WHIRLPOOL CORP quarterly report, Q2 FY2019

Whirlpool Corporation — Q2 2019 Form 10-Q Summary

Business Context and Reporting Period

Whirlpool manufactures and markets major home appliances globally through four geographic segments: North America, EMEA, Latin America and Asia. This Form 10-Q covers the three and six months ended June 30, 2019. The company reported approximately $21 billion of 2018 annual sales and 92,000 employees.

Financial Performance and Key Metrics

Metric	Q2 2019	Q2 2018	Six Months 2019	Six Months 2018
Net sales	$5,186 million	$5,140 million	$9,946 million	$10,051 million
Gross margin	$932 million; 18.0%	$880 million; 17.1%	$1,744 million; 17.5%	$1,692 million; 16.8%
Operating profit (loss)	$191 million	$(472) million	$454 million	$(329) million
Net earnings (loss) available to Whirlpool	$67 million	$(657) million	$538 million	$(563) million
Diluted EPS	$1.04	$(9.50)	$8.35	$(8.03)
Cash used in operating activities	Not separately provided	Not separately provided	$(821) million	$(584) million
Free cash flow	Not separately provided	Not separately provided	$(997) million	$(725) million

Q2 operating margin was approximately 3.7%; six-month operating margin was approximately 4.6%. Management reported record ongoing, non-GAAP Q2 EPS of $4.01 and approximately 30 basis points of ongoing EBIT margin expansion.

Q2 sales increased 0.9%; sales excluding foreign currency increased 3.5%. Six-month sales declined 1.0%, while sales excluding foreign currency increased 2.3%.
Q2 unit volume increased 0.8%; six-month units declined 0.5%.
SG&A increased 8.1% in Q2 and 4.3% year to date, primarily due to brand investments.
Q2 interest expense increased to $52 million from $47 million, primarily reflecting higher average short-term debt.
Q2 income tax expense was $130 million; six-month tax benefit was $2 million. The six-month result included a $235 million valuation allowance reduction in the first quarter, partly offset by a $39 million increase in the second quarter.

Liquidity, Cash Flow and Capital Structure

Cash and cash equivalents were $1,178 million at June 30, 2019, compared with $1,498 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $1,209 million.
Cash used in operations was $821 million year to date, driven primarily by the French antitrust settlement payment and temporarily higher working capital, including increases of $574 million in inventories and $251 million in receivables.
Capital expenditures were $197 million year to date. Dividends paid were $149 million, and share repurchases were $50 million.
Notes payable increased to $2,157 million from $1,034 million at year-end, including $947 million of commercial paper and $1,210 million of short-term bank borrowings.
Current maturities of long-term debt were $573 million, and long-term debt was $4,155 million. The fair value of total long-term debt, including current maturities, was $4.92 billion.
Committed credit facilities totaled approximately $3.6 billion, including a $3.0 billion amended long-term facility. No borrowings were outstanding under the committed credit facilities at June 30, 2019.
Whirlpool issued $700 million of 4.75% senior notes due 2029 and repaid approximately $673 million under the EMEA term loan and $250 million of senior notes during the first quarter.
The quarterly dividend increased 4.3% to $1.20 per share. Approximately $750 million remained available under the share repurchase authorization.

Material Changes Versus the Prior Comparable Period

Profitability improved substantially versus Q2 2018, which included $747 million of EMEA goodwill and intangible impairment charges and a $114 million French antitrust settlement charge. Q2 2019 included no impairment charge and reported $67 million of Whirlpool net earnings versus a $657 million loss.
Q2 gross margin improved by approximately 90 basis points to 18.0%, reflecting favorable price/mix, partly offset by raw material inflation, tariffs, lower volume and foreign currency.
North America sales increased 2.8% in Q2 and EBIT margin improved to 12.4% from 11.9%.
EMEA sales declined 5.8% because of foreign currency and unfavorable price/mix, although EBIT margin improved to negative 1.6% from negative 2.3%, primarily due to restructuring benefits.
Latin America sales increased 4.1% and EBIT margin increased to 6.3% from 3.8%, supported by price/mix and volume.
Asia sales were broadly flat in Q2, but EBIT margin declined to 3.6% from 10.1%, primarily because of lower China volume and increased brand investment; the prior-year period benefited from Chinese government incentives.
Restructuring charges declined to $86 million year to date from $188 million, while Q2 restructuring charges increased to $60 million from $44 million.
Brazil indirect tax credits contributed $53 million in Q2 and $180 million year to date to interest and sundry income. These are unusual, non-operating items.

Guidance, Outlook and Unusual Items

Management maintained 2019 diluted EPS guidance of $17.80 to $18.55. The outlook includes estimated adjustments for restructuring, Brazil indirect tax credits, divestiture costs, the South Africa disposal loss, legacy warranty costs, the Embraco sale gain and tax-related items.
Management expects approximately $1.4 billion of 2019 operating cash flow and approximately $800 million of free cash flow, including up to $200 million of restructuring cash outlays and approximately $625 million of capital expenditures. The free cash flow outlook excludes Embraco sale proceeds.
Expected 2019 industry demand was North America down 2% to flat, EMEA down 1% to up 1%, Latin America approximately up 5%, and Asia up 1% to 2%.
Whirlpool closed the sale of Embraco to Nidec on July 1, 2019 for approximately $1.08 billion. Management estimated a net gain of approximately $375 million to $425 million and expected to use the proceeds to repay approximately $1 billion of outstanding term-loan borrowings in the third quarter.
Whirlpool recorded a $68 million loss related to the pending South Africa sale and $11 million of Turkey divestiture-related costs. The South Africa transaction had a stated cash purchase price of $5 million, subject to closing adjustments.
Management expects approximately $200 million of restructuring charges for full-year 2019, primarily related to EMEA fixed-cost reductions.
Material risks include competition, weak or uncertain appliance demand, raw material inflation, tariffs, foreign currency movements, supply-chain disruption, customer concentration and insolvency, cybersecurity, product liability and recalls, labor matters, international operations, litigation and tax disputes.
Significant contingencies include Brazilian tax assessments of approximately $499 million related to BEFIEX credits, approximately $66 million related to IPI tax matters and approximately $55 million related to controlled foreign corporation taxes. Whirlpool has not accrued amounts for these assessments and is defending them.
Other potentially material matters include the second phase of the French Competition Authority investigation, an approximately €174.5 million clawback claim related to the Alno insolvency, class-action litigation involving top-load washing machines, and claims related to the Grenfell Tower fire. The filing states that outcomes and potential losses cannot currently be reasonably estimated for several of these matters.
U.S. tariffs and the global trade environment increased material costs and could materially affect future results. The company also reported an additional $12 million of Q2 warranty expense related to the legacy Indesit dryer corrective-action campaign in the United Kingdom.

Important Facts for Investors to Verify

Reconcile reported GAAP earnings with management’s ongoing EPS of $4.01 and assess the sustainability of the Brazil tax credits and other excluded items.
Verify completion accounting for the Embraco sale, including the final gain, working-capital and debt adjustments, tax effects and repayment of the term loan.
Monitor liquidity after the increase in short-term borrowings, the $573 million of debt maturing within twelve months and the planned debt repayment.
Assess whether the targeted $1.4 billion of operating cash flow and $800 million of free cash flow remain achievable after the first-half operating cash outflow of $821 million.
Evaluate EMEA turnaround progress, restructuring costs, Asia profitability, raw material and tariff exposure, and foreign currency sensitivity.
Review the potential financial impact of Brazilian tax disputes, French competition proceedings, product-liability matters, warranty campaigns and other unresolved contingencies.