Whirlpool Corporation: Q3 2019 Form 10-Q Summary
Business context and reporting period
Whirlpool manufactures and markets major home appliances through four geographic segments: North America, EMEA, Latin America and Asia. This Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $5.091 billion | $5.326 billion | $15.037 billion | $15.377 billion |
| Gross margin | $741 million; 14.5% | $895 million; 16.8% | $2.485 billion; 16.5% | $2.587 billion; 16.8% |
| Operating profit | $693 million | $299 million | $1.147 billion | $(30) million |
| Net earnings available to Whirlpool | $358 million | $210 million | $896 million | $(353) million |
| Diluted EPS | $5.57 | $3.22 | $13.93 | $(5.18) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(566) million | $(615) million |
Q3 net earnings margin was 7.0%, versus 3.9% in the prior-year quarter. Management reported ongoing EBIT margin of 7.2%, with ongoing EBIT of $364 million compared with $332 million in Q3 2018. Nine-month ongoing EBIT was $1.025 billion versus $970 million.
Cash and cash equivalents were $993 million at September 30, 2019, compared with $1.498 billion at December 31, 2018. Total cash, cash equivalents and restricted cash were $999 million. Nine-month investing cash flow was $723 million, principally reflecting Embraco sale proceeds, while financing cash flow was $(641) million. Capital expenditures were $306 million.
At September 30, 2019, notes payable were $941 million, current maturities of long-term debt were $546 million and long-term debt was $4.105 billion. The company had approximately $3.8 billion of committed credit facilities and no borrowings outstanding under those facilities. A $3.5 billion long-term facility matures in August 2024 and includes a debt-to-capitalization covenant of no more than 0.65 to 1.00 and an interest coverage covenant of at least 3.0 to 1.00.
Material changes versus the prior comparable period
- Sales declined 4.4% in Q3 and 2.2% year to date, primarily due to lower unit volumes, foreign currency effects and the Embraco divestiture. Excluding foreign currency, sales declined 3.5% in Q3 but increased 0.2% year to date.
- Gross margin declined to 14.5% in Q3 from 16.8%, reflecting raw-material inflation, foreign currency, lower volumes and approximately $105 million of warranty expense related to certain EMEA washers.
- Q3 operating profit benefited from a $511 million pretax gain on the Embraco sale, partly offset by $119 million of product warranty and liability expense and $56 million of restructuring costs.
- Embraco was sold on July 1, 2019 for approximately $1.1 billion of cash proceeds. Whirlpool used approximately $1.0 billion of the proceeds to repay the related term loan.
- Nine-month results benefited from $180 million of Brazil indirect tax credits and were affected by $74 million of South Africa disposal and Turkey exit costs. The prior-year period included $747 million of goodwill and intangible impairment charges and a $114 million French antitrust settlement.
- North America EBIT margin improved to 12.8% in Q3 from 12.0%. EMEA improved to negative 0.4% from negative 3.4%; Latin America declined to 4.6% from 7.0%; and Asia declined to 2.4% from 3.8%.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $858 million of right-of-use assets and corresponding lease liabilities, plus an approximately $82 million reduction to retained earnings related to sale-leaseback accounting.
- Whirlpool recorded $34 million of prior-year transition-tax-related adjustments and a separate $22 million adjustment related to first-quarter 2019 foreign-subsidiary income and tax-credit items in Q3.
Guidance, outlook and management commentary
- Full-year 2019 diluted EPS guidance remained $16.80 to $17.55. The outlook includes restructuring expense, Brazil tax credits, the Embraco gain, product warranty expense and related tax adjustments.
- Management expected approximately $1.4 billion of operating cash flow and approximately $800 million of non-GAAP free cash flow, including up to $200 million of restructuring cash outlays, approximately $625 million of capital expenditures, Embraco proceeds and the $1.0 billion term-loan repayment.
- Expected 2019 industry demand ranges were North America down 2% to flat, EMEA down 1% to up 1%, Latin America up 3% to 4%, and Asia up 1% to 2%.
- Full-year restructuring charges were expected to be approximately $200 million. Naples plant reconversion costs were estimated at approximately $127 million, with completion expected in 2020.
- Management cited continued progress toward margin expansion, improved free-cash conversion and a long-term gross-debt-to-EBITDA target of 2.0.
Risks, contingencies and unusual items
- Product warranty reserves increased to $389 million from $279 million at September 30, 2018. The EMEA washer matter and the legacy Indesit dryer corrective-action campaign could require materially higher costs than currently estimated.
- Material unresolved matters include Embraco antitrust claims retained after the sale, Brazilian tax assessments, the second phase of the French competition investigation, the Alno insolvency claim, U.S. washer class actions and product-liability matters related to the Grenfell Tower incident.
- Brazilian tax assessments include approximately $465 million related to BEFIEX credits, approximately $61 million related to IPI credits and approximately $27 million related to controlled-foreign-corporation taxes. The company has not accrued amounts for these assessments.
- Tariffs, raw-material and freight inflation, foreign currency movements, weak global demand, competition, cybersecurity, supply disruptions and Brexit-related uncertainty could affect results.
- Approximately $1.0 billion of cash was held by foreign subsidiaries, substantially all outside the United States. The company stated that it intends to permanently reinvest these funds abroad.
- The company had $546 million of long-term debt maturing within the following twelve months and was evaluating repayment, refinancing, free-cash-flow generation or use of cash on hand.
Important facts for investors to verify
- Reconcile reported EPS and operating profit to the Embraco gain, warranty charges, restructuring, Brazil tax credits, divestiture costs and other non-GAAP adjustments.
- Assess the sustainability of the reported margin improvement after removing divestiture gains and considering warranty, tariff, raw-material and foreign-currency pressures.
- Monitor fourth-quarter operating cash flow and whether the approximately $800 million full-year free-cash-flow target remains achievable.
- Review near-term debt maturities, refinancing plans, covenant compliance and the company’s progress toward its gross-debt-to-EBITDA objective.
- Track product-warranty developments, litigation and Brazilian tax contingencies, including potential unaccrued exposures.
- Evaluate performance excluding Embraco, since the divestiture materially affects year-over-year sales, segment mix, cash flow and leverage comparisons.