Whirlpool Slips, Lowers Outlook

Oct.31.11 | About: Whirlpool Corporation (WHR)

Whirlpool Corporation (NYSE:WHR) reported net earnings of $177 million or $2.27 per share in the third quarter of 2011, compared with $79 million or $1.02 per share in the prior-year quarter.

However, the company incurred charges of 8 cents per share related to the recent developments in the ongoing Embraco antitrust matters versus similar charges of $1.20 per share in the year-ago quarter.

Excluding these items, the company’s adjusted income in the quarter amounted to $2.35 per share compared with $2.22 per share a year ago. Adjusted income per share was substantially lower than the Zacks Consensus Estimate of $2.68 per share. Adjusted operating profit was $136 million versus $234 million a year ago.

Revenues in the quarter rose 2.3% year over year to $4.63 billion. However, it was lower than the Zacks Consensus Estimate of $4.69 billion.

The company’s results were negatively impacted by an overall weak industry demand (in the mature markets as well as in the emerging markets), higher raw material costs and elevated fuel costs, partly offset by higher price instituted by the company for some products.

Performance by Region

Revenues in the North American region decreased 2% year over year to $2.40 billion owing to a 3% decline in unit shipments in the North American industry. In addition, unit shipments of major appliances dipped 4% in the U.S. during the quarter. The company expects U.S. industry unit shipments to decrease between 3% and 5% for 2011.

Operating profit fell significantly to $62 million in the reported quarter from $114 million in the prior-year quarter. Results were favorably impacted by product price increases and improved product mix, which were more than offset by lower industry volume and higher material costs.

Revenues in the Europe, Middle East and Africa region improved 6% year over year to $874 million, despite unit shipments remaining flat on a year-over-year basis. The region borne an operating loss of $12 million compared with a year ago operating profit of $26 million, which was attributable to unfavorable product price/mix, higher material costs and lower production levels. This was partially offset by cost reduction and productivity enhancing initiatives. The company currently expects unit shipments to remain flat for the region for 2011.

Revenues from the Latin American region climbed 8% year over year to $1.20 billion, despite a 5% deterioration in unit shipments for the region. Operating profit increased marginally to $147 million from $143 million in the prior-year quarter, based on increased monetization of certain tax credits and product/price mix as well as cost reduction and productivity initiatives. These were partially offset by higher material costs and lower industry demand. The company continues to anticipate appliance industry shipments to increase in the range of 0%–5% for full-year 2011.

Revenues from the Asian region increased 10% year over year to $215 million. The improvement was primarily attributable to higher industry demand from the region, resulting in a 4% increase in unit shipments to Asia. Operating profit fell to $4 million from $5 million in the year-ago quarter due to unfavorable product price/mix and higher material costs, partly offset by higher unit volumes and efficiency initiatives during the quarter. The company currently anticipates industry unit shipments in Asia to increase approximately 2% to 4% for fiscal 2011.

Financial Position

Whirlpool had cash and cash equivalents of $511.0 million as of September 30, 2011, compared with $1.37 billion as of December 31, 2010. Long-term debt declined slightly to $2.13 billion as of September 30, 2011 from $2.20 billion as of December 31, 2010. However, inventories increased to $2.86 billion at the end of the third quarter of 2011 from $2.79 billion at the end of the fourth quarter of 2010.

In the first nine months of the year, the company had cash outflow of $342 million from operating activities compared with an inflow of $377 million in the year-ago period, primarily due to lower earnings, higher accrued pension and higher taxes deferred and payable. Meanwhile, capital expenditures increased to $417 million in the first three quarters from $387 million incurred in the year-ago period.

Earnings and Cash Flow Guidance

Whirlpool expects industry demand to remain low in the near term and thus reduced its earnings per share projections to $4.75–$5.25 from its previous estimate of $7.25–$8.25 for 2011. In addition, the company expects to generate negative free cash flow between $150 million and $200 million compared with its previous estimate of $160 million and $260 million for the same period.

The company also expects to generate cash flow from operating activities in the range of $400 million–$430 million for 2011. Capital expenditure for the full year is estimated between $600 million and $625 million.

Our Take

Whirlpool is considered to be the largest home-appliances manufacturer in the world, ahead of Electrolux AB (OTC:ELUXF), LG (LG), Samsung and General Electric Co. (NYSE:GE). The company holds #1 rank in North America and Latin America, and is also placed among the leading home appliances makers in India and Europe.

However, rising material costs have forced Whirlpool to raise the prices of its products. This may lead to a decline in demand for its products, leading to a loss of market share to some of its major competitors like LG and Samsung.

Furthermore, Whirlpool’s customer concentration is high. The company’s large trade customers include Sears Holdings Corporation (NASDAQ:SHLD), Lowe’s Companies Inc. (NYSE:LOW), The Home Depot, Inc. (NYSE:HD), Casas Bahia, Best Buy Co. Inc. (NYSE:BBY) and Ikea, who have significant leverage as buyers. This makes the company all the more vulnerable to risk.

The shares of Whirlpool are currently maintaining a Zacks#4 Rank that translates into a Sell rating over the short term.