UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |
Emerging growth company ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class of common stock | Shares outstanding at October 19, 2018 | |
Common stock, par value $1 per share | 63,808,275 | |
WHIRLPOOL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
Three and Nine Months Ended September 30, 2018
TABLE OF CONTENTS
PAGE | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
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 quarterly report, including those within the forward-looking perspective section within this report's 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, and the impact of the changing retail environment; (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) impacts from goodwill impairment and related charges; (16) triggering events or circumstances impacting the carrying value of our long-lived assets; (17) inventory and other asset risk; (18) the uncertain global economy and changes in economic conditions which affect demand for our products; (19) health care cost trends, regulatory changes and variations between results and estimates that could increase future funding obligations for pension and postretirement benefit plans; (20) 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; (21) the effects and costs of governmental investigations or related actions by third parties; and (22) changes in the legal and regulatory environment including environmental, health and safety regulations, and taxes and tariffs.
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 Part II, Item 1A of this report.
Unless otherwise indicated, the terms "Whirlpool," "the Company," "we," "us," and "our" refer to Whirlpool Corporation and its consolidated subsidiaries.
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Website Disclosure
We routinely post important information for investors on our website, whirlpoolcorp.com, in the "Investors" section. We intend to use this webpage as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the Investors section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, our webpage is not incorporated by reference into, and is not a part of, this document.
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PART I. FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
TABLE OF CONTENTS
PAGE | ||
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) | ||
1. | Basis of Presentation | |
2. | Revenue Recognition | |
3. | Cash, Cash Equivalents and Restricted Cash | |
4. | Inventories | |
5. | Property, Plant and Equipment | |
6. | Financing Arrangements | |
7. | Commitments and Contingencies | |
8. | Pension and Other Postretirement Benefit Plans | |
9. | Hedges and Derivative Financial Instruments | |
10. | Fair Value Measurements | |
11. | Stockholders' Equity | |
12. | Restructuring Charges | |
13. | Income Taxes | |
14. | Segment Information | |
15. | Assets and Liabilities Held for Sale | |
16. | Goodwill and Other Intangibles | |
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WHIRLPOOL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30
(Millions of dollars, except per share data)
Three Months Ended | Nine Months Ended | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net sales | $ | 5,326 | $ | 5,418 | $ | 15,377 | $ | 15,551 | |||||||
Expenses | |||||||||||||||
Cost of products sold | 4,431 | 4,503 | 12,790 | 12,934 | |||||||||||
Gross margin | 895 | 915 | 2,587 | 2,617 | |||||||||||
Selling, general and administrative | 550 | 521 | 1,596 | 1,546 | |||||||||||
Intangible amortization | 18 | 18 | 58 | 52 | |||||||||||
Restructuring costs | 28 | 45 | 216 | 150 | |||||||||||
Impairment of goodwill and other intangibles | — | — | 747 | — | |||||||||||
Operating profit (loss) | 299 | 331 | (30 | ) | 869 | ||||||||||
Other (income) expense | |||||||||||||||
Interest and sundry (income) expense | 24 | 21 | 106 | 69 | |||||||||||
Interest expense | 52 | 42 | 141 | 122 | |||||||||||
Earnings (loss) before income taxes | 223 | 268 | (277 | ) | 678 | ||||||||||
Income tax (benefit) expense | 7 | (4 | ) | 52 | 69 | ||||||||||
Net earnings (loss) | 216 | 272 | (329 | ) | 609 | ||||||||||
Less: Net earnings (loss) available to noncontrolling interests | 6 | (4 | ) | 24 | (9 | ) | |||||||||
Net earnings (loss) available to Whirlpool | $ | 210 | $ | 276 | $ | (353 | ) | $ | 618 | ||||||
Per share of common stock | |||||||||||||||
Basic net earnings (loss) available to Whirlpool | $ | 3.25 | $ | 3.78 | $ | (5.18 | ) | $ | 8.36 | ||||||
Diluted net earnings (loss) available to Whirlpool | $ | 3.22 | $ | 3.72 | $ | (5.18 | ) | $ | 8.23 | ||||||
Dividends declared | $ | 1.15 | $ | 1.10 | $ | 3.40 | $ | 3.20 | |||||||
Weighted-average shares outstanding (in millions) | |||||||||||||||
Basic | 64.5 | 72.9 | 68.2 | 73.9 | |||||||||||
Diluted | 65.3 | 74.0 | 68.2 | 75.1 | |||||||||||
Comprehensive income (loss) | $ | 130 | $ | 286 | $ | (573 | ) | $ | 694 | ||||||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
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WHIRLPOOL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Millions of dollars, except share data)
(Unaudited) | |||||||
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 1,032 | $ | 1,196 | |||
Accounts receivable, net of allowance of $151 and $157, respectively | 2,881 | 2,665 | |||||
Inventories | 2,873 | 2,988 | |||||
Prepaid and other current assets | 862 | 1,081 | |||||
Assets held for sale | 813 | — | |||||
Total current assets | 8,461 | 7,930 | |||||
Property, net of accumulated depreciation of $6,216 and $6,825, respectively | 3,396 | 4,033 | |||||
Goodwill | 2,478 | 3,118 | |||||
Other intangibles, net of accumulated amortization of $512 and $476, respectively | 2,325 | 2,591 | |||||
Deferred income taxes | 2,103 | 2,013 | |||||
Other noncurrent assets | 330 | 353 | |||||
Total assets | $ | 19,093 | $ | 20,038 | |||
Liabilities and stockholders' equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 4,200 | $ | 4,797 | |||
Accrued expenses | 751 | 674 | |||||
Accrued advertising and promotions | 728 | 853 | |||||
Employee compensation | 363 | 414 | |||||
Notes payable | 2,153 | 450 | |||||
Current maturities of long-term debt | 260 | 376 | |||||
Other current liabilities | 740 | 941 | |||||
Liabilities held for sale | 479 | — | |||||
Total current liabilities | 9,674 | 8,505 | |||||
Noncurrent liabilities | |||||||
Long-term debt | 4,768 | 4,392 | |||||
Pension benefits | 542 | 1,029 | |||||
Postretirement benefits | 316 | 352 | |||||
Other noncurrent liabilities | 485 | 632 | |||||
Total noncurrent liabilities | 6,111 | 6,405 | |||||
Stockholders' equity | |||||||
Common stock, $1 par value, 250 million shares authorized, 112 million shares issued, and 64 million and 71 million shares outstanding, respectively | 112 | 112 | |||||
Additional paid-in capital | 2,777 | 2,739 | |||||
Retained earnings | 6,837 | 7,352 | |||||
Accumulated other comprehensive loss | (2,590 | ) | (2,331 | ) | |||
Treasury stock, 48 million and 41 million shares, respectively | (4,776 | ) | (3,674 | ) | |||
Total Whirlpool stockholders' equity | 2,360 | 4,198 | |||||
Noncontrolling interests | 948 | 930 | |||||
Total stockholders' equity | 3,308 | 5,128 | |||||
Total liabilities and stockholders' equity | $ | 19,093 | $ | 20,038 | |||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
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WHIRLPOOL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30
(Millions of dollars)
Nine Months Ended | |||||||
2018 | 2017 | ||||||
Operating activities | |||||||
Net earnings (loss) | $ | (329 | ) | $ | 609 | ||
Adjustments to reconcile net earnings to cash provided by (used in) operating activities: | |||||||
Depreciation and amortization | 491 | 487 | |||||
Impairment of goodwill and other intangibles | 747 | — | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (585 | ) | (259 | ) | |||
Inventories | (271 | ) | (589 | ) | |||
Accounts payable | (122 | ) | 107 | ||||
Accrued advertising and promotions | (95 | ) | 18 | ||||
Accrued expenses and current liabilities | 196 | (154 | ) | ||||
Taxes deferred and payable, net | (105 | ) | (144 | ) | |||
Accrued pension and postretirement benefits | (433 | ) | (85 | ) | |||
Employee compensation | 35 | 49 | |||||
Other | (144 | ) | (72 | ) | |||
Cash used in operating activities | (615 | ) | (33 | ) | |||
Investing activities | |||||||
Capital expenditures | (330 | ) | (371 | ) | |||
Proceeds from sale of assets and business | 27 | 5 | |||||
Proceeds from held-to-maturity securities | 60 | — | |||||
Investment in related businesses | (25 | ) | (35 | ) | |||
Other | (4 | ) | 1 | ||||
Cash used in investing activities | (272 | ) | (400 | ) | |||
Financing activities | |||||||
Proceeds from borrowings of long-term debt | 703 | — | |||||
Repayments of long-term debt | (381 | ) | (261 | ) | |||
Net proceeds from short-term borrowings | 1,761 | 1,365 | |||||
Dividends paid | (232 | ) | (235 | ) | |||
Repurchase of common stock | (1,102 | ) | (550 | ) | |||
Common stock issued | 7 | 33 | |||||
Other | (6 | ) | (17 | ) | |||
Cash provided by financing activities | 750 | 335 | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (74 | ) | 55 | ||||
Decrease in cash, cash equivalents and restricted cash | (211 | ) | (43 | ) | |||
Cash, cash equivalents and restricted cash at beginning of period | 1,293 | 1,240 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 1,082 | $ | 1,197 | |||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
General Information
The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Form 10-K for the year ended December 31, 2017.
