Whirlpool Corporation Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global major-appliance manufacturer operating through North America, Latin America, EMEA and Asia. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results include the acquisitions of Indesit and Whirlpool China, completed in late 2014.
Key financial metrics
| Millions of dollars, except per-share data | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $5,208 | $4,682 | $10,054 | $9,045 |
| Gross margin | $905 | $787 | $1,758 | $1,542 |
| Gross margin percentage | 17.4% | 16.8% | 17.5% | 17.0% |
| Operating profit | $273 | $291 | $576 | $572 |
| Net earnings available to Whirlpool | $177 | $179 | $368 | $339 |
| Diluted EPS | $2.21 | $2.25 | $4.60 | $4.27 |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(397) | $(368) |
Q2 operating margin was approximately 5.2%, compared with 6.2% in the prior-year quarter. Six-month operating margin was approximately 5.7%, compared with 6.3% in 2014. Q2 net margin was approximately 3.4%, compared with 3.8%; six-month net margin was approximately 3.7%, compared with 3.7%.
- Cash and equivalents were $691 million at June 30, 2015, down from $1.026 billion at December 31, 2014.
- Total debt, including notes payable and current maturities, was approximately $4.757 billion, consisting of $740 million of notes payable, $267 million of current maturities and $3.750 billion of long-term debt.
- Inventories increased to $3.086 billion from $2.740 billion at year-end, while total current liabilities were $7.796 billion versus $8.403 billion.
- Capital expenditures were $268 million for the first six months, compared with $265 million in 2014. Investing cash use was $243 million and financing cash provided was $342 million.
- Dividends declared increased to $0.90 per share from $0.75 per share. Whirlpool repurchased $50 million of stock during the first six months, with approximately $425 million remaining under the authorization.
Material changes versus the prior comparable period
- Sales increased 11.2% in Q2 and 11.1% for the first six months, primarily due to acquisition-related volume and favorable product and price mix. Foreign currency reduced reported sales growth.
- Excluding foreign currency and BEFIEX credits, sales increased 25.0% in Q2 and 24.1% for the first six months.
- EMEA sales rose 79.0% in Q2 and 77.9% year to date, primarily from Indesit. Asia sales rose 80.7% and 101.6%, primarily from Whirlpool China. North America sales increased 0.4% in both periods, while Latin America declined 21.8% in Q2 and 23.1% year to date.
- Gross margin improved by 60 basis points in Q2 and 50 basis points year to date, reflecting productivity, mix, restructuring benefits and acquisition integration. The six-month result also benefited from a $47 million postretirement-benefit curtailment gain.
- SG&A increased 22.0% in Q2 and 17.7% year to date, driven primarily by the acquisitions. Restructuring charges increased to $58 million in Q2 and $91 million year to date from $34 million and $63 million, respectively.
- Q2 net earnings available to Whirlpool declined slightly despite higher sales, while six-month earnings increased 8.3%. Q2 results benefited from a $65 million gain related to a Brazilian business investment, while the prior-year period included different acquisition-related and tax items.
- Operating cash flow remained negative, reflecting seasonal working-capital investment associated with the acquisitions and new product launches. Cash declined by $335 million during the first six months.
Guidance, outlook, risks and unusual items
- Management projected 2015 diluted EPS of $9.50 to $10.50. The outlook includes estimated per-share impacts of restructuring expense of $2.85, acquisition-related transition costs of $0.57, pension settlement charges of $0.15, antitrust resolutions of $0.12, a $0.62 gain on a business investment and a $0.44 benefit-plan curtailment gain.
- Management expected approximately $700 million of 2015 free cash flow, based on operating cash flow of $1.450 billion to $1.500 billion, capital expenditures and related items of $750 million to $800 million, restructuring cash outlays of up to $250 million and U.S. pension contributions of approximately $72 million.
- Expected 2015 industry demand was approximately 4% growth in North America, 15% contraction in Latin America, flat to 2% growth in EMEA and flat demand in Asia.
- The Italian integration restructuring plan is expected to cost up to approximately $268 million at the exchange rate used in the filing, including approximately $233 million of future cash expenditures, and is expected to be completed by the end of 2018.
- Whirlpool reported $267 million of debt maturing within the next twelve months and $645 million of commercial paper outstanding at June 30, 2015. A March 2015 offering added approximately $525 million of euro-denominated notes due in 2020.
- Material contingencies include Brazilian tax assessments of approximately $475 million related to BEFIEX credits, approximately $68 million related to IPI tax credits and approximately $57 million related to CFC tax matters. Whirlpool has not accrued the disputed amounts based on its legal and tax assessments.
- Other risks include Embraco antitrust matters, front-load washer class actions, a French competition investigation, product warranty claims, foreign-currency volatility, commodity costs, acquisition integration, economic weakness and customer-credit exposure. Whirlpool had approximately $103 million of exposure to Alno AG, including approximately $35 million overdue.
- Whirlpool China suspended trading of its stock in July 2015 while evaluating its response to a Chinese securities-regulatory notification; the filing states that resumption was expected under applicable rules but provides no definitive date.
Important facts for investors to verify
- Whether acquisition-driven sales growth translates into sustainable organic growth after adjusting for currency, mix and the absence of BEFIEX monetization.
- The timing and cash cost of the Italian and other restructuring programs, including whether the projected $700 million of free cash flow is achieved.
- Working-capital trends, operating cash conversion and the reduction in cash balances.
- Debt maturities, commercial-paper dependence and liquidity following the Indesit and Whirlpool China acquisitions.
- Outcomes and potential cash impacts of Brazilian tax disputes, antitrust matters, product litigation and the French competition investigation.
- Progress integrating Indesit and Whirlpool China, including acquisition-related amortization, restructuring charges and segment profitability.
- Whether the 2015 EPS guidance appropriately reflects the disclosed unusual gains, curtailment benefit and restructuring, pension and legal charges.