshida Sanyo Electric for RMB 3.4 billion, or approximately $553 million. Closing was expected by the end of 2014, subject to shareholder and regulatory approvals. Funding was expected from cash on hand or debt financing, and a $20 million breakup fee could apply in specified circumstances.
- Embraco antitrust matters had generated cumulative charges of approximately $364 million since 2009. At September 30, $101 million remained accrued, including $74 million of installment payments plus interest due to government authorities through 2015. Additional damages and litigation costs could be material.
- Brazilian tax disputes included approximately $84 million of IPI-related assessments, approximately $54 million of potential CFC tax exposure, and approximately $550 million of BEFIEX-related assessments. Whirlpool had not accrued amounts for these disputed exposures.
- Product warranty and recall reserves were $192 million at September 30, 2013, compared with $183 million at September 30, 2012. The company was investigating a limited number of potential quality and safety issues.
- Other risks included intense competition, uncertain global demand, housing and interest-rate conditions, commodity costs, foreign currency movements, supplier and labor issues, product liability, litigation, regulatory matters, pension obligations, information technology failures, and data security breaches.
Most important facts for investors to verify
- Whether the projected 2013 EPS and free-cash-flow ranges were achieved, particularly after restructuring, tax credits, and other nonrecurring items.
- The sustainability of gross-margin improvement after productivity benefits, higher material costs, pricing and mix effects, and the expiration of tax-related benefits.
- Liquidity available after the acquisition of Hefei Sanyo and the approximately $600 million of near-term debt maturities.
- Changes in the estimated exposure from Brazilian BEFIEX, IPI, and CFC tax matters and Embraco antitrust litigation.
- Progress, remaining cash costs, and realized benefits from the 2011 restructuring plan and European facility closures.
- Whether working-capital growth, especially inventories and receivables, converts into the projected operating cash flow.