Management believes that the accompanying Consolidated Condensed Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.
We are required to make estimates and assumptions that affect the amounts reported in the Consolidated Condensed Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.
Certain prior year amounts in the Consolidated Condensed Financial Statements have been reclassified to conform with current year presentation. Assets and liabilities related to the sale of Embraco which met the held for sale criteria as of September 30, 2018 have been presented separately in the Consolidated Condensed Balance Sheet. See Note 15 to the Consolidated Condensed Financial Statements.
We have eliminated all material intercompany transactions in our Consolidated Condensed Financial Statements. 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. 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.
Related Party Transaction
Whirlpool of India Limited (Whirlpool India), a majority-owned subsidiary of Whirlpool Corporation, acquired a 49% equity interest in Elica PB India for $22 million. As part of the agreement, Whirlpool India received an option to acquire the remaining equity interest in the future for fair value, and the non-Whirlpool India shareholders of Elica PB India received an option to sell their remaining equity interest to Whirlpool India in the future for fair value, which could be material to the financial statements depending on the performance of the venture. We account for our minority interest under the equity method of accounting.
Adoption of New Accounting Standards
On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective method. Under the modified retrospective method, we recognized the cumulative effect of initially applying the new revenue standard as an increase to the opening balance of retained earnings. This adjustment did not have a material impact on our financial statements. For additional information on the required disclosures related to the impact of adopting this standard, see Note 2 to the Consolidated Condensed Financial Statements.
In October 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Company adopted the accounting standard on January 1, 2018 and recognized a $56 million increase to the opening balance of retained earnings.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new standard, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount
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and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company elected to early adopt the accounting standard in the second quarter of 2018. For additional information related to the impact of goodwill impairment and related charges, see Note 16 to the Consolidated Condensed Financial Statements.
We adopted the following standards, none of which have a material impact on our Consolidated Condensed Financial Statements:
Standard | Effective Date | |
2016-01 | Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | January 1, 2018 |
2016-04 | Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products | January 1, 2018 |
2016-15 | Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments | January 1, 2018 |
2016-18 | Statement of Cash Flows (Topic 230): Restricted Cash | January 1, 2018 |
2017-01 | Business Combinations (Topic 805): Clarifying the Definition of a Business | January 1, 2018 |
2017-09 | Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting | January 1, 2018 |
All other newly issued and effective accounting standards during 2018 were not relevant or material to the Company.
Accounting Pronouncements Issued But Not Yet Effective
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The new standard gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income as a result of the tax reform. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. The Company is currently evaluating the impact of adopting this guidance.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year in which the entity adopts. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently planning to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating other practical expedients available under the guidance. In March 2018, the FASB approved a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. The Company plans to elect this transition method, and as a result, the Company will not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date.
In connection with the adoption of the new lease accounting standard, we established a cross functional project management implementation team. As part of that process, we have completed scoping reviews and we continue to make progress in updating business process, systems, accounting policies and internal controls and continue to execute our implementation strategy.
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The implementation strategy to obtain and summarize our leases includes utilizing surveys to centrally gather more information about the Company's existing leases, lease processes, and contracts that may contain leases, including service agreements. To ensure completeness of the population of lease contracts, the results of the survey are being cross-referenced against other available lease information such as year-end disclosures and lease expense. As of September 30, 2018, the Company has obtained the relevant lease contract data points and is updating our lease accounting system.
The Company anticipates the adoption of this new standard will result in a material increase in ROU assets and liabilities on our consolidated balance sheet. The impact on the Company's consolidated statement of income is being evaluated. As the impact of this standard is non–cash in nature, we do not anticipate its adoption having an impact on the Company's Consolidated Condensed Statement of Cash Flows.
The FASB has issued the following relevant standards, which are not expected to have a material impact on our Consolidated Condensed Financial Statements:
Standard | Effective Date | |
2016-13 | Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | January 1, 2020 |
2018-13 | Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | January 1, 2020 |
2018-14 | Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | January 1, 2021 |
2018-15 | Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred In a Cloud Computing Arrangement That Is a Service Contract | January 1, 2020 |
All other issued and not yet effective accounting standards are not relevant to the Company.
(2) REVENUE RECOGNITION
Revenue from Contracts with Customers
On January 1, 2018, we adopted Topic 606 using the modified retrospective method, as a result, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. This adjustment did not have a material impact on our Consolidated Condensed Financial Statements. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Revenue Recognition ("Topic 605"). The adoption of Topic 606 did not have a material impact on our Consolidated Condensed Statements of Comprehensive Income (Loss) and Consolidated Condensed Balance Sheets.
The adoption of Topic 606 represents a change in accounting principle that will provide financial statement readers with enhanced revenue recognition disclosures. In accordance with Topic 606, revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. Certain customers may receive cash and/or non-cash incentives, which are accounted for as variable consideration. To achieve this core principle, the Company applies the following five steps:
1. Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an agreement with a customer that defines each party's rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) both parties to the contract are committed to perform their respective obligations, (iii) the contract has commercial substance, and (iv) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer's intent and ability to pay the promised consideration. The Company applies judgment in determining the customer's ability and intention to pay, which is based on a variety of factors including the customer's payment history or, in the case of a new customer, published credit and financial information pertaining to the customer.
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2. Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised products or services are accounted for as a combined performance obligation. The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by the standard.
3. Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. To the extent the transaction price is variable, revenue is recognized at an amount equal to the consideration to which the Company expects to be entitled. This estimate includes customer sales incentives which are accounted for as a reduction to revenue and estimated primarily using the expected value method. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.
In practice, we do not offer extended payment terms beyond one year to customers. As such, we do not adjust our consideration for financing arrangements.
4. Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless a portion of the variable consideration related to the contract is allocated entirely to a performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately.
5. Recognize revenue when or as the Company satisfies a performance obligation
The Company generally satisfies performance obligations at a point in time. Revenue is recognized based on the transaction price at the time the related performance obligation is satisfied by transferring a promised product or service to a customer. The impact to revenue related to prior period performance obligations in the three and nine months ended September 30, 2018 is immaterial.
Disaggregation of Revenue
The following table presents our disaggregated revenues by revenue source. We sell products within all product categories in each operating segment. Revenues related to compressors are fully reflected in our Latin America segment. For additional information on the disaggregated revenues by geographical regions, see Note 14 to the Consolidated Condensed Financial Statements.
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
Millions of dollars | 2018 | 2018 | ||||||
Major product categories: | ||||||||
Laundry | $ | 1,580 | $ | 4,605 | ||||
Refrigeration | 1,577 | 4,474 | ||||||
Cooking | 1,204 | 3,342 | ||||||
Dishwashing | 421 | 1,229 | ||||||
Total major product category net sales | $ | 4,782 | $ | 13,650 | ||||
Compressors | 266 | 847 | ||||||
Spare parts and warranties | 246 | 768 | ||||||
Other | 32 | 112 | ||||||
Total net sales | $ | 5,326 | $ | 15,377 | ||||
Major Product Category Sales
Whirlpool Corporation manufactures and markets a full line of home appliances and related products and services. Our major product categories include the following: refrigeration, laundry, cooking, and dishwashing. The refrigeration product category includes refrigerators, freezers, ice makers and refrigerator water filters. The laundry product category includes laundry appliances and related laundry accessories. The cooking category includes cooking appliances and other small domestic appliances. The dishwashing product category includes dishwasher appliances and related accessories. In addition, we also produce hermetic compressors for refrigeration systems which is not considered a major product category.
