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Whirlpool Corp - All Washed Up?



January 03, 2012 – Comments (0) | RELATED TICKERS: WHR

Board: Value Hounds

Author: LeKitKat

That sucking sound you hear is Whirlpool circling the drain at nearly 52-week lows. The share price has been spiraling down since July when management cut guidance and could not offer any opinions on 2012. The Sears implosion took WHR further down. Sears does carry Whirlpool appliances. Closing 120 stores and same store sales that continue double-digit declines will have an effect. Whirlpool does not quantify vendor results individually. There is no comment on Sears yet—expect that in 2012.

Why bother with Whirlpool? There are easier ways to make 4.2% in dividends. The interesting thing about Whirlpool is the unusual growth stock momentum potential combined with a good dividend yield at current prices. In the past decade, it has not failed to reach new peaks after all sensational troughs. Investors can be won over when the company recovers. I don’t expect anything as spectacular as the February 2009 $22 trough climb to the $108 peak in April 2010[a five-fold increase in just 15 months]. I would expect them to sell for more than the current forward PE of 10 and price/BV of 0.85.

Granted there are intangibles [holdover from Maytag acquisition 2006] and the price/tangible BV is 5 and not quite as impressive. However, those intangibles from the acquisition were not a drag immediately post-acquisition on invested capital and I tend to view them as neutral [they are at 8-year lows in 2010— more later—there is a reversible reason]

Déjà vu all over again.

Back in 2008 I looked at them pretty closely as they crashed along with the rest of the market to $31 from $75. It had further to go in 2009 and ended up at $20.

In the last decade Whirlpool has become a lot more volatile with price swings of 30% to 50% cycling over periods of 2-3 years. Prior to that, it tended to plateau for years at a time.

I used to think of WHR as a rather stodgy slow growing dividend payer, when in fact it could behave as badly as any growth story that falls precipitously on disappointing earnings and guidance.

In the fall of 2008 Whirlpool had seen 9 quarters of decreasing demand for large appliances as consumers quit buying and replacing major appliances and kept what they had and fixed their washers and refrigerators. The sales slowdown has not been as severe or as long as 2008 with Q3 2011 seeing the worst unit sales declines.

The outcome is the same—massive restructuring and contraction of the business; negative free cash flow; huge restructuring costs and cash burn.

My notes from the Whirlpool time capsule

From 2008:

In response to slowing demand for appliances, Whirlpool is restructuring and raising prices. Prices are being increased to help offset the high cost of commodities and other inflation.

During the quarter they recorded $24 million of restructuring charges related to previously announced restructuring initiatives, bringing the year-to-date total to $72 million. The additional restructuring charges lowered operating earnings by $11 million during the third quarter when compared to the prior year third quarter

Free cash flow was a negative $167 million, compared with $105 million of positive free cash flow sequentially. Here is the effect of cash tied up in working capital when earnings are down.

Through nine months free cash flow was a negative $349 million, compared a negative $83 million in 2007. Cash flow was down due to lower earnings, higher capex as the company accelerated cost reduction initiatives, and higher absolute levels of working capital. They say they will continue to tightly manage capex through the remainder of the year and expect full-year capital spending to be in the range of $535 million to $550 million

High commodities were killing margins in 2008 and guidance was revised down and no forward guidance was given—just like in Q3 2011.

From 2008:

Guidance 2008

Weaker demand, continued high material prices, significant currency movements, and additional restructuring plans caused guidance to be lowered from the previous $7 to $7.50, down to $5.75 to $6 per share for 2008

Cash flow is projected at $500 million to $550 million – TTM CFFO is $793. Whirlpool had -$41 million cash from ops in the third quarter

There is no guidance for 2009 until February

Pension plans are frozen. They are under-funded as of 2008—about $500 million. They are 90% funded. WHR put $85 million in cash in for 2008.

Doing the time warp again and coming back to 2011:

Jeff M. Fettig - Chairman and CEO:

Thanks, Larry. Good morning, everyone, and thank you for joining us on our call today. As you saw in our press release this morning, we reported an increase in revenue and earnings in the third quarter compared to last year. However, these results were lower than we expected as our price increases and productivity improvements were more than offset by the impact of weakness which we saw in global demand and high material cost.

Demand has also fallen off sharply in parts of Europe and has slowed in emerging markets. So, given this economic environment, we’ve taken significant actions to substantially reduce our cost and capacity that will improve our operating margins and profitability.

Overall, given the weaker than expected economic environment, we’re seeing, we are lowering our full year earnings guidance. Earnings per share are going from $7.25 to $8.25 per share to $4.75 a share to $5.25, and free cash flow guidance was $160 million to $260 million positive is now $150 million to $200 million negative. We will not be providing any 2012 forecast today, but as we normally do, we will provide annual guidance when we report our year-end results in early February.

