Whirlpool Corporation: Q1 2015 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 report covers the unaudited three months ended March 31, 2015, compared with the same period in 2014. Results include the acquisitions of Hefei Sanyo from October 24, 2014, and Indesit from October 14, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $4.846 billion | $4.363 billion | +11.1% |
| Gross margin | $853 million; 17.6% | $755 million; 17.3% | +12.9%; +0.3 pts |
| Operating profit | $303 million | $281 million | +7.8% |
| Net earnings | $198 million | $164 million | +20.7% |
| Net earnings available to Whirlpool | $191 million | $160 million | +18.8% |
| Diluted EPS | $2.38 | $2.02 | +17.9% |
| Dividends declared per share | $0.75 | $0.625 | +20.0% |
| Cash used in operating activities | $(569) million | $(339) million | Higher use of $230 million |
Operating margin was approximately 6.3% in 2015 versus 6.4% in 2014. Selling, general and administrative expense increased to $498 million, or 10.3% of sales, from $439 million, or 10.1%. Intangible amortization rose to $19 million from $6 million, primarily reflecting the acquisitions. Restructuring charges were $33 million versus $29 million.
Income before taxes was $207 million versus $214 million. Income tax expense declined to $9 million from $50 million, benefiting from tax-planning actions and a $58 million release of valuation allowances. Comprehensive income was a loss of $13 million, compared with income of $206 million, primarily due to a $209 million unfavorable currency-translation adjustment.
Regional performance and material changes
- North America: Sales increased 0.4% to $2.341 billion; units increased 1.5%. Gross margin improved to 19.2% from 17.9%, helped by a postretirement curtailment gain and lower material costs.
- Latin America: Sales declined 24.2% to $899 million; units declined 20.1%. Results were affected by weaker Brazilian demand, foreign exchange, and the absence of $14 million of BEFIEX-credit monetization recorded in Q1 2014. Gross margin fell to 15.0% from 17.7%.
- EMEA: Sales increased 76.7% to $1.273 billion, primarily from Indesit and higher units. Gross margin increased to 13.9% from 13.3%, while operating profit rose to $17 million from $7 million.
- Asia: Sales increased 128.1% to $378 million, primarily from Hefei Sanyo. Gross margin increased to 23.3% from 18.6%, and operating profit increased to $24 million from $5 million.
Excluding foreign-currency effects and BEFIEX credits, consolidated sales increased 23.2%. The reported increase was therefore substantially acquisition-driven and partly offset by currency translation.
Cash flow, liquidity, and debt
- Cash and equivalents declined to $704 million at March 31, 2015, from $1.026 billion at December 31, 2014. The decrease included $569 million of operating cash use, $97 million of investing cash use, $387 million of financing cash provided, and a $43 million foreign-exchange impact.
- Working-capital cash use reflected seasonal inventory investment, acquisition-related requirements, and new product launches. Inventories increased to $3.002 billion from $2.740 billion.
- Capital expenditures were $126 million, compared with $123 million in Q1 2014.
- Total notes payable were $441 million, down from $569 million. Long-term debt was $3.977 billion, up from $3.544 billion; current maturities were $213 million.
- Whirlpool issued approximately $525 million of 0.625% euro-denominated notes due 2020 in March 2015, using proceeds partly to repay acquisition-related borrowings. The fair value of total long-term debt, including current maturities, was approximately $4.3 billion.
- For full-year 2015, management expected operating cash flow of $1.450 billion to $1.500 billion and free cash flow of approximately $700 million, after capital expenditures, asset-sale proceeds, and restricted-cash changes.
Guidance, outlook, unusual items, and risks
- 2015 diluted EPS guidance was $9.00 to $10.00. The guidance included a $0.44 benefit from the postretirement curtailment gain and expected per-share charges of $2.84 for restructuring, $0.38 for acquisition-related transition costs, $0.12 for a pension settlement charge, and $0.09 for antitrust resolutions.
- Expected 2015 industry demand was approximately +4% in North America, down 10% to 12% in Latin America, flat to up 2% in EMEA, and up 1% to 3% in Asia.
- The $47 million postretirement curtailment gain materially benefited Q1 gross margin and earnings. The effective tax rate was also unusually low because of the $58 million valuation-allowance release.
- Whirlpool committed in April 2015 to an Italian industrial plan affecting approximately 1,350 positions. Estimated total costs through 2018 are approximately €135 million, including approximately €110 million of future cash expenditures.
- Key exposures include foreign currency, weak Brazilian demand, material and commodity costs, intense competition, acquisition integration, and European economic conditions.
- Brazilian tax assessments include approximately $445 million related to BEFIEX credits, approximately $65 million related to IPI tax credits, and approximately $56 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 contingencies include Embraco antitrust matters, French competition-authority proceedings, product-related class actions, front-load-washer litigation, warranty obligations, and potential quality or safety actions. Product-warranty reserves were $222 million at March 31, 2015, compared with $180 million a year earlier.
- Approximately $105 million of receivables and notes were outstanding from European customer Alno AG, including approximately $43 million overdue. The overdue balance was scheduled to be paid by the end of the first quarter of 2016, subject to Alno securing financing.
Important facts for investors to verify
- Whether acquisition-driven revenue growth in EMEA and Asia translates into sustainable operating-profit improvement after integration costs and amortization.
- The extent to which Q1 earnings benefited from the $47 million curtailment gain and the $58 million tax valuation-allowance release.
- Progress toward the $700 million 2015 free-cash-flow target despite Q1 operating cash use of $569 million.
- Debt levels, refinancing needs, and liquidity following the Hefei Sanyo and Indesit acquisitions.
- Developments in the Brazilian tax assessments, Embraco antitrust matters, French competition investigation, and product litigation.
- Execution and ultimate cost of the Italian restructuring plan and other acquisition-integration actions.
- Foreign-exchange effects and demand trends, particularly in Brazil and Europe.
- The filing states that disclosure controls were effective as of March 31, 2015, while integration of Hefei Sanyo and Indesit remained ongoing.