For product sales and compressors, we transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer or when the customer receives the product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. We do not have any additional performance obligations other than product sales that are material in the context of the contract. The amount of consideration we receive and revenue we recognize varies due to sales incentives and returns we offer to our customers. When we give our customers the right to return eligible products, we reduce revenue for our estimate of the expected returns which is primarily based on an analysis of historical experience.
Spare Parts & Warranties
Spare parts are primarily sold to parts distributors and retailers, with a small number of sales to end consumers. For spare part sales, we transfer control and recognize a sale when we ship the product to our customer or when the customer receives product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. We do not have any additional performance obligations other than spare part sales that are material in the context of the contract. The amount of consideration we receive and revenue we recognize varies due to sales incentives and returns we offer to our customers. When we give our customers the right to return eligible products, we reduce revenue for our estimate of the expected returns which is primarily based on an analysis of historical experience.
Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the consumer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company offers certain limited warranties that are assurance type warranties and extended service arrangements that are service type warranties. Assurance type warranties are not accounted for as separate performance obligations under the revenue model. If a service type warranty is sold with a product or separately, revenue is recognized over the life of the warranty. The Company evaluates warranty offerings in comparison to industry standards and market expectations to determine appropriate warranty classification. Industry standards and market expectations are determined by jurisdictional laws, competitor offerings and customer expectations. Market expectations and industry standards can vary based on product type and geography. The Company primarily offers assurance type warranties.
Whirlpool sells certain extended service arrangements separately from the sale of products. Whirlpool acts as a sales agent under some of these arrangements whereby the Company receives a fee that is recognized as revenue upon
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the sale of the extended service arrangement. The Company is also the principal for certain extended service arrangements. Revenue related to these arrangements is recognized ratably over the contract term.
Other Revenue
Other revenue sources include subscription arrangements and licenses as described below.
The Company has a water subscription business in our Latin America segment which provides the customer with a water filtration system that is delivered to the consumer's home. Our water subscription contracts represent a performance obligation that is satisfied over time and revenue is recognized as the performance obligation is completed. The installation and maintenance of the water filtration system are not distinct services in the context of the contract (i.e., the customer views all activities associated with the arrangement as one singular value proposition). The contract term is generally less than one year for these arrangements and revenue is recognized based on the monthly invoiced amount which directly corresponds to the value of our performance completed to date.
We license our brands in arrangements that do not include other performance obligations. Whirlpool licensing provides a right of access to the Company's intellectual property throughout the license period. Whirlpool recognizes licensing revenue over the life of the license contract as the underlying sale or usage occurs. As a result, we recognize revenue for these contracts at the amount which directly corresponds to the value provided to the customer.
Costs to Obtain or Fulfill a Contract
We do not capitalize costs to obtain a contract because a nominal number of contracts have terms that extend beyond one year. The Company does not have a significant amount of capitalized costs related to fulfillment.
Sales Tax and Other Non Income Taxes
The Company is subject to certain non-income taxes in certain jurisdictions including but not limited to sales tax, value added tax, excise tax and other taxes we collect concurrent with revenue-producing activities that are excluded from the transaction price, and therefore, excluded from revenue.
Bad Debt Expense
For the three and nine months ended September 30, 2018, we recorded $29 million of bad debt expense related to trade customer insolvency of a U.S. retailer and a Brazilian retailer, in the amount of $17 million and $12 million, respectively. There was an immaterial amount of bad debt expense recorded in the prior periods.
Financial Statement Impact of Adopting Topic 606
On January 1, 2018, we adopted Topic 606 using the modified retrospective method. In previous years, our Brazilian operations earned tax credits under the Brazilian government's export incentive program (BEFIEX). These credits reduced Brazilian federal excise taxes on domestic sales. Prior to the adoption of Topic 606, the excise taxes in our Brazilian operations were reflected in revenue. In accordance with Topic 606, we made a policy election to exclude non-income taxes from the transaction price. As a result, these credits in 2018 are reflected in other income. Based on our evaluation, we determined no significant changes are required to our business processes, systems and controls to effectively report revenue recognition under the new standard. Adoption of the new standard does not materially change the timing or amount of revenue recognized in our Consolidated Condensed Financial Statements.
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(3) CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash as reported within our Consolidated Condensed Statements of Cash Flows:
September 30 | |||||||
Millions of dollars | 2018 | 2017 | |||||
Cash and cash equivalents as presented in our Consolidated Condensed Balance Sheets | 1,032 | 1,087 | |||||
Restricted cash included in prepaid and other current assets (1) | 45 | 47 | |||||
Restricted cash included in other noncurrent assets (1) | 5 | 63 | |||||
Cash, cash equivalents and restricted cash as presented in our Consolidated Condensed Statements of Cash Flows | $ | 1,082 | $ | 1,197 | |||
(1)Change in restricted cash resulted in realization of foreign currency translation adjustments of $3 million and ($5 million), respectively, for the nine months ended September 30, 2018 and 2017 compared to the prior year.
December 31, | |||||||
Millions of dollars | 2017 | 2016 | |||||
Cash and cash equivalents as presented in our Consolidated Balance Sheets | 1,196 | 1,085 | |||||
Restricted cash included in prepaid and other current assets | 48 | 45 | |||||
Restricted cash included in other noncurrent assets | 49 | 110 | |||||
Cash, cash equivalents and restricted cash as presented in our Consolidated Statements of Cash Flows | $ | 1,293 | $ | 1,240 | |||
Restricted cash can only be 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 Whirlpool China (formerly Hefei Sanyo) acquisition completed in October 2014.
(4) INVENTORIES
The following table summarizes our inventory for the periods presented:
Millions of dollars | September 30, 2018 | December 31, 2017 | ||||||
Finished products | $ | 2,385 | $ | 2,374 | ||||
Raw materials and work in process | 624 | 725 | ||||||
3,009 | 3,099 | |||||||
Less: excess of FIFO cost over LIFO cost | (136 | ) | (111 | ) | ||||
Total inventories | $ | 2,873 | $ | 2,988 | ||||
LIFO inventories represented 42% and 38% of total inventories at September 30, 2018 and December 31, 2017, respectively.
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(5) PROPERTY, PLANT & EQUIPMENT
The following table summarizes our property, plant and equipment as of September 30, 2018 and December 31, 2017:
Millions of dollars | September 30, 2018 | December 31, 2017 | ||||||
Land | $ | 122 | $ | 123 | ||||
Buildings | 1,671 | 1,789 | ||||||
Machinery and equipment | 7,819 | 8,946 | ||||||
Accumulated depreciation | (6,216 | ) | (6,825 | ) | ||||
Property, plant and equipment, net | $ | 3,396 | $ | 4,033 | ||||
During the nine months ended September 30, 2018, we disposed of buildings, machinery and equipment no longer in use with a net book value of $25 million and certain land use rights were transferred to the China government resulting in a $27 million gain recorded in cost of products sold.
(6) FINANCING ARRANGEMENTS
Debt Offering
On November 9, 2017, Whirlpool Finance Luxembourg S.à. r.l., an indirect, wholly-owned finance subsidiary of Whirlpool Corporation, completed a debt offering of €600 million (approximately $699 million as of the date of issuance) principal amount of 1.100% notes due in 2027. 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 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.
Debt Repayment
On April 26, 2018, $363 million of 4.50% senior notes matured and were repaid. On November 1, 2017, $300 million of 1.65% senior notes matured and were repaid. On March 1, 2017, $250 million of 1.35% senior notes matured and were repaid.
