UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2016
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _______ to _______
Commission file number 1-3932
WHIRLPOOL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 38-1490038 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
2000 North M-63, Benton Harbor, Michigan | 49022-2692 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (269) 923-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common stock, par value $1 per share | Chicago Stock Exchange and New York Stock Exchange | |
0.625% Senior Notes due 2020 | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | Yesý No¨ | |||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. | Yes¨ Noý | |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during | ||||
the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such | ||||
filing requirements for the past 90 days. | Yesý No¨ | |||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data | ||||
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months | ||||
(or for such shorter period that the registrant was required to submit and post such files). | Yesý No¨ | |||
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained | ||||
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by | ||||
reference in Part III of this Form 10-K or any amendment to this Form 10-K. | ý | |||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting | ||||
company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. | ||||
(Check one) | ||||
Large accelerated filer ý | Accelerated filer ¨ | |||
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes¨ Noý | |||
On February 3, 2017, the registrant had 74,467,790 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated:
Document | Part of Form 10-K into which incorporated | |
The registrant’s proxy statement for the 2017 annual meeting of stockholders (the “Proxy Statement”) | Part III | |
WHIRLPOOL CORPORATION
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2016
TABLE OF CONTENTS
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Item 9. | ||
Item 9A. | ||
Item 9B. | ||
Item 10. | ||
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Item 16 | ||
PART I | ||||
ITEM 1. | BUSINESS |
Whirlpool Corporation ("Whirlpool"), the number one major appliance manufacturer in the world, was incorporated in 1955 under the laws of Delaware as the successor to a business that traces its origin to 1898. Whirlpool manufactures products in 14 countries and markets products in nearly every country around the world under brand names such as Whirlpool, KitchenAid, Maytag, Consul, Brastemp, Amana, Bauknecht, Jenn-Air, Indesit, and Hotpoint*. Whirlpool’s reportable segments consist of North America, Europe, Middle East and Africa ("EMEA"), Latin America and Asia. As of December 31, 2016, Whirlpool had approximately 93,000 employees.
As used herein, and except where the context otherwise requires, “Whirlpool,” “the Company,” “we,” “us,” and “our” refer to Whirlpool Corporation and its consolidated subsidiaries.
Products and Regions
Whirlpool manufactures and markets a full line of major home appliances and related products. Our principal products are laundry appliances, refrigerators and freezers, cooking appliances, dishwashers, mixers and other small domestic appliances. We also produce hermetic compressors for refrigeration systems.
The following table provides the percentage of net sales for each class of products which accounted for 10% or more of our consolidated net sales over the last three years:
2016 | 2015 | 2014 | |||||||
Laundry Appliances | 28 | % | 29 | % | 27 | % | |||
Refrigerators and Freezers | 28 | % | 28 | % | 28 | % | |||
Cooking Appliances | 18 | % | 18 | % | 18 | % | |||
Other | 26 | % | 25 | % | 27 | % | |||
Net Sales | 100 | % | 100 | % | 100 | % | |||
In North America, Whirlpool markets and distributes major home appliances and small domestic appliances under a variety of brand names. In the United States, we market and distribute products primarily under the Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Roper, Admiral, Affresh and Gladiator brand names primarily to retailers, distributors and builders. In Canada, we market and distribute major home appliances primarily under the Inglis, Admiral, Whirlpool, Maytag, Jenn-Air, Amana, Roper, Estate and KitchenAid brand names. In Mexico, we market and distribute major home appliances primarily under the Whirlpool, Maytag, Acros, KitchenAid and Supermatic brand names. We sell some products to other manufacturers, distributors, and retailers for resale in North America under those manufacturers’ and retailers’ respective brand names.
In EMEA, we market and distribute our major home appliances primarily under the Whirlpool, Bauknecht, Ignis, Maytag, Laden, Indesit and Privileg brand names, and major and small domestic appliances under the KitchenAid, Hotpoint*, and Hotpoint-Ariston brand name. In addition to our operations in Western and Eastern Europe, Turkey and Russia, we have sales subsidiaries in Morocco and Dubai. We market and distribute a full line of products under the Whirlpool and KIC brand names in South Africa. Our European operations also market and distribute products under the Whirlpool, Bauknecht, Maytag, Amana and Ignis brand names to distributors and dealers in Africa and the Middle East.
In Latin America, we market and distribute our major home appliances and small domestic appliances primarily under the Consul, Brastemp, Whirlpool and KitchenAid brand names. We manage sales and distribution through our local entities in Brazil, Argentina, Chile, Peru, Ecuador, Colombia and Guatemala. We also serve the countries of Bolivia, Paraguay, Uruguay, Venezuela, and certain Caribbean and Central America countries, where we manage appliances sales and distribution through our accredited distributors. Our Latin America operations also produce hermetic compressors for refrigeration systems.
*Whirlpool ownership of the Hotpoint brand in the EMEA and Asia Pacific regions is not affiliated with the Hotpoint brand sold in the Americas
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In Asia, we have organized the marketing and distribution of our major home appliances and small domestic appliances into five operating groups: (1) mainland China; (2) Hong Kong and Taiwan; (3) India, which includes Bangladesh, Sri Lanka, Nepal and Pakistan; (4) Oceania, which includes Australia, New Zealand and Pacific Islands; and (5) Southeast Asia, which includes Thailand, Singapore, Malaysia, Indonesia, Vietnam, the Philippines, Korea, Myanmar and Japan. We market and distribute our products in Asia primarily under the Whirlpool, Maytag, KitchenAid, Amana, Bauknecht, Jenn-Air, Diqua, and Royalstar brand names through a combination of direct sales to appliance retailers and chain stores and through full-service distributors to a large network of retail stores.
Competition
Competition in the major home appliance industry is intense, including competitors such as Arcelik, Bosch Siemens, Electrolux, Haier, Kenmore, LG, Mabe, Midea, Panasonic and Samsung, many of which are increasingly expanding beyond their existing manufacturing footprint. Moreover, our customer base includes large, sophisticated trade customers who have many choices and demand competitive products, services and prices. Competition in our business is based upon a wide variety of factors, including selling price, product features and design, performance, innovation, energy efficiency, quality, cost, distribution and financial incentives. These financial incentives include cooperative advertising, co-marketing funds, salesperson incentives, volume rebates and terms. We believe that we can best compete in the current environment by focusing on introducing new and innovative products, building strong brands, enhancing trade customer and consumer value with our product and service offerings, expanding our regional footprint and trade distribution channels, increasing productivity, improving quality, lowering costs, and taking other efficiency-enhancing measures.
Raw Materials and Purchased Components
We are generally not dependent upon any one source for raw materials or purchased components essential to our business. In areas where a single supplier is used, alternative sources are generally available and can be developed within the normal manufacturing environment. Some supply disruptions and unanticipated costs may be incurred in transitioning to a new supplier if a prior single supplier relationship was abruptly interrupted or terminated. In the event of a disruption, we believe that we will be able to qualify and use alternate materials, sometimes at premium costs, and that such raw materials and components will be available in adequate quantities to meet forecasted production schedules.
Trademarks, Licenses and Patents
We consider the trademarks, copyrights, patents, and trade secrets we own, and the licenses we hold, in the aggregate, to be a valuable asset. Whirlpool is the owner of a number of trademarks in the United States and foreign countries. The most important trademarks to North America are Whirlpool, Maytag, Jenn-Air, KitchenAid, Amana and Acros. The most important trademarks to Latin America are Consul, Brastemp, Whirlpool and KitchenAid. The most important trademarks to EMEA are Whirlpool, KitchenAid, Bauknecht, Indesit, Hotpoint*, Hotpoint-Ariston and Ignis. The most important trademarks to Asia are Whirlpool, Royalstar and Diqua. We receive royalties from licensing our trademarks to third parties to manufacture, sell and service certain products bearing the Whirlpool, Maytag, KitchenAid, and Amana brand names. We continually apply for and obtain United States and foreign patents. The primary purpose in obtaining patents is to protect our designs and technologies.
Research and Development
Expenditures for research and development relating to new and innovative products and the improvement of existing products were approximately $604 million, $579 million and $563 million in 2016, 2015 and 2014, respectively.
Protection of the Environment
Our manufacturing facilities are subject to numerous laws and regulations designed to protect or enhance the environment, many of which require federal, state, or other governmental licenses and permits with regard to wastewater discharges, air emissions, and hazardous waste management. Our policy is to comply with all such laws and regulations. Where laws and regulations are less restrictive, we have established and are following our own standards, consistent with our commitment to environmental responsibility.
*Whirlpool ownership of the Hotpoint brand in the EMEA and Asia Pacific regions is not affiliated with the Hotpoint brand sold in the Americas
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We believe that we are in compliance, in all material respects, with presently applicable governmental provisions relating to environmental protection in the countries in which we have manufacturing operations. Compliance with these environmental laws and regulations did not have a material effect on capital expenditures, earnings, or our competitive position during 2016 and is not expected to be material in 2017.
The entire major home appliance industry, including Whirlpool, must contend with the adoption of stricter governmental energy and environmental standards. These standards were phased-in over the past several years and include the general phase-out of ozone-depleting chemicals used in refrigeration, and energy standards for selected major appliances, regulatory restrictions on the materials content specified for use in our products by some jurisdictions and mandated recycling of our products at the end of their useful lives. Compliance with these various standards, as they become effective, will require some product redesign. However, we believe, based on our understanding of the current state of proposed regulations, that we will be able to develop, manufacture, and market products that comply with these regulations.
Whirlpool participates in environmental assessments and cleanup at a number of locations globally. These include operating and non-operating facilities, previously owned properties and waste sites, including "Superfund" (under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites. However, based upon our evaluation of the facts and circumstances relating to these sites along with the evaluation of our technical consultants, we do not presently anticipate any material adverse effect upon our earnings, financial condition, or competitive position arising out of the resolution of these matters or the resolution of any other known governmental proceeding regarding environmental protection matters.
Acquisitions
Whirlpool China
On October 24, 2014, Whirlpool's wholly-owned subsidiary, Whirlpool (China) Investment Co., Ltd., completed its acquisition of a 51% equity stake in Hefei Rongshida Sanyo Electric Co., Ltd. ("Hefei Sanyo"), a joint stock company whose shares are listed and traded on the Shanghai Stock Exchange, which we have since renamed to Whirlpool (China) Co., Ltd. ("Whirlpool China"). The aggregate purchase price for the transaction was RMB 3.4 billion (approximately $551 million at the date of purchase for each step of the transaction) net of cash acquired.
Indesit Company S.p.A.
On December 3, 2014, Whirlpool completed the final step in its acquisition of Indesit Company S.p.A. ("Indesit") and on the same day Indesit delisted from the Electronic Stock Market organized and managed by Borsa Italiana S.p.A. Total consideration paid for Indesit was €1.1 billion (approximately $1.4 billion at the dates of purchase of each step in the transaction) in aggregate net of cash acquired.
Further discussion of these transactions can be found in the Financial Condition and Liquidity section of Management's Discussion and Analysis.
Other Information
For information about the challenges and risks associated with our foreign operations, see “Risks Factors” under Item 1A.
For certain other financial information concerning our business segments and foreign and domestic operations, see Note 13 to the Consolidated Financial Statements.
For information on our global restructuring plans, and the impact of these plans on our operating segments, see Note 10 to the Consolidated Financial Statements.
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Executive Officers of the Registrant
The following table sets forth the names and ages of our executive officers on February 13, 2017, the positions and offices they held on that date, and the year they first became executive officers:
Name | Office | First Became an Executive Officer | Age | |||
Jeff M. Fettig | Director, Chairman of the Board and Chief Executive Officer | 1994 | 59 | |||
Marc R. Bitzer | Director, President and Chief Operating Officer | 2006 | 52 | |||
Esther Berrozpe Galindo | Executive Vice President and President, Whirlpool EMEA | 2013 | 47 | |||
João C. Brega | Executive Vice President and President, Whirlpool Latin America | 2012 | 53 | |||
Joseph T. Liotine | Executive Vice President and President, Whirlpool North America | 2014 | 44 | |||
James W. Peters | Executive Vice President and Chief Financial Officer | 2016 | 47 | |||
David T. Szczupak | Executive Vice President, Global Product Organization | 2008 | 61 | |||
The executive officers named above were elected by our Board of Directors to serve in the office indicated until the first meeting of the Board of Directors following the annual meeting of stockholders in 2017 and until a successor is chosen and qualified or until the executive officer's earlier resignation or removal. Each of our executive officers has held the position set forth in the table above or has served Whirlpool in various executive or administrative capacities for at least the past five years.
Available Information
Financial results and investor information (including Whirlpool’s Form 10-K, 10-Q, and 8-K reports) are accessible at Whirlpool’s website: investors.whirlpoolcorp.com. Copies of our Form 10-K, 10-Q, and 8-K reports and amendments, if any, are available free of charge through our website on the same day they are filed with, or furnished to, the Securities and Exchange Commission.
