NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Whirlpool Corporation (NYSE: WHR), including the company's Long-Term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable.
Fitch has also assigned a 'BBB' rating to WHR's potential offering of Euro-denominated 10-year senior unsecured notes. The notes being contemplated will be issued by Whirlpool Finance Luxembourg S.a.r.l. (a finance subsidiary that holds no material assets and does not engage in any business activities or operations other than intercompany group financing) and will be guaranteed by Whirlpool Corporation. The new offering will be equal in right of payment with all other senior unsecured debt. WHR intends to use the net proceeds from the sale of the notes for general corporate purposes, including the repayment of a portion of WHR's commercial paper borrowings.
A complete list of rating actions follows at the end of this press release.
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 volatile raw material costs. Risks include the company's recent 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, disciplined capital allocation strategy, and Fitch's expectation that credit metrics will remain relatively stable in the near to intermediate term.
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.
DISCIPLINED CAPITAL ALLOCATION STRATEGY
The company 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 about 1.5x debt to EBITDA; return cash to shareholders and pursue M&A opportunities.
The company's leverage has been above its target ratio due to the acquisitions completed during the latter part of 2014. Management expects to eventually reach its leverage target of approximately 1.5x with EBITDA growth and some debt reduction.
The company kept its dividend throughout the recent recession, paying out $128 million in 2008, $128 million in 2009 and $132 million in 2010. The board increased the company's quarterly dividend payments by 16% in April 2011, 25% in April 2013, 20% in April 2014, 20% in April 2015 and an additional 11% in April 2016. Management expects to pay out 25% to 30% of trailing-12- months earnings in dividends. The 2016 payout represents about 31.5% of WHR's ongoing business EPS (excluding restructuring and other non-recurring items) during 2015.
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, $250 million during 2015 and $225 million during 1Q16. In April 2016, the board authorized a new share repurchase plan of up to $1 billion. WHR repurchased $100 million of stock under this plan during 2Q16 and an additional $100 million during 3Q16. 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.
GROWTH STRATEGY
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 acquisition of Indesit has good strategic rationale for WHR as it provides the company with a broader platform to expand its European operations. Prior to the acquisition, about 16% of WHR's revenues were generated from this region. Through the first nine months of 2016, sales from Europe, Middle East and Africa represented about 25.1% of WHR's worldwide sales. WHR also continues to realize synergies from the acquisition. EBIT margins in this region increased 120 bps to 3.7% during the Sept. 30, 2016 year-to-date period compared with the same period last year. Management's goal is to achieve 7%-8% ongoing EBIT margin by 2018.
Similarly, the acquisition of a majority stake in Hefei gave WHR access to a large established distribution network, manufacturing scale, access to the China supply base as well as an experienced management team. Hefei has an established and broad distribution network that includes more than 30,000 outlets throughout China. Hefei's significant presence in rural areas complements WHR's presence in China's higher-tier cities.
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.
STABLE CREDIT METRICS
WHR's credit metrics are appropriate for the rating. Debt to EBITDA for the latest-12-month (LTM) period ending June 30, 2016 was 2.3x, up from 1.9x at the end of 2015 and flat from the year-ago period. Interest coverage remains strong at 12.5x for the June 30, 2016 LTM period compared with 12.1x during calendar 2015. Fitch expects debt to EBITDA will be at around 2.1x at the end of 2016 while interest coverage remains above 12.5x.
STRONG FREE CASH FLOW GENERATION
The company generated $250 million of free cash flow (1.2% of revenues) for the LTM period ending Sept. 30, 2016 compared with $267 million (1.3%) during 2015, $535 million (2.7%) during 2014, $497 million (2.6%) during 2013 and $65 million (0.7%) during 2012. Fitch expects WHR will generate between $350 million and $400 million of FCF during 2016 (including about $300 million of cash outlays for acquisition-related restructuring initiatives and warranty and liability costs) and about 2% to 3% of revenues during 2017.
SOLID LIQUIDITY POSITION
WHR has solid liquidity with cash of $1.025 billion as of Sept. 30, 2016, and about $1.6 billion of availability under its commercial paper programs that is backstopped by the company's $2.5 billion long-term revolving credit facility maturing in 2021 and Euro 250 European facility maturing in 2019. A majority of the company's cash is held in foreign countries (approximately 94% of cash as of Dec. 31, 2015 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.
DEBT MATURITIES
The company has significant short-term debt ($1.4 billion of CP and bank borrowings as of Sept. 30, 2016) and $1.2 billion of long-term debt maturing between 2017 and 2019. The potential notes issuance, together with FCF expected to be generated during 4Q'16, will be used to pay down CP borrowings. WHR has demonstrated its ability to access the capital markets and refinance its debt maturities and Fitch expects the company will refinance some of these debt maturities as they become due.
REGULATORY ISSUES AND OTHER CONTINGENT LIABILITIES
There are ongoing regulatory issues in Brazil that could potentially negatively affect the company's financial profile. 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.
--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 1.6 billion Brazilian reais (equivalent to roughly $508 million as of Sept. 30, 2016).
--The Brazilian tax authority has challenged WHR's recording of certain IPI tax credits (credits for purchase of raw materials in Brazil for production) in 2003 and 2004. WHR elected to settle certain of these tax credits but the Brazilian revenue authority notified the company that certain of these settlements were rejected and WHR received tax assessments of 229 million Brazilian reais (about $71 million).
--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, 2016, the potential exposure for income and social contribution taxes is about 159 Brazilian reais or $49 million.
The company is disputing these issues and has not accrued any amounts related to these assessments.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Total U.S. industry housing starts improve 8.8%, while new and existing home sales grow 14.6% and 3%, respectively, in 2016. Fitch expects the housing upcycle to continue in 2017, with total housing starts forecast to improve 8.3% and new and existing home sales increase 11.5% and 4%, respectively;
--U.S. home improvement spending advances 4.5% during 2016 and 4% during 2017;
--Revenues fall low-single digits this during 2016 and increase low-single digits in 2017;
--EBITDA margins of 10.5%-11% during 2016 and 2017;
--Debt/EBITDA settles around 2.1x at the conclusion of 2016 and below 2.0x at year-end 2017;
--Interest coverage sustains above 12.5x during the next few years;
--WHR reports FCF of $350 million - $400 million during 2016 (including about $300 million of cash outlays for acquisition-related restructuring initiatives and warranty and liability costs) and generates FCF margin of 2%-3% in 2017.
RATING SENSITIVITIES
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 inflation in 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:
Whirlpool Corporation
--Long-Term IDR at 'BBB';
--Short-Term IDR at 'F2';
--Commercial Paper Rating at 'F2';
--Senior unsecured notes at 'BBB';
--Multi-year bank revolving credit facility at 'BBB'.
Whirlpool Finance B.V.
--Short-Term IDR at 'F2';
--Commercial Paper Rating at 'F2'.
Whirlpool Europe B.V.
--Commercial Paper Rating at 'F2'.
Fitch has also assigned a 'BBB' rating to WHR's potential offering of Euro-denominated 10-year senior unsecured notes.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and also restructuring and acquisition charges.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013875
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013875
Endorsement Policy
https://www.fitchratings.com/regulatory
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