Whirlpool Corporation: Q2 2010 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation, a global manufacturer of major home appliances, reported unaudited results for the three and six months ended June 30, 2010. The company operates through North America, Europe, Latin America and Asia segments. The filing was dated July 20, 2010.
Financial performance and liquidity
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Net sales | $4.534 billion | $4.169 billion | $8.806 billion | $7.738 billion |
| Operating profit | $331 million | $134 million | $572 million | $300 million |
| Operating margin | 7.3% | 3.2% | 6.5% | 3.9% |
| Net earnings attributable to Whirlpool | $205 million | $78 million | $369 million | $146 million |
| Diluted EPS | $2.64 | $1.04 | $4.78 | $1.95 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $170 million | $(4) million |
Consolidated gross margin increased to 16.8% from 13.3% in the second quarter and to 15.9% from 13.9% for the six-month period. Improvement reflected cost reductions and productivity initiatives, partly offset by lower product price/mix and higher material and oil-related costs. SG&A was 8.8% of sales in both three- and six-month periods, compared with 9.3% in the prior-year periods.
Second-quarter sales increased 8.7%, while six-month sales increased 13.8%. Excluding foreign currency, sales increased 6.2% and 8.6%, respectively. Six-month regional sales increased 6.3% in North America, declined 0.3% in Europe, increased 42.5% in Latin America and increased 49.4% in Asia.
Cash and equivalents were $850 million at June 30, 2010, compared with $1.380 billion at December 31, 2009 and $247 million at June 30, 2009. The six-month cash decrease of $530 million reflected $170 million of operating cash flow, $276 million used in investing activities and $380 million used in financing activities, plus a $44 million foreign-exchange impact.
Inventories increased to $2.676 billion from $2.197 billion at year-end, primarily because of higher production and transition inventory. Capital expenditures were $267 million, compared with $229 million in the prior-year period.
Debt consisted of $310 million of current maturities, $2.195 billion of long-term debt and $22 million of notes payable at June 30, 2010. The fair value of long-term debt, including current maturities, was $2.738 billion. Whirlpool repaid $372 million of long-term debt during the first six months and reported no outstanding balance under its credit facility; it was in compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Sales growth was driven principally by higher unit volume and favorable foreign-currency effects, although product price/mix was unfavorable.
- Operating profit more than doubled in the second quarter and increased substantially for the six-month period, supported by higher sales, productivity and cost reductions.
- Interest expense declined modestly because of lower average debt, while interest and sundry expense worsened by $57 million in the second quarter, primarily because of higher legal contingencies and defense costs.
- The effective tax benefit declined to 3.9% from 35.4% for the quarter and to 2.9% from 31.5% for the six-month period, mainly because higher earnings generated tax expense, partly offset by general business credits.
- Operating cash flow improved from an outflow of $4 million to $170 million, but working capital absorbed cash, particularly the $577 million increase in inventories.
- Comprehensive income available to Whirlpool common stockholders was a loss of $39 million in the quarter, compared with income of $406 million in the prior-year quarter, largely because of unfavorable currency translation, cash-flow hedge changes, pension items and available-for-sale securities.
Guidance, outlook, risks and unusual items
Management increased full-year 2010 diluted EPS guidance to $9.00-$9.50 from $8.00-$8.50. Free cash flow guidance increased to $550-$650 million from $500-$600 million, based on projected operating cash flow of $1.115-$1.225 billion, capital expenditures of $575-$625 million and asset-sale proceeds of $10-$50 million. North American appliance shipments were expected to increase approximately 5%, versus the previous expectation of 3%-5%.
The company announced a voluntary recall of 1.8 million dishwashers in the United States and Canada because of a heating-element electrical failure. Whirlpool accrued $75 million in the March 2010 quarter. The filing states that actual costs could vary depending on consumer response, repair and administrative costs, and supplier recovery.
Restructuring charges were $22 million in the quarter and $42 million for the six months. The company continued capacity shifts, facility optimization and workforce reductions. The Evansville, Indiana facility closed in June 2010, eliminating approximately 1,100 positions. Approximately $10 million of closure costs and $7 million of workforce-reduction costs remained at June 30, 2010.
Whirlpool had accrued approximately $100 million for compressor-industry antitrust investigations and related litigation as of June 30, 2010. The company stated that the aggregate exposure could not be reasonably estimated and could materially affect financial position, liquidity or results of operations. A separate Brazilian litigation matter resulted in an additional accrual of approximately $53 million during the June quarter, although the final award could differ materially.
Latin America results included monetization of $88 million of BEFIEX export credits during the first six months, with $614 million remaining. Future Brazilian government actions could limit monetization. The company also identified potential settlement of approximately $41 million of unrecognized tax benefits over the following twelve months.
Key ongoing risks include appliance demand and housing conditions, supplier and customer liquidity, competition, foreign-currency movements, raw-material prices, product liability and recalls, antitrust and other litigation, pension and healthcare obligations, labor relations, regulatory changes, supply interruptions, information-technology failures and geopolitical or economic disruptions. Management stated that there were no material changes in market-risk exposures or risk factors from the 2009 Form 10-K.
Important facts for investors to verify
- Whether operating improvement is sustainable after excluding recall charges, curtailment gains, tax credits, restructuring and other unusual items.
- Progress toward the $550-$650 million free-cash-flow outlook and the effect of inventory normalization on cash generation.
- Execution of the dishwasher recall and any changes in warranty, recall or product-liability reserves.
- Potential additional costs from antitrust investigations, compressor litigation and the Brazilian financial-institution dispute.
- Debt maturities, refinancing requirements, credit-facility availability and compliance with financial covenants.
- Whether Latin American BEFIEX credits can continue to be monetized and how foreign exchange affects reported sales and earnings.
- Demand trends by region, particularly weaker European sales and the sustainability of strong Latin American and Asian growth.