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ITEM 1A. | RISK FACTORS |
This report contains statements referring to Whirlpool that are not historical facts and are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are intended to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, are based on current projections about operations, industry conditions, financial condition and liquidity. Words that identify forward-looking statements include words such as “may,” “could,” “will,” “should,” “possible,” “plan,” “predict,” “forecast,” “potential,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “believe,” “may impact,” “on track,” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, a merger, or our businesses. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Those statements are not guarantees and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these forward-looking statements.
We have listed below the most significant strategic, operational, financial, and legal and compliance risks relating to our business.
STRATEGIC RISKS
Key Risk | Risk Description | |
We face intense competition in the major home appliance industry and failure to successfully compete could negatively affect our business and financial performance. | Each of our operating segments operates in a highly competitive business environment and faces intense competition from a growing number of competitors, many of which have strong consumer brand equity. Several of these competitors, such as Arcelik, Bosch Siemens, Electrolux, Haier, LG, Mabe, Midea, Panasonic and Samsung are large, well-established companies, many ranking among the Global Fortune 150, and have demonstrated a commitment to success in the global market. Moreover, our customer base includes large, sophisticated trade customers who have many choices and demand competitive products, services and prices. Competition in the global appliance market is based on a number of factors including selling price, product features and design, performance, innovation, reputation, energy efficiency, quality, cost, distribution, and financial incentives, such as cooperative advertising, co-marketing funds, sales person incentives, volume rebates and terms. Many of our competitors are increasingly expanding beyond their existing manufacturing footprints. Our competitors, especially global competitors with low-cost sources of supply and/or highly protected home markets outside the United States, have aggressively priced their products and/or introduced new products to increase market share and expand into new geographies. If we are unable to successfully compete in this highly competitive environment, our business and financial performance could be negatively affected. | |
The loss of, or substantial decline in, sales to any of our key trade customers, major buying groups, and builders could adversely affect our financial performance. | We sell to a sophisticated customer base of large trade customers that have significant leverage as buyers over their suppliers. Most of our products are not sold through long-term contracts, allowing trade customers to change volume among suppliers. As the trade customers continue to become larger, they may seek to use their position to improve their profitability by various means, including improved efficiency, lower pricing, and increased promotional programs. If we are unable to meet their demand requirements, our volume growth and financial results could be negatively affected. The loss of, or substantial decline in volume of, sales to our key trade customers, major buying groups, builders, or any other trade customers to which we sell a significant amount of products, could adversely affect our financial performance. Additionally, the loss of market share or financial difficulties, including bankruptcy and financial restructuring, by these trade customers could have a material adverse effect on our liquidity, financial position and results of operations. | |
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Failure to maintain our reputation and brand image could negatively impact our business. | Our brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands depends on our marketing efforts, including advertising and consumer campaigns, as well as product innovation. We could be adversely impacted if we fail to achieve any of these objectives or if, whether or not justified, the reputation or image of our company or any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us, or product quality issues, could damage our reputation and brand image, undermine our customers' confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. Inaccurate or negative posts or comments about us on social networking and other websites that spread rapidly through such forums could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected. | |
An inability to effectively execute and manage our business objectives could adversely affect our financial performance. | The highly competitive nature of our industry requires that we effectively execute and manage our business objectives including our global operating platform initiative. Our global operating platform initiative aims to reduce costs, expand margins, drive productivity and quality improvements, accelerate our rate of innovation, and drive shareholder value. Our inability to effectively control costs and drive productivity improvements could affect our profits. In addition, our inability to provide high-quality, innovative products could adversely affect our ability to maintain or increase our sales, which could negatively affect our revenues and overall financial performance. Additionally, our success is dependent on anticipating and appropriately reacting to changes in customer preferences and on successful new product and process development and product relaunches in response to such changes. Our future results and our ability to maintain or improve our competitive position will depend on our capacity to gauge the direction of our key markets and upon our ability to successfully and timely identify, develop, manufacture, market, and sell new or improved products in these changing markets. | |
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brands. | We consider our intellectual property rights, including patents, trademarks, copyrights and trade secrets, and the licenses we hold, to be a significant part and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third party nondisclosure and assignment agreements. Our failure to obtain or adequately protect our trademarks, products, new features of our products, or our processes may diminish our competitiveness. We have applied for intellectual property protection in the United States and other jurisdictions with respect to certain innovations and new products, design patents, product features, and processes. We cannot be assured that the U.S. Patent and Trademark Office or any similar authority in other jurisdictions will approve any of our patent applications. Additionally, the patents we own could be challenged or invalidated, others could design around our patents or the patents may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, the laws of certain foreign countries in which we do business, or contemplate doing business in the future, do not recognize intellectual property rights or protect them to the same extent as United States law. As a result, these factors could weaken our competitive advantage with respect to our products, services, and brands in foreign jurisdictions, which could adversely affect our financial performance. Moreover, while we do not believe that any of our products infringe on enforceable intellectual property rights of third parties, others may assert intellectual property rights that cover some of our technology, brands, products, or services. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Claims of intellectual property infringement might also require us to enter into costly license agreements or modify our products or services. We also may be subject to significant damages, injunctions against development and sale of certain products or services, or limited in the use of our brands. | |
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OPERATIONAL RISKS
Key Risk | Risk Description | |
We face risks associated with our acquisitions and other investments and risks associated with our increased presence in emerging markets. | From time to time, we make strategic acquisitions, investments and participate in joint ventures. For example, we acquired Indesit and a majority interest in Hefei Sanyo in the fourth quarter of 2014. These transactions, and other transactions that we have entered into or which we may enter into in the future, can involve significant challenges and risks, including that the transaction does not advance our business strategy or fails to produce a satisfactory return on our investment. We may encounter difficulties in integrating acquisitions with our operations, applying our internal control processes to these acquisitions, and in managing strategic investments. Integrating acquisitions is often costly and may require significant attention from management. Furthermore, we may not realize the degree, or timing, of benefits we anticipate when we first enter into a transaction. While our evaluation of any potential acquisition includes business, legal and financial due diligence with the goal of identifying and evaluating the material risks involved, our due diligence reviews may not identify all of the issues necessary to accurately estimate the cost and potential loss contingencies of a particular transaction, including potential exposure to regulatory sanctions resulting from an acquisition target’s previous activities or costs associated with any quality issues with an acquisition target's legacy products. Our growth plans include efforts to increase revenue from emerging markets, including through acquisitions. Local business practices in these countries may not comply with U.S. laws, local laws or other laws applicable to us or our compliance policies, which non-compliant practices may result in increased liability risks. For example, we may incur unanticipated costs, expenses or other liabilities as a result of an acquisition target’s violation of applicable laws, such as the U.S. Foreign Corrupt Practices Act (FCPA) or similar worldwide anti-bribery laws in non-U.S. jurisdictions. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities. In addition, our recent and future acquisitions may increase our exposure to other risks associated with operating internationally, including foreign currency exchange rate fluctuations; political, legal and economic instability; inflation; changes in tax rates and tax laws; and work stoppages and labor relations. | |
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Risks associated with our international operations may decrease our revenues and increase our costs. | For the year ended December 31, 2016, international operations represent approximately 54% of our net sales, including 25% in EMEA, 16% in Latin America, 7% in Asia, 4% in Canada and 2% in Mexico. We expect that international sales will continue to account for a significant percentage of our net sales in the foreseeable future. Accordingly, we face numerous risks associated with conducting international operations, any of which could negatively affect our financial performance. These risks include the following: •political, legal, and economic instability and uncertainty; •foreign currency exchange rate fluctuations; •changes in foreign tax rules, regulations and other requirements, such as changes in tax rates and statutory and judicial interpretations of tax laws; •changes in diplomatic and trade relationships, including sanctions resulting from the current political situation in countries in which we do business; •inflation and/or deflation •changes in foreign country regulatory requirements; •various import/export restrictions and disruptions and the availability of required import/export licenses; •imposition of tariffs and other trade barriers; •managing widespread operations and enforcing internal policies and procedures such as compliance with U.S. and foreign anti-bribery and anti-corruption regulations, such as the FCPA, and antitrust laws; •labor disputes and work stoppages at our operations and suppliers; •government price controls; •the inability to collect accounts receivable; and •limitations on the repatriation or movement of earnings and cash. As a U.S. corporation, we are subject to the FCPA, which may place us at a competitive disadvantage to foreign companies that are not subject to similar regulations. Additionally, any determination that we have violated the FCPA or other anti-corruption laws could have a material adverse effect on us. Terrorist attacks, armed conflicts, civil unrest, natural disasters, governmental actions and epidemics could affect our domestic and international sales, disrupt our supply chain, and impair our ability to produce and deliver our products. Such events could directly impact our physical facilities or those of our suppliers or customers. | |
We may be subject to information technology system failures, network disruptions, cybersecurity attacks and breaches in data security, which may materially adversely affect our operations, financial condition and operating results. | We depend on information technology to improve the effectiveness of our operations and to interface with our customers, as well as to maintain financial accuracy and efficiency. Information technology system failures, including suppliers' or vendors' system failures, could disrupt our operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, the loss of customers, impediments to the manufacture or shipment of products, other business disruptions, or the loss of or damage to intellectual property through security breach. In addition, we have outsourced certain information technology support services and administrative functions, such as payroll processing and benefit plan administration, to third-party service providers and may outsource other functions in the future to achieve cost savings and efficiencies. If these service providers do not perform effectively, we may not achieve the expected cost savings and may incur additional costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies or the loss of or damage to intellectual property through security breach, or harm employee morale. Our information systems, or those of our third-party service providers, could also be penetrated by outside parties intent on extracting or corrupting information or disrupting business processes. Such unauthorized access could disrupt our business and could result in the loss of assets. Cybersecurity attacks are becoming more sophisticated and include malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. These events could impact our customers and reputation and lead to financial losses from remediation actions, loss of business or potential liability or an increase in expense, all of which may have a material adverse effect on our business. | |
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Product-related liability or product recall costs could adversely affect our business and financial performance. | We may be exposed to product-related liabilities, which in some instances may result in product redesigns, product recalls, or other corrective action. In addition, any claim or product recall that results in significant adverse publicity, particularly if those claims or recalls cause customers to question the safety or reliability of our products, may negatively affect our business, financial condition, or results of operations. We maintain product liability insurance, but it may not be adequate to cover losses related to product liability claims brought against us. Product liability insurance could become more expensive and difficult to maintain and may not be available on commercially reasonable terms, if at all. We may also be involved in certain class action and other litigation, for which no insurance is available. A cost effective market for product recall insurance does not exist, so any product recall we initiate could have a significant impact on our operating results and/or cash flows. We regularly engage in investigations of potential quality and safety issues as part of our ongoing effort to deliver quality products to our customers. We are currently investigating a limited number of potential quality and safety issues, and as appropriate, we undertake to effect repair or replacement of appliances. Currently we are implementing a corrective action plan affecting certain of our Indesit and Hotpoint* branded dryers (see Note 6 of the Notes to the Consolidated Financial Statements for additional information on these matters). Actual costs of these and any future issues depend upon several factors, including the number of consumers who respond to a particular recall, repair and administrative costs, whether the cost of any corrective action is borne by Whirlpool or the supplier, and, if borne by Whirlpool, whether we will be successful in recovering our costs from the supplier. The actual costs incurred as a result of these issues and any future issues could have a material adverse effect on our business, financial condition or results of operations. | |