Term Loan Agreements
On June 5, 2018, the Company and its indirect wholly-owned subsidiary, Whirlpool EMEA Finance S.à. r.l., entered into a Term Loan Agreement (the "Whirlpool EMEA Finance Term Loan") with Wells Fargo Bank, National Association, as Administrative Agent, and certain other financial institutions. Wells Fargo Securities, LLC acted as Sole Lead Arranger and Sole Bookrunner for the Whirlpool EMEA Finance Term Loan. The Whirlpool EMEA Finance Term Loan Agreement provides for an aggregate lender commitment of €600 million (approximately $703 million as of June 5, 2018) and is recorded in long-term debt of our Consolidated Condensed Balance Sheets. The Whirlpool EMEA Finance Term Loan has a maturity date of December 1, 2019, and contains an unconditional Company guarantee for repayment of amounts borrowed by Whirlpool EMEA Finance S.à. r.l. under the term loan facility. The Company and Whirlpool EMEA Finance S.à. r.l. also agree to repay outstanding loan amounts with the proceeds received from any future capital markets transaction involving Whirlpool EMEA Finance S.à. r.l. as issuer or the Company as issuer or guarantor.
The interest and fee rates payable with respect to the term loan facility based on the Company's current debt rating are as follows: (1) the spread over EURIBOR is 1.00%; (2) the spread over prime is 0.125%; and (3) the ticking fee is 0.125%, as of the date hereof. The Whirlpool EMEA Finance Term Loan Agreement, as amended August 30, 2018, contains customary covenants and warranties including, among other things, a Company debt to capitalization ratio of less than or equal to 0.65 to 1.00 as of the last day of each fiscal quarter, and a Company rolling twelve month interest coverage ratio required to be greater than or equal to 3.0 to 1.0 for each fiscal quarter. In addition, the covenants limit the Company's ability to (or to permit any subsidiaries to), subject to various exceptions and limitations: (i) merge with other companies; (ii) create liens on its property; (iii) incur debt or off-balance sheet obligations at the subsidiary level; (iv) enter into transactions with affiliates, except on an arms-length basis or with or between subsidiaries; (v) enter into agreements restricting the payment of subsidiary dividends or restricting the making of loans or repayment of debt by subsidiaries to the Company or other subsidiaries; and (vi) enter into agreements restricting the creation of
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liens on its assets. The covenants also provide that Whirlpool EMEA Finance S.à. r.l must at all times remain a wholly-owned subsidiary of the Company.
On April 23, 2018 the Company entered into, and on May 14, 2018 and August 30, 2018 the Company amended, a Term Loan Agreement (the "Term Loan Agreement") by and among the Company, Citibank, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A. as Syndication Agent, and certain other financial institutions. Citibank, N.A., JPMorgan Chase Bank, N.A., BNP Paribas Securities Corp., Mizuho Bank, Ltd., and Wells Fargo Securities, LLC acted as Joint Lead Arrangers and Joint Bookrunners for the Term Loan Agreement. The Term Loan Agreement provides for an aggregate lender commitment of $1.0 billion and is recorded in notes payable of our Consolidated Condensed Balance Sheets. The Term Loan Agreement has a maturity date of April 22, 2019, which date may be extended by the Company, in its discretion, prior to the maturity date for an additional six months. The Company also has agreed to repay the outstanding term loan amounts with the net cash proceeds received from the closing of the Embraco sale transaction. The proceeds of the Term Loan Agreement were used to fund accelerated share repurchases through a modified Dutch auction tender offer.
The interest and fee rates payable with respect to the term loan facility based on the Company's current debt rating are as follows: (1) the spread over LIBOR is 1.125%; (2) the spread over prime is 0.125%; and (3) the ticking fee is 0.125%, as of the date hereof. The Term Loan Agreement, as amended, contains customary covenants and warranties including, among other things, a debt to capitalization ratio of less than or equal to 0.65 to 1.00 as of the last day of each fiscal quarter, and a rolling twelve month interest coverage ratio required to be greater than or equal to 3.0 to 1.0 for each fiscal quarter. In addition, the covenants limit the Company's ability to (or to permit any subsidiaries to), subject to various exceptions and limitations: (i) merge with other companies; (ii) create liens on its property; (iii) incur debt or off-balance sheet obligations at the subsidiary level; (iv) enter into transactions with affiliates, except on an arms-length basis or with or between subsidiaries; (v) enter into agreements restricting the payment of subsidiary dividends or restricting the making of loans or repayment of debt by subsidiaries to the Company or other subsidiaries; and (vi) enter into agreements restricting the creation of liens on its assets.
Credit Facilities
On September 27, 2017, Whirlpool Corporation exercised its commitment increase and term extension rights under the Third Amended and Restated Long-Term Credit Agreement (the "Amended Long-Term Facility") by and among the Company, certain other borrowers, the lenders referred to therein, JPMorgan Chase Bank, N.A. as Administrative Agent, and Citibank, N.A., as Syndication Agent. In connection with this exercise, the Company entered into a Consent to Commitment Increase agreement with the Administrative Agent, which increases aggregate borrowing capacity under the Amended Long-Term Facility from $2.5 billion to $3.0 billion, and the Administrative Agent received extension request consents from a majority of lenders, which extends the termination date of the Amended Long-Term Facility by one year, to May 17, 2022.
The interest and fee rates payable with respect to the Amended Long-Term Facility based on our current debt rating are as follows: (1) the spread over LIBOR is 1.125%; (2) the spread over prime is 0.125%; and (3) the unused commitment fee is 0.125%. The Amended Long-Term Facility, as amended August 30, 2018, contains customary covenants and warranties including, among other things, a debt to capitalization ratio of less than or equal to 0.65 to 1.00 as of the last day of each fiscal quarter, and a rolling twelve month interest coverage ratio required to be greater than or equal to 3.0 to 1.0 for each fiscal quarter. In addition, the covenants limit our ability to (or to permit any subsidiaries to), subject to various exceptions and limitations: (i) merge with other companies; (ii) create liens on our property; (iii) incur debt or off-balance sheet obligations at the subsidiary level; (iv) enter into transactions with affiliates, except on an arms-length basis or with or between subsidiaries; (v) enter into agreements restricting the payment of subsidiary dividends or restricting the making of loans or repayment of debt by subsidiaries to the Company or other subsidiaries; and (vi) enter into agreements restricting the creation of liens on our assets.
In addition to the committed $3.0 billion Amended Long-Term Facility, we have a committed European facility and committed credit facilities in Brazil. The European facility provides borrowings up to €250 million (approximately $290 million at September 30, 2018 and $300 million at December 31, 2017), maturing on September 26, 2019. The committed credit facilities in Brazil provide borrowings up to 1.0 billion Brazilian reais (approximately $250 million at September 30, 2018 and $302 million at December 31, 2017), maturing through 2019.
We had no borrowings outstanding under the committed credit facilities at September 30, 2018 or December 31, 2017.
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Notes Payable
Notes payable, which consist of short-term borrowings payable to banks or commercial paper, are generally used to fund working capital requirements. The proceeds of the term loan, included in short-term borrowings, were used to fund accelerated share repurchases through a modified Dutch auction tender offer in the second quarter of 2018. Additionally notes payable were used to fund the $350 million of discretionary pension contributions in September 2018. The fair value of our notes payable approximates the carrying amount due to the short maturity of these obligations. The following table summarizes the carrying value of notes payable at September 30, 2018 and December 31, 2017.
Millions of dollars | September 30, 2018 | December 31, 2017 | ||||||
Commercial paper | $ | 907 | $ | 401 | ||||
Short-term borrowings due to banks | 1,246 | 49 | ||||||
Total notes payable | $ | 2,153 | $ | 450 | ||||
(7) COMMITMENTS AND CONTINGENCIES
Embraco Antitrust Matters
Beginning in February 2009, our compressor business headquartered in Brazil ("Embraco") was notified of antitrust investigations of the global compressor industry by government authorities in various jurisdictions. Embraco has resolved government investigations in various jurisdictions as well as all related civil lawsuits in the United States and all agreed payments relating to such resolutions have been made. Embraco also has resolved certain other claims and certain claims remain pending.
At September 30, 2018, a nominal amount remains accrued. We continue to defend these actions and take other steps to minimize our potential exposure. The final outcome and impact of these matters are subject to many variables, and cannot be predicted. While it is currently not possible to reasonably estimate the aggregate amount of costs which we may incur in connection with these matters, such costs could have a material adverse effect on our financial statements.