The 2011 situation is worse than 2008. Not only is demand falling, but also cash flow from operations will likely be negative for 2011 due to several massive uses of cash and may run over in to 2012 as the expenses continue.

I went back 15 years and could not find a year when cash flow from operations was negative--2011 has the distinction of possibly being the first. A lot of things have gone wrong for them in 2011.

If the only concern was a weaker than expected 2011, Whirlpool at $47 might be a deal. The dividend yield is 4.2% and they are now paying $2 per share having increased the payment in the second quarter of 2011.

Free cash flow in 2011 will be in the range of negative $150-$200 million.

What went wrong?

• Slowing demand and revenue growth
• A $615 million legal settlement form Brazil 2003 due in two installments
• Restructuring
• Pension contribution increase
• Contracting gross margins from high commodity prices

Growth 9 months 2011

revenue 3.2%
gross -8.9%
operating -27.2%
net -58.7%

Nine-month revenue growth slowed to 3.2% in 2011 from 7.4% in 2010. During the first nine months of 2009, commodity costs were rising fast and margins contracted. Gross declined 9% as copper, steel, base metals, resin and oil climbed.

Operating income continues to be negatively impacted by ongoing [seemingly forever] restructuring.

Net income for the nine months was hit hardest as Whirlpool paid $300 million for a legal settlement in Brazil.

On the cash flow statement, accrued pension contribution consumed $248 million. Cash flow from operations was a negative $342 million and free cash flow will be ($150)-($200) million for the year.

The dividend yield is now 4.2% and $2.00 per share. It took them 8 years to increase the dividend from $1.72 up to $2.00—not impressively shareholder friendly. The payout ratio has been low.

Cash flow and free cash flow

[See post for tables]

Along with the negative CFFO comes significant cash burn for all three quarters of 2011. The negative free cash flow and the decreasing cash levels make the dividend look a little tenuous. The company has never failed to pay and it was just raised in Q2 2011. To retract it now or cut it would pull the rug out from under the share price and shake shareholder confidence. It will be difficult for them to pay it. It’s $38 million per quarter now.

The other calls on cash flow are not going to abate either -— pension contributions, the second payment for litigation settlement, capex and debt repayment will all be there to be paid in 2012. The worst quarter is likely to be Q1 2012 when the $314 million is due for litigation.

They are not giving any guidance for 2012. That will come in February.

Overall, given the weaker than expected economic environment, we’re seeing, we are lowering our full year earnings guidance. Earnings per share are going from $7.25 to $8.25 per share to $4.75 a share to $5.25, and free cash flow guidance was $160 million to $260 million positive is now $150 million to $200 million negative. We will not be providing any 2012 forecast today, but as we normally do, we will provide annual guidance when we report our year-end results in early February.

The miss was enormous and the stock price decline is hardly surprising. Not only are earnings disappointing, but also CFFO will continue to run in the red and we have to wonder if WHR can continue to pay the dividend. If they do pay out, cash will continue to disappear in Q4 2011.

There is no guidance for 2012. If growth returns and margins expand, the company may be able to meet its substantial obligations including approximately $152 million in dividends for the year. I would not count on positive free cash flow for 2012 and am not ruling out the need to raise some through issuance of debt.

A reasonably sharp analyst from Goldman Sachs made the following point concerning 2012 cash flow:

Q: Josh Pollard - Goldman Sachs:

I’d love to discuss with you guys how you get to that 8% plus maybe after the call if you guys have some time.

My second question is around cash flow for 2012. I’m just going through a couple of line items between the Brazilian cash settlement [legal], the pension contribution that you mentioned a few minutes ago, the cash restructuring that you guys outlined, and then the make-up of your CapEx of roughly maybe being flat next year.

I get cash obligation just from those four buckets of about $1.4 billion next year. I’m wondering and I’m trying to understand how you guys get to the cash flow positive next year when you add that and also consider all that you have due in 2012.

It was not denied by the CFO:

A: Roy Templin - EVP and CFO:

Josh, it’s Roy. First of all, I don’t think you are lost in terms of assumptions you’re making with respect to the payments for next year.

Again, I mentioned to Michael what pension funding will be, you’re exactly right, we do have a softer payment and we have some significant outflows next year, but what we haven’t talked about yet and unfortunately what we can’t talk about on this call because we’re quite frankly just not prepared as all the other components of operating cash flow in particular the delta and cash earnings when you look year-over-year to next year et cetera what we’re going to do with working capital and when you see that side, then I think the story will come together better for you but in terms of have you identified some big cash outflows next year that we are in fact seeing as headwinds in cash flow, yes you have.