The ability of suppliers to deliver parts, components and manufacturing equipment to our manufacturing facilities, and our ability to manufacture without disruption, could affect our global business performance. | We use a wide range of materials and components in the global production of our products, which come from numerous suppliers. Because not all of our business arrangements provide for guaranteed supply and some key parts may be available only from a single supplier or a limited group of suppliers, we are subject to supply and pricing risk. In addition, certain proprietary component parts used in some of our products are provided by single-source unaffiliated third-party suppliers. We would be unable to obtain these proprietary components for an indeterminate period of time if these single-source suppliers were to cease or interrupt production or otherwise fail to supply these components to us, which could adversely affect our product sales and operating results. Our operations and those of our suppliers are subject to disruption for a variety of reasons, including work stoppages, labor relations, intellectual property claims against suppliers, information technology failures, and hazards such as fire, earthquakes, flooding, or other natural disasters, insurance for any of which may not be available, affordable or adequate. Such disruption could interrupt our ability to manufacture certain products. Any significant disruption could negatively impact our revenue and/or earnings performance. | |
Our ability to attract, develop and retain executives and other qualified employees is crucial to our results of operations and future growth. | We depend upon the continued services and performance of our key executives, senior management and skilled personnel, particularly professionals with experience in our business and operations and the home appliance industry. We cannot be sure that any of these individuals will continue to be employed by us. Significant time is required to hire and develop skilled replacement personnel. An inability to hire, develop, engage and retain a sufficient number of qualified employees could materially hinder our business by, for example, delaying our ability to bring new products to market or impairing the success of our operations. | |
A deterioration in labor relations could adversely impact our global business. | As of December 31, 2016, we had approximately 93,000 employees. We are subject to separate collective bargaining agreements with certain labor unions, which generally have two to three year terms, as well as various other commitments regarding our workforce. We periodically negotiate with certain unions representing our employees and may be subject to work stoppages or may be unable to renew collective bargaining agreements on the same or similar terms, or at all, all of which may also have a material adverse effect on our business, financial condition, or results of operations. | |
*Whirlpool ownership of the Hotpoint brand in the EMEA and Asia Pacific regions is not affiliated with the Hotpoint brand sold in the Americas
11
FINANCIAL RISKS
Key Risk | Risk Description | |
Fluctuations and volatility in the cost of raw materials and purchased components could adversely affect our operating results. | The sources and prices of the primary materials (such as steel, resins, and base metals) used to manufacture our products and components containing those materials are susceptible to significant global and regional price fluctuations due to supply/demand trends, transportation costs, government regulations (such as conflict mineral provisions) and tariffs, changes in currency exchange rates, price controls, the economic climate, and other unforeseen circumstances. Significant increases in these and other costs in the future could have a material adverse effect on our operating results. | |
Foreign currency fluctuations may affect our financial performance. | We generate a significant portion of our revenue and incur a significant portion of our expenses in foreign currencies. Changes in the exchange rates of functional currencies of those operations affect the U.S. dollar value of our revenue and earnings from our foreign operations. We use currency forwards, net investment hedges, and options to manage our foreign currency transaction exposures. We cannot completely eliminate our exposure to foreign currency fluctuations, which may adversely affect our financial performance. In addition, because our consolidated financial results are reported in U.S. dollars, if we generate sales or earnings in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings. Finally, the amount of legal contingencies related to foreign operations may fluctuate significantly based upon changes in exchange rates and usually cannot be managed with currency forwards, options or other arrangements. Such fluctuations in exchange rates can significantly increase or decrease the amount of any legal contingency related to our foreign operations and make it difficult to assess and manage the potential exposure. | |
We face inventory and other asset risk. | We write down product and component inventories that have become obsolete or do not meet anticipated demand or net realizable value. We also review our long-lived and intangible assets for impairment whenever events or changed circumstances indicate the carrying amount of an asset may not be recoverable. If we determine that impairment has occurred, we record a write-down to adjust carrying value to fair value. No assurance can be given that, given the unpredictable pace of product obsolescence and business conditions with trade customers and in general, we will not incur additional inventory or asset related charges. Such charges could negatively affect our financial condition and operating results. | |
12
We are exposed to risks associated with the uncertain global economy. | Uncertain and changing economic conditions within our regions, along with national debt and fiscal concerns in various regions and government austerity measures, are posing challenges to the industry in which Whirlpool operates. A number of economic factors, including gross domestic product, availability of consumer credit, interest rates, consumer sentiment and debt levels, retail trends, housing starts, sales of existing homes, the level of mortgage refinancing and defaults, fiscal and credit market uncertainty, and foreign currency exchange rates, generally affect demand for our products. Economic uncertainty and related factors exacerbate negative trends in business and consumer spending and may cause certain customers to push out, cancel, or refrain from placing orders for our products. Uncertain market conditions, difficulties in obtaining capital, or reduced profitability may also cause some customers to scale back operations, exit markets, merge with other retailers, or file for bankruptcy protection and potentially cease operations, which can also result in lower sales and/or additional inventory. These conditions may similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for our products or added costs. In addition, these conditions may lead to strategic alliances by, or consolidation of, other appliance manufacturers, which could adversely affect our ability to compete effectively. A decline in economic activity and conditions in certain areas in which we operate have had an adverse effect on our financial condition and results of operations in recent years, and future declines and adverse conditions could have a similar adverse effect. Regional, political and economic instability in countries in which we do business may adversely affect business conditions, disrupt our operations, and have an adverse effect on our financial condition and results of operations. Uncertainty about future economic and industry conditions also makes it more challenging for us to forecast our operating results, make business decisions, and identify and prioritize the risks that may affect our businesses, sources and uses of cash, financial condition and results of operations. We may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect our ability to capitalize on opportunities in a market recovery. In addition, our operations are subject to general credit, liquidity, foreign exchange, market and interest rate risks. Our ability to invest in our businesses, fund strategic acquisitions and refinance maturing debt obligations depends in part on access to the capital markets. If we do not timely and appropriately adapt to changes resulting from the uncertain macroeconomic environment and industry conditions, or to difficulties in the financial markets, or if we are unable to continue to access the capital markets, our business, financial condition and results of operations may be materially and adversely affected. | |
Significant differences between actual results and estimates of the amount of future funding for our pension plans and postretirement health care benefit programs, and significant changes in funding assumptions or significant increases in funding obligations due to regulatory changes, could adversely affect our financial results. | We have both funded and unfunded defined benefit pension plans that cover certain employees around the world. We also have unfunded postretirement health care benefit plans for eligible retired employees. The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, as amended, govern the funding obligations for our U.S. pension plans, which are our principal pension plans. Our U.S. defined benefit plans were frozen as of December 31, 2006 for substantially all participants. For 2007 and beyond, Whirlpool employees may participate in an enhanced defined contribution plan. As of December 31, 2016, our projected benefit obligations under our pension plans and postretirement health and welfare benefit programs exceeded the fair value of plan assets by an aggregate of approximately $1.5 billion, ($1.1 billion of which was attributable to pension plans and $0.4 billion of which was attributable to postretirement health care benefits). Estimates for the amount and timing of the future funding obligations of these pension plans and postretirement health and welfare benefit plans are based on various assumptions. These assumptions include discount rates, expected long-term rate of return on plan assets, life expectancies and health care cost trend rates. These assumptions are subject to change based on changes in interest rates on high quality bonds, stock and bond market returns, and health care cost trend rates, all of which are largely outside our control. Significant differences in results or significant changes in assumptions may materially affect our postretirement obligations and related future contributions and expenses. | |
13
LEGAL & COMPLIANCE RISKS
Key Risk | Risk Description | |
Unfavorable results of legal and regulatory proceedings could materially adversely affect our business and financial condition and performance. | We are subject to a variety of litigation and legal compliance risks relating to, among other things, products, intellectual property rights, income and non-income taxes, environmental matters, corporate matters, commercial matters, competition laws and distribution, marketing and trade practices, anti-bribery, anti-corruption, energy regulations, and employment and benefit matters. For example, we are currently disputing certain income and non-income tax related assessments issued by the Brazilian authorities (see Note 6 and Note 11 of the Notes to the Consolidated Financial Statements for additional information on these matters). Unfavorable outcomes regarding these assessments could have a material adverse effect on our financial position, liquidity, or results of operations in any particular reporting period. Results of such proceedings cannot be predicted with certainty and for some matters, such as class actions, no insurance is cost effectively available. Regardless of merit, such proceedings may be both time-consuming and disruptive to our operations and could divert the attention of our management and key personnel from our business operations. We estimate loss contingencies and establish accruals as required by generally accepted accounting principles, based on our assessment of contingencies where liability is deemed probable and reasonably estimable, in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings, volatility in foreign currency exchange rates and other factors may affect our assessment and estimates of the loss contingency recorded and could result in an adverse effect on our results of operations in the period in which a liability would be recognized or cash flows for the period in which amounts would be paid. Actual results may significantly vary from our reserves. | |
We are subject to, and could be further subject to, governmental investigations or actions by other third parties. | We are subject to various federal, foreign and state laws, including antitrust laws, violations of which can involve civil or criminal sanctions. Responding to governmental investigations or other actions may be both time-consuming and disruptive to our operations and could divert the attention of our management and key personnel from our business operations. The impact of these and other investigations and lawsuits could have a material adverse effect on our financial position, liquidity and results of operations. | |
Changes in the legal and regulatory environment could limit our business activities, increase our operating costs, reduce demand for our products or result in litigation. | The conduct of our businesses, and the production, distribution, sale, advertising, labeling, safety, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets in which we operate. These laws and regulations may change, sometimes dramatically, as a result of political, economic or social events. Changes in laws, regulations or governmental policy and the related interpretations may alter the environment in which we do business and may impact our results or increase our costs or liabilities. In addition, we incur and will continue to incur capital and other expenditures to comply with various laws and regulations, especially relating to protection of the environment, human health and safety and energy efficiency. These types of costs could adversely affect our financial performance. Additionally, we could be subjected to future liabilities, fines or penalties or the suspension of product production for failing to comply with various laws and regulations, including environmental regulations. Cleanup obligations that might arise at any of our manufacturing sites or the imposition of more stringent environmental laws in the future could adversely affect us. | |
14
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Our principal executive offices are located in Benton Harbor, Michigan. On December 31, 2016, our principal manufacturing operations were carried on at 42 locations in 14 countries worldwide. We occupied a total of approximately 86.4 million square feet devoted to manufacturing, service, sales and administrative offices, warehouse and distribution space. Over 37.9 million square feet of such space was occupied under lease. Whirlpool properties include facilities which are suitable and adequate for the manufacture and distribution of Whirlpool’s products. The Company’s principal manufacturing sites by operating segment were as follows:
Segment | Country | Principal Manufacturing Locations |
North America | United States | 10 |
Mexico | 3 | |
Europe, Middle East and Africa | France | 1 |
Italy | 5 | |
Poland | 3 | |
Russia | 1 | |
Slovakia | 1 | |
South-Africa | 1 | |
Turkey | 1 | |
United Kingdom | 1 | |
Latin America | Brazil | 4 |
China | 1 | |
Colombia | 1 | |
Italy | 1 | |
Slovakia | 1 | |
Mexico | 1 | |
Asia | China | 3 |
India | 3 | |
Total | 42 | |
ITEM 3. | LEGAL PROCEEDINGS |
Information regarding legal proceedings can be found in Note 6 to the Consolidated Financial Statements and is incorporated herein by reference.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
15
PART II | ||||
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS |
AND ISSUER PURCHASES OF EQUITY SECURITIES | |
Whirlpool’s common stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. As of February 3, 2017, the number of holders of record of Whirlpool common stock was approximately 10,474.
Quarterly market and dividend information can be found in Note 14 to the Consolidated Financial Statements.
On April 14, 2014, our Board of Directors authorized a share repurchase program of up to $500 million. During the first quarter of 2016, we repurchased 1,507,100 shares at an aggregate purchase price of approximately $225 million under this program. As of March 31, 2016, there were no remaining funds authorized under this program.
On April 18, 2016 , our Board of Directors authorized a new share repurchase program of up to $1 billion. For the year ended December 31, 2016, we repurchased 1,749,600 shares at an aggregate purchase price of approximately $300 million under this program. At December 31, 2016, there were approximately $700 million in remaining funds authorized under this program.
Share repurchases are made from time to time on the open market as conditions warrant. The program does not obligate us to repurchase any of our shares.
