Whirlpool Corporation 2020 Q1 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation manufactures and markets home appliances through four geographic segments: North America, EMEA, Latin America and Asia. This report covers the three months ended March 31, 2020, with comparisons to the three months ended March 31, 2019. The quarter was materially affected by the COVID-19 pandemic, particularly in EMEA and Asia.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $4.325 billion | $4.760 billion | Down 9.1% |
| Gross margin | $700 million; 16.2% | $812 million; 17.1% | Margin down 0.9 percentage points |
| Operating profit | $260 million | $263 million | Down $3 million |
| Net earnings available to Whirlpool | $152 million | $471 million | Down 67.7% |
| Diluted EPS | $2.41 | $7.31 | Down 67.0% |
| Net earnings margin | 3.5% | 9.9% | Down 6.4 percentage points |
| Ongoing EBIT margin | 6.1% | 6.3% | Down 0.2 percentage points |
| Cash used in operating activities | $814 million | $895 million | Use improved by $81 million |
| Capital expenditures | $82 million | $85 million | Down $3 million |
| Free cash flow | $(870) million | $(969) million | Use improved by $99 million |
Cash and cash equivalents were $2.837 billion at March 31, 2020, compared with $1.952 billion at December 31, 2019. Total debt, including notes payable and long-term debt, was approximately $7.054 billion. Notes payable increased to $2.392 billion from $294 million, while long-term debt increased to $4.662 billion from $4.140 billion.
Whirlpool borrowed approximately $2.2 billion under its $3.5 billion revolving credit facility during the quarter; $1.3 billion remained available at March 31, 2020. The company also had approximately $200 million of availability under facilities in Brazil and India. On April 27, 2020, it entered into an additional $500 million 364-day credit facility.
Total assets were $19.395 billion and total stockholders’ equity was $3.980 billion at March 31, 2020. Dividends declared were $1.20 per share. The company repurchased 902,000 shares for approximately $121 million during the quarter but subsequently suspended repurchases to preserve liquidity.
Material changes versus the prior comparable period
- Sales declined primarily because of COVID-19-related volume reductions, unfavorable product price/mix, foreign currency effects and the 2019 divestiture of the Embraco compressor business.
- Organic sales, excluding foreign currency and Embraco, decreased 0.3% overall. North America sales increased 0.2%, while EMEA, Latin America and Asia sales decreased 12.4%, 29.4% and 22.3%, respectively.
- Gross margin declined due to lower volumes, product mix and foreign currency, partially offset by productivity gains and raw-material deflation.
- Net earnings were significantly lower partly because Q1 2019 included a $127 million Brazil indirect tax credit in interest and sundry income and a $235 million valuation allowance release that reduced tax expense.
- Ongoing EBIT was $266 million versus $298 million in Q1 2019, excluding restructuring, divestiture-related transition costs and the Brazil tax credit.
- Operating cash flow remained negative, reflecting seasonal inventory investment and working-capital requirements, but improved from the prior year.
- Whirlpool issued €500 million of 0.50% senior notes due 2028 and repaid €500 million of 0.625% senior notes that matured in March 2020.
Guidance, outlook, commentary and risks
On March 24, 2020, Whirlpool withdrew its previously issued 2020 guidance for sales, GAAP and ongoing EPS, ongoing EBIT margin, regional industry outlook, operating cash flow and free cash flow. Management expects COVID-19-related demand disruptions and production impacts to continue negatively affecting results throughout 2020.
Management reported aggressive actions to protect employees, reduce costs, manage inventory and supply flows, lower capital expenditures and preserve liquidity. It believes the company has a strong financial position, investment-grade credit ratings, covenant headroom and sufficient liquidity to navigate the uncertainty, but stated that the ultimate impact of COVID-19 remains unpredictable.
- The EMEA reporting unit and the Indesit, Hotpoint and Maytag trademarks remained at risk of future impairment. No impairment triggering event was identified in Q1 2020.
- Whirlpool expects up to $100 million of 2020 restructuring charges. Estimated total costs for the Naples, Italy exit were revised to approximately $135 million, with approximately $80 million remaining.
- A product recall for certain Indesit-designed washing machines in the United Kingdom and Ireland remained ongoing. Approximately $38 million of settlements were incurred in Q1 2020 against a previously recorded estimated warranty charge of approximately $105 million.
- Material risks include COVID-19 effects on demand, manufacturing, suppliers, trade customers and financial markets; customer insolvency; tariffs and raw-material costs; foreign exchange; impairment; litigation; product liability and recalls; cybersecurity; and labor and regulatory issues.
- Brazilian tax assessments include approximately 2.0 billion Brazilian reais related to BEFIEX credits, approximately 255 million Brazilian reais related to IPI matters and approximately 293 million Brazilian reais related to PIS/COFINS matters. Whirlpool believes these assessments are without merit and has not accrued amounts for them.
- Embraco antitrust matters, the French Competition Authority investigation, product liability litigation including the Grenfell Tower matter, and class-action lawsuits remain contingencies whose ultimate effects are uncertain.
Important facts for investors to verify
- Whether COVID-19 demand, production and supply-chain disruptions produce further sales declines, margin pressure or impairment charges.
- The sustainability of liquidity after the $2.2 billion revolver draw, the increase in short-term debt and the additional $500 million 364-day facility.
- Compliance with revolving-credit debt-to-capitalization and interest-coverage covenants in future periods.
- The timing and total cost of the Naples restructuring and broader EMEA restructuring program.
- Potential changes to warranty and recall reserves, especially for the Indesit washer recall.
- Exposure and potential outcomes related to Brazilian tax disputes, antitrust matters, product liability claims and other litigation.
- Whether the company reinstates share repurchases or changes its dividend policy as liquidity conditions evolve.