Fitch Affirms Whirlpool's IDR at 'BBB'; Outlook Stable
KEY RATING DRIVERS
WHR's ratings reflect its position as the world's largest appliance manufacturer, with leading market positions in many regions. WHR's global operating platform, increased manufacturing efficiency, and well-recognized skills in innovation have enabled it to improve its cost structure, compete more effectively around the world, and adjust to fluctuations in material costs. Risks include the company's somewhat aggressive growth strategy, intense global competition, volatility of raw material costs, sensitivity to business cycles, and ongoing regulatory issues.
The Stable Outlook takes into account the company's solid liquidity position and Fitch's expectation that credit metrics will improve in the intermediate term as the company integrates the sizeable acquisitions completed during the latter part of 2014.
RECENT AGGRESSIVE GROWTH STRATEGY
The company grew its revenues from about $10 billion in 2000 to almost $20 billion in 2014. Revenues are projected to exceed $21 billion this year. In 2014, WHR spent almost $2 billion for the acquisitions of Indesit Company SpA (a leading European manufacturer and distributor of major appliances) and a 51% stake in Hefei Rongshida Sanyo Electric Co., Ltd. (a leading manufacturer of home appliances based in Hefei, China). The last major acquisition was in 2006, when the company acquired Maytag for about $1.9 billion, including approximately $848 million of cash and roughly 9.7 million shares of WHR stock.
Management is focused on integrating the Indesit and Hefei acquisitions and realizing planned cost synergies. The company also seeks to use its larger platform to further grow the business, including achieving revenue synergies from the recent acquisitions, growing its core business, improving its emerging market presence, and expanding its adjacent businesses.
LEADING MARKET POSITION
WHR is the world's largest appliance manufacturer with leading market positions in key countries including the U.S., Brazil, the UK, Canada, Russia, Italy, and France. The company also has meaningful market share in other countries such as Mexico, China, India, Germany and Spain.
CREDIT METRICS EXPECTED TO IMPROVE
WHR's key leverage metrics have weakened due to the incremental debt incurred from the Indesit and Hefei acquisitions last year. WHR's debt increased from about $3.15 billion as of Sept. 30, 2014 to $4.81 billion as of Sept. 30, 2015. The company's leverage as measured by debt-to-EBITDA stood at 2.3x for the latest-12-months (LTM) ending Sept. 30, 2015 compared with 2.3x at the end of 2014, 1.2x at the conclusion of 2013 and 1.5x at year-end 2012. Total adjusted debt-to-EBITDAR was 3.0x for the LTM ending Sept. 30, 2015 compared with 3.1x at the end of 2014, 2.1x at year-end 2013 and 2.5x at the conclusion of 2012. EBITDA to interest coverage remains solid at 12.1x for the LTM period ending Sept. 30, 2015 compared with 11.6x during 2014, 11.2x during 2013 and 8.3x during 2012.
Fitch expects debt to EBITDA will settle at or below 2.0x at year-end 2015 while adjusted debt-to-EBITDAR will be approximately 2.6x. Interest coverage is forecast to be above 12.0x by the end of 2015. Fitch expects further improvement during 2016, with debt to EBITDA forecast to be between 1.5x-2.0x, adjusted debt to EBITDAR of 2.0x-2.5x, and interest coverage above 12.0x.
WHR has solid liquidity with cash of $698 million as of Sept. 30, 2015, and no borrowings under its $2 billion long-term revolving credit facility maturing in September 2019 and its $500 million 364-day revolving credit facility maturing in September 2016. At the end of the third quarter of 2015 (3Q'15), WHR had $656 million outstanding under its commercial paper program (that is supported by its revolving credit facilities). A majority of the company's cash is held in foreign countries (approximately 90% of cash as of Dec. 31, 2014 was held overseas). WHR's intent is to permanently reinvest these funds outside the U.S. and the company's current plans do not demonstrate the need to repatriate these funds to support U.S. operations.
The company has significant long-term debt maturing over the next three years, with roughly $1.7 billion of senior notes coming due between 2016 and 2019, including $250 million of senior notes maturing in June 2016 and $244 million of senior notes coming due in July 2016. In addition, the company also had $656 million outstanding under its commercial paper program and $147 million of other short-term borrowings as of Sept. 30, 2015. WHR has demonstrated its ability to access the capital markets and refinance its debt maturities. In March 2015, WHR issued EUR500 million of 0.625% senior notes due 2020. In November 2014, WHR issued $300 million of 1.65% senior notes due 2017 and $350 million of 3.7% senior notes due 2025. Fitch expects the company may again access the capital markets to refinance some of these upcoming debt maturities.
STRONG FREE CASH FLOW
The company generated $502 million of free cash flow (FCF: cash flow from operations less capital expenditures and dividends; 2.4% of revenues) for the LTM ending Sept. 30, 2015 compared with $535 million (2.7%) during 2014, $497 million (2.6%) during 2013 and $65 million (0.4%) during 2012. The 2012 FCF was reduced by a $275 million final installment payment to settle a Brazilian collection dispute. Fitch expects WHR will generate between $300 million-$400 million of FCF during 2015 (including about $200 million of cash outlays for restructuring initiatives) and about 2.5%-3.5% of revenues during 2016 and 2017.
Management is focused on reducing the company's leverage to within its target level of 1.0x-1.5x based on debt to EBITDA. The company expects to accomplish this with a combination of debt reduction and EBITDA growth. The company also has a disciplined capital allocation strategy and will deploy capital to: fund the business (roughly 3.5% of revenues); manage debt and its pension obligations with a targeted capital structure of 1.0x-1.5x debt to EBITDA; return cash to shareholders and pursue M&A opportunities.