The following table summarizes repurchases of Whirlpool's common stock in the three months ended December 31, 2016:
Period (Millions of dollars, except number and price per share) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan | |||||
October 1, 2016 through October 31, 2016 | 265,000 | $ | 150.89 | 265,000 | $ | 760 | |||
November 1, 2016 through November 30, 2016 | 396,200 | 151.37 | 396,200 | 700 | |||||
December 1, 2016 through December 31, 2016 | — | — | — | 700 | |||||
Total | 661,200 | $ | 151.17 | 661,200 | |||||
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ITEM 6. | SELECTED FINANCIAL DATA |
FIVE-YEAR SELECTED FINANCIAL DATA
(Millions of dollars, except share and employee data) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
CONSOLIDATED OPERATIONS | ||||||||||||||||||||
Net sales | $ | 20,718 | $ | 20,891 | $ | 19,872 | $ | 18,769 | $ | 18,143 | ||||||||||
Restructuring costs | 173 | 201 | 136 | 196 | 237 | |||||||||||||||
Depreciation and amortization | 655 | 668 | 560 | 540 | 551 | |||||||||||||||
Operating profit | 1,354 | 1,285 | 1,188 | 1,249 | 869 | |||||||||||||||
Earnings before income taxes and other items | 1,114 | 1,031 | 881 | 917 | 558 | |||||||||||||||
Net earnings | 928 | 822 | 692 | 849 | 425 | |||||||||||||||
Net earnings available to Whirlpool | 888 | 783 | 650 | 827 | 401 | |||||||||||||||
Capital expenditures | 660 | 689 | 720 | 578 | 476 | |||||||||||||||
Dividends paid | 294 | 269 | 224 | 187 | 155 | |||||||||||||||
CONSOLIDATED FINANCIAL POSITION | ||||||||||||||||||||
Current assets | $ | 7,339 | $ | 7,325 | $ | 8,098 | $ | 7,022 | $ | 6,827 | ||||||||||
Current liabilities | 7,662 | 7,744 | 8,403 | 6,794 | 6,510 | |||||||||||||||
Accounts receivable, inventories and accounts payable, net | 918 | 746 | 778 | 548 | 694 | |||||||||||||||
Property, net | 3,810 | 3,774 | 3,981 | 3,041 | 3,034 | |||||||||||||||
Total assets | 19,153 | 19,010 | 20,002 | 15,544 | 15,396 | |||||||||||||||
Long-term debt | 3,876 | 3,470 | 3,544 | 1,846 | 1,944 | |||||||||||||||
Total debt(1) | 4,470 | 3,998 | 4,347 | 2,463 | 2,461 | |||||||||||||||
Whirlpool stockholders’ equity | 4,773 | 4,743 | 4,885 | 4,924 | 4,260 | |||||||||||||||
PER SHARE DATA | ||||||||||||||||||||
Basic net earnings available to Whirlpool | $ | 11.67 | $ | 9.95 | $ | 8.30 | $ | 10.42 | $ | 5.14 | ||||||||||
Diluted net earnings available to Whirlpool | 11.50 | 9.83 | 8.17 | 10.24 | 5.06 | |||||||||||||||
Dividends | 3.90 | 3.45 | 2.88 | 2.38 | 2.00 | |||||||||||||||
Book value(2) | 61.82 | 59.54 | 61.39 | 60.97 | 53.70 | |||||||||||||||
Closing Stock Price—NYSE | 181.77 | 146.87 | 193.74 | 156.86 | 101.75 | |||||||||||||||
KEY RATIOS | ||||||||||||||||||||
Operating profit margin | 6.5 | % | 6.2 | % | 6.0 | % | 6.7 | % | 4.8 | % | ||||||||||
Pre-tax margin(3) | 5.4 | % | 4.9 | % | 4.4 | % | 4.9 | % | 3.1 | % | ||||||||||
Net margin(4) | 4.3 | % | 3.7 | % | 3.3 | % | 4.4 | % | 2.2 | % | ||||||||||
Return on average Whirlpool stockholders’ equity(5) | 18.7 | % | 16.3 | % | 13.3 | % | 18.0 | % | 9.5 | % | ||||||||||
Return on average total assets(6) | 4.7 | % | 4.0 | % | 3.7 | % | 5.3 | % | 2.6 | % | ||||||||||
Current assets to current liabilities | 1.0 | 0.9 | 1.0 | 1.0 | 1.0 | |||||||||||||||
Total debt as a percent of invested capital(7) | 43.8 | % | 41.3 | % | 42.9 | % | 33.0 | % | 36.0 | % | ||||||||||
Price earnings ratio(8) | 15.8 | 14.9 | 23.7 | 15.3 | 20.1 | |||||||||||||||
OTHER DATA | ||||||||||||||||||||
Common shares outstanding (in thousands): | ||||||||||||||||||||
Average number—on a diluted basis | 77,211 | 79,667 | 79,578 | 80,761 | 79,337 | |||||||||||||||
Year-end common shares outstanding | 74,465 | 77,221 | 77,956 | 77,417 | 78,407 | |||||||||||||||
Year-end number of stockholders | 10,528 | 10,663 | 11,225 | 11,889 | 12,759 | |||||||||||||||
Year-end number of employees | 93,000 | 97,000 | 100,000 | 69,000 | 68,000 | |||||||||||||||
Five-year annualized total return to stockholders(9) | 33.6 | % | 13.0 | % | 22.0 | % | 34.0 | % | 7.6 | % | ||||||||||
(1) Total debt includes notes payable and current and long-term debt.
(2) Total Whirlpool stockholders’ equity divided by average number of shares on a diluted basis.
(3) Earnings (loss) before income taxes, as a percent of net sales.
(4) Net earnings available to Whirlpool, as a percent of net sales.
(5) Net earnings available to Whirlpool, divided by average Whirlpool stockholders’ equity.
(6) Net earnings available to Whirlpool, divided by average total assets.
(7) Total debt divided by total debt and total stockholders’ equity.
(8) Closing stock price divided by diluted net earnings available to Whirlpool.
(9) Stock appreciation plus reinvested dividends, divided by share price at the beginning of the period.
17
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND |
RESULTS OF OPERATIONS | |
This Management Discussion and Analysis should be read in connection with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Selected Financial Data included in this Form 10-K. Certain references to particular information in the Notes to the Consolidated Financial Statements are made to assist readers.
ABOUT WHIRLPOOL
Whirlpool is the number one major appliance manufacturer in the world with net sales of approximately $21 billion in 2016. We are a leading producer of major home appliances in North America, Europe and Latin America, and have a significant presence throughout China and India. We have received worldwide recognition for accomplishments in a variety of business and social efforts, including leadership, diversity, innovative product design, business ethics, social responsibility and community involvement. We conduct our business through four reportable segments, which we define based on geography. Our reportable segments consist of North America, EMEA, Latin America and Asia. Our customer base includes large, sophisticated trade customers who have many choices and demand competitive products, services and prices. The major home appliance industry operates in an intensely competitive environment, reflecting the impact of both new and established global competitors, including Asian and European manufacturers.
The charts below summarize the balance of net sales by reportable segment for 2016, 2015 and 2014, respectively:
We monitor country-specific economic factors such as gross domestic product, unemployment, consumer confidence, retail trends, housing starts and completions, sales of existing homes and mortgage interest rates as key indicators of industry demand. In addition to profitability, we also focus on country, brand, product and channel sales when assessing and forecasting financial results.
Our leading portfolio of brands includes Whirlpool, Maytag, KitchenAid, Embraco, Brastemp, Consul and Indesit. Our global branded consumer products strategy is to introduce innovative new products, increase brand customer loyalty, expand our presence outside the United States, enhance our trade management platform, improve total cost and quality by expanding and leveraging our global operating platform and, where appropriate, make strategic acquisitions and investments.
As we grow revenues in our core products, our strategy is to extend our business by offering products and services that are dependent on and related to our core business and expand into adjacent products, such as Affresh cleaners and Gladiator GarageWorks, through businesses that leverage our core competencies and business infrastructure.
OVERVIEW
During 2016, we had another year of strong performance for Whirlpool Corporation, as we delivered record results through strong operational execution and decisive actions to adjust to changes in global markets.
Over the last few years, macroeconomic volatility has been a factor in many of the countries where we operate. We continued to experience volatility during 2016. The Brexit decision in June had a negative impact on British currency and demand, while uncertainty in emerging markets generated additional currency and demand weakness, especially in Brazil, Russia and China.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
These challenges, along with a further strengthening U.S. dollar, had a combined negative impact of approximately $600 million in revenue and $2 per share of earnings.
Our earnings growth and strong cash generation enabled us to create long-term shareholder value through the execution of our balanced capital allocation approach. We invested in our innovation pipeline through $660 million in capital expenditures while increasing our dividend by 11% and repurchasing $525 million in common stock. These investments continue to be supported by a strong balance sheet, an increased capacity to invest and the confidence that our operating plans will deliver extraordinary levels of shareholder value both now and in the future.
Our long-term value creation framework is built upon the strong foundation we have in place: our industry-leading brand portfolio and robust product innovation pipeline, supported by our best cost global operating platform and executed by our exceptional employees throughout the world. We will measure these value-creation components by focusing on the following key metrics:
• | Deliver 3 to 5 percent annual organic net sales growth across our global footprint |
• | Grow earnings per share by 10 to 15 percent annually |
• | Expand EBIT margins to 10 percent plus by 2020 through strong cost productivity programs and further leveraging our strong brands and innovative new products |
• | Generate free cash flow of 5 to 6 percent of net sales by 2018, which represents over 85 percent earnings to free cash conversion |
We remain confident in our ability to effectively manage our business regardless of the operating environment and expect to continue delivering long-term value for all of our shareholders.
RESULTS OF OPERATIONS
The following table summarizes the consolidated results of operations:
December 31, | ||||||||||||||||
Consolidated - Millions of dollars (except per share data) | 2016 | Better/(Worse) | 2015 | Better/(Worse) | 2014 | |||||||||||
Net sales | $ | 20,718 | (0.8)% | $ | 20,891 | 5.1% | $ | 19,872 | ||||||||
Gross margin | 3,682 | (0.2) | 3,690 | 8.7 | 3,395 | |||||||||||
Selling, general and administrative | 2,084 | 2.2 | 2,130 | (4.6) | 2,038 | |||||||||||
Restructuring costs | 173 | 13.9 | 201 | (48.2) | 136 | |||||||||||
Interest and sundry (income) expense | 79 | 11.2 | 89 | 36.7 | 142 | |||||||||||
Interest expense | 161 | 2.4 | 165 | — | 165 | |||||||||||
Income tax expense | 186 | 11.3 | 209 | (10.1) | 189 | |||||||||||
Net earnings available to Whirlpool | 888 | 13.4 | 783 | 20.4 | 650 | |||||||||||
Diluted net earnings available to Whirlpool per share | $ | 11.50 | 17.0% | $ | 9.83 | 20.3% | $ | 8.17 | ||||||||
Consolidated Net Sales
The following charts summarize units sold and consolidated net sales by operating segment:
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Consolidated net sales decreased 0.8% compared to 2015 primarily driven by unfavorable impacts from foreign currency and product price/mix, partially offset by higher unit volumes. Excluding the impact of foreign currency, consolidated net sales increased 1.6% compared to 2015. Consolidated net sales for 2015 increased 5.1% compared to 2014 primarily driven by increased volume due to acquisitions and favorable product price/mix, partially offset by the unfavorable impact of foreign currency and a weakened demand environment in emerging markets. Excluding the impact of foreign currency and BEFIEX in 2014, consolidated net sales for 2015 increased 18.1% compared to 2014.
We provide the percentage change in net sales, excluding the impact of foreign currency and BEFIEX, as a supplement to the change in net sales as determined by U.S. generally accepted accounting principles ("GAAP") to provide stockholders with a clearer basis to assess Whirlpool's results over time. This measure is considered a non-GAAP financial measure and is calculated by translating the current period net sales in functional currency, to U.S. dollars using the prior-year's exchange rate compared to the prior-year period net sales and BEFIEX.
Significant regional trends were as follows:
• | North America net sales increased 3.9% compared to 2015 primarily due to a 7.7% increase in units sold, partially offset by unfavorable impacts from product price/mix and foreign currency. Excluding the impact of foreign currency, net sales increased 5.0% in 2016. North America net sales for 2015 increased 0.9% compared to 2014 primarily due to a 1.4% increase in units sold and favorable product/price mix, partially offset by foreign currency. Excluding the impact of foreign currency, net sales increased 3.2% in 2015. |
• | EMEA net sales decreased 8.1% compared to 2015, primarily due to unfavorable impacts from foreign currency, product price/mix, and a 1.9% decrease in units sold. Excluding the impact of foreign currency, net sales decreased 4.3% in 2016. EMEA net sales for 2015 increased 43.4% compared to 2014, primarily due to a 59.7% increase in units sold due to the acquisition of Indesit and favorable product mix, partially offset by unfavorable foreign currency. Excluding the impact of foreign currency, net sales increased 75.3% in 2015. |
• | Latin America net sales decreased 4.7% compared to 2015 primarily due to a 11.5% decrease in units sold and unfavorable impacts from foreign currency, partially offset by favorable product price/mix. Excluding the impact of foreign currency, Latin America net sales decreased 1.5% in 2016. Latin America net sales for 2015 decreased 28.5% compared to 2014 primarily due to a 21.3% decrease in units sold and unfavorable foreign currency, partially offset by favorable product mix. Excluding the impact of foreign currency and BEFIEX, Latin America net sales decreased 5.9% in 2015. |
• | Asia net sales increased 0.5% compared to 2015 primarily due to a 12.3% increase in units sold, partially offset by unfavorable impacts from product price/mix and foreign currency. Excluding the impact of foreign currency, Asia net sales increased 5.4% in 2016. Asia net sales for 2015 increased 73.6% compared to 2014 primarily due to a 78.8% increase in units sold driven by the acquisition of Hefei Sanyo. Excluding the impact of foreign currency, Asia net sales increased 78.3% in 2015. |
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Gross Margin
The chart below summarizes gross margin percentages by operating segment:
The consolidated gross margin percentage increased by 10 basis points to 17.8% compared to 2015, primarily due to ongoing cost productivity and acquisition synergies, unit volume growth, and benefits from cost and capacity-reduction initiatives, partially offset by the unfavorable impacts from product price/mix and foreign currency.
