Whirlpool Corporation 2011 Q2 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, Europe, the Middle East and Africa, and Asia. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Net sales | $4,730 million | $4,534 million | $9,130 million | $8,806 million |
| Gross margin | $669 million; 14.1% | $761 million; 16.8% | $1,291 million; 14.1% | $1,400 million; 15.9% |
| Operating profit | $223 million | $331 million | $450 million | $572 million |
| Net earnings available to Whirlpool | $(161) million | $205 million | $8 million | $369 million |
| Diluted earnings per share | $(2.10) | $2.64 | $0.10 | $4.78 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $(234) million | $170 million |
| Capital expenditures | Not separately provided | Not separately provided | $259 million | $267 million |
Q2 sales increased 4.3%, while six-month sales increased 3.7%. Operating profit declined 32.6% in Q2 and 21.3% for the six-month period. The consolidated gross margin fell 270 basis points in Q2 and 180 basis points year to date.
At June 30, 2011, cash and equivalents were $845 million, compared with $1,368 million at December 31, 2010. Total debt, including current maturities, was $2,521 million, consisting of $363 million of current maturities and $2,143 million of long-term debt, plus $15 million of notes payable. The fair value of long-term debt, including current maturities, was $2,712 million.
Total current assets were $7,215 million versus current liabilities of $6,869 million. The company had no borrowings under its credit facility or commercial paper program at June 30, 2011. Its amended credit facility provides $1.725 billion of commitments through June 28, 2016, including a $200 million letter-of-credit sublimit, and the company remained in compliance with its covenants.
Six-month cash used in operating activities was driven by approximately $200 million of U.S. pension contributions, lower operating profit, working-capital needs, and tax-related payments. Cash used in investing activities was $277 million. Financing cash use was $58 million, including $306 million of debt repayments, partly offset by $300 million of new debt issuance. The quarterly dividend increased to $0.50 per share from $0.43.
Regional Performance and Material Changes
- North America: Q2 sales decreased 6.7% and six-month sales decreased 3.4%, reflecting lower unit volume and unfavorable price/mix. Q2 gross margin declined to 10.7% from 14.8%.
- Latin America: Q2 sales increased 25.3% and six-month sales increased 16.0%, supported by higher units, favorable currency, and BEFIEX credits. Gross margin nevertheless declined to 20.0% from 22.7% in Q2.
- Europe, Middle East and Africa: Q2 sales increased 13.8%, primarily from currency, while sales excluding currency declined. Gross margin decreased to 12.8% from 13.5%.
- Asia: Q2 sales decreased 1.9%, while six-month sales increased 2.3%. Gross margin was broadly stable.
- Raw-material and oil-related inflation, including steel, copper, aluminum, zinc, nickel, resins and other components, materially reduced margins. Price increases, productivity programs and cost reductions only partially offset these pressures.
- Selling, general and administrative expense increased 6.0% in Q2 and 4.3% year to date, mainly because of higher advertising spending and unfavorable currency effects.
- Restructuring charges decreased to $14 million in Q2 and $22 million year to date, from $22 million and $42 million, respectively, in the prior-year periods.
Unusual Items, Outlook and Risks
The company recorded approximately $522 million of Q2 charges in interest and sundry expense related primarily to the Brazilian collection dispute and increased Embraco antitrust accruals. The Brazilian dispute produced an additional charge of approximately $439 million and an after-tax earnings impact of approximately $290 million. The settlement totals approximately $614 million, with $300 million paid in July 2011 and approximately $314 million planned for the first quarter of 2012.
Embraco antitrust matters have generated approximately $306 million of cumulative charges, with $209 million accrued at June 30, 2011. Additional costs cannot presently be estimated and could materially affect financial position, liquidity or results. Related government investigations and private litigation remain ongoing.
Management reduced its 2011 earnings outlook to $7.25–$8.25 per diluted share from the prior $12.00–$13.00 range, reflecting the Brazilian collection dispute and Embraco matters. The company expected free cash flow of $160–$260 million, based on operating cash flow of $740–$860 million, capital expenditures of $600–$625 million, and asset-sale proceeds of $20–$25 million. Management indicated it was guiding toward the low end because of economic uncertainty, global volatility and raw-material inflation.
Expected 2011 industry demand ranges were negative 1% to negative 2% in North America, 5% to 10% growth in Latin America, 1% to 2% growth in EMEA, and 4% to 6% growth in Asia. Near-term liquidity uses included the Brazilian settlement, approximately $350 million of term-debt maturities over the following 11 months, approximately $90 million of pension funding in the second half of 2011, and legal contingencies.
Other notable matters include planned European manufacturing changes estimated to cost approximately $71 million during 2011 and 2012, a revised $66 million dishwasher recall estimate, potential exposure from product liability and other litigation, and antidumping and countervailing-duty petitions concerning bottom-mount refrigerators from South Korea and Mexico. Management stated that there were no material changes to previously disclosed risk factors or market-risk exposures.
Important Facts for Investors to Verify
- Confirm the timing and funding of the remaining approximately $314 million Brazilian settlement payment and its effect on cash balances.
- Monitor the final cost and payment schedule for Embraco antitrust matters, including the $209 million accrued balance and unresolved private litigation.
- Assess whether price increases and productivity initiatives offset continuing raw-material and oil-related inflation.
- Reconcile projected 2011 free cash flow with actual operating cash flow, pension contributions, capital spending and working-capital movements.
- Evaluate covenant compliance, debt maturities and available liquidity after settlement payments and other contingencies.
- Track monetization of the remaining $474 million of BEFIEX credits and the risk that Brazilian government actions could limit realization.
- Consider the sustainability of earnings excluding the large Brazilian dispute, antitrust, tax-credit and other unusual items.