WHIRLPOOL CORP quarterly report, Q3 FY2015

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 nine months ended September 30, 2015, compared with the corresponding 2014 periods. The results include Whirlpool China and Indesit following their 2014 acquisitions.

Key financial metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Net sales	$5.277 billion	$4.824 billion	$15.331 billion	$13.869 billion
Gross margin	$930 million; 17.6%	$827 million; 17.1%	$2.688 billion; 17.5%	$2.369 billion; 17.1%
Operating profit	$329 million	$335 million	$905 million	$907 million
Net earnings available to Whirlpool	$235 million	$230 million	$603 million	$569 million
Diluted earnings per share	$2.95	$2.88	$7.54	$7.16
Income tax expense	$17 million	$26 million	$116 million	$126 million

Gross margin improved by 0.5 percentage points in the quarter and 0.4 points year to date. Selling, general and administrative expense increased 17.6% in the quarter and 17.7% year to date, while restructuring charges increased to $54 million and $145 million, respectively. Lower tax expense benefited earnings, including releases of tax valuation allowances.

Cash used in operating activities was $157 million for the first nine months of 2015 versus $128 million used in 2014. Working-capital investment, acquisitions and product launches contributed to the use of cash.
Capital expenditures were $391 million year to date, compared with $422 million in 2014. Investing cash use was $407 million versus $748 million.
Financing activities provided $296 million, including $531 million of long-term borrowings and $307 million of net short-term borrowings, partly offset by $278 million of long-term debt repayments and $200 million of dividends paid.
Cash and equivalents declined to $698 million at September 30, 2015, from $1.026 billion at December 31, 2014.
At September 30, 2015, notes payable were $803 million, current maturities of long-term debt were $507 million, and long-term debt was $3.502 billion. Total reported debt was approximately $4.812 billion.
The company had approximately $2.8 billion of committed credit facilities, including a $500 million 364-day facility, and reported compliance with its financial covenants.
Dividends increased 20% to $0.90 per share. Whirlpool repurchased approximately $95 million of common stock during the first nine months, with approximately $380 million remaining under the authorization.

Material changes versus the prior comparable period

Sales increased 9.4% in the quarter and 10.5% year to date, primarily because of the Indesit and Whirlpool China acquisitions, higher volume and favorable product/price mix. Excluding foreign currency and BEFIEX credits, sales increased 24.6% in the quarter and 24.1% year to date.
Regional sales trends were uneven. Q3 sales were approximately flat in North America, down 33.6% in Latin America, up 84.8% in EMEA and up 120.0% in Asia. Latin America was affected by weak demand and currency depreciation.
Operating profit was broadly flat despite higher sales because of increased SG&A, restructuring charges, acquisition-related amortization and other integration costs.
Interest expense increased because of higher debt following the Indesit acquisition, partly offset by lower average interest rates.
Other income and expense improved, including a $65 million gain related to a Brazilian business investment in the second quarter of 2015 and the absence of certain 2014 acquisition-related investment expenses.
Accumulated other comprehensive loss increased substantially, primarily because of currency translation losses. Nine-month comprehensive income declined to $254 million from $429 million.

Guidance, outlook, commentary and unusual items

Management’s 2015 outlook was diluted EPS of $9.75 to $10.25, free cash flow of approximately $600 million to $700 million, operating cash flow of $1.3 billion to $1.45 billion, and capital spending of approximately $700 million to $750 million.
The outlook included up to $200 million of restructuring cash outlays and approximately $72 million of U.S. pension contributions. Expected industry demand was approximately 5% growth in North America, approximately 20% decline in Latin America, flat to 2% growth in EMEA, and flat demand in Asia.
Management expected approximately $230 million of restructuring charges for full-year 2015. The Italian restructuring plan is expected to cost approximately €241 million and be completed by the end of 2018, with approximately €209 million expected to require future cash expenditures.
Whirlpool recorded a liability for a corrective action involving certain heritage Indesit products. Estimated total cost was approximately €245 million, with approximately 90% of affected units manufactured before Whirlpool’s acquisition. Approximately €35 million was expensed in the third quarter for post-acquisition units; the remaining amount was treated primarily as a purchase-accounting adjustment increasing goodwill.
Product warranty reserves increased to $506 million at September 30, 2015, from $179 million a year earlier, largely reflecting the Indesit corrective action.
Brazilian tax assessments included approximately $380 million related to BEFIEX credits, approximately $54 million related to IPI tax credits and approximately $45 million related to controlled-foreign-corporation taxes. Whirlpool had not accrued amounts for these disputed assessments based on advice from tax and legal advisers.
Other material contingencies include Embraco antitrust matters, class-action and product-liability lawsuits involving front-load washing machines, and a French Competition Authority investigation. Potential outcomes are uncertain and could materially affect a particular reporting period.
Whirlpool had approximately $96 million of receivables and notes due from European customer Alno AG, including approximately $38 million overdue. The overdue balance was scheduled to be paid by the end of 2016, subject to Alno securing additional financing.
Key ongoing risks include intense competition, foreign exchange volatility, raw-material prices, integration of Indesit and Whirlpool China, international economic conditions, product liability and recalls, litigation, tax disputes, labor actions, cybersecurity and pension obligations.

Facts investors should verify

Whether the company achieved its 2015 diluted EPS and free-cash-flow guidance, particularly given negative operating cash flow through the first nine months.
The timing, cash cost and final scope of the Indesit corrective action and related warranty payments.
Progress and total cash requirements of the Italian restructuring program and other integration activities.
Debt maturities, short-term borrowings, liquidity availability and compliance with the 3.25-to-1 leverage and 3.0-to-1 interest-coverage covenants.
Resolution and potential cash exposure from the Brazilian tax disputes, Embraco antitrust matters, product litigation and the French competition investigation.
Regional demand, currency effects and operating performance in Latin America, EMEA and Asia, where reported trends differed materially.
Whether tax valuation allowance releases and other unusual items are recurring or materially affected 2015 earnings.