Significant regional trends were as follows:
• | North America gross margin percentage decreased compared to 2015 primarily due to unfavorable product price/mix, recognition of postretirement-benefit curtailment gains in 2015, and foreign currency, partially offset by unit volume growth and ongoing cost productivity. North America gross margin for 2015 increased compared to 2014 primarily due to ongoing cost productivity and recognition of postretirement-benefit curtailment gains, partially offset by unfavorable foreign currency. |
• | EMEA gross margin percentage increased compared to 2015 primarily due to favorable impacts from acquisition synergies, partially offset by unfavorable impacts from foreign currency, product price/mix, unit volume declines, and acquisition-related integration costs. During 2015, EMEA gross margin was flat compared to 2014 primarily due to benefits from the Indesit acquisition, favorable product price/mix, ongoing cost productivity, and capacity optimization initiatives, offset by unfavorable foreign currency, legacy Indesit product corrective action costs and increased investments in marketing, technology and products. |
• | Latin America gross margin percentage increased compared to 2015 primarily due to favorable product price/mix and benefits from cost and capacity reduction initiatives, partially offset by unit volume declines due to the weakened demand environment in Brazil. During 2015, Latin America gross margin decreased compared to 2014 primarily due to unfavorable foreign currency and the weakened demand environment in Brazil, partially offset by higher product price/mix. |
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
• | Asia gross margin percentage decreased in 2016, compared to 2015, primarily due to unfavorable product price/mix and increased investments in marketing, technology and products, partially offset by unit volume growth and benefits from ongoing cost productivity. During 2015, Asia gross margin increased compared to 2014 primarily due to acquisition synergies, partially offset by increased investments in marketing, technology and products. |
Selling, General and Administrative
The following table summarizes selling, general and administrative expenses as a percentage of sales by operating segment:
December 31, | |||||||||||||||||||||
Millions of dollars | 2016 | As a % of Net Sales | 2015 | As a % of Net Sales | 2014 | As a % of Net Sales | |||||||||||||||
North America | $ | 783 | 7.0 | % | $ | 762 | 7.1 | % | $ | 761 | 7.2 | % | |||||||||
EMEA | 577 | 11.2 | 604 | 10.8 | 506 | 13.0 | |||||||||||||||
Latin America | 305 | 9.6 | 315 | 9.4 | 359 | 7.7 | |||||||||||||||
Asia | 216 | 15.2 | 226 | 16.0 | 146 | 17.9 | |||||||||||||||
Corporate/other | 203 | — | 223 | — | 266 | — | |||||||||||||||
Consolidated | $ | 2,084 | 10.1 | % | $ | 2,130 | 10.2 | % | $ | 2,038 | 10.3 | % | |||||||||
Consolidated selling, general and administrative expenses as a percent of consolidated net sales in 2016 and 2015, compared to the previous years, reflect the favorable impact of acquisition synergies, partially offset by foreign currency.
Restructuring
We incurred restructuring charges of $173 million, $201 million, and $136 million for the years ended December 31, 2016, 2015 and 2014, respectively. For the full year 2017, we expect to incur up to $200 million of restructuring charges, which will result in ongoing substantial cost reductions.
Additional information about restructuring activities can be found in Note 10 of the Notes to the Consolidated Financial Statements.
Interest and Sundry (Income) Expense
Interest and sundry (income) expense decreased $10 million compared to 2015, primarily due to amounts received pursuant to an agreement, reached in the fourth quarter of 2016, with the seller of Indesit to recover a portion of our acquisition related costs. During 2015, interest and sundry (income) expense decreased $53 million compared to 2014, primarily due to a $64 million gain related to a business investment in Brazil during 2015 and previous year investment expenses related to the Hefei Sanyo and Indesit acquisitions, partially offset by impact from foreign currency.
For additional information about the Embraco antitrust matters and legacy product warranty cost, see Note 6 of the Notes to the Consolidated Financial Statements. For additional information about the acquisitions of Hefei Sanyo and Indesit, see the Financial Condition and Liquidity section of Management's Discussion and Analysis.
Interest Expense
Interest expense decreased by $4 million compared to 2015. This was a result of lower average interest rates on long-term debt, offset by higher average long-term debt balances. During 2015, interest expense was unchanged compared to 2014. This was a result of higher average long-term debt balances, offset by lower average interest rates on long-term debt.
Income Taxes
Income tax expenses were $186 million, $209 million, and $189 million in 2016, 2015 and 2014, respectively. The decrease in tax expense in 2016 compared to 2015 is primarily due to favorable audits and settlements and tax planning resulting in valuation allowance releases, partially offset by higher pre-tax earnings. The increase in tax expense in 2015 compared to 2014 is primarily due to higher pre-tax earnings, partially offset by a lower effective tax rate.
For additional information about our consolidated tax provision, see Note 11 of the Notes to the Consolidated Financial Statements.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
FORWARD-LOOKING PERSPECTIVE
Earnings per diluted share presented below are net of tax, while each adjustment is presented on a pre-tax basis. The aggregate income tax impact of the taxable components of each adjustment is presented in the income tax impact line item at our anticipated 2017 full-year tax rate of 22%. We currently estimate earnings per diluted share and industry demand for 2017 to be within the following ranges:
2017 | |||
Current Outlook | |||
Estimated earnings per diluted share, for the year ending December 31, 2017 | $13.25 | — | $14.25 |
Including: | |||
Restructuring Expense | $(2.62) | ||
Income Tax Impact | $0.58 | ||
Industry demand | |||
North America (1) | +4% | — | +6% |
EMEA | +1% | — | +2% |
Latin America (2) | Flat | ||
Asia | Flat | — | +2% |
(1) Reflects industry demand in the United States.
(2) Reflects industry demand in Brazil.
For the full-year 2017, we expect to generate cash from operating activities of $1.7 billion to $1.75 billion and free cash flow of approximately $1 billion, including primarily acquisition related restructuring cash outlays of up to $165 million, legacy product warranty and liability costs of $69 million, pension contributions of $42 million and, with respect to free cash flow, capital expenditures of $700 million to $750 million.
The table below reconciles projected 2017 cash provided by operating activities determined in accordance with GAAP to free cash flow, a non-GAAP measure. Management believes that free cash flow provides stockholders with a relevant measure of liquidity and a useful basis for assessing Whirlpool’s ability to fund its activities and obligations. There are limitations to using non-GAAP financial measures, including the difficulty associated with comparing companies that use similarly named non-GAAP measures whose calculations may differ from our calculations. We define free cash flow as cash provided by continuing operations less capital expenditures and including proceeds from the sale of assets/businesses, and changes in restricted cash. The change in restricted cash relates to the private placement funds paid by Whirlpool to acquire majority control of Hefei Sanyo in 2014 and which are used to fund capital expenditures and technical resources to enhance Whirlpool China’s research and development and working capital, as required by the terms of the Hefei Sanyo acquisition made in October 2014.
2017 | |||||||
Millions of dollars | Current Outlook | ||||||
Cash provided by operating activities(1) | $ | 1,700 | — | $ | 1,750 | ||
Capital expenditures, proceeds from sale of assets/businesses and changes in restricted cash | (700 | ) | — | (750 | ) | ||
Free cash flow | ~ $1,000 | ||||||
(1) Financial guidance on a GAAP basis for cash provided by (used in) financing activities and cash provided by (used in) investing activities has not been provided because in order to prepare any such estimate or projection, the Company would need to rely on market factors and certain other conditions and assumptions that are outside of its control.
The projections above are based on many estimates and are inherently subject to change based on future decisions made by management and the Board of Directors of Whirlpool, and significant economic, competitive and other uncertainties and contingencies.
FINANCIAL CONDITION AND LIQUIDITY
Our objective is to finance our business through operating cash flow and the appropriate mix of long-term and short-term debt. By diversifying the maturity structure, we avoid concentrations of debt, reducing liquidity risk. We have varying needs for short-term working capital financing as a result of the nature of our business. We regularly review our capital structure and liquidity priorities, which include funding the business through capital and engineering spending to support innovation and productivity initiatives, funding our pension plan and term debt liabilities, providing return to shareholders and potential acquisitions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Our short term potential uses of liquidity include funding our ongoing capital spending, restructuring activities, funding pension plans and returns to shareholders. We also have $560 million of term debt maturing in the next twelve months, and are currently evaluating our options in connection with this maturing debt, which may include repayment through refinancing, through free cash flow generation, or cash on hand.
We monitor the credit ratings and market indicators of credit risk of our lending, depository, and derivative counterparty banks regularly, and take certain action to manage credit risk. We diversify our deposits and investments in short term cash equivalents to limit the concentration of exposure by counterparty.
As of December 31, 2016, the only country where we had cash or cash equivalents greater than 1% of our consolidated assets was China, which represented 2.4%. In addition, we did not have any third-party accounts receivable greater than 1% of our consolidated assets in any single country outside of North America, with the exceptions of Italy, China, and Brazil which represented 1.0%, 1.0%, and 1.3% respectively. We continue to monitor general financial instability and uncertainty globally.
As of December 31, 2016, we had €67 million (approximately $71 million as of December 31, 2016) in outstanding trade receivables and short-term and long-term notes due to us associated with Alno AG, a long-standing European customer. Approximately €49 million (approximately $51 million as of December 31, 2016) of the outstanding receivables were overdue as of December 31, 2016. Our exposure includes not only the outstanding receivables but also the potential risks of an Alno AG bankruptcy and impacts to our distribution process. We believe our reserves related to these outstanding receivables are sufficient. In the fourth quarter of 2016, Whirlpool sold its remaining investment of approximately 10.6 million shares in Alno AG for approximately €5 million (approximately $6 million). We continue to monitor customer financial conditions globally.
The Company had cash and cash equivalents of approximately $1.1 billion at December 31, 2016, of which approximately $1.0 billion was held by subsidiaries in foreign countries. For each of its foreign subsidiaries, the Company makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. Our intent is to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate these funds to fund our U.S. operations. However, if these funds were repatriated, then we would be required to accrue and pay applicable United States taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various countries. The repatriation could result in an adjustment to the tax liability after considering available foreign tax credits and other tax attributes. It is not practicable to estimate the amount of the deferred tax liability associated with these unremitted earnings due to the complexity of its hypothetical calculation.
Sources and Uses of Cash
We met our cash needs during 2016 through cash flows from operations, cash and cash equivalents, and financing arrangements. Our cash and cash equivalents at December 31, 2016 increased $313 million compared to the same period in 2015.
The following table summarizes the net increase (decrease) in cash and cash equivalents for the periods presented. Significant drivers of changes in our cash and cash equivalents balance during 2016 are discussed below:
Cash Flow Summary
Millions of dollars | 2016 | 2015 | 2014 | |||||||||
Cash provided by (used in): | ||||||||||||
Operating activities | $ | 1,203 | $ | 1,225 | $ | 1,479 | ||||||
Investing activities | (588 | ) | (681 | ) | (2,456 | ) | ||||||
Financing activities | (278 | ) | (707 | ) | 705 | |||||||
Effect of exchange rate changes | (24 | ) | (91 | ) | (82 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 313 | $ | (254 | ) | $ | (354 | ) | ||||
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Cash Flows from Operating Activities
The decrease in cash provided by operating activities during 2016 reflects strong cash earnings and effective credit management, more than offset by cash expenditures related to the legacy product corrective action.
The timing of cash flows from operations varies significantly throughout the year primarily due to changes in production levels, sales patterns, promotional programs, funding requirements, credit management, as well as receivable and payment terms. Depending on the timing of cash flows, the location of cash balances, as well as the liquidity requirements of each country, external sources of funding are used to support working capital requirements.
Cash Flows from Investing Activities
Changes in cash used in investing activities during 2016 primarily reflect a reduction in capital expenditures and investment in related businesses, partially offset by increased proceeds from the sale of business assets.
In June 2016, Whirlpool China Co., Ltd. (“Whirlpool China”), our majority-owned indirect subsidiary, entered into an agreement to return land use rights for land now occupied by two Whirlpool China plants in Hefei, China to a division of the Hefei municipal government. The aggregate price for the return of land use rights was approximately RMB 687 million (approximately $103 million as of June 27, 2016). Whirlpool China received RMB 280 million (approximately $42 million as of June 27, 2016) of the aggregate return price on June 27, 2016 with the remainder to be paid in installments in 2017 and 2018. The remaining balance is RMB 407 million (approximately $59 million as of December 31, 2016).
Cash Flows from Financing Activities
Cash used in financing activities during 2016 primarily reflects share repurchase activity and repayments of long-term debt. Cash used in financing activities during 2015 primarily reflects share repurchase activity under our share repurchase program. Cash provided by financing activities during 2014 primarily reflects funding required to complete the acquisitions of Hefei Sanyo and Indesit.
