Whirlpool Corporation 2017 Q3 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global major-appliance manufacturer operating through North America, EMEA, Latin America and Asia. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $5.418 billion | $5.248 billion | $15.551 billion | $15.062 billion |
| Gross margin | $915 million; 16.9% | $940 million; 17.9% | $2.617 billion; 16.8% | $2.732 billion; 18.1% |
| Operating profit | $331 million; 6.1% | $374 million; 7.1% | $869 million; 5.6% | $1.027 billion; 6.8% |
| Net earnings available to Whirlpool | $276 million | $238 million | $618 million | $708 million |
| Diluted EPS | $3.72 | $3.10 | $8.23 | $9.16 |
| Cash from operating activities | Not separately provided | Not separately provided | $(33) million | $(175) million |
Q3 net sales increased 3.2%, while net earnings available to Whirlpool increased 15.9% and diluted EPS increased 20.0%. The Q3 effective tax result was a $4 million benefit versus $61 million of expense in the prior-year quarter. Nine-month net earnings and diluted EPS declined 12.7% and 10.2%, respectively, primarily reflecting weaker operating performance and higher restructuring costs.
At September 30, 2017, cash and cash equivalents were $1.087 billion. Total assets were $20.838 billion and total stockholders’ equity was $5.687 billion. Notes payable increased to $1.442 billion from $34 million at December 31, 2016. Long-term debt, including current maturities, totaled approximately $4.340 billion, with $671 million due within the next twelve months. The fair value of long-term debt was approximately $4.5 billion.
Whirlpool used $349 million in investing activities and generated $335 million in financing activities during the first nine months. Financing included $1.365 billion of net short-term borrowings, $550 million of share repurchases and $235 million of dividends paid. The company had approximately $3.6 billion of committed credit facilities and no borrowings under those committed facilities at quarter-end.
Material changes versus the prior comparable period
- Sales increased 3.2% in both Q3 and the first nine months. Excluding foreign currency, sales increased 1.7% in Q3 and 2.6% for the nine months.
- North America sales increased 4.9% in Q3 and 6.5% year to date; Latin America increased 6.1% and 7.9%; Asia increased 5.4% and 5.7%. EMEA sales declined 3.9% and 7.6%.
- Gross margin declined because of raw-material inflation, unfavorable product price/mix and, in Asia, adjustments related primarily to prior-period trade-promotion accruals.
- Restructuring costs rose to $45 million in Q3 and $150 million year to date, compared with $29 million and $116 million, respectively, in 2016.
- The company recorded an out-of-period adjustment in Asia that reduced 2017 net sales by approximately $35 million, increased other operating expenses by approximately $8 million before tax, reduced net earnings available to Whirlpool by approximately $16 million and reduced diluted EPS by $0.22. Management determined the effect was immaterial to prior periods and the current reporting period.
- On September 27, 2017, Whirlpool increased its principal long-term credit facility from $2.5 billion to $3.0 billion and extended its termination date to May 17, 2022.
- The quarterly dividend increased 10%, from $1.00 to $1.10 per share. Whirlpool repurchased approximately 3.1 million shares for $550 million during the first nine months and authorized an additional $2 billion repurchase program in July 2017.
Guidance, outlook, commentary and unusual items
- Management’s 2017 diluted EPS outlook was $11.10 to $11.40, including estimated per-share effects of $(2.66) for restructuring, $(0.27) for the out-of-period adjustment and $0.45 from tax impacts.
- Management projected 2017 operating cash flow of $1.55 billion to $1.60 billion and free cash flow of approximately $900 million, including capital expenditures of approximately $650 million to $700 million.
- Expected 2017 restructuring charges were up to $200 million. Major programs include Italian operations integration and EMEA dryer manufacturing changes, with approximately 500 positions affected and substantial completion expected in 2018.
- Industry demand expectations were 4% to 6% growth in North America, flat to 2% growth in EMEA, flat demand in Latin America and flat to 2% growth in Asia.
- Whirlpool expects to stop supplying Whirlpool-branded products to Sears effective October 27, 2017, absent an agreement on terms. Sears represented approximately 1% of consolidated sales for the first nine months of 2017.
- In Brazil, a court ruling supported recognition of $72 million of additional BEFIEX credits, of which $58 million remained to be monetized at September 30. Related tax assessments totaled approximately $584 million, and the company had not accrued for them.
- Whirlpool had not recorded significant charges related to the ongoing Grenfell Tower investigation involving a Hotpoint refrigerator manufactured before the Indesit acquisition. The eventual financial impact was not determinable from the filing.
Risks and contingencies
- Key risks include intense global competition, raw-material inflation, foreign-currency volatility, uncertain appliance demand, customer concentration, supply-chain disruption, product liability and recalls, cybersecurity incidents, labor matters, acquisitions, litigation, tax disputes and regulatory changes.
- Brazilian tax matters include BEFIEX, IPI tax-credit and controlled-foreign-corporation assessments. The company is contesting the matters and has not accrued amounts it believes are unsupported; unfavorable outcomes could materially affect a particular reporting period.
- The French Competition Authority investigation, product-related litigation, post-retirement benefit litigation and other legal proceedings could have material effects, although management stated that currently pending general litigation was not expected to have a material adverse effect based on available information.
- Product warranty and legacy-product reserves totaled $276 million at September 30, 2017, down from $358 million a year earlier. Legacy dryer corrective-action cash settlements were $61 million during the first nine months and were substantially complete.
- The company had $420 million outstanding under bank guarantees, letters of credit and surety bonds, primarily related to Brazilian tax matters and other obligations.
Investor verification points
- Verify whether the $11.10 to $11.40 2017 EPS outlook and approximately $900 million free-cash-flow target were achieved in subsequent filings.
- Assess the sustainability of margin performance given raw-material inflation, product price/mix pressure and restructuring benefits.
- Monitor the refinancing or repayment of the $671 million of debt maturing within twelve months of September 30, 2017, and the effect of elevated short-term borrowings.
- Review subsequent developments regarding Sears, Grenfell Tower, Brazilian tax assessments, the French competition investigation and product-liability matters.
- Reconcile the unusually negative year-to-date operating cash flow with management’s full-year operating-cash-flow forecast, recognizing the seasonal nature of working capital.
- Confirm the effect of the $35 million Asia sales adjustment and $0.22 diluted-EPS reduction when comparing reported results with underlying performance.