BEFIEX Credits and Other Brazil Tax Matters
In previous years, our Brazilian operations earned tax credits under the Brazilian government's export incentive program (BEFIEX). These credits reduced Brazilian federal excise taxes on domestic sales. Prior to the adoption of Topic 606, the excise taxes in our Brazilian operations were reflected in revenue. In accordance with Topic 606, we made a policy election to exclude non-income taxes from the transaction price. As a result, these credits in 2018 are reflected in other income. For additional information, see Note 2 of the Consolidated Condensed Financial Statements.
In December 2013, the Brazilian government reinstituted the monetary adjustment index applicable to BEFIEX credits that existed prior to July 2009, when the Brazilian government required companies to apply a different monetary adjustment index to BEFIEX credits. Whether use of the reinstituted index should be given retroactive effect for the July 2009 to December 2013 period has been subject to review by the Brazilian courts. In the third quarter of 2017, the Brazilian Supreme Court ruled that the reinstituted index should be given retroactive effect for the July 2009 to December 2013 period, which decision has been appealed by the Brazilian government. Based on this ruling, we were entitled to recognize $72 million in additional credits. We monetized $42 million of BEFIEX credits during the twelve months ended December 31, 2017 and $30 million during the first half of 2018. As of September 30, 2018, no BEFIEX credits remain to be monetized.
Our Brazilian operations have received tax assessments for income and social contribution taxes associated with certain monetized BEFIEX credits. We do not believe BEFIEX credits are subject to income or social contribution taxes. We are disputing these tax assessment matters in various courts and intend to vigorously defend our positions. We have not provided for income or social contribution taxes on these BEFIEX credits and, based on the opinions of tax and legal advisors, we have not accrued any amount related to these assessments as of September 30, 2018. The total amount of outstanding tax assessments received for income and social contribution taxes relating to the BEFIEX credits, including interest and penalties, is approximately 1.9 billion Brazilian reais (approximately $480 million as of September 30, 2018).
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Relying on existing Brazilian legal precedent, in 2003 and 2004, we recognized tax credits in an aggregate amount of $26 million, adjusted for currency, on the purchase of raw materials used in production ("IPI tax credits"). The Brazilian tax authority subsequently challenged the recording of IPI tax credits. No credits have been recognized since 2004. In 2009, we entered into a Brazilian government program which provided extended payment terms and reduced penalties and interest to encourage taxpayers to resolve this and certain other disputed tax credit amounts. As permitted by the program, we elected to settle certain debts through the use of other existing tax credits and recorded charges of approximately $34 million in 2009 associated with these matters. In July 2012, the Brazilian revenue authority notified us that a portion of our proposed settlement was rejected and we received tax assessments of 247 million Brazilian reais (approximately $62 million as of September 30, 2018), reflecting interest and penalties to date. We are disputing these assessments and we intend to vigorously defend our position. Among other arguments, the government's assessment in this case relies heavily on its arguments regarding taxability of BEFIEX credits for certain years, which we are disputing in one of the BEFIEX government assessment cases cited in the prior paragraph.
In 2001, Brazil adopted a law making the profits of controlled foreign corporations of Brazilian entities subject to income and social contribution tax regardless of whether the profits were repatriated ("CFC Tax"). Our Brazilian subsidiary, along with other corporations, challenged tax assessments on foreign profits on constitutionality and other grounds. In April 2013, the Brazilian Supreme Court ruled on one of our cases, finding that the law is constitutional, but remanding the case to a lower court for consideration of other arguments raised in our appeal, including the existence of tax treaties with jurisdictions in which controlled foreign corporations are domiciled. As of September 30, 2018, our potential exposure for income and social contribution taxes relating to profits of controlled foreign corporations, including interest and penalties and net of expected foreign tax credits, is approximately 196 million Brazilian reais (approximately $49 million as of September 30, 2018). We believe these assessments are without merit and we intend to continue to vigorously dispute them. Based on the opinion of our tax and legal advisors, we have not accrued any amount related to these assessments as of September 30, 2018.
In addition to the IPI tax credit and CFC Tax matters noted above, we are currently disputing other assessments issued by the Brazilian tax authorities related to non-income and income tax matters, and other matters, which are at various stages of review in numerous administrative and judicial proceedings. The amounts related to these assessments will continue to be increased by monetary adjustments at the Selic rate, which is the benchmark rate set by the Brazilian Central Bank. In accordance with our accounting policies, we routinely assess these matters and, when necessary, record our best estimate of a loss. We believe these tax assessments are without merit and are vigorously defending our positions.
We also filed legal actions to recover certain social integration and social contribution taxes paid over gross sales including ICMS receipts, which is a form of Value Added Tax in Brazil. During 2017, we sold the rights to certain portions of this litigation to a third party for 90 million Brazilian reais (approximately $27 million as of December 31, 2017). Approximately $215 million in face value of credits related to this litigation remain. While the Company's recovery with respect to the remaining litigation may be material, there is substantial uncertainty about both the amount and timing of any recovery. No amounts have been recorded related to these items.
Litigation is inherently unpredictable and the conclusion of these matters may take many years to ultimately resolve. Accordingly, it is possible that an unfavorable outcome in these proceedings could have a material adverse effect on our financial statements in any particular reporting period.
Competition Investigation
In 2013, the French Competition Authority ("FCA") commenced an investigation of appliance manufacturers and retailers in France. The investigation includes a number of manufacturers, including the Whirlpool and Indesit operations in France. The Company is cooperating with this investigation.
On June 26, 2018, Whirlpool France SAS, a subsidiary of Whirlpool, reached an agreement with the staff of the FCA to settle the first part of its investigation, which relates to a 14-month period during parts of 2006-07 and 2008-09. The agreement establishes a settlement range between €95 million to €115 million for Indesit and Whirlpool legacy operations in France. The settlement must be approved by the FCA's college of commissioners, which also determines the final settlement amount within the agreed range. As no amount within the range of settlement was determined to be more likely than any other, a reserve of €95 million (approximately $111 million as of the settlement date) was recorded in interest and sundry (income) expense during the second quarter of 2018. The Company expects to pay the final settlement amount in 2019, following final approval by the FCA's college of commissioners.
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The second part of the FCA investigation, which is expected to focus primarily on manufacturer interactions with retailers, is ongoing but at a less advanced stage. The Company is cooperating with this investigation. Although it is currently not possible to assess the impact, if any, this matter may have on our financial statements, the resolution of the second part of the FCA investigation could have a material adverse effect on our financial statements in any particular reporting period.
Trade Customer Insolvency
In 2017, Alno AG and certain affiliated companies filed for insolvency protection in Germany. Bauknecht Hausgeräte GmbH, a subsidiary of the Company, was a long-standing supplier to Alno and certain of its affiliated companies. The Company was also a former indirect minority shareholder of Alno. In August 2018, the insolvency trustee asserted €174.5 million in clawback and related claims against Bauknecht. We are reviewing the claims made by the insolvency trustee. Based on our preliminary understanding of the facts and the applicable law, we expect to vigorously defend against the claims. Although it is currently not possible to assess the impact this matter may have on our Consolidated Condensed Financial Statements, the resolution of this matter could have a material adverse effect on our financial statements in any particular reporting period.
Other Litigation
We are currently vigorously defending a number of lawsuits in federal and state courts in the U.S. related to the manufacture and sale of our products which include class action allegations, and have and may become involved in similar actions in other jurisdictions. These lawsuits allege claims which include negligence, breach of contract, breach of warranty, product liability and safety claims, false advertising, fraud, and violation of federal and state regulations, including consumer protection laws. In general, we do not have insurance coverage for class action lawsuits. We are also involved in various other legal actions in the U.S. and other jurisdictions around the world arising in the normal course of business, for which insurance coverage may or may not be available depending on the nature of the action. We dispute the merits of these suits and actions, and intend to vigorously defend them. Management believes, based upon its current knowledge, after taking into consideration legal counsel's evaluation of such suits and actions, and after taking into account current litigation accruals, that the outcome of these matters currently pending against Whirlpool should not have a material adverse effect, if any, on our financial statements.