Not excellent English from the CFO, but the gist is the cash outflows will be over $1 billion just for litigation, pension and restructuring. That does not include the dividend and looming debt maturity. Without some remarkable working capital management and a lot more net income, finances could be very tight next year.

Details of some of the cash uses


Restructuring charges are often one-time events in response to a massive reorganization. Not so with Whirlpool.

When have they not been restructuring? I ran out of 10Ks at 10K Wizard at 1994. The charges in 1994 were $250 million. Restructuring will never come to an end. During times of crisis –-- 2008--- they go up. For 2011 and 2012, restructuring is going to be a big expense.

Since they are likely to be forever restructuring, it will have to be viewed as an ongoing operating expense that is always going to decrease operating income. To their credit I have not seen Whirlpool ask us to adjust it out of earnings pretending this will be a short duration event.

The upcoming charges

[See post for tables]

These are not after tax as the company is realizing tax benefits since 2008 making it difficult to apply a tax rate to the restructuring. The amounts per share are substantial The best that can be said that after 2013, earnings should benefit as the expense declines.

Restructuring moves for 2011-2013

Whirlpool will continue its comprehensive worldwide effort to optimize regional manufacturing facilities, supply base, product platforms and technology resources. These restructuring costs will increase substantially in 2012-2013.

On October 27, 2011, Whirlpool revealed the $500 million expenditure planned for the next two years.

• $320 million employee related termination costs
• $80 million of facility exit costs
• $70 million of asset related costs
• $30 million for contract termination

These costs are expected to be incurred between the fourth quarter of 2011 through 2013. They expect approximately $430 million of these costs will result in future cash expenditures.

The cost in 2011 is $105 million-- $80 million for new initiatives and about $25 million for things that were already underway. In 2012 and 2013 the expense is $280 million and $115 million respectively and is all inclusive

Plans include a workforce reduction of more than 5,000 positions primarily in North America and Europe, Middle East and Africa.

These plans include:

• Reduction of approximately 1,200 salaried positions.

• Closure of the refrigeration manufacturing facility in Fort Smith, Arkansas by mid-2012. Production from Fort Smith will be consolidated into current North American sites to leverage existing resources and capacity.

• Relocation of dishwasher production from Neunkirchen, Germany to Poland in January 2012.

• Additional organizational efficiency actions in North America and Europe.


Whirlpool is in the midst of paying off three legal settlements. Most of it will be paid off in 2015. The first two do not amount to a lot. The third hit June 2011 fairly hard producing a net earnings loss. The next and last installment due the first quarter of 2012 should have a nearly identical effect.

1) In September 2009, the Brazilian competition commission agreed to terminate the administrative investigation of the compressor business. Under the terms of the settlement agreement, Whirlpool will pay 100 million Brazilian reais to a Brazilian government fund. The contributions translated to approximately $56 million, all of which was recorded within interest and sundry income (expense) in 2009. The payments are to be made in twelve semiannual installments of approximately 8 million Brazilian reais through 2015. As of September 30, 2011, approximately $21 million had been paid

2) In September 2010 a plea agreement was reached again for antitrust matters for compressors. The fine was $91.8 million paid to the United States government. The full amount of the fine was recorded within interest and sundry income (expense) in the third quarter of 2010. Embraco made the first payment of $16.8 million in January 2011. The five remaining annual payments of $15.0 million plus interest will be made during each fourth quarter through 2015.

3) the biggest settlement stems from a 2003 dispute of a loan made in Brazil. The settlement requires payment to Banco Safra S.A. of 959 million Brazilian reais in two installments. The first was $301 million paid July 14, 2011. The second is 490 million reais will be paid first quarter of 2012. These are paid from cash. The final amount in US$ will be determined at time of payment. Estimates are over $300 million now.

Pension contributions

Pension contributions are rising.

Contributions are estimated at $300 million for 2011 and will decline to $250 million in 2012. Contributions during 2010, 2009 and 2008 were $65 million, $40 million and $70 million, respectively.


While not counted against cash flow, debt may become a threat to dividends if the company cannot either repay it or refinance it. I would expect them to use remaining $1.35 billion credit facility to get them through the next year or two.

The following is an excerpt from Moody’s opinion of WHR. Because we are looking at WHR from both an equity investment and a creditor [who wants to be paid a dividend] this is useful information.

Moody's Investors Service revised Whirlpool's Corporations outlook to stable from positive due to weakening demand trends throughout the world. The Baa3 senior unsecured rating and Prime-3 commercial paper rating are affirmed.

