Whirlpool Corporation 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
Whirlpool Corporation is a global manufacturer and marketer of major home appliances, operating through North America, Latin America, EMEA, and Asia segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Three Months 2014 | Three Months 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net sales | $4.682 billion | $4.748 billion | $9.045 billion | $8.996 billion |
| Gross margin | $787 million | $817 million | $1.542 billion | $1.543 billion |
| Gross margin percentage | 16.8% | 17.2% | 17.0% | 17.1% |
| Operating profit | $291 million | $328 million | $572 million | $582 million |
| Operating margin | 6.2% | 6.9% | 6.3% | 6.5% |
| Net earnings available to Whirlpool | $179 million | $198 million | $339 million | $450 million |
| Diluted earnings per share | $2.25 | $2.44 | $4.27 | $5.56 |
Six-month cash used in operating activities was $368 million, compared with $196 million used in 2013. Capital expenditures were $265 million versus $180 million, while cash used in investing activities was $290 million versus $215 million. Financing activities provided $215 million, compared with $69 million used in 2013. Cash and equivalents declined to $945 million at June 30, 2014, from $1.380 billion at December 31, 2013.
At June 30, 2014, total assets were $15.608 billion and total stockholders’ equity was $5.351 billion. Long-term debt was $2.461 billion, current maturities of long-term debt were $312 million, and notes payable were $3 million. The fair value of long-term debt, including current maturities, was approximately $2.9 billion. The company reported no commercial paper borrowings outstanding.
Working capital included $2.812 billion of inventory, up from $2.408 billion at year-end 2013, and $2.222 billion of accounts receivable, up from $2.005 billion. The company had $312 million of debt maturing within the next twelve months.
The quarterly dividend increased 20% to $0.75 per share from $0.625. A new $500 million share-repurchase authorization was approved, but no shares had been repurchased under the program as of June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales decreased 1.4%, while year-to-date sales increased 0.6%. Excluding foreign currency and BEFIEX credits, sales increased 0.4% in the quarter and 2.9% year to date.
- Second-quarter net earnings available to Whirlpool declined 9.6%, and diluted EPS declined 7.9%. Year-to-date net earnings declined 24.6%, and diluted EPS declined 23.2%.
- Gross margin declined 40 basis points in the quarter and 10 basis points year to date, primarily due to higher material costs, currency effects, and lower BEFIEX credits.
- Operating profit declined $37 million in the quarter and $10 million year to date. SG&A increased 0.6% in the quarter and 2.4% year to date, reflecting higher brand investment and investment-related expenses.
- Income tax expense was $50 million in the quarter and $100 million year to date, compared with $39 million of expense and a $28 million benefit, respectively, in the 2013 periods. The 2013 year-to-date benefit included significant U.S. government tax incentives.
- North America sales increased 3.3% in the quarter and 3.7% year to date, while Latin America sales declined 10.7% and 5.8%, EMEA sales increased 1.9% and 4.7%, and Asia sales declined 14.1% and 12.9%, respectively.
- Unit volume declined 5.1% in the quarter but increased 0.4% year to date. Latin America was affected by World Cup-related timing, and Asia was affected by trade-inventory transitions in China ahead of the pending Hefei Sanyo acquisition.
- Restructuring charges were $34 million in the quarter and $63 million year to date, compared with $31 million and $73 million in the comparable 2013 periods.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management’s 2014 outlook calls for diluted EPS of $10.30 to $10.80 and free cash flow of $600 million to $650 million. The free-cash-flow outlook includes projected operating cash flow of $1.225 billion to $1.325 billion, capital spending of $625 million to $675 million, restructuring cash outlays of up to $150 million, and U.S. pension contributions of approximately $160 million.
Management expects approximately $100 million of restructuring charges in 2014, including the closure of an EMEA microwave manufacturing facility. Industry demand was estimated at approximately 5% growth in North America, flat to down 3% in Latin America, flat to up 2% in EMEA, and flat in Asia.
Whirlpool was pursuing a 51% acquisition of Hefei Sanyo for approximately $547 million, subject to additional Chinese regulatory approvals and other closing conditions. A $20 million breakup fee had been paid and could be retained by the sellers under specified circumstances. Whirlpool also entered into agreements to acquire approximately 66.8% of the voting stock of Indesit for approximately $1.038 billion, subject to purchase-price adjustments, judicial and antitrust approvals, and other conditions. The Indesit transaction contemplated a mandatory tender offer for remaining shares and additional debt or cash funding.
Brazilian BEFIEX credits monetized during the first six months totaled $14 million, compared with $40 million in 2013. Outstanding Brazilian tax assessments related to BEFIEX credits were approximately $573 million, with no reserve recorded. Other disputed Brazilian tax exposures included approximately $91 million related to IPI credits and approximately $50 million related to controlled foreign corporation taxes.
Embraco antitrust matters resulted in cumulative charges of approximately $414 million since 2009. At June 30, 2014, $45 million remained accrued, including $42 million of installment payments plus interest through 2015. U.S. direct-purchaser claims had received final settlement approval, but other matters and potential future claims remained subject to uncertainty.
Whirlpool reported $86 million of exposure to Alno AG, including approximately $41 million of overdue receivables whose payment terms were extended to January 2015. Product-liability, front-load washing-machine class actions, other litigation, and a French Competition Authority investigation remained unresolved. The filing states that potential losses for certain matters cannot currently be estimated and could be material.
Principal ongoing risks include intense competition, volatile material and commodity costs, foreign currency fluctuations, uncertain global demand, customer and supplier concentration, pension and health-care costs, product liability and recalls, labor and regulatory matters, cybersecurity, and execution and integration risks associated with the pending acquisitions. Management stated that disclosure controls and procedures were effective as of June 30, 2014, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether operating cash flow recovers from the $368 million year-to-date use and supports the $600 million to $650 million full-year free-cash-flow outlook.
- The effect of inventory growth, planned capital spending, pension contributions, restructuring payments, and the $312 million debt maturity on liquidity.
- Final regulatory approvals, financing, purchase-price adjustments, and integration risks for the Hefei Sanyo and Indesit acquisitions.
- The ultimate resolution and cash impact of the approximately $573 million BEFIEX-related Brazilian tax assessments and other Brazilian tax disputes.
- Remaining Embraco antitrust payments and the potential for additional litigation costs or claims.
- Whether higher material costs, foreign exchange movements, weak Latin American and Asian volumes, and brand investment pressure margins and the 2014 EPS outlook.
- Collection of the overdue Alno receivables and the broader credit and distribution risks associated with that customer.