Product Warranty and Legacy Product Corrective Action Reserves
Product warranty reserves are included in other current and other noncurrent liabilities in our Consolidated Condensed Balance Sheets. The following table summarizes the changes in total product warranty and legacy product warranty liability reserves for the periods presented:
Product Warranty | Legacy Product Warranty | Total | ||||||||||||||||||||||
Millions of dollars | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Balance at January 1 | $ | 277 | $ | 251 | $ | — | $ | 69 | $ | 277 | $ | 320 | ||||||||||||
Issuances/accruals during the period | 218 | 251 | — | 1 | 218 | 252 | ||||||||||||||||||
Settlements made during the period/other | (216 | ) | (226 | ) | — | (70 | ) | (216 | ) | (296 | ) | |||||||||||||
Balance at September 30 | $ | 279 | $ | 276 | $ | — | $ | — | $ | 279 | $ | 276 | ||||||||||||
Current portion | $ | 204 | $ | 203 | $ | — | $ | — | $ | 204 | $ | 203 | ||||||||||||
Non-current portion | 75 | 73 | — | — | 75 | 73 | ||||||||||||||||||
Total | $ | 279 | $ | 276 | $ | — | $ | — | $ | 279 | $ | 276 | ||||||||||||
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
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Whirlpool's acquisition of Indesit in October 2014. During 2017, the corrective action was substantially complete and any remaining charges related to the action were recorded under product warranty for 2018.
Guarantees
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 September 30, 2018 and December 31, 2017, the guaranteed amounts totaled $97 million and $284 million, respectively. Our subsidiary insures against a significant portion of this credit risk for these guarantees, under normal operating conditions, through policies purchased from high-quality underwriters.
We provide guarantees of indebtedness and lines of credit for various consolidated subsidiaries. The maximum contractual amount of indebtedness and credit facilities available under these lines for consolidated subsidiaries totaled $3.7 billion and $2.8 billion as of September 30, 2018 and December 31, 2017, respectively. Our total short-term outstanding bank indebtedness under guarantees was $43 million at September 30, 2018 and $49 million at December 31, 2017.
(8) PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The following table summarizes the components of net periodic pension cost and the cost of other postretirement benefits for the periods presented:
Three Months Ended September 30, | ||||||||||||||||||||||||
United States Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
Millions of dollars | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 2 | $ | 1 | ||||||||||||
Interest cost | 30 | 34 | 5 | 6 | 3 | 4 | ||||||||||||||||||
Expected return on plan assets | (43 | ) | (43 | ) | (8 | ) | (8 | ) | — | — | ||||||||||||||
Amortization: | ||||||||||||||||||||||||
Actuarial loss | 14 | 12 | 2 | 2 | — | — | ||||||||||||||||||
Prior service credit | (1 | ) | (1 | ) | — | — | (3 | ) | (4 | ) | ||||||||||||||
Settlement and curtailment (gain) loss | — | — | 1 | — | 4 | — | ||||||||||||||||||
Net periodic cost | $ | 1 | $ | 3 | $ | 1 | $ | 1 | $ | 6 | $ | 1 | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
United States Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
Millions of dollars | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Service cost | $ | 2 | $ | 2 | $ | 4 | $ | 4 | $ | 5 | $ | 5 | ||||||||||||
Interest cost | 89 | 101 | 17 | 17 | 10 | 12 | ||||||||||||||||||
Expected return on plan assets | (128 | ) | (131 | ) | (25 | ) | (23 | ) | — | — | ||||||||||||||
Amortization: | ||||||||||||||||||||||||
Actuarial loss | 40 | 37 | 7 | 5 | — | — | ||||||||||||||||||
Prior service credit | (2 | ) | (2 | ) | — | — | (2 | ) | (11 | ) | ||||||||||||||
Settlement and curtailment (gain) loss | — | — | (2 | ) | 1 | 4 | — | |||||||||||||||||
Net periodic cost | $ | 1 | $ | 7 | $ | 1 | $ | 4 | $ | 17 | $ | 6 | ||||||||||||
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The following table summarizes the net periodic cost recognized in operating profit and interest and sundry (income) expense for the periods presented:
Three Months Ended September 30, | ||||||||||||||||||||||||
United States Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
Millions of dollars | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Operating profit (loss) | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 2 | $ | 1 | ||||||||||||
Interest and sundry (income) expense | — | 2 | — | — | 4 | — | ||||||||||||||||||
Net periodic benefit cost | $ | 1 | $ | 3 | $ | 1 | $ | 1 | $ | 6 | $ | 1 | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
United States Pension Benefits | Foreign Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
Millions of dollars | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Operating profit (loss) | $ | 2 | $ | 2 | $ | 4 | $ | 4 | $ | 5 | $ | 5 | ||||||||||||
Interest and sundry (income) expense | (1 | ) | 5 | (3 | ) | — | 12 | 1 | ||||||||||||||||
Net periodic benefit cost | $ | 1 | $ | 7 | $ | 1 | $ | 4 | $ | 17 | $ | 6 | ||||||||||||
During the second quarter 2011, we modified retiree medical benefits for certain retirees to be consistent with those benefits provided by the Whirlpool Corporation Group Benefit Plan. We accounted for these changes as a plan amendment in 2011, resulting in a reduction in the postretirement benefit obligation of $138 million, of which approximately $83 million of benefit has been recognized in net earnings since 2011, with an offset to accumulated other comprehensive loss, net of tax. In response, a group of retirees initiated legal proceedings against Whirlpool asserting the above benefits are vested and changes to the plan are not permitted. In October 2018, we reached preliminary agreement on a settlement to resolve plaintiffs’ claims. The settlement will require court approval in order to be finalized, and we will proceed through the court process to request such approval. Charges incurred in the third quarter of 2018 related to this settlement were not material, and we expect the settlement, if and when approved, to result in non-material cash expenditures in future periods.
On September 15, 2018, we contributed $358 million in cash contributions to the pension trust for our U.S. defined benefit pension plans, which included $350 million of discretionary contributions.
(9) HEDGES AND DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments are accounted for at fair value based on market rates. Derivatives where we elect hedge accounting are designated as either cash flow, fair value or net investment hedges. Derivatives that are not accounted for based on hedge accounting are marked to market through earnings. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. Hedging ineffectiveness and a net earnings impact occur when the change in the fair value of the hedge does not offset the change in the fair value of the hedged item. The ineffective portion of the gain or loss is recognized in earnings. The fair value of the hedge asset or liability is presented in either other current assets/liabilities or other noncurrent assets/liabilities on the Consolidated Condensed Balance Sheets and in other within cash used in operating activities in the Consolidated Condensed Statements of Cash Flows.
Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss we could incur if a counterparty were to default on a derivative contract. We generally deal with investment grade counterparties and monitor the overall credit risk and exposure to individual counterparties. We do not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is limited to the unrealized gains, if any, on such derivative contracts. We do not require nor do we post collateral on such contracts.
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Hedging Strategy
In the normal course of business, we manage risks relating to our ongoing business operations including those arising from changes in foreign exchange rates, interest rates and commodity prices. Fluctuations in these rates and prices can affect our operating results and financial condition. We use a variety of strategies, including the use of derivative instruments, to manage these risks. We do not enter into derivative financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We incur expenses associated with the procurement and production of products in a limited number of countries, while we sell in the local currencies of a large number of countries. Our primary foreign currency exchange exposures result from cross-currency sales of products. As a result, we enter into foreign exchange contracts to hedge certain firm commitments and forecasted transactions to acquire products and services that are denominated in foreign currencies.
We enter into certain undesignated non-functional currency asset and liability hedges that relate primarily to short-term payables, receivables and intercompany loans. These forecasted cross-currency cash flows relate primarily to foreign currency denominated expenditures and intercompany financing agreements, royalty agreements and dividends. When we hedge a foreign currency denominated payable or receivable with a derivative, the effect of changes in the foreign exchange rates are reflected currently in interest and sundry (income) expense for both the payable/receivable and the derivative. Therefore, as a result of this economic hedge, we do not elect hedge accounting.
Commodity Price Risk
We enter into commodity derivative contracts on various commodities to manage the price risk associated with forecasted purchases of materials used in our manufacturing process. The objective of these hedges is to reduce the variability of cash flows associated with the forecasted purchase of commodities.
