Whirlpool Corporation 2012 Q3 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, 2012. Reportable segments are North America, Latin America, EMEA, and Asia. The filing was submitted October 23, 2012, with 77.9 million common shares outstanding as of October 16, 2012.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $4,495 million | $4,625 million | $13,355 million | $13,755 million |
| Gross margin | $704 million; 15.7% | $573 million; 12.4% | $2,084 million; 15.6% | $1,864 million; 13.5% |
| Operating profit | $214 million | $136 million | $614 million | $586 million |
| Net earnings available to Whirlpool | $74 million | $177 million | $279 million | $185 million |
| Diluted EPS | $0.94 | $2.27 | $3.53 | $2.37 |
| Cash used in operating activities | Not separately provided | Not separately provided | $161 million | $342 million |
- Q3 net sales declined 2.8%; nine-month sales declined 2.9%. Excluding foreign currency, sales increased 3.4% in Q3 and 2.1% for the nine months.
- Gross margin improved primarily from pricing, product mix, restructuring initiatives, and productivity, partly offset by higher material costs and lower Latin American BEFIEX credits.
- Q3 operating profit increased despite higher restructuring charges. Nine-month operating profit rose to $614 million from $586 million.
- Q3 earnings declined because of higher income tax expense and unfavorable interest and sundry expense, including a $22 million net expense primarily related to the conclusion of U.S. contract and patent litigation. Nine-month earnings benefited from lower unusual expenses versus 2011.
- Cash and equivalents were $518 million at September 30, 2012, down from $1,109 million at December 31, 2011. Total current assets were $6,604 million versus current liabilities of $6,360 million.
- Debt consisted of $510 million of current maturities, $20 million of notes payable, and $1,920 million of long-term debt. Fair value of total long-term debt, including current maturities, was $2,638 million.
- The company issued $300 million of 4.70% notes due 2022 and repaid $350 million of 8.00% notes that matured in May 2012.
- Nine-month investing cash outflow was $274 million, including $276 million of capital expenditures. Financing cash outflow was $161 million, including $116 million of dividends and $359 million of long-term debt repayments.
Material changes versus the prior comparable period
- Unit sales decreased 2.0% in Q3 and 2.7% for the nine months. North America and Latin America sales volumes were divergent: North America units fell 5.5% in Q3, while Latin America units increased 14.5%.
- EMEA was the weakest region, with sales down 19.5% in Q3 and 15.2% for the nine months, driven by weak European demand, lower units, and currency effects.
- North America sales increased 2.1% in Q3 and 1.8% year to date, while gross margin increased to 16.7% from 9.8% in Q3.
- Latin America sales were flat in Q3 and declined 3.2% year to date, primarily because BEFIEX credits monetized fell to $13 million in Q3 and $22 million year to date, compared with $62 million and $207 million, respectively, in 2011.
- Restructuring charges increased to $62 million in Q3 and $175 million year to date, compared with $36 million and $58 million, respectively, in 2011. Cumulative charges under the combined plans were $253 million against expected total charges of approximately $500 million through 2013.
- Income tax expense was $47 million in Q3 and $87 million year to date, compared with tax benefits of $123 million and $353 million in the prior-year periods. The prior year included U.S. energy tax credits and other favorable tax items.
- Cash used in operations improved to $161 million year to date from $342 million, but working-capital uses remained significant, including $260 million of inventory investment and $188 million of higher receivables.
Guidance, outlook, commentary, and risks
- Management’s 2012 outlook called for diluted EPS of $5.00 to $5.50, including a $0.50 to $0.55 benefit from BEFIEX credits and a $2.30 to $2.50 dilution from restructuring expense.
- Free cash flow guidance was $125 million to $175 million, based on projected operating cash flow of $625 million to $725 million and capital expenditures, net of asset-sale proceeds, of $500 million to $550 million.
- Expected 2012 industry demand ranged from flat to down 2% in North America, up 7% to 10% in Latin America, down 2% to 3% in EMEA, and down 5% to 7% in Asia.
- Guidance included up to $250 million of restructuring cash outlays, up to $200 million of pension contributions, approximately $110 million for Embraco antitrust matters, and the $275 million final payment for the Brazilian collection dispute.
- Management stated that operating cash flow and available liquidity were expected to meet ongoing requirements. The company had no borrowings under committed credit facilities or commercial paper at September 30, 2012 and was in compliance with financial covenants. Approximately $500 million of term debt was expected to mature over the following 12 months.
- Alno AG, a European customer, had $106 million of Whirlpool trade and other receivables outstanding. The restructuring could result in Whirlpool owning more than 50% of Alno indirectly and creates potential bankruptcy, collection, and distribution risks.
- Embraco antitrust matters had generated approximately $339 million of aggregate charges, with $119 million accrued at September 30, 2012 and $93 million of installment payments, plus interest, remaining through 2015. Additional exposure could not be reasonably estimated.
- Whirlpool was defending front-load washer and other product-related class actions, product liability matters, and other litigation. Warranty and recall reserves were $183 million at September 30, 2012.
- Other principal risks include intense competition, weak developed-market demand, European economic uncertainty, commodity costs, foreign exchange, customer concentration, supplier disruptions, pension obligations, product recalls, regulatory matters, cybersecurity, labor relations, and legal contingencies.
Important facts for investors to verify
- Whether pricing, mix, productivity, and restructuring benefits can offset lower volumes, material inflation, currency pressure, and weak EMEA demand.
- Progress toward the $5.00–$5.50 diluted EPS and $125–$175 million free cash flow targets, particularly given negative operating cash flow through the first nine months.
- The timing and cash cost of the remaining restructuring program, pension contributions, Embraco settlements, and approximately $500 million of upcoming debt maturities.
- Collection and ownership consequences of the Alno restructuring and the recoverability of its $106 million receivable exposure.
- Potential additional costs from Embraco antitrust litigation, product-related class actions, recalls, and other contingencies beyond recorded reserves.
- The sustainability of the reported earnings improvement after excluding favorable restructuring effects, prior-year unusual charges, tax credits, and other nonrecurring items.