WHIRLPOOL CORP quarterly report, Q3 FY2011

Whirlpool Corporation — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Whirlpool operates through North America, Latin America, Europe/Middle East/Africa, and Asia segments and manufactures major home appliances.

Financial performance and position

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Net sales	$4,625 million	$4,519 million	$13,755 million	$13,325 million
Gross margin	$573 million; 12.4%	$648 million; 14.3%	$1,864 million; 13.5%	$2,048 million; 15.4%
Operating profit	$136 million	$234 million	$586 million	$806 million
Net earnings available to Whirlpool	$177 million	$79 million	$185 million	$448 million
Diluted EPS	$2.27	$1.02	$2.37	$5.79
Cash provided by operating activities	Not separately provided	Not separately provided	$(342) million	$377 million

Q3 sales increased 2.3%, while nine-month sales increased 3.2%. Growth reflected favorable foreign currency and product price/mix in the quarter; nine-month growth also reflected higher unit sales and increased BEFIEX tax credits. Consolidated units sold declined 2.3% in Q3 but increased 0.5% for the first nine months.

Gross margin declined 190 basis points in both reported periods, primarily from higher raw-material and oil-related costs, with unfavorable product mix also affecting the nine-month period. Operating profit fell 42% in Q3 and 27% for the nine months. Selling, general and administrative expense was $394 million in Q3 and $1,199 million year to date, broadly stable as a percentage of sales.

The nine-month net loss before income taxes and other items was $157 million, compared with earnings of $454 million in 2010. Results included significant legal and settlement items, partly offset by tax benefits. The effective tax benefit was $123 million in Q3 and $353 million year to date, including U.S. energy tax credits and Brazilian BEFIEX incentives.

Cash and equivalents were $511 million at September 30, 2011, down from $1,368 million at December 31, 2010.
Total debt, including current maturities and notes payable, was approximately $2.51 billion; long-term debt including current maturities had a reported fair value of $2.676 billion.
Working capital was approximately $217 million, based on current assets of $6.460 billion and current liabilities of $6.243 billion.
Nine-month capital expenditures were $417 million versus $387 million in 2010.
Cash used in investing activities was $408 million; cash used in financing activities was $104 million.
The quarterly dividend increased to $0.50 per share from $0.43 per share.
Whirlpool had $5 million outstanding under its amended $1.725 billion revolving credit facility and no commercial paper borrowings. It was in compliance with its financial covenants.

Material changes versus the prior comparable period

Sales rose, but profitability weakened because of cost inflation and product mix. Q3 operating margin declined to approximately 2.9% from 5.2%; nine-month operating margin declined to approximately 4.3% from 6.1%.
Q3 net earnings available to Whirlpool more than doubled, primarily because 2010 included substantial legal charges that did not recur. The nine-month result fell sharply because 2011 included the Brazilian collection dispute settlement and Embraco antitrust-related costs.
Operating cash flow shifted from $377 million provided in the first nine months of 2010 to $342 million used in 2011. The change reflected the $301 million Brazilian settlement payment, $266 million of U.S. pension funding, lower operating profit, and tax-related cash uses.
Whirlpool issued $300 million of 4.85% notes due 2021 and used the proceeds to repay maturing 6.125% notes. The revolving credit facility was extended to June 2016 and increased from $1.35 billion to $1.725 billion.
Cash declined substantially, while inventories increased to $2.864 billion from $2.792 billion at year-end 2010.
Other comprehensive income available to Whirlpool was $88 million for the first nine months, compared with $372 million in 2010, reflecting currency translation and hedge losses.

Guidance, outlook, risks, contingencies, and unusual items

Management’s September 30 outlook for 2011 was diluted EPS of $4.75 to $5.25 and free cash flow of negative $150 million to negative $200 million. The outlook assumed operating cash flow of approximately $400 million to $430 million, capital expenditures of $600 million to $625 million, and asset-sale proceeds of $20 million to $25 million. Industry demand expectations were negative 3% to negative 5% in North America, flat to up 5% in Latin America, flat in EMEA, and up 2% to 4% in Asia.

The outlook included estimated BEFIEX benefits of $250 million to $300 million, approximately $350 million of energy tax credits, and raw-material inflation of $450 million to $500 million. Management cited weakening global demand, lower production, unfavorable country and product mix, elevated input costs, and macroeconomic volatility as principal pressures.

Restructuring: Plans announced October 27, 2011 are expected to generate approximately $500 million of charges through 2013, including $320 million of employee termination costs, $80 million of facility exit costs, $70 million of asset-related costs, and $30 million of other costs. Approximately $430 million is expected to require cash expenditures. More than 5,000 positions are expected to be eliminated, including approximately 1,200 salaried positions. The Fort Smith, Arkansas refrigeration facility is expected to close by mid-2012, and dishwasher production is expected to move from Germany to Poland.
Brazilian collection dispute: A total settlement of 959 million Brazilian reais was agreed. Whirlpool paid $301 million in July 2011 and had approximately $264 million accrued for payment in the first quarter of 2012.
Embraco antitrust matters: Aggregate charges were approximately $314 million through September 30, 2011, with $209 million accrued. Additional costs cannot be reasonably estimated and could materially affect liquidity, financial position, or results.
Tax credits: $207 million of BEFIEX credits were monetized during the first nine months, with approximately $383 million remaining. Future Brazilian government action could limit monetization.
Product recall: The estimated cost of the dishwasher recall was reduced from $75 million to $66 million. A supplier agreed to reimburse $61 million of refrigerator recall costs in the December 2011 quarter.
Liquidity demands: Near-term uses included the remaining Brazilian settlement, approximately $350 million of debt maturities over the following eight months, U.S. pension funding, and legal contingencies.
Other risks: Key risks include appliance-industry competition, weak housing and consumer demand, commodity and oil-price inflation, foreign-currency volatility, labor and supply-chain disruptions, recalls and product liability, pension obligations, litigation, regulatory changes, cybersecurity, and potential goodwill or intangible-asset impairment. No impairment was identified at September 30, 2011.

Important facts for investors to verify

Whether the projected $500 million restructuring program and more than 5,000-position reduction deliver the expected savings and margin improvement.
The timing and funding of the approximately $264 million remaining Brazilian collection-dispute payment and other near-term debt maturities.
The ultimate cost and legal exposure from Embraco antitrust investigations and related lawsuits beyond the $209 million accrued.
Whether BEFIEX and energy tax credits recur at the levels embedded in 2011 guidance.
Whether commodity inflation, weak demand, and lower production continue to pressure gross margins and operating cash flow.
Progress toward the stated negative $150 million to negative $200 million free-cash-flow outlook and maintenance of credit-facility covenant compliance.
The recoverability of goodwill, indefinite-lived trademarks, deferred tax assets, pension assets, and other balance-sheet items under changing market conditions.