WHR

Whirlpool Corp. 10-Q Summary: Quarter Ended September 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on that date. Whirlpool Corporation is a global manufacturer of home appliances. The company operates in four primary geographic segments: North America, Europe, Latin America, and Asia. The financial statements are unaudited and prepared in accordance with U.S. GAAP for interim reporting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 13% for the quarter and 9% year-to-date compared to 2002. Unit sales volume increased 8% for the quarter and 6% year-to-date.
• Profitability Improvement: Net earnings for the nine months ended September 30, 2003, were $290 million, a significant turnaround from a net loss of $364 million in the same period in 2002. The 2002 loss included a $613 million non-cash charge for the cumulative effect of a change in accounting principle (SFAS No. 142 goodwill impairment).
• Regional Performance:
  • North America: Sales up 12% (quarter) and 8% (YTD) driven by strong consumer demand and the home building market.
  • Europe: Sales up 19% (quarter) and 20% (YTD), largely due to favorable Euro-U.S. dollar translation and the Polar acquisition.
  • Latin America: Sales up 7% (quarter) but flat YTD; unit volumes declined due to unfavorable macroeconomic conditions.
  • Asia: Sales up 5% (quarter) and 6% (YTD) driven by growth in India and China.
• Cost Structure: Gross margins were slightly down due to increased pension/healthcare costs and competitive pricing pressures, partially offset by productivity gains.

Outlook, Risks, and Unusual Items

• Guidance: Management expects full-year 2003 appliance industry shipments to increase 2-3% in North America and Europe, decrease 12-14% in Latin America, and increase 5% in Asia.
• Unusual Items:
  • Retiree Healthcare: A one-time gain of $13.5 million (net of tax) was recorded in June 2003 related to a modification of U.S. retiree healthcare plans.
  • Product Recall: A pre-tax charge of $16 million was recorded in Q2 2003 for final costs related to a 2001 microwave hood recall.
  • Acquisitions/Sales: The company sold its interest in Wellmann (German kitchen cabinets) to Alno and acquired the remaining 5% of Polar S.A. (Poland).
• Risks and Contingencies:
  • Guarantees: The company guarantees bills of exchange for Wellmann ($18 million outstanding) and customer lines of credit in Brazil ($70 million outstanding).
  • Market Risks: Exposure to currency exchange rate fluctuations, competitive pricing pressures, and economic volatility in developing markets.
  • Legal: Various legal actions are ongoing, though management does not expect a material adverse effect.
• Liquidity: The company maintains $1.2 billion in committed credit facilities ($800m five-year and $400m 364-day) with no borrowings under these lines as of September 30, 2003. Debt ratings remain investment grade.

Investor Verification Checklist

• Excluding Accounting Changes: Verify the comparison of 2003 earnings against 2002 by excluding the $613 million goodwill impairment charge in 2002 to assess true operational performance.
• Latin America Exposure: Review the impact of the 13% unit volume decline in Latin America on future cash flows given the region's macroeconomic volatility.
• Pension Obligations: Note the $164 million voluntary pension contribution made in Q3 2003 and its impact on future expense projections.
• Guarantees: Confirm the status of the $18 million Wellmann guarantees and $70 million Brazilian subsidiary guarantees, as these represent off-balance-sheet liabilities.
• Stock Repurchases: Verify the October 2003 subsequent event where the company repurchased 976,300 shares for $65.7 million from its pension plan.