Whirlpool Corporation — Q1 2012 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation is a global manufacturer of major home appliances operating through four geographic segments: North America, Latin America, Europe, the Middle East and Africa (EMEA), and Asia. This unaudited Form 10-Q covers the three months ended March 31, 2012, with comparison to the three months ended March 31, 2011. The company reported 77.3 million common shares outstanding as of April 19, 2012.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $4.349 billion | $4.401 billion | (1.2%) |
| Gross margin | $651 million; 15.0% | $623 million; 14.1% | +$28 million; +0.9 pts |
| Operating profit | $205 million; approximately 4.7% of sales | $228 million; approximately 5.2% | (10.1%) |
| Net earnings available to Whirlpool | $92 million | $169 million | (45.6%) |
| Diluted earnings per share | $1.17 | $2.17 | (46.1%) |
| Cash used in operating activities | $423 million | $224 million | Higher use of $199 million |
| Capital expenditures | $92 million | $115 million | Down $23 million |
Gross margin improved because of pricing and product-mix actions, restructuring benefits, and productivity improvements, partly offset by higher material costs. SG&A increased to $405 million, or 9.3% of sales, from $380 million, or 8.6%, primarily due to higher employee benefits and increased consumer advertising. Restructuring charges rose to $34 million from $8 million. The effective tax result changed from a $24 million benefit in Q1 2011 to $36 million of expense in Q1 2012, primarily because the U.S. energy tax credit expired.
Cash and equivalents declined to $583 million at March 31, 2012, from $1.109 billion at December 31, 2011. Total debt, including current maturities, was approximately $2.489 billion, consisting of $861 million of current maturities and $1.628 billion of long-term debt. Approximately $850 million of term debt was scheduled to mature over the following 12 months. Whirlpool had no borrowings under its credit facilities or commercial paper outstanding at quarter-end and reported compliance with its financial covenants.
Material changes versus the prior comparable period
- Consolidated units sold decreased 3.7%, while reported sales declined 1.2%. Excluding foreign currency, sales increased 1.0%, reflecting price and mix improvements.
- North America sales declined 0.8% as a 7.1% unit decline more than offset better pricing and mix. Operating profit increased to $151 million from $59 million.
- Latin America sales increased 2.6%, supported by a 2.3% unit increase, but operating profit fell to $121 million from $174 million. Lower BEFIEX credits and higher material costs affected results.
- EMEA sales declined 7.5% and operating profit declined to $5 million from $25 million, reflecting lower unit volume, unfavorable currency, higher material costs, and lower productivity.
- Asia sales declined 2.9%, while operating profit declined to $9 million from $11 million.
- Net earnings were reduced by higher restructuring costs, the absence of the prior-year energy tax credit, and lower operating profit despite improved gross margin.
- Operating cash flow included a $275 million January 2012 payment settling the Brazilian collection dispute and $58 million of U.S. pension funding, compared with $16 million of pension funding in Q1 2011.
Guidance, outlook, risks, contingencies, and unusual items
Management maintained its 2012 outlook for diluted earnings per share of $5.00 to $5.50 and free cash flow of $100 million to $150 million. The earnings outlook includes an estimated $60 million to $80 million BEFIEX benefit, or approximately $0.80 to $1.00 per share, and $250 million to $270 million of restructuring expense, or approximately $2.30 to $2.50 per share. Expected 2012 cash provided by operations was $600 million to $700 million, with capital expenditures of $500 million to $550 million.
The company expects industry demand of 0% to 3% in North America, 2% to 5% in Latin America, negative 2% to negative 5% in EMEA, and 2% to 4% in Asia. The outlook includes up to $279 million of restructuring cash outlays, up to $250 million of pension contributions, approximately $110 million for Embraco antitrust matters, and the $275 million Brazilian settlement payment.
The 2011 restructuring plan is expected to cost approximately $500 million through the end of 2013, including workforce reductions of more than 5,000 positions, a U.S. refrigeration facility closure, and European production changes. Cumulative charges were $112 million at March 31, 2012, with approximately $373 million of future cash expenditures expected.
Embraco antitrust matters have generated approximately $323 million of cumulative charges. Whirlpool had $195 million accrued at March 31, 2012, including $171 million of installment payments plus interest due to government authorities through 2015. Related private litigation and potential additional investigations could materially affect liquidity, financial position, or results, although the ultimate exposure could not be estimated.
Other notable exposures include approximately $100 million of past-due Eurozone trade receivables, concentrated primarily with one European customer; $184 million of product warranty and recall reserves; and approximately $418 million of Brazilian customer credit guarantees, which were insured under normal operating conditions. The company also faced litigation concerning front-load washing machines and other product claims. Management stated that currently pending litigation, after existing reserves, was not expected to have a material adverse effect, but loss ranges were not reasonably estimable for certain matters.
Key ongoing risks include weak developed-market demand, European economic and debt-crisis effects, intense competition, commodity and component costs, foreign currency volatility, restructuring execution, customer concentration, product liability and recalls, antitrust litigation, pension funding, labor and regulatory matters, supplier disruption, and information-technology or data-security failures. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and productivity actions can offset material-cost inflation and continued volume weakness.
- The timing and cash impact of approximately $850 million of debt maturities over the next 12 months.
- Progress toward the $100 million to $150 million free-cash-flow target after restructuring, pension, settlement, and antitrust payments.
- Actual BEFIEX credit monetization, particularly because Q1 2012 monetization was $7 million versus $66 million in Q1 2011.
- Final costs and cash requirements for the $500 million restructuring plan.
- Potential additional liability from Embraco antitrust litigation and unresolved government matters.
- Credit quality and collectability of the approximately $100 million of past-due Eurozone receivables.
- Final outcomes of U.S. trade-remedy proceedings involving refrigerators and washers, including the potential appeal regarding refrigerators.