Whirlpool Subsidiary Share Repurchase
On July 12, 2016, Whirlpool S.A. (“WHR SA”) and Brasmotor S.A. (“BMT”), both majority-owned indirect subsidiaries of Whirlpool Corporation, issued public announcements in Brazil reporting that Whirlpool do Brasil Ltda., the controlling shareholder of both WHR SA and BMT, intended to acquire the outstanding common and preferred shares of WHR SA and BMT by means of tender offers for the publicly-held shares. At that time, Whirlpool do Brasil Ltda. and other Whirlpool entities held 99.20% of the common and 95.68% of the preferred shares of WHR SA and 99.40% of the common and 93.55% of the preferred shares of BMT. The tender offers were launched in November 2016 and concluded in December 2016. The offer for BMT was successful and will result in the acquisition of 100% of the shares of BMT after the squeeze-out of the remaining minority shareholders. The cost related to this offer was approximately $25 million as of December 2016. The squeeze-out was completed in January 2017, bringing the total cost to approximately $31 million. The WHR SA tender offer was abandoned because the minimum number of interested minority shareholders was not obtained.
Financing Arrangements
On July 15, 2016, $244 million of 7.75% notes matured and were repaid. On June 15, 2016, $250 million of 6.50% notes matured and were repaid.
On May 23, 2016, we completed a debt offering of $500 million principal amount of 4.50% notes due in 2046. The notes contain covenants that limit our ability to incur certain liens or enter into certain sale and lease-back transactions. In addition, if we experience a specific kind of change of control, we are required to make an offer to purchase all of the notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest. The notes are registered under the Securities Act of 1933, as amended, pursuant to our Registration Statement on Form S-3 (File No. 333-203704) filed with the Securities and Exchange Commission on April 29, 2015.
On November 2, 2016, Whirlpool Finance Luxembourg S.à. r.l., an indirect, wholly-owned finance subsidiary of Whirlpool Corporation, completed a debt offering of €500 million (approximately $555 million as of the date of issuance) principal amount of 1.250% notes due in 2026. The Company has fully and unconditionally guaranteed these notes. The notes contain covenants that limit Whirlpool Corporation's ability to incur certain liens or enter into certain sale and lease-back transactions. In addition, if we experience a specific kind of change of control, we are required to make an offer to purchase all of the notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest. The notes are registered under the Securities Act
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
of 1933, as amended, pursuant to our Registration Statement on Form S-3 (File No.333-203704-1) filed with the Securities and Exchange Commission on October 25, 2016
The Company had a total committed credit facilities of approximately $3.1 billion as of December 31, 2016, which is fundamentally unchanged from the committed credit facilitates as of December 31, 2015. The facilities are more geographically diverse and reflect the Company’s growing global operations. The Company believes these facilities are sufficient to support its global operations. We had no borrowings outstanding under the committed credit facilities at December 31, 2016 and 2015, respectively.
For additional information about our financing arrangements, see Note 5 of the Notes to the Consolidated Financial Statements.
WHIRLPOOL CHINA ACQUISITION
On August 12, 2013, Whirlpool's wholly-owned subsidiary, Whirlpool (China) Investment Co., Ltd., reached agreements to acquire a 51% equity stake in Hefei Sanyo, a joint stock company whose shares are listed and traded on the Shanghai Stock Exchange. This transaction was completed on October 24, 2014. Hefei Sanyo has since been renamed to "Whirlpool China Co., Ltd." The aggregate purchase price was RMB 3.4 billion (approximately $551 million at the dates of purchase). The Company funded the total consideration for the shares with cash on hand. The cash paid for the private placement portion of the transaction is considered restricted cash, which is used to fund capital expenditures and technical resources to enhance Whirlpool China’s research and development and working capital, as required by the terms of the Hefei Sanyo acquisition made in October 2014.
We expect the acquisition will accelerate Whirlpool's profitable growth in China. During 2014, Whirlpool began integrating the manufacturing, administrative, supply chain and technology operations of Hefei Sanyo. The results of Hefei Sanyo’s operations have been included in the Consolidated Financial Statements beginning October 24, 2014.
Hefei Sanyo has an established and broad distribution network that includes a very large number of distribution outlets throughout China. Its significant presence in rural areas complements Whirlpool’s presence in China’s higher-tier cities. With this acquisition, Whirlpool also gained manufacturing scale and a competitive cost structure in the city of Hefei. The ability to consolidate operations offers strong synergies as Whirlpool will provide extensive technical, marketing and product development, combined with Hefei Sanyo’s sales execution and operational strengths, to support the next phase of development in the advancement of Whirlpool China as an important global production and research and development center for the home appliance sector.
INDESIT ACQUISITION
On December 3, 2014, Whirlpool completed the final step in its acquisition of Indesit. Total consideration paid for Indesit was €1.1 billion (approximately $1.4 billion at the dates of purchase of each step in the transaction) in aggregate net of cash acquired. The Company funded the aggregate purchase price for Indesit through borrowings under its credit facility and commercial paper programs, and repaid a portion of such borrowings through the issuance of an aggregate principal amount of $650 million in senior notes on November 4, 2014 and an aggregate principal amount of €500 million (approximately $525 million as of the date of issuance) in senior notes on March 12, 2015.
This transaction has built Whirlpool’s market position within Europe, and we believe will continue to enable sustainable growth given the complementary market positions, product offerings and distribution channels of Whirlpool and Indesit throughout Europe. We expect efficiencies in R&D, capital spending and value chain costs, as well as operational scale with increased volume and the ability to more effectively integrate our product platforms. The results of Indesit’s operations have been included in the Consolidated Financial Statements beginning October 14, 2014.
Dividends
In April 2016, our Board of Directors approved an 11% increase in our quarterly dividend on our common stock to $1 per share from 90 cents per share.
Repurchase Program
For additional information about our repurchase program, see Note 8 of the Notes to the Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
CONTRACTUAL OBLIGATIONS AND FORWARD-LOOKING CASH REQUIREMENTS
The following table summarizes our expected cash outflows resulting from financial contracts and commitments:
Payments due by period | ||||||||||||||||||||
Millions of dollars | Total | 2017 | 2018 & 2019 | 2020 & 2021 | Thereafter | |||||||||||||||
Long-term debt obligations(1) | $ | 5,960 | $ | 709 | $ | 835 | $ | 1,025 | $ | 3,391 | ||||||||||
Operating lease obligations | 936 | 206 | 311 | 214 | 205 | |||||||||||||||
Purchase obligations(2) | 764 | 164 | 295 | 194 | 111 | |||||||||||||||
United States & Foreign pension plans(3) | 823 | 57 | 161 | 175 | 430 | |||||||||||||||
Other postretirement benefits(4) | 307 | 42 | 68 | 65 | 132 | |||||||||||||||
Legal settlements(5) | 7 | 7 | — | — | — | |||||||||||||||
Total(6) | $ | 8,797 | $ | 1,185 | $ | 1,670 | $ | 1,673 | $ | 4,269 | ||||||||||
(1) | Interest payments related to long-term debt are included in the table above. For additional information about our financing arrangements, see Note 5 of the Notes to the Consolidated Financial Statements. |
(2) | Purchase obligations include our “take-or-pay” contracts with materials vendors and minimum payment obligations to other suppliers. |
(3) | Represents the minimum contributions required for foreign and domestic pension plans based on current interest rates, asset return assumptions, legislative requirements and other actuarial assumptions at December 31, 2016. Management may elect to contribute amounts in addition to those required by law. See Note 12 of the Notes to the Consolidated Financial Statements for additional information. |
(4) | Represents our portion of expected benefit payments under our retiree healthcare plans. |
(5) | For additional information regarding legal settlements, see Note 6 of the Notes to the Consolidated Financial Statements. |
(6) | This table does not include credit facility and commercial paper borrowings. For additional information about short-term borrowings, see Note 5 of the Notes to the Consolidated Financial Statements. This table does not include future anticipated income tax settlements; see Note 11 of the Notes to the Consolidated Financial Statements. |
OFF-BALANCE SHEET ARRANGEMENTS
We have guarantee arrangements in a Brazilian subsidiary. As a standard business practice in Brazil, the subsidiary guarantees customer lines of credit at commercial banks to support purchases following its normal credit policies. If a customer were to default on its line of credit with the bank, our subsidiary would be required to satisfy the obligation with the bank and the receivable would revert back to the subsidiary. At December 31, 2016 and December 31, 2015, the guaranteed amounts totaled $258 million and $260 million, respectively. The fair value of these guarantees were nominal at December 31, 2016 and December 31, 2015. Our subsidiary insures against credit risk for these guarantees, under normal operating conditions, through policies purchased from high-quality underwriters. We had no losses associated with these guarantees in 2016 or 2015.
We have guaranteed a $40 million five-year revolving credit facility between certain financial institutions and a not-for-profit entity in connection with a community and economic development project (“Harbor Shores”). The credit facility, which originated in 2008, was refinanced in December 2012 and we renewed our guarantee through 2017. It was also amended in 2015 and reduced from $43 million to $40 million by Harbor Shores in 2016. The fair value of this guarantee was nominal at December 31, 2016 and December 31, 2015. The purpose of Harbor Shores is to stimulate employment and growth in the areas of Benton Harbor and St. Joseph, Michigan. In the event of default, we must satisfy the guarantee of the credit facility up to the amount borrowed at the date of default.
In the ordinary course of business, we enter into agreements with financial institutions to issue bank guarantees, letters of credit and surety bonds. These agreements are primarily associated with unresolved tax matters in Brazil, as is customary under local regulations, and governmental obligations related to certain employee benefit arrangements. As of December 31, 2016 and 2015, we had approximately $327 million and $290 million outstanding under these agreements, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make certain estimates and assumptions. We periodically evaluate these estimates and assumptions, which are based on historical experience, changes in the business environment and other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits involves estimating the costs of future benefits and attributing the cost over the employee’s expected period of employment. The determination of our obligation and expense for these costs requires the use of certain assumptions. Those key assumptions include the discount rate, expected long-term rate of return on plan assets, life expectancy, and health care cost trend rates. These assumptions are subject to change based on interest rates on high quality bonds, stock and bond markets and medical cost inflation, respectively. Actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and accrued liability in such future periods. While we believe that our assumptions are appropriate given current economic conditions and actual experience, significant differences in results or significant changes in our assumptions may materially affect our pension and other postretirement benefit obligations and related future expense.
Our pension and other postretirement benefit obligations at December 31, 2016 and preliminary retirement benefit costs for 2017 were prepared using the assumptions that were determined as of December 31, 2016. The following table summarizes the sensitivity of our December 31, 2016 retirement obligations and 2017 retirement benefit costs of our United States plans to changes in the key assumptions used to determine those results:
Estimated increase (decrease) in | ||||||
Millions of dollars | Percentage Change | 2017 Expense | PBO/APBO* for 2016 | |||
United States Pension Plans | ||||||
Discount rate | +/-50bps | $ 1/(1) | $ (174)/187 | |||
Expected long-term rate of return on plan assets | +/-50bps | (13)/13 | – | |||
United States Other Postretirement Benefit Plan | ||||||
Discount rate | +/-50bps | 1/(1) | (14)/15 | |||
Health care cost trend rate | +/-100bps | – | – | |||
* | Projected benefit obligation (PBO) for pension plans and accumulated postretirement benefit obligation (APBO) for other postretirement benefit plans. |
These sensitivities may not be appropriate to use for other years’ financial results. Furthermore, the impact of assumption changes outside of the ranges shown above may not be approximated by using the above results. For additional information about our pension and other postretirement benefit obligations, see Note 12 of the Notes to the Consolidated Financial Statements.
Income Taxes
We estimate our income taxes in each of the taxing jurisdictions in which we operate. This involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes. These differences may result in deferred tax assets or liabilities, which are included in our Consolidated Balance Sheets. We are required to assess the likelihood that deferred tax assets, which include net operating loss carryforwards, foreign tax credits and deductible temporary differences, that are expected to be realizable in future years. Realization of our net operating loss and foreign tax credit deferred tax assets is supported by specific tax planning strategies and, where possible, considers projections of future profitability. If recovery is not more likely than not, we provide a valuation allowance based on estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. If future taxable income is lower than expected or if tax planning strategies are not available as anticipated, we may record additional valuation allowances through income tax expense in the period such determination is made. Likewise, if we determine that we are able to realize our deferred tax assets in the future in excess of net recorded amounts, an adjustment to the deferred tax asset will benefit income tax expense in the period such determination is made.
As of December 31, 2016 and 2015, we had total deferred tax assets of $3.2 billion and $3.3 billion, respectively, net of valuation allowances of $150 million and $286 million, respectively. Our income tax expense has fluctuated considerably over the last five years from $133 million in 2012 to $186 million in the current year. The tax expense has been influenced primarily by U.S. energy tax credits, foreign tax credits, audit settlements and adjustments, tax planning strategies, enacted legislation, and dispersion of global income. Future changes in the effective tax rate will be subject to several factors, including business profitability, tax planning strategies, and enacted tax laws.
