Whirlpool Corporation 2018 Q1 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation manufactures and markets home appliances globally through four geographic segments: North America, EMEA, Latin America and Asia. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Whirlpool operated in 15 countries and marketed products in nearly every country worldwide.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $4.911 billion | $4.786 billion | 2.6% increase |
| Gross margin | $812 million | $826 million | 1.7% decrease |
| Gross margin percentage | 16.5% | 17.3% | Down approximately 80 basis points |
| Operating profit | $143 million | $264 million | 45.8% decrease |
| Operating margin | 2.9% | 5.5% | Down approximately 260 basis points |
| Net earnings available to Whirlpool | $94 million | $153 million | 38.9% decrease |
| Diluted EPS | $1.30 | $2.01 | 35.6% decrease |
| Operating cash flow | $(713) million | $(435) million | Greater seasonal use of cash |
| Free cash flow | $(756) million | $(497) million | Greater use of cash |
Ongoing EBIT, which excludes restructuring charges, increased to $295 million from $285 million. Management attributed the improvement to favorable global price/mix, North American growth and margin expansion, and fixed-cost reductions, which offset significant raw-material inflation. Reported results were reduced by $144 million of restructuring charges, compared with $46 million in the prior-year quarter.
Product-category sales were laundry $1.562 billion, refrigeration $1.291 billion, cooking $1.049 billion, dishwashing $396 million, compressors $296 million, spare parts and warranties $273 million, and other revenue $44 million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $1.041 billion at March 31, 2018, compared with $1.196 billion at December 31, 2017. Cash, cash equivalents and restricted cash totaled $1.124 billion.
- Operating cash flow was $(713) million, primarily reflecting lower earnings and working-capital effects from lower unit volume and higher material costs.
- Capital expenditures were $66 million, compared with $88 million in Q1 2017.
- Short-term notes payable increased to $1.060 billion from $450 million at year-end, while current maturities of long-term debt were $632 million.
- Long-term debt was $4.190 billion, compared with $4.392 billion at December 31, 2017. Total debt, including current maturities and notes payable, was approximately $5.882 billion.
- Whirlpool reported approximately $3.6 billion of committed credit facilities and no borrowings under those committed facilities at March 31, 2018.
- The company had $632 million of long-term debt maturing within the next 12 months and was evaluating repayment, refinancing, free-cash-flow generation or cash-on-hand alternatives.
- Dividends declared were $1.10 per share. In April 2018, the quarterly dividend was increased 4.5% to $1.15 per share.
Material changes versus the prior comparable period
- Sales increased despite a 5.4% decline in consolidated units, driven by favorable product price/mix and foreign-currency effects. Excluding currency, sales declined 0.7%.
- Gross margin declined due primarily to raw-material inflation, partly offset by favorable price/mix.
- Reported operating profit and EPS declined substantially because restructuring costs increased by $98 million year over year.
- Income tax expense declined to $15 million from $40 million, reflecting lower earnings, the reduction in the U.S. statutory tax rate from 35% to 21%, and tax-planning benefits.
- Operating cash usage increased by $278 million year over year, while financing cash inflow increased to $522 million, primarily from higher short-term borrowings and the absence of share repurchases.
- North America sales increased 2.9% and units increased 1.2%. EMEA sales increased 3.4% on currency and price/mix, but units declined 14.3%. Latin America sales declined 2.5%, and Asia sales increased 3.1% despite an 8.3% unit decline.
- The company adopted the new revenue-recognition standard, Topic 606, on January 1, 2018, with no material impact on reported financial statements. It also recorded a $56 million increase to opening retained earnings from adopting the intra-entity transfer tax standard.
Guidance, outlook, commentary and unusual items
- Management projected 2018 diluted EPS of $12.30 to $13.30, including an estimated $2.77 per share restructuring impact and a $0.57 per share income-tax impact.
- Expected 2018 industry demand was 2% to 3% in North America, 1% to 2% in EMEA, 1% to 2% in Latin America and 2% to 4% in Asia.
- Management forecast 2018 operating cash flow of $1.675 billion to $1.775 billion and free cash flow of approximately $1.0 billion to $1.1 billion, including up to $300 million of acquisition-related restructuring cash outlays, $35 million of pension contributions and approximately $675 million of capital expenditures.
- Full-year 2018 restructuring charges were expected to be approximately $200 million. Restructuring programs included Italian operations, EMEA dryer manufacturing and the Embraco compressor business, with approximately 500 positions potentially affected by each of the latter two initiatives.
- On April 23–24, 2018, Whirlpool agreed to sell Embraco to Nidec for $1.08 billion, subject to customary adjustments and regulatory approvals. Closing was expected by early 2019. Embraco had March 31 assets of $1.063 billion and liabilities of $597 million.
- Whirlpool entered into a $1.0 billion term loan facility on April 23, 2018, maturing April 22, 2019, extendable by six months. The company expected to use the proceeds to accelerate share repurchases.
- Whirlpool announced its intention to conduct a modified Dutch auction tender offer of approximately $1 billion in the second quarter of 2018. No share repurchases occurred during Q1, and approximately $1.95 billion remained authorized under the existing $2 billion program.
- Material contingencies included Brazilian tax assessments related to BEFIEX and other matters, French competition proceedings, product-liability and warranty matters, post-retirement benefit litigation, and investigations relating to a Hotpoint-branded refrigerator associated with the Grenfell Tower fire. The filing states that the potential effects of several matters cannot currently be estimated and could be material.
- U.S. steel and aluminum tariffs contributed to higher raw-material costs. Additional trade or tariff changes could materially affect results.
Important facts for investors to verify
- Whether price increases, productivity actions and fixed-cost reductions can offset continuing steel, aluminum and other raw-material inflation.
- The timing, final consideration and regulatory approvals for the $1.08 billion Embraco sale, including any working-capital, cash or debt adjustments.
- The funding and leverage effects of the $1.0 billion term loan and the proposed approximately $1 billion share repurchase.
- Progress toward the company’s 2018 operating-cash-flow and free-cash-flow guidance despite the Q1 cash deficit and higher working-capital needs.
- The ultimate cost and cash requirements of restructuring programs, including the stated approximately $200 million of 2018 charges.
- Potential exposure from Brazilian tax assessments, including approximately $568 million of BEFIEX-related assessments, and other disputed Brazilian tax matters.
- The outcome and possible financial impact of the French Competition Authority investigation, product-related claims, Grenfell Tower-related matters and post-retirement benefit litigation.
- Compliance with debt covenants, including a debt-to-capitalization ratio no greater than 0.60 to 1.00 and rolling 12-month interest coverage of at least 3.0 to 1.0.