Whirlpool Corporation — Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation, a global manufacturer of major home appliances, reported unaudited results for the three and nine months ended September 30, 2010. Operations are organized geographically across North America, Europe, Latin America and Asia.
Financial performance and position
| Metric | Three months 2010 | Three months 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $4.519 billion | $4.497 billion | $13.325 billion | $12.235 billion |
| Operating profit | $234 million | $189 million | $806 million | $489 million |
| Net earnings available to common stockholders | $79 million | $87 million | $448 million | $233 million |
| Diluted earnings per share | $1.02 | $1.15 | $5.79 | $3.10 |
| Gross margin | 14.3% | 13.8% | 15.4% | 13.9% |
- Nine-month sales increased 8.9%; excluding foreign currency effects, sales increased 5.7%. Third-quarter sales increased 0.5%, or 0.7% excluding currency.
- Nine-month operating profit increased $317 million, despite $93 million of third-quarter antitrust charges related to Embraco. The third quarter’s higher operating profit did not translate into higher net earnings because of legal charges and other expense.
- Regional nine-month sales increased 30.9% in Latin America, 39.4% in Asia and 3.1% in North America, while Europe declined 3.2%.
- Cash provided by operating activities was $377 million for the nine months, down from $652 million in 2009. Inventory increased to $3.084 billion from $2.197 billion at December 31, 2009, primarily because of higher production, product transitions and lower-than-expected demand.
- Capital expenditures were $387 million, compared with $348 million in the prior-year period. Investing cash use was $423 million and financing cash use was $431 million.
- Cash and equivalents were $901 million at September 30, 2010, compared with $1.380 billion at December 31, 2009 and $725 million at September 30, 2009.
- Long-term debt was $2.197 billion, with $311 million of current maturities. The fair value of total long-term debt, including current maturities, was $2.755 billion. Whirlpool reported no outstanding balance under its credit facility and compliance with financial covenants.
Material changes versus the prior comparable period
- Gross margin improved by 0.5 percentage point in the third quarter and 1.5 percentage points for the nine-month period, driven by productivity, cost reduction and higher BEFIEX tax incentives, partly offset by material and oil costs and unfavorable product price/mix.
- North America gross margin declined 0.7 percentage point for both periods, while Europe and Latin America improved. Asia gross margin declined 3.5 percentage points in the third quarter and 2.2 points year to date.
- SG&A declined to 8.7% of sales from 8.9% in the third quarter and to 8.7% from 9.1% for the nine-month period.
- Restructuring charges declined to $16 million from $24 million in the third quarter and to $58 million from $71 million year to date.
- Interest expense declined to $54 million from $58 million in the third quarter and to $167 million from $178 million year to date, primarily reflecting lower average debt.
- Net earnings benefited from higher operating performance year to date but were reduced by $93 million, or approximately $1.20 per diluted share, of Embraco antitrust-related charges recorded in the third quarter.
Guidance, outlook, commentary and risks
- Whirlpool reduced its 2010 diluted EPS outlook to $7.80–$8.30 from $9.00–$9.50, reflecting the Embraco antitrust charges.
- Projected 2010 operating cash flow is $1.115–$1.225 billion; capital expenditures are expected to be $575–$625 million; projected free cash flow is $550–$650 million.
- Management cited continued uncertainty in consumer confidence, discretionary spending and supplier liquidity, although it expects operating cash flow, cash balances and financing arrangements to meet ongoing funding needs.
- The company expects approximately $200 million of minimum U.S. pension funding for 2011, with potential discretionary contributions.
- Embraco agreed to a $91.8 million U.S. antitrust fine payable in six annual installments, subject to court approval, with the first payment expected in the first quarter of 2011. A Canadian plea agreement involves an approximately $1.5 million fine and was also awaiting court approval.
- Whirlpool had accrued approximately $202 million for compressor-industry antitrust matters as of September 30, 2010, but stated that total potential costs cannot currently be estimated and could materially affect results, liquidity or financial position.
- A voluntary recall of 1.8 million dishwashers resulted in a $75 million accrual; $31 million remained at September 30, 2010. The company also disclosed ongoing investigations of a limited number of potential quality and safety issues.
- Key risks include demand and housing-market weakness, raw-material and oil costs, foreign exchange, competition, supplier disruptions, product liability and recalls, litigation, labor matters, pension obligations, regulatory changes, information-technology failures and geopolitical uncertainty.
Most important facts for investors to verify
- Whether U.S. and Canadian courts approve the Embraco plea agreements and how future antitrust litigation affects cash payments and accruals.
- Progress in reducing elevated inventories and converting projected operating cash flow into free cash flow.
- Achievement of the revised 2010 EPS and free-cash-flow outlook.
- Actual recall costs and developments in the company’s other product-quality investigations.
- Future commodity prices, product price/mix, foreign-exchange movements and regional demand, particularly in North America and Europe.
- Whirlpool’s ability to fund debt maturities, pension requirements and ongoing capital expenditures while maintaining liquidity.