In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. For additional information about income taxes, see Notes 1, 6 and 11 of the Notes to the Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Legacy Product Corrective Action Reserves
In the normal course of business, we engage in investigations of potential quality and safety issues. As part of our ongoing effort to deliver quality products to consumers, we are currently investigating a limited number of potential quality and safety issues globally. As necessary, we undertake to effect repair or replacement of appliances in the event that an investigation leads to the conclusion that such action is warranted.
As part of that process, in 2015, Whirlpool engaged in thorough investigations of incident reports associated with two of its dryer production platforms developed by Indesit. These dryer production platforms were developed prior to Whirlpool's acquisition of Indesit in October 2014. This led to Indesit reporting the issue to regulatory authorities for consideration. These discussions determined that corrective action of the affected dryers was required. Whirlpool has implemented modifications at the point of manufacture to ensure that dryers produced after October 2015 are not affected by this issue. An outreach and service campaign is underway to modify dryers that have already been sold. Such dryers were manufactured between April 2004 and October 2015 and sold in the UK and other countries in the EMEA region under the Hotpoint* and Indesit brand names, as well as various other brands owned by other manufacturers, distributors and retailers whose products Indesit produced.
As of December 31, 2016, Whirlpool had $162 million of cash expenditures related to the corrective action. We expect the corrective action affecting these dryers to have future cash expenditures in 2017 of $69 million.
For additional information about the legacy product corrective action, see Note 6 of the Notes to the Consolidated Financial Statements.
Warranty Obligations
The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and represents our best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. Future events and circumstances could materially change our estimates and require adjustments to the warranty obligations. For additional information about warranty obligations, see Note 6 of the Notes to the Consolidated Financial Statements.
Goodwill and Other Intangibles
Certain business acquisitions have resulted in the recording of goodwill and trademark assets. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including trademark assets, based on estimated fair value, with any remaining purchase price recorded as goodwill. Primarily, Whirlpool's trademarks and goodwill are considered indefinite-life intangible assets and as such, are not amortized. At December 31, 2016, we had goodwill of approximately $3.0 billion. There have been no changes to our reporting units or allocations of goodwill by reporting units except for the impact of foreign currency. We primarily have trademark assets in our North America, EMEA and Asia operating segments with a total carrying value of approximately $2.6 billion as of December 31, 2016.
We perform our annual impairment assessment for goodwill and other indefinite-life intangible assets as of October 1st and more frequently if indicators of impairment exist.
In 2016, the Company primarily elected to perform a quantitative analysis using a discounted cash flow model and other valuation techniques, to evaluate goodwill and certain indefinite-life intangible assets.
Goodwill Valuations
In performing a quantitative assessment, we estimate each reporting units' fair value using the income approach. The income approach uses operating segments projection of estimated operating results and cash flows that are discounted using a weighted-average cost of capital that is determined based on current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and cash expenditures. Other estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. The estimated fair value of each operating segment is compared to their respective carrying values.
*Whirlpool ownership of the Hotpoint brand in the EMEA and Asia Pacific regions is not affiliated with the Hotpoint brand sold in the Americas
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Additionally we validate our estimates of fair value under the income approach by comparing the values of fair value estimates using a market approach. A market approach estimates fair value by applying cash flow multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. We consider the implied control premium and conclude whether the implied control premium is reasonable based on other recent market transactions.
If actual results are not consistent with managements’ estimate and assumptions, goodwill may be overstated and a charge against net income would be required, which would adversely affect the Company’s financial statements.
Based on the results of our quantitative assessment conducted on October 1, 2016, the fair values of Whirlpool's reporting units continue to exceed their respective carrying values. The range by which the excess fair value of our reporting units' goodwill exceeded their respective carrying values was 4% to 142%. The EMEA reporting unit has excess fair value of 4%. During the fourth quarter 2014, Whirlpool acquired Indesit, resulting in substantially all of the goodwill included in this reporting unit. The range by which the excess fair value of our remaining reporting units' goodwill exceeded their respective carrying values was 70% to 142%.
Other Intangible Valuations
In performing a quantitative assessment of indefinite life intangible assets other than goodwill, primarily trademarks, we estimate the fair value of these intangible assets using the relief-from-royalty method, which requires assumptions related to projected revenues from our annual long-range plan; assumed royalty rates that could be payable if we did not own the trademark; and a discount rate based on our weighted average cost of capital. If the estimated fair value of the indefinite-lived intangible asset is less than its carrying value, we would recognize an impairment loss.
Three trademarks acquired in fourth quarter of 2014 have fair values that exceed their carrying values by less than 10%. The fair values of all other trademarks exceeded their carrying values by more than 10% with the exception of one North American trademark.
The fair value of this North American trademark exceeded its carrying value of approximately $1 billion by 6% in 2016 and 5% in 2015. We expect revenue trends for this brand to improve as we continue to execute specific brand investments and product development plans. Additionally, we performed a sensitivity analysis on our estimated fair value noting that a 10% reduction of forecasted revenues, a 50 basis point decrease in royalty rate, or a 50 basis point increase in discount rate would result in an impairment ranging from approximately $22 million to $78 million.
If actual results are not consistent with management's estimate and assumptions, trademarks or other indefinite-life intangible assets may be overstated and a charge against net income would be required, which would adversely affect the Company’s financial results of operations.
Based on the results of our quantitative assessment performed as of October 1, 2014, impairment of two trademarks was determined to exist, primarily driven by a change in our brand strategy in EMEA as a result of the acquisition of Indesit and resulted in a charge of approximately $12 million in 2014.
Our assessment indicates no impairment of any trademarks as of December 31, 2016.
For additional information about goodwill and intangible valuations, see Note 2 of the Notes to the Consolidated Financial Statements.
ISSUED BUT NOT YET EFFECTIVE ACCOUNTING PRONOUNCEMENTS
Additional information regarding recently issued accounting pronouncements can be found in Note 1 of the Notes to the Consolidated Financial Statements.
OTHER MATTERS
For information regarding certain of our loss contingencies/litigation, see Note 6 of the Consolidated Financial Statements.
Antidumping Petition
In December 2015, we filed a petition with the U.S. Department of Commerce (DOC) and the United States International Trade Commission (ITC) to address Samsung and LG dumping large residential washers from China. The petition was filed to
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
restore fair competition in the United States that will support significant investment in the production of large residential washers and the creation of U.S. jobs. The Whirlpool washers affected by the imports subject in this case are made in Clyde, Ohio.
In December 2016, the DOC issued a final determination that Samsung and LG violated U.S. and international trade laws by dumping washers from China into the U.S. As part of the final determination, the DOC also announced certain antidumping margins for Samsung and LG. In January 2017, the ITC voted unanimously that Samsung and LG's dumping had caused material injury to the U.S. washer industry. As in the case of our December 2011 petition, the DOC and ITC decisions will be followed by administrative review procedures and possible appeals over the next several years.
Post-Retirement Benefit Litigation
For information regarding post-retirement benefit litigation, see Note 12 of the Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. Certain statements contained in this annual report, including those within the forward-looking perspective section within this Management's Discussion and Analysis, and other written and oral statements made from time to time by us or on our behalf do not relate strictly to historical or current facts and may contain forward-looking statements that reflect our current views with respect to future events and financial performance. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “may,” “could,” “will,” “should,” “possible,” “plan,” “predict,” “forecast,” “potential,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “believe,” “may impact,” “on track,” and similar words or expressions. Our forward-looking statements generally relate to our growth strategies, financial results, product development, and sales efforts. These forward-looking statements should be considered with the understanding that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.
This document contains forward-looking statements about Whirlpool Corporation and its consolidated subsidiaries (“Whirlpool”) that speak only as of this date. Whirlpool disclaims any obligation to update these statements. Forward-looking statements in this document may include, but are not limited to, statements regarding expected earnings per share, cash flow, productivity and raw material prices. Many risks, contingencies and uncertainties could cause actual results to differ materially from Whirlpool's forward-looking statements. Among these factors are: (1) intense competition in the home appliance industry reflecting the impact of both new and established global competitors, including Asian and European manufacturers; (2) Whirlpool's ability to maintain or increase sales to significant trade customers and the ability of these trade customers to maintain or increase market share; (3) Whirlpool's ability to maintain its reputation and brand image; (4) the ability of Whirlpool to achieve its business plans, productivity improvements, and cost control objectives, and to leverage its global operating platform, and accelerate the rate of innovation; (5) Whirlpool's ability to obtain and protect intellectual property rights; (6) acquisition and investment-related risks, including risks associated with our past acquisitions, and risks associated with our increased presence in emerging markets; (7) risks related to our international operations, including changes in foreign regulations, regulatory compliance and disruptions arising from political, legal and economic instability; (8) information technology system failures, data security breaches, network disruptions, and cybersecurity attacks; (9) product liability and product recall costs; (10) the ability of suppliers of critical parts, components and manufacturing equipment to deliver sufficient quantities to Whirlpool in a timely and cost-effective manner; (11) our ability to attract, develop and retain executives and other qualified employees; (12) the impact of labor relations; (13) fluctuations in the cost of key materials (including steel, resins, copper and aluminum) and components and the ability of Whirlpool to offset cost increases; (14) Whirlpool’s ability to manage foreign currency fluctuations; (15) inventory and other asset risk; (16) the uncertain global economy and changes in economic conditions which affect demand for our products; (17) health care cost trends, regulatory changes and variations between results and estimates that could increase future funding obligations for pension and postretirement benefit plans; (18) litigation, tax, and legal compliance risk and costs, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same; (19) the effects and costs of governmental investigations or related actions by third parties; and (20) changes in the legal and regulatory environment including environmental, health and safety regulations.
We undertake no obligation to update any forward-looking statement, and investors are advised to review disclosures in our filings with the SEC. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. Therefore, investors should not consider the foregoing factors to be an exhaustive statement of all risks, uncertainties, or factors that could potentially cause actual results to differ from forward-looking statements.
Additional information concerning these and other factors can be found in “Risk Factors” in Item 1A of this report.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
MARKET RISK
We have in place an enterprise risk management process that involves systematic risk identification and mitigation covering the categories of enterprise, strategic, financial, operation and compliance and reporting risk. The enterprise risk management process receives Board of Directors and Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.
We are exposed to market risk from changes in foreign currency exchange rates, domestic and foreign interest rates, and commodity prices, which can affect our operating results and overall financial condition. We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the use of derivatives. Derivatives are viewed as risk management tools and are not used for speculation or for trading purposes. Derivatives are generally contracted with a diversified group of investment grade counterparties to reduce exposure to nonperformance on such instruments.
We use foreign currency forward contracts, currency options, and currency swaps to hedge the price risk associated with firmly committed and forecasted cross-border payments and receipts related to ongoing business and operational financing activities. Foreign currency contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2016, a 10% favorable or unfavorable exchange rate movement in each currency in our portfolio of foreign currency contracts would have resulted in an incremental unrealized gain of approximately $125 million or loss of approximately $145 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the re-measurement of the underlying exposures.