In April 2015, the company increased its quarterly dividend payment by 20%. The board also increased the company's quarterly dividend payments by 16% in April 2011, 25% in April 2013, and 20% in April 2014. During 2013, the company repurchased $350 million of stock, completing a $500 million share repurchase program authorized in 2008. (WHR did not repurchase stock during the 2009-2012 periods.) In April 2014, the board approved a new $500 million share repurchase authorization. WHR repurchased $25 million of stock during 2014 and $95 million through the first nine months of 2015. Fitch expects WHR will continue with moderate share repurchases, funded mainly with FCF. Fitch also expects management will remain disciplined in prioritizing the uses of its cash and cash flow.
The near-term operating outlook for global appliance demand remains relatively stable despite weak growth in some international markets. In the U.S., Fitch expects appliance demand will increase mid-single-digits during 2015 as the housing market continues its recovery. Internationally, Fitch expects appliance shipments will remain relatively stable in the EMEA region while demand will continue to be weak in Latin America (particularly Brazil) and Asia.
REGULATORY ISSUES AND OTHER CONTINGENT LIABILITIES
There are ongoing regulatory issues that could potentially negatively affect the company's financial profile. WHR's Brazilian operations have received governmental assessments from Brazil related to claims for income and social contribution taxes associated with the Brazilian government's export incentive program (BEFIEX) credits monetized by WHR from 2000 to 2002 and 2007 through 2011. The total outstanding tax assessment for income and social contribution taxes related to the BEFIEX credits, including interest and penalties, is approximately 1.5 billion Brazilian reais (equivalent to roughly $380 million as of Sept. 30, 2015). The company is disputing these tax matters in various courts and has not accrued any amounts relating to these assessments.
In 2001, Brazil adopted a law making the profits of controlled foreign corporations of Brazilian entities subject to income and social contribution tax regardless whether the profits were repatriated. WHR's Brazilian subsidiary, along with other corporations, challenged the constitutionality of the law but the Brazilian Supreme Court ruled on one of the cases in April 2013, finding that the law is constitutional. The case has been remanded to a lower court for consideration of other arguments raised in WHR's appeal. As of Sept. 30, 2015, the potential exposure for income and social contribution taxes is about 180 Brazilian reais or $45 million. The company is disputing this and has not accrued any amounts related to these assessments.
In September 2015, WHR recognized a liability related to a corrective action affecting certain heritage Indesit products. The company estimates pre-tax cost of the corrective action to be about EUR245 million (pre-tax) or roughly $274 million. Approximately 90% of the affected units were manufactured by Indesit prior to the acquisition by WHR in October 2014. The company intends to seek indemnity from the sellers, which could reduce WHR's net costs.
Individually, these issues are manageable but collectively, they have the potential to result in substantial cash outflows. In particular, the Brazilian tax disputes could increase meaningfully because of interest, penalties and/or changes in exchange rates.
Fitch's key assumptions within its rating case for the issuer include:
--Total U.S. industry housing starts improve 11.3%, while new and existing home sales grow 20% and 6.9%, respectively, in 2015. Further growth is expected during 2016, with total housing starts advancing 11.2%, new home sales increasing 18%, and existing home sales expanding 4% for the year;
--U.S. home improvement spending advances 4.5% during 2015 and 2016.
--Revenues grow high-single digits this year (driven mostly by acquisitions) and by low-single digits during 2016, driven by moderately stronger appliance shipments in the U.S. and relatively weak overall demand internationally;
--EBITDA margins of 10%-11% during 2015 and 2016;
--Debt/EBITDA at or slightly below 2.0x by year-end 2015 and settles between 1.5x-2.0x at the conclusion of 2016 while interest coverage sustains above 12.0x during the next few years;
--Whirlpool reports between $300 million-$400 million of FCF during 2015 (including about $200 million of cash outlays for restructuring initiatives) and about 2.5%-3.5% of revenues during 2016.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Debt reduction and/or EBITDA/funds from operations (FFO) growth, resulting in sustained improvement in credit metrics, including debt to EBITDA consistently situating within a range of 1.0x-1.5x and interest coverage sustaining above 10.0x and the company continues to maintain a healthy liquidity position.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--A sustained erosion of profits and cash flows either due to weak global demand, meaningful and continued loss of market share or as the result of long-term higher raw material costs, leading to EBITDA margins sustained below 8.5%, debt to EBITDA consistently above 2.5x and interest coverage below 5.5x;
--Whirlpool completes another sizeable acquisition before it fully integrates the Indesit and Hefei acquisitions and meaningfully increases its leverage from current levels;
--Whirlpool undertakes consequential shareholder friendly activities funded by debt, and/or there is a material judgment against the company related to existing regulatory proceedings, leading to leverage levels consistently above 2.5x and interest coverage falling below 5.5x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2';
--Senior unsecured notes at 'BBB';
--Bank revolving credit facility at 'BBB' (Whirlpool Corp., Whirlpool Europe B.V., Whirlpool Finance B.V. and Whirlpool Canada Holding Company as borrowers).
Fitch has also assigned a 'BBB' rating to Whirlpool Corp.'s 364-day revolving credit facility (Whirlpool Corp., Whirlpool Europe B.V., Whirlpool Finance B.V. and Whirlpool Canada Holding Company as borrowers).
Whirlpool Finance B.V.
--Short-term IDR at 'F2';
-- CP at 'F2'.
Whirlpool Europe B.V.
-- CP at 'F2'.
The Rating Outlook is Stable.
Fitch has also withdrawn its 'BBB' long-term IDR on Maytag Corporation. The notes issued under this borrower have been repaid.