Business Context and Reporting Period
Whirlpool Corporation, a global major-appliance manufacturer, filed this unaudited Form 10-Q for the three and six months ended June 30, 2017. Reportable segments are North America, EMEA, Latin America and Asia.
Key Financial Metrics
| Millions, except per-share data | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $5,347 | $5,198 | $10,133 | $9,814 |
| Gross margin | $876 | $969 | $1,702 | $1,792 |
| Gross margin percentage | 16.4% | 18.6% | 16.8% | 18.3% |
| Operating profit | $274 | $368 | $538 | $653 |
| Operating margin | 5.1% | 7.1% | 5.3% | 6.7% |
| Net earnings available to Whirlpool | $189 | $320 | $342 | $470 |
| Diluted EPS | $2.52 | $4.15 | $4.53 | $6.06 |
- Q2 net sales increased 2.9%; six-month sales increased 3.3%. Excluding foreign currency, growth was 3.3% and 3.1%, respectively.
- Net earnings available to Whirlpool declined 40.9% in Q2 and 27.2% for the six-month period. Diluted EPS declined 39.3% and 25.3%, respectively.
- Gross margin pressure primarily reflected raw-material inflation, with productivity savings only partially offsetting the impact. Q2 restructuring expense was $59 million, versus $40 million in the prior year; six-month expense was $105 million, versus $87 million.
- Six-month cash used in operating activities was $191 million, compared with $404 million used in the prior-year period. Investing cash use was $202 million; financing activities provided $313 million. Ending cash was $1.041 billion, down from $1.085 billion at December 31, 2016.
- At June 30, 2017, total debt comprised $1.111 billion of notes payable, $659 million of current maturities of long-term debt and $3.631 billion of long-term debt. The company had approximately $3.1 billion of committed credit facilities and no borrowings under those committed facilities.
- Current assets were $8.229 billion versus current liabilities of $9.056 billion. Inventories increased to $3.230 billion from $2.623 billion at year-end.
- Capital expenditures were $210 million for the first six months, compared with $206 million in 2016. Dividends declared increased to $1.10 per share from $1.00.
Material Changes Versus the Prior Comparable Period
- North America sales increased 8.2% in Q2 and 7.4% year to date, primarily from unit-volume growth. EMEA sales declined 7.4% and 9.6%, primarily due to product-availability-related volume declines and currency effects.
- Latin America sales increased 2.8% in Q2 and 8.8% year to date, while Asia sales declined 1.5% in Q2 but increased 5.9% year to date.
- EMEA operating profit fell to breakeven in Q2 from $46 million and to a $17 million loss year to date from $101 million of profit. Asia operating profit declined to a $32 million loss in Q2 from $16 million of profit and to a $9 million loss year to date from $41 million of profit.
- The company recorded an out-of-period adjustment in Asia related primarily to prior-period trade-promotion accruals. The adjustment reduced Q2 net sales by approximately $32 million, increased other operating expenses by approximately $8 million before tax, reduced net earnings available to Whirlpool by approximately $15 million and reduced diluted EPS by $0.20. Management determined the impact was immaterial to prior periods and the current reporting period.
- Short-term notes payable rose to $1.111 billion from $34 million at year-end, primarily reflecting $966 million of commercial paper. The company also repaid $250 million of senior notes in March 2017.
- Whirlpool repurchased approximately 1.93 million shares for $350 million during the first six months. On July 25, 2017, the board authorized an additional $2 billion repurchase program.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2017 diluted EPS outlook was $12.40 to $12.90, including estimated impacts of $(2.32) from restructuring, $(0.27) from the out-of-period adjustment and a $0.49 income-tax impact.
- Management expected 2017 operating cash flow of $1.65 billion to $1.70 billion and free cash flow of approximately $1 billion, with capital expenditures of approximately $650 million to $700 million.
- Expected 2017 industry demand was 4% to 6% in North America, flat to 2% in EMEA, flat in Brazil and flat to 2% in Asia. The company expected up to $175 million of restructuring charges for the full year.
- Restructuring programs included Italian operations and EMEA dryer manufacturing. The EMEA dryer plan was expected to affect approximately 500 positions and be substantially complete in 2018; broader Italian actions were expected to be complete in 2019.
- The company had $659 million of long-term debt maturing within the next twelve months and was evaluating repayment through refinancing, free cash flow or cash on hand.
- Material contingencies included Brazilian tax assessments, including approximately $552 million related to BEFIEX matters, approximately $72 million related to IPI tax credits and approximately $66 million related to controlled-foreign-corporation tax matters. No related reserves were recorded based on management’s and advisers’ assessments.
- Whirlpool was cooperating with U.K. authorities regarding the Grenfell Tower fire involving a Hotpoint refrigerator manufactured before the Indesit acquisition. The investigation was ongoing, and no significant charge had been recorded in Q2.
- Other risks included raw-material inflation, foreign-currency volatility, competitive pressure, product warranty and recall exposure, cybersecurity, litigation, labor and supply-chain risks, and the French competition investigation.
Investor Verification Priorities
- Verify whether raw-material inflation, product availability and EMEA/Asia performance improved sufficiently to support the 2017 EPS outlook.
- Reconcile the $15 million out-of-period earnings impact and assess whether further China trade-promotion or acquisition-control issues could arise.
- Monitor operating cash conversion, inventory growth and the company’s planned funding of the $659 million debt maturity.
- Track restructuring cash costs, position reductions and whether projected savings offset the charges.
- Review developments in Brazilian tax disputes, Grenfell Tower-related proceedings, product warranty matters and other litigation for potential unreserved exposure.
- Assess the effect of the expanded share-repurchase authorization and higher dividend on liquidity and leverage.