Whirlpool Corporation 2020 Q3 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation manufactures and markets kitchen and laundry appliances through four geographic segments: North America, EMEA, Latin America and Asia. This Form 10-Q covers the three and nine months ended September 30, 2020. Results reflect significant but recovering COVID-19-related disruption to manufacturing, supply chains, distribution and consumer demand.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $5.291 billion | $5.091 billion | $13.658 billion | $15.037 billion |
| Gross margin | $1.155 billion; 21.8% | $741 million; 14.5% | $2.486 billion; 18.2% | $2.485 billion; 16.5% |
| Operating profit | $570 million | $693 million | $907 million | $1.147 billion |
| Net earnings available to Whirlpool | $397 million | $358 million | $584 million | $896 million |
| Diluted EPS | $6.27 | $5.57 | $9.26 | $13.93 |
| Net earnings margin | 7.5% | 7.0% | 4.3% | 6.0% |
| Ongoing EBIT margin | 12.0% | 7.2% | 8.1% | 6.8% |
Third-quarter sales increased 3.9% year over year, while nine-month sales declined 9.2%. Organic sales, excluding foreign currency and Embraco, increased 7.0% in the quarter and declined 2.3% year to date. Quarterly improvement reflected higher volumes, favorable product price/mix, cost reductions and raw-material deflation, partly offset by foreign currency.
Cash provided by operating activities was $407 million for the first nine months of 2020 versus cash used of $566 million in the prior-year period. Reported free cash flow was $170 million versus negative $805 million in 2019, based on Whirlpool's definition. Capital expenditures were $251 million, compared with $306 million.
At September 30, 2020, cash and cash equivalents were $3.528 billion, or $3.541 billion including restricted cash. Notes payable were $1.735 billion, current maturities of long-term debt were $298 million, and long-term debt was $4.965 billion. The fair value of total long-term debt, including current maturities, was $5.88 billion. The company reported approximately $2.5 billion of remaining committed borrowing capacity and compliance with its debt-to-capitalization and interest-coverage covenants.
Material changes versus the prior comparable period
- Quarterly net sales rose 3.9%, but nine-month sales fell because of COVID-19 effects, foreign currency, lower volumes and the 2019 divestiture of Embraco.
- Gross margin improved substantially, reaching 21.8% in the quarter, primarily from price/mix, raw-material deflation and productivity actions.
- Quarterly GAAP EPS increased 12.6%; nine-month EPS decreased 33.5%, largely reflecting the prior-year $511 million pre-tax Embraco sale gain and the absence of prior-year Brazil tax-credit gains.
- North America quarterly EBIT margin increased to 19.2% from 12.8%; EMEA improved to 3.4% from negative 0.4%; Latin America improved to 10.7% from 4.6%; Asia declined to 1.8% from 2.4%.
- The company issued new debt, including $500 million of 4.60% senior notes due 2050 and €500 million of 0.50% senior notes due 2028. It also established a $500 million 364-day credit facility.
- Share repurchases totaled $121 million for the first nine months, all in the first quarter; repurchases were suspended beginning in the second quarter to preserve liquidity.
Guidance, outlook, management commentary and unusual items
Whirlpool reinstated 2020 guidance after withdrawing it in March because of COVID-19 uncertainty. The company expects full-year diluted EPS of $14.90 to $15.40, operating cash flow of approximately $1.2 billion and free cash flow of approximately $900 million. The outlook includes approximately $475 million of capital expenditures and approximately $260 million of restructuring cash outlays.
Expected 2020 restructuring charges were increased to approximately $300 million. The company recorded $186 million in restructuring charges during the first nine months, including U.S. workforce actions and global fixed-cost reductions. The Naples, Italy plant exit is expected to produce total costs of approximately $137 million, with most cash settlement delayed into 2021 because of COVID-19.
Other notable items include a $7 million final purchase-price gain related to the Embraco divestiture, a $13 million vendor-recovery benefit related to the EMEA washer corrective action, and postretirement plan amendments that reduced the accumulated benefit obligation by approximately $157 million.
The EMEA reporting unit and the Indesit, Hotpoint and Maytag trademarks remained at risk of future impairment, although no impairment-triggering event was identified in the third quarter. A potential partial tender offer for majority control of Whirlpool China had no recorded accounting impact as of September 30, 2020.
Material risks include renewed or prolonged COVID-19 disruption, supply constraints, trade-customer insolvency, foreign currency volatility, raw-material and tariff costs, competition, product liability and recalls, cybersecurity, impairment risk, litigation and tax matters. Significant contingencies include approximately $349 million of Brazilian BEFIEX-related tax assessments, other Brazilian tax assessments, ongoing French competition matters, product-related class actions and the IRS tax dispute under appeal.
Important facts for investors to verify
- Whether COVID-19 recovery, demand, supply-chain conditions and foreign exchange trends support the reinstated 2020 EPS and cash-flow guidance.
- The company's ability to repay the $1.7 billion of short-term debt expected to be repaid within twelve months while maintaining covenant compliance.
- The timing and total cash cost of the restructuring programs and Naples facility exit.
- Potential impairment exposure in EMEA and for the Indesit, Hotpoint and Maytag trademarks.
- Outcomes and possible cash exposure from Brazilian tax assessments, product-liability matters, competition investigations and the IRS appeal.
- The final terms and strategic implications of any Whirlpool China tender offer.
- The sustainability of margin gains from pricing, mix, productivity and raw-material deflation after these favorable factors normalize.