Interest Rate Risk
We may enter into interest rate swap agreements to manage interest rate risk exposure. Our interest rate swap agreements, if any, effectively modify our exposure to interest rate risk, primarily through converting certain floating rate debt to a fixed rate basis, and certain fixed rate debt to a floating rate basis. These agreements involve either the receipt or payment of floating rate amounts in exchange for fixed rate interest payments or receipts, respectively, over the life of the agreements without an exchange of the underlying principal amounts. We also may utilize a cross-currency interest rate swap agreement to manage our exposure relating to certain intercompany debt denominated in one foreign currency that will be repaid in another foreign currency. At September 30, 2018 and December 31, 2017, there were no outstanding interest rate swap agreements.
We enter into swap rate lock agreements to effectively modify our exposure to interest rate risk by locking in interest rates on probable long-term debt issuances.
Net Investment Hedging
The following table summarizes our foreign currency denominated debt and foreign exchange forwards/options designated as net investment hedges at September 30, 2018 and December 31, 2017:
Notional (Local) | Notional (USD) | Current Maturity | ||||||||||||||||
Instrument | 2018 | 2017 | 2018 | 2017 | ||||||||||||||
Senior note - 0.625% | € | 500 | € | 500 | $ | 580 | $ | 600 | March 2020 | |||||||||
Commercial Paper | € | 150 | € | 150 | $ | 174 | $ | 180 | October 2018 | |||||||||
Foreign exchange forwards/options | MXN 7,200 | MXN 7,200 | $ | 385 | $ | 366 | August 2022 | |||||||||||
For instruments that are designated and qualify as a net investment hedge, the effective portion of the instruments' gain or loss is reported as a component of other comprehensive income (OCI) and recorded in accumulated other comprehensive loss. The gain or loss will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated. The remaining change in fair value of the hedge instruments represents the ineffective portion, which is immediately recognized in interest and sundry (income) expense on our consolidated statements of income. As of September 30, 2018 and December 31, 2017, there was no ineffectiveness on hedges designated as net investment hedges.
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The following table summarizes our outstanding derivative contracts and their effects on our Consolidated Condensed Balance Sheets at September 30, 2018 and December 31, 2017:
Fair Value of | Type of Hedge(1) | |||||||||||||||||||||||||||||
Notional Amount | Hedge Assets | Hedge Liabilities | Maximum Term (Months) | |||||||||||||||||||||||||||
Millions of dollars | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||
Derivatives accounted for as hedges | ||||||||||||||||||||||||||||||
Foreign exchange forwards/options | $ | 3,218 | $ | 3,113 | $ | 27 | $ | 55 | $ | 56 | $ | 157 | (CF/NI) | 47 | 56 | |||||||||||||||
Commodity swaps/options | 234 | 269 | 5 | 29 | 18 | 1 | (CF) | 33 | 36 | |||||||||||||||||||||
Interest rate derivatives | 350 | — | — | — | 2 | — | (CF) | 2 | 0 | |||||||||||||||||||||
Total derivatives accounted for as hedges | $ | 32 | $ | 84 | $ | 76 | $ | 158 | ||||||||||||||||||||||
Derivatives not accounted for as hedges | ||||||||||||||||||||||||||||||
Foreign exchange forwards/options | $ | 4,037 | $ | 3,390 | $ | 21 | $ | 58 | $ | 49 | $ | 50 | N/A | 24 | 33 | |||||||||||||||
Commodity swaps/options | — | 1 | — | — | — | — | N/A | 0 | 5 | |||||||||||||||||||||
Total derivatives not accounted for as hedges | 21 | 58 | 49 | 50 | ||||||||||||||||||||||||||
Total derivatives | $ | 53 | $ | 142 | $ | 125 | $ | 208 | ||||||||||||||||||||||
Current | $ | 39 | $ | 89 | $ | 72 | $ | 81 | ||||||||||||||||||||||
Noncurrent | 14 | 53 | 53 | 127 | ||||||||||||||||||||||||||
Total derivatives | $ | 53 | $ | 142 | $ | 125 | $ | 208 | ||||||||||||||||||||||
(1) Derivatives accounted for as hedges are considered either cash flow (CF) or net investment (NI) hedges.
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The following tables summarize the effects of derivative instruments on our Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended as follows:
Three Months Ended September 30, | |||||||||||||||||
Gain (Loss) Recognized in OCI (Effective Portion) | Gain (Loss) Reclassified from OCI into Earnings (Effective Portion) (1) | ||||||||||||||||
Cash Flow Hedges - Millions of dollars | 2018 | 2017 | 2018 | 2017 | |||||||||||||
Foreign exchange forwards/options | $ | 30 | $ | (49 | ) | $ | 33 | $ | (34 | ) | (a) | ||||||
Commodity swaps/options | (27 | ) | 18 | 1 | 11 | (a) | |||||||||||
Interest rate derivatives | (2 | ) | — | — | (1 | ) | (b) | ||||||||||
Net Investment Hedges | |||||||||||||||||
Foreign currency | (10 | ) | (23 | ) | — | — | |||||||||||
$ | (9 | ) | $ | (54 | ) | $ | 34 | $ | (24 | ) | |||||||
Three Months Ended September 30, | |||||||||||||||||
Gain (Loss) Recognized on Derivatives not Accounted for as Hedges (2) | |||||||||||||||||
Derivatives not Accounted for as Hedges - Millions of dollars | 2018 | 2017 | |||||||||||||||
Foreign exchange forwards/options | $ | 48 | $ | (21 | ) | ||||||||||||
Nine Months Ended September 30, | |||||||||||||||||
Gain (Loss) Recognized in OCI (Effective Portion) | Gain (Loss) Reclassified from OCI into Earnings (Effective Portion) (1) | ||||||||||||||||
Cash Flow Hedges - Millions of dollars | 2018 | 2017 | 2018 | 2017 | |||||||||||||
Foreign exchange | $ | 106 | $ | (109 | ) | $ | 75 | $ | (76 | ) | (a) | ||||||
Commodity swaps/options | (42 | ) | 35 | 24 | 29 | (a) | |||||||||||
Interest rate derivatives | (2 | ) | — | (1 | ) | (1 | ) | (b) | |||||||||
Net Investment Hedges | |||||||||||||||||
Foreign currency | (5 | ) | (63 | ) | — | — | |||||||||||
$ | 57 | $ | (137 | ) | $ | 98 | $ | (48 | ) | ||||||||
Nine Months Ended September 30, | |||||||||||||||||
Gain (Loss) Recognized on Derivatives not Accounted for as Hedges (2) | |||||||||||||||||
Derivatives not Accounted for as Hedges - Millions of dollars | 2018 | 2017 | |||||||||||||||
Foreign exchange forwards/options | $ | 111 | $ | (100 | ) | ||||||||||||
(1) Gains and losses reclassified from accumulated OCI and recognized in income are recorded in (a) cost of products sold or (b) interest expense.
(2) Mark to market gains and losses recognized in income are recorded in interest and sundry (income) expense.
For cash flow hedges, the amount of ineffectiveness recognized in interest and sundry (income) expense was nominal for the periods ended September 30, 2018 and 2017. There were no hedges designated as fair value for the periods ended September 30, 2018 and 2017. The net amount of unrealized gain or loss on derivative instruments included in accumulated OCI related to contracts maturing and expected to be realized during the next twelve months is a loss of $33 million at September 30, 2018.
(10) FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or
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liability. Assets and liabilities measured at fair value are based on a market valuation approach using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. As a basis for considering such assumptions, a three-tiered fair value hierarchy is established, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets that are observable, either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The non-recurring fair values represent only those assets whose carrying values were adjusted to fair value during the reporting period. See Note 16 to the Consolidated Condensed Financial Statements for additional information on the goodwill and other intangibles impairment in the second quarter of 2018.
The following table summarizes the valuation of our assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 are as follows:
Fair Value | ||||||||||||||||||||||||||||||||
Millions of dollars | Total Cost Basis | Level 1 | Level 2 | Total | ||||||||||||||||||||||||||||
Measured at fair value on a recurring basis: | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Money market funds(1) | $ | 230 | $ | 255 | $ | 7 | $ | 2 | $ | 223 | $ | 253 | $ | 230 | $ | 255 | ||||||||||||||||
Net derivative contracts | — | — | — | — | (72 | ) | (66 | ) | (72 | ) | (66 | ) | ||||||||||||||||||||
Available for sale investments | 7 | 6 | 21 | 22 | — | — | 21 | 22 | ||||||||||||||||||||||||
Held-to-maturity investments (2) | — | 60 | — | — | — | 60 | — | 60 | ||||||||||||||||||||||||
(1) Money market funds are comprised primarily of government obligations or time deposits with banks and other first tier obligations.