We enter into commodity swap contracts to hedge the price risk associated with firmly committed and forecasted commodities purchases, the prices of which are not fixed directly through supply contracts. As of December 31, 2016, a 10% favorable or unfavorable shift in commodity prices would have resulted in an incremental gain or loss of approximately $30 million, respectively, related to these contracts.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
(Millions of dollars, except per share data)
2016 | 2015 | 2014 | ||||||||||
Net sales | $ | 20,718 | $ | 20,891 | $ | 19,872 | ||||||
Expenses | ||||||||||||
Cost of products sold | 17,036 | 17,201 | 16,477 | |||||||||
Gross margin | 3,682 | 3,690 | 3,395 | |||||||||
Selling, general and administrative | 2,084 | 2,130 | 2,038 | |||||||||
Intangible amortization | 71 | 74 | 33 | |||||||||
Restructuring costs | 173 | 201 | 136 | |||||||||
Operating profit | 1,354 | 1,285 | 1,188 | |||||||||
Other (income) expense | ||||||||||||
Interest and sundry (income) expense | 79 | 89 | 142 | |||||||||
Interest expense | 161 | 165 | 165 | |||||||||
Earnings before income taxes | 1,114 | 1,031 | 881 | |||||||||
Income tax expense | 186 | 209 | 189 | |||||||||
Net earnings | 928 | 822 | 692 | |||||||||
Less: Net earnings available to noncontrolling interests | 40 | 39 | 42 | |||||||||
Net earnings available to Whirlpool | $ | 888 | $ | 783 | $ | 650 | ||||||
Per share of common stock | ||||||||||||
Basic net earnings available to Whirlpool | $ | 11.67 | $ | 9.95 | $ | 8.30 | ||||||
Diluted net earnings available to Whirlpool | $ | 11.50 | $ | 9.83 | $ | 8.17 | ||||||
Weighted-average shares outstanding (in millions) | ||||||||||||
Basic | 76.1 | 78.7 | 78.3 | |||||||||
Diluted | 77.2 | 79.7 | 79.6 | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(Millions of dollars)
2016 | 2015 | 2014 | |||||||||||
Net earnings | $ | 928 | $ | 822 | $ | 692 | |||||||
Other comprehensive income (loss), before tax: | |||||||||||||
Foreign currency translation adjustments | (30 | ) | (432 | ) | (392 | ) | |||||||
Derivative instruments: | |||||||||||||
Net gain (loss) arising during period | 106 | (25 | ) | 10 | |||||||||
Less: reclassification adjustment for gain (loss) included in net earnings | 35 | (2 | ) | 11 | |||||||||
Derivative instruments, net | 71 | (23 | ) | (1 | ) | ||||||||
Marketable securities: | |||||||||||||
Net gain (loss) arising during period | (2 | ) | 3 | — | |||||||||
Marketable securities, net | (2 | ) | 3 | — | |||||||||
Defined benefit pension and postretirement plans: | |||||||||||||
Prior service (cost) credit arising during period | 30 | (5 | ) | (11 | ) | ||||||||
Net gain (loss) arising during period | (139 | ) | (55 | ) | (242 | ) | |||||||
Less: amortization of prior service credit (cost) and actuarial (loss) | (39 | ) | 19 | (20 | ) | ||||||||
Defined benefit pension and postretirement plans, net: | (70 | ) | (79 | ) | (233 | ) | |||||||
Other comprehensive (loss), before tax | (31 | ) | (531 | ) | (626 | ) | |||||||
Income tax benefit (expense) related to items of other comprehensive income (loss) | (37 | ) | 30 | 80 | |||||||||
Other comprehensive income (loss), net of tax | $ | (68 | ) | $ | (501 | ) | $ | (546 | ) | ||||
Comprehensive income | $ | 860 | $ | 321 | $ | 146 | |||||||
Less: comprehensive income, available to noncontrolling interests | 40 | 30 | 38 | ||||||||||
Comprehensive income available to Whirlpool | $ | 820 | $ | 291 | $ | 108 | |||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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WHIRLPOOL CORPORATION
CONSOLIDATED BALANCE SHEETS
At December 31,
(Millions of dollars)
2016 | 2015 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 1,085 | $ | 772 | |||
Accounts receivable, net of allowance of $185 and $160, respectively | 2,711 | 2,530 | |||||
Inventories | 2,623 | 2,619 | |||||
Prepaid and other current assets | 920 | 953 | |||||
Total current assets | 7,339 | 6,874 | |||||
Property, net of accumulated depreciation of $6,055 and $5,953, respectively | 3,810 | 3,774 | |||||
Goodwill | 2,956 | 3,006 | |||||
Other intangibles, net of accumulated amortization of $387 and $327, respectively | 2,552 | 2,678 | |||||
Deferred income taxes | 2,154 | 2,301 | |||||
Other noncurrent assets | 342 | 377 | |||||
Total assets | $ | 19,153 | $ | 19,010 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 4,416 | $ | 4,403 | |||
Accrued expenses | 649 | 675 | |||||
Accrued advertising and promotions | 742 | 706 | |||||
Employee compensation | 390 | 452 | |||||
Notes payable | 34 | 20 | |||||
Current maturities of long-term debt | 560 | 508 | |||||
Other current liabilities | 871 | 980 | |||||
Total current liabilities | 7,662 | 7,744 | |||||
Noncurrent liabilities | |||||||
Long-term debt | 3,876 | 3,470 | |||||
Pension benefits | 1,074 | 1,025 | |||||
Postretirement benefits | 334 | 390 | |||||
Other noncurrent liabilities | 479 | 707 | |||||
Total noncurrent liabilities | 5,763 | 5,592 | |||||
Stockholders’ equity | |||||||
Common stock, $1 par value, 250 million shares authorized, 111 million shares issued, and 74 million and 77 million shares outstanding, respectively | 111 | 111 | |||||
Additional paid-in capital | 2,672 | 2,641 | |||||
Retained earnings | 7,314 | 6,722 | |||||
Accumulated other comprehensive loss | (2,400 | ) | (2,332 | ) | |||
Treasury stock, 37 million and 33 million shares, respectively | (2,924 | ) | (2,399 | ) | |||
Total Whirlpool stockholders’ equity | 4,773 | 4,743 | |||||
Noncontrolling interests | 955 | 931 | |||||
Total stockholders’ equity | 5,728 | 5,674 | |||||
Total liabilities and stockholders’ equity | $ | 19,153 | $ | 19,010 | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(Millions of dollars)
2016 | 2015 | 2014 | |||||||||
Operating activities | |||||||||||
Net earnings | $ | 928 | $ | 822 | $ | 692 | |||||
Adjustments to reconcile net earnings to cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 655 | 668 | 560 | ||||||||
Curtailment gain | — | (63 | ) | — | |||||||
Changes in assets and liabilities (net of effects of acquisitions): | |||||||||||
Accounts receivable | (291 | ) | (89 | ) | (90 | ) | |||||
Inventories | (18 | ) | (141 | ) | 49 | ||||||
Accounts payable | 37 | 14 | 359 | ||||||||
Accrued advertising and promotions | 46 | 74 | 121 | ||||||||
Accrued expenses and current liabilities | 46 | (43 | ) | (232 | ) | ||||||
Taxes deferred and payable, net | (116 | ) | (42 | ) | 49 | ||||||
Accrued pension and postretirement benefits | (43 | ) | (129 | ) | (181 | ) | |||||
Employee compensation | (38 | ) | 8 | (17 | ) | ||||||
Other | (3 | ) | 146 | 169 | |||||||
Cash provided by operating activities | 1,203 | 1,225 | 1,479 | ||||||||
Investing activities | |||||||||||
Capital expenditures | (660 | ) | (689 | ) | (720 | ) | |||||
Proceeds from sale of assets and business | 63 | 37 | 21 | ||||||||
Change in restricted cash | 24 | 47 | 74 | ||||||||
Acquisition of Indesit Company S.p.A. | — | — | (1,356 | ) | |||||||
Acquisition of Hefei Rongshida Sanyo Electric Co., Ltd. | — | — | (453 | ) | |||||||
Investment in related businesses | (12 | ) | (70 | ) | (16 | ) | |||||
Other | (3 | ) | (6 | ) | (6 | ) | |||||
Cash used in investing activities | (588 | ) | (681 | ) | (2,456 | ) | |||||
Financing activities | |||||||||||
Proceeds from borrowings of long-term debt | 1,012 | 531 | 1,483 | ||||||||
Repayments of long-term debt | (522 | ) | (283 | ) | (606 | ) | |||||
Net proceeds from short-term borrowings | 55 | (465 | ) | 63 | |||||||
Dividends paid | (294 | ) | (269 | ) | (224 | ) | |||||
Repurchase of common stock | (525 | ) | (250 | ) | (25 | ) | |||||
Purchase of noncontrolling interest shares | (25 | ) | — | (5 | ) | ||||||
Common stock issued | 26 | 38 | 38 | ||||||||
Other | (5 | ) | (9 | ) | (19 | ) | |||||
Cash provided by (used in) financing activities | (278 | ) | (707 | ) | 705 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (24 | ) | (91 | ) | (82 | ) | |||||
Increase (decrease) in cash and cash equivalents | 313 | (254 | ) | (354 | ) | ||||||
Cash and cash equivalents at beginning of year | 772 | 1,026 | 1,380 | ||||||||
Cash and cash equivalents at end of year | $ | 1,085 | $ | 772 | $ | 1,026 | |||||
Supplemental disclosure of cash flow information | |||||||||||
Cash paid for interest | $ | 198 | $ | 178 | $ | 172 | |||||
Cash paid for income taxes | $ | 300 | $ | 251 | $ | 140 | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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WHIRLPOOL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Year ended December 31,
(Millions of dollars)
Whirlpool Stockholders’ Equity | ||||||||||||||||||||||||
Total | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock/ Additional Paid- in-Capital | Common Stock | Non- Controlling Interests | |||||||||||||||||||
Balances, December 31, 2013 | $ | 5,034 | $ | 5,784 | $ | (1,298 | ) | $ | 329 | $ | 109 | $ | 110 | |||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net earnings | 692 | 650 | — | — | — | 42 | ||||||||||||||||||
Other comprehensive (loss) | (546 | ) | — | (542 | ) | — | — | (4 | ) | |||||||||||||||
Comprehensive income | 146 | 650 | (542 | ) | — | — | 38 | |||||||||||||||||
Stock issued (repurchased) | 59 | — | — | 58 | 1 | — | ||||||||||||||||||
Dividends declared | (244 | ) | (225 | ) | — | — | — | (19 | ) | |||||||||||||||
Acquisitions | 801 | — | — | 19 | — | 782 | ||||||||||||||||||
Balances, December 31, 2014 | 5,796 | 6,209 | (1,840 | ) | 406 | 110 | 911 | |||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net earnings | 822 | 783 | — | — | — | 39 | ||||||||||||||||||
Other comprehensive (loss) | (501 | ) | — | (492 | ) | — | — | (9 | ) | |||||||||||||||
Comprehensive income | 321 | 783 | (492 | ) | — | — | 30 | |||||||||||||||||
Stock issued (repurchased) | (163 | ) | — | — | (164 | ) | 1 | — | ||||||||||||||||
Dividends declared | (280 | ) | (270 | ) | — | — | — | (10 | ) | |||||||||||||||
Balances, December 31, 2015 | 5,674 | 6,722 | (2,332 | ) | 242 | 111 | 931 | |||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net earnings | 928 | 888 | — | — | — | 40 | ||||||||||||||||||
Other comprehensive (loss) | (68 | ) | — | (68 | ) | — | — | — | ||||||||||||||||
Comprehensive income | 860 | 888 | (68 | ) | — | — | 40 | |||||||||||||||||
Stock issued (repurchased) | (506 | ) | — | — | (494 | ) | — | (12 | ) | |||||||||||||||
Dividends declared | (300 | ) | (296 | ) | — | — | — | (4 | ) | |||||||||||||||
Balances, December 31, 2016 | $ | 5,728 | $ | 7,314 | $ | (2,400 | ) | $ | (252 | ) | $ | 111 | $ | 955 | ||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
General Information
Whirlpool Corporation, a Delaware corporation, is the world's leading manufacturer and marketer of major home appliances. Whirlpool manufactures products in 14 countries and markets products in nearly every country around the world under brand names such as Whirlpool, KitchenAid, Maytag, Consul, Brastemp, Amana, Bauknecht, Jenn-Air, Indesit, and Hotpoint* . Whirlpool’s reportable segments consist of North America, Europe, Middle East and Africa ("EMEA"), Latin America and Asia.
Principles of Consolidation
The consolidated financial statements are prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP), and include all majority-owned subsidiaries. All material intercompany transactions have been eliminated upon consolidation. We do not consolidate the financial statements of any company in which we have an ownership interest of 50% or less unless that company is deemed to be a variable interest entity ("VIE") of which we are the primary beneficiary. Certain VIEs are consolidated when the company is the primary beneficiary of these entities and has the ability to directly impact the activities of these entities, and have a nominal effect on the Company's results.
Reclassifications
We reclassified certain prior period amounts in our Consolidated Financial Statements to be consistent with current period presentation.
Use of Estimates
We are required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. The most significant assumptions are estimates in determining the fair value of intangible assets, legal contingencies, income taxes and pension and postretirement benefits. Actual results could differ materially from those estimates.
Revenue Recognition
Sales are recognized when revenue is realized or realizable and has been earned. Revenue is recognized when the sales price is determinable and the risk and rewards of ownership are transferred to the customer as determined by the shipping terms. For the majority of our sales, title is transferred to the customer as soon as products are shipped. For a portion of our sales, title is transferred to the customer upon receipt of products at the customer’s location. Sales are net of allowances for product returns, which are based on historical return rates and certain promotions.
Accounts Receivable and Allowance for Doubtful Accounts
We carry accounts receivable at sales value less an allowance for doubtful accounts. We periodically evaluate accounts receivable and establish an allowance for doubtful accounts based on a combination of specific customer circumstances, credit conditions and the history of write-offs and collections. We evaluate items on an individual basis when determining accounts receivable write-offs. In general, our policy is to not charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payment has not been received within agreed upon invoice terms.
Freight and Warehousing Costs
We classify freight and warehousing costs within cost of products sold in our Consolidated Statements of Income.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an initial maturity of three months or less are considered cash equivalents.
*Whirlpool ownership of the Hotpoint brand in the EMEA and Asia Pacific regions is not affiliated with the Hotpoint brand sold in the Americas
39
NOTES TO THE CONSOLIDATED FINANC