WHIRLPOOL CORP quarterly report, Q2 FY2018

Whirlpool Corporation — Form 10-Q Summary

Business context and reporting period

Whirlpool Corporation manufactures and markets home appliances and related products through four geographic segments: North America, EMEA, Latin America and Asia. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.

Whirlpool adopted ASC Topic 606, Revenue from Contracts with Customers, and ASU 2016-16 on January 1, 2018. The reported impact was not material to the financial statements, except for a $56 million increase to opening retained earnings from ASU 2016-16.

Key financial metrics

Metric	Three months ended June 30	Six months ended June 30
Net sales	$5.14 billion, down 3.9%	$10.05 billion, down 0.8%
Gross margin	$880 million; approximately 17.1% of sales	$1.69 billion; approximately 16.8% of sales
Operating profit (loss)	$(472) million	$(329) million
Net earnings (loss) available to Whirlpool	$(657) million	$(563) million
Diluted earnings (loss) per share	$(9.50)	$(8.03)
Operating cash flow	Not separately reported for the quarter	$(584) million
Free cash flow	Not separately reported for the quarter	$(725) million

Ongoing EBIT, a non-GAAP measure excluding restructuring, the French antitrust settlement, impairment charges and other specified items, was $343 million in the second quarter and $638 million for the first six months, compared with $350 million and $635 million, respectively, in 2017.

Liquidity, debt and capital allocation

Cash and cash equivalents were $1.06 billion at June 30, 2018, compared with $1.20 billion at December 31, 2017. Cash, cash equivalents and restricted cash totaled $1.13 billion.
Total debt, including notes payable, current maturities and long-term debt, was approximately $6.84 billion at June 30, 2018, versus approximately $5.22 billion at year-end 2017.
Notes payable increased to $1.80 billion from $450 million, primarily reflecting short-term borrowings used in connection with the accelerated share repurchase.
Long-term debt was $4.78 billion and current maturities were $262 million. The company had approximately $3.6 billion of committed credit facilities and no borrowings outstanding under those committed facilities at June 30, 2018.
Operating cash flow was negative because of the net loss and working-capital uses, including increases in inventory and receivables and reductions in accounts payable and promotional accruals.
Whirlpool repurchased 6.27 million shares for approximately $1.0 billion, or $159.50 per share, representing approximately 8.8% of shares outstanding. Approximately $950 million remained authorized under the repurchase program.
The quarterly dividend increased 4.5% to $1.15 per share from $1.10 per share.

Material changes versus the prior comparable period

Second-quarter net sales declined 3.9%, while unit volume declined 8.8%. First-half sales declined 0.8% and unit volume declined 7.2%.
Second-quarter gross margin dollars increased modestly despite lower sales, reflecting favorable price/mix and productivity benefits that offset raw-material inflation. First-half gross margin declined slightly because of lower volume and raw-material inflation.
GAAP results deteriorated sharply because of a $747 million EMEA impairment charge, consisting of $579 million of goodwill impairment and $168 million of other intangible-asset impairment.
Restructuring charges increased to $188 million for the first half from $105 million in the prior-year period. Management expects approximately $200 million of restructuring charges for full-year 2018.
Interest and sundry expense increased primarily because of a preliminary $111 million French Competition Authority settlement reserve, partially offset by Brazilian tax credits.
Interest expense increased because of higher average short- and long-term debt balances.
North America remained comparatively strong, with first-half sales up 0.3%. EMEA sales declined 3.1% for the first half, Latin America declined 8.2%, and Asia increased 8.5%.
Comprehensive loss was $802 million in the second quarter and $703 million for the first six months, compared with comprehensive income of $170 million and $408 million, respectively, in 2017.

Guidance, outlook and management commentary

Whirlpool maintained a 2018 estimated diluted EPS range of $0.15 to $0.75. The outlook includes negative per-share impacts of approximately $2.92 from restructuring, $1.67 from the French antitrust settlement and $10.91 from goodwill and intangible impairments, partly offset by tax-related adjustments.
Management expects approximately $1.5 billion of operating cash flow and approximately $850 million of free cash flow for 2018, including up to $300 million of restructuring cash outlays, $35 million of pension contributions and approximately $675 million of capital expenditures.
Expected 2018 industry demand was 1% to 2% in North America, 1% to 2% in EMEA, approximately 1% in Latin America and 2% to 4% in Asia.
Management cited positive global price/mix and fixed-cost reductions, but also significant unit-volume declines, raw-material inflation, foreign-currency headwinds and challenging EMEA operating conditions.
Whirlpool agreed to sell its Embraco compressor business to Nidec for $1.08 billion, subject to customary adjustments and regulatory approvals. Closing was expected by early 2019. Embraco assets of $884 million and liabilities of $525 million were classified as held for sale.
Whirlpool financed an amount approximately equal to anticipated Embraco sale proceeds and used the funds to complete the accelerated share repurchase.

Risks, contingencies and unusual items

The EMEA reporting unit remains vulnerable to further impairment. The reported impairment used a 12% discount rate and approximately 5% forecasted EBIT margin. Management estimated that a 100-basis-point increase in the discount rate could have produced an $847 million impairment charge.
The French Competition Authority settlement range was €95 million to €115 million; Whirlpool reserved €95 million, approximately $111 million, with payment expected in 2019. A second phase of the investigation remains ongoing.
Brazilian tax disputes include approximately $493 million of BEFIEX-related assessments, approximately $64 million of IPI tax-credit assessments and approximately $50 million of CFC tax exposure. The company has not accrued amounts for these disputed assessments.
Embraco-related antitrust matters, product-liability and warranty claims, post-retirement benefit litigation and other legal proceedings could result in material charges, although timing and outcomes are uncertain.
The company has not recorded significant charges related to potential claims associated with the Grenfell Tower fire and stated that the investigation remains ongoing.
Steel and aluminum tariffs increased raw-material costs in the first half of 2018. Additional tariffs and changes in global trade policy could adversely affect future costs and results.
Whirlpool expects to retain certain tax, environmental, labor and product liabilities after the Embraco sale.

Important facts for investors to verify

Whether EMEA operating performance improves sufficiently to avoid additional goodwill or intangible impairments.
Whether the company converts its negative first-half operating cash flow into the approximately $1.5 billion full-year operating cash-flow target.
The final French Competition Authority settlement and the outcome of the investigation's second phase.
Completion timing, final proceeds and retained liabilities associated with the Embraco sale.
The effect of tariffs, raw-material inflation, foreign exchange and unit-volume trends on margins.
Whether increased short-term borrowings and the $262 million of debt maturing within twelve months are refinanced or repaid without constraining liquidity.
The ultimate exposure from Brazilian tax matters, antitrust claims, product-related litigation and post-retirement benefit litigation.