(2) Held-to-maturity investments are primarily comprised of certificates of deposit with an approximate maturity term of less than six months.
The following table summarizes the valuation of our assets measured at fair value on a non-recurring basis during the second quarter and as of June 30, 2018.
Fair Value | ||||||
Millions of dollars | Level 3 | |||||
Measured at fair value on a non-recurring basis: | 2018 | 2017 | ||||
Assets: | ||||||
Goodwill (3) | $ | 315 | $ | — | ||
Indefinite-lived intangible assets (4) | 384 | — | ||||
Definite-lived intangible assets (5) | — | — | ||||
Total level 3 assets | $ | 699 | $ | — | ||
(3) Goodwill with a carrying amount of $894 million was written down to a fair value of $315 million resulting in a goodwill impairment charge of $579 million.
(4) Indefinite-lived intangible assets with a carrying amount of approximately $492 million were written down to a fair value of $384 million resulting in an impairment charge of $108 million.
(5) A definite-lived intangible asset with a carrying amount of approximately $60 million was written down to a fair value of $0 million resulting in an impairment charge of $60 million.
Goodwill
We have four reporting units for which we assess for impairment. We use a discounted cash flow analysis to determine fair value and consistent projected financial information in our analysis of goodwill and intangible assets. The discounted cash flow analysis for the quantitative impairment assessment for the EMEA reporting unit during the second quarter of 2018 utilized a discount rate of 12%. Based on the quantitative assessment performed, the carrying value of the EMEA reporting unit exceeded its fair value resulting in a goodwill impairment charge of $579 million during the second quarter and for the nine-months ended September 30, 2018.
Other Intangible Assets
The relief-from-royalty method for the quantitative impairment assessment for other intangible assets in the EMEA reporting unit during the second quarter of 2018 utilized discount rates ranging from 11.5% - 16% and royalty rates ranging from 1.5% - 3.5%. Based on the quantitative impairment assessment performed, the carrying value of certain
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other intangible assets, primarily the Indesit and Hotpoint* brands, exceeded their fair value, resulting in an impairment charge of $168 million during the second quarter and for the nine-months ended September 30, 2018.
See Note 16 to the Consolidated Condensed Financial Statements for additional information.
*Whirlpool ownership of the Hotpoint brand in the EMEA and Asia Pacific regions is not affiliated with the Hotpoint brand sold in the Americas.
Other Fair Value Measurements
The fair value of long-term debt (including current maturities) was $4.26 billion and $4.95 billion at September 30, 2018 and December 31, 2017, respectively, and was estimated using discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements (Level 2 input).
(11) STOCKHOLDERS' EQUITY
Other Comprehensive Income (Loss)
The following table summarizes our other comprehensive income (loss) and related tax effects for the periods presented:
Three Months Ended September 30, | ||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||
Millions of dollars | Pre-tax | Tax Effect | Net | Pre-tax | Tax Effect | Net | ||||||||||||||
Currency translation adjustments | $ | (65 | ) | $ | (1 | ) | $ | (66 | ) | $ | 20 | $ | — | $ | 20 | |||||
Cash flow and net investment hedges | (61 | ) | 16 | (45 | ) | (22 | ) | 10 | (12 | ) | ||||||||||
Pension and other postretirement benefits plans | 32 | (7 | ) | 25 | (15 | ) | 14 | (1 | ) | |||||||||||
Available for sale securities | — | — | — | 7 | — | 7 | ||||||||||||||
Other comprehensive income (loss) | (94 | ) | 8 | (86 | ) | (10 | ) | 24 | 14 | |||||||||||
Less: Other comprehensive income (loss) available to noncontrolling interests | (1 | ) | — | (1 | ) | 2 | — | 2 | ||||||||||||
Other comprehensive income (loss) available to Whirlpool | $ | (93 | ) | $ | 8 | $ | (85 | ) | $ | (12 | ) | $ | 24 | $ | 12 | |||||
Nine Months Ended September 30, | ||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||
Millions of dollars | Pre-tax | Tax Effect | Net | Pre-tax | Tax Effect | Net | ||||||||||||||
Currency translation adjustments | $ | (235 | ) | $ | (7 | ) | $ | (242 | ) | $ | 96 | $ | — | $ | 96 | |||||
Cash flow and net investment hedges | (83 | ) | 21 | (62 | ) | (47 | ) | 17 | (30 | ) | ||||||||||
Pension and other postretirement benefits plans | 82 | (22 | ) | 60 | 5 | 7 | 12 | |||||||||||||
Available for sale securities | — | — | — | 7 | — | 7 | ||||||||||||||
Other comprehensive income (loss) | (236 | ) | (8 | ) | (244 | ) | 61 | 24 | 85 | |||||||||||
Less: Other comprehensive income (loss) available to noncontrolling interests | — | — | — | 1 | — | 1 | ||||||||||||||
Other comprehensive income (loss) available to Whirlpool | $ | (236 | ) | $ | (8 | ) | $ | (244 | ) | $ | 60 | $ | 24 | $ | 84 | |||||
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Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
The following table provides the reclassification adjustments out of accumulated other comprehensive income (loss), by component, which was included in net earnings for the three and nine months ended September 30, 2018:
Three Months Ended | Nine Months Ended | |||||||||
Millions of dollars | (Gain) Loss Reclassified | (Gain) Loss Reclassified | Classification in Earnings | |||||||
Cash flow hedges, pre-tax | $ | — | $ | (19 | ) | Cost of products sold | ||||
Cash flow and net investment hedges, pre-tax | (34 | ) | (79 | ) | Interest and sundry (income) expense | |||||
Pension and postretirement benefits, pre-tax | 12 | 43 | Interest and sundry (income) expense | |||||||
The following table summarizes the changes in stockholders' equity for the period presented:
Millions of dollars | Total | Whirlpool Common Stockholders | Noncontrolling Interests | |||||||||
Stockholders' equity, December 31, 2017 | $ | 5,128 | $ | 4,198 | $ | 930 | ||||||
Net earnings (loss) | (329 | ) | (353 | ) | 24 | |||||||
Other comprehensive loss | (244 | ) | (244 | ) | — | |||||||
Comprehensive income (loss) | (573 | ) | (597 | ) | 24 | |||||||
Adjustment to beginning retained earnings (1) | 72 | 72 | — | |||||||||
Adjustment to beginning accumulated other comprehensive loss | (17 | ) | (17 | ) | — | |||||||
Common stock | — | — | — | |||||||||
Treasury stock | (1,102 | ) | (1,102 | ) | — | |||||||
Additional paid-in capital | 38 | 38 | — | |||||||||
Dividends declared on common stock | (238 | ) | (232 | ) | (6 | ) | ||||||
Stockholders' equity, September 30, 2018 | $ | 3,308 | $ | 2,360 | $ | 948 | ||||||
(1) Increase to beginning retained earnings is due to the following accounting standard adoptions: ASU 2014-09 [increase of approximately $0.4 million], ASU 2016-01 [increase of approximately $17 million] and ASU 2016-16 [increase of approximately $56 million]. For additional information regarding the adoption of these accounting standards, see Note 1 of the Consolidated Condensed Financial Statements.
Net Earnings per Share
Diluted net earnings per share of common stock include the dilutive effect of stock options and other share-based compensation plans. Basic and diluted net earnings per share of common stock for the periods presented were calculated as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Millions of dollars and shares | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Numerator for basic and diluted earnings per share - Net earnings (loss) available to Whirlpool | $ | 210 | $ | 276 | $ | (353 | ) | $ | 618 | |||||||
Denominator for basic earnings per share - weighted-average shares | 64.5 | 72.9 | 68.2 | 73.9 | ||||||||||||
Effect of dilutive securities – share-based compensation | 0.8 | 1.1 | — | 1.2 | ||||||||||||
Denominator for diluted earnings per share – adjusted weighted-average shares | 65.3 | 74.0 | 68.2 | 75.1 | ||||||||||||
Anti-dilutive stock options/awards excluded from earnings per share | 1.7 | |||||||||||||||