"Whirlpool is likely to face additional operating performance challenges in the near to mid-term as purchases for appliances, other than for replacement purchases, remain uncertain" said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service. Moody's is also concerned about the retrenchment in demand seen in Latin America in the third quarter.

Because of Moody's expectation of diminished cash flow and profitability in the near to mid-term, the ratings are unlikely to be upgraded in the next 12--18 months. "We think demand contraction in the US and in Europe could accelerate if macro economic factors such as consumer confidence continue to deteriorate and the macro economy remains uncertain," Cassidy added. "But, similar to what happened in early 2010 and 2011, we believe demand will improve once the macro economy gets better." Moody's thinks the restructuring actions Whirlpool announced last week should enable it to improve operating margins and cash flow in 2012 and beyond and give it credit metrics that are commensurate with a Baa3 rating.


Whirlpool's Baa3 rating reflects its significant scale with revenue approaching $19 billion, considerable geographic diversification throughout the world, a very strong brand name and good liquidity profile. The rating also reflects good credit metrics, excluding the one-time Brazilian payment dispute charge, with retained cash flow to net debt around 20% and debt/EBITDA about 3.5 times. Because of overall demand contraction and high raw material costs, Moody's thinks credit metrics will likely remain at about the same levels over the next 12-18 months. The ratings are constrained by the risks associated with high raw material costs and the impact this has on profitability and cash flow. The continued uncertainty in discretionary consumer spending for low and mid-tier consumers is also a risk, as is the fragility of the global macro economy. Softening demand trends in Brazil also pose a risk.

If Whirlpool can improve its profitability and credit metrics to pre-recession levels or better on a sustained basis in the face of less demand, high raw material prices and concerns over the global macro-economy, its rating could be upgraded. Specifically, an upgrade would require debt/EBITDA approaching 2.5 times, EBITA margins close to 7%, and retained cash flow to net debt sustained at 30% or higher (all metrics incorporating Moody's standard accounting adjustments).

Ratings could be downgraded if North America, European or Latin America appliance demand materially decreases or Whirlpool is not able to reconfigure its cost structure to match lower demand levels or operating performance otherwise weakens. Key credit metrics that could drive a downgrade would be debt/EBITDA sustained above 4 times, EBITA margins approaching 3%, retained cash flow to net debt sustained below 20% or sustained negative free cash flow. A rapid deterioration in liquidity or adoption of a more aggressive financial policy could also trigger a downgrade.

The stable outlook reflects Moody's belief that Whirlpool will continue to realign its cost structure to match anticipated demand levels. Moody's also expects Whirlpool to continue to increase prices as needed to offset high raw material costs, maintain a strong liquidity profile, and maintain credit metrics appropriate for its Baa3 rating.
The following ratings were affirmed:

• Senior Unsecured at Baa3;

• Senior Unsecured (Shelf) at (P) Baa3;

• Senior Subordinated (Shelf) at (P) Ba1;

• Commercial Paper at Prime-3

Takeaways are that current prospects are not great and the downgrade from positive to stable reflects that. Circumstances are not so dire that Moody’s expects any long-term weakness and risks of default or bankruptcy.

WHR should be able to roll into more debt to pay maturing loans. The rates will be high with ratings one step above junk—7%-8%?

The credit facility has $1.3 billion available.

The situation could take as long as 18 months to improve.
Cash flow has been compromised and while debt may be manageable, the dividend could be sacrificed if necessary. The blowback would be substantial as the floor is removed from the stock price. WHR may not want to incur this particular wrath from investors and may elect to live on expensive debt for a year or two.

Moody’s respects the scale and the geographic diversity of the company and favors the restructuring efforts that help match expenses to demand.

Moody’s does see risk in the lack of economic recovery, high commodity prices and failure to contain costs and raise margins and profitability.

Debt due

[See post for tables]

After all the bad news and calls on cash, is there anything we can put in the positive column?

There is not much in the next year.

By the end of 2012, WHR should start looking like the unlikely growth stock it sometimes resembles.

• Margins will improve as cost cutting takes effect and the perennial restructuring charge returns to the lower post-crisis levels.

• The bulk of litigation settlements/fines will be history.

• Cash flow should return to black

• Pension contributions will be 16% lower

• Business may actually improve [but I expect the first half of 2012to be rocky and unimpressive]

• Productivity that reached a historic low will begin to improve and begin once again to outpace the cost of inflating commodities.

• Commodities appear to be in decline

• WHR is reducing capacity by 6 million units and cutting the high cost low margin facilities. Operating margins will expand.

• Recently instituted price increases will increase margins in 2012

• Deferred tax asset reversal will improve cash flow.

Final parting numbers –just how bad it is

It’s bad

Margins,growth, ROIC and dividends

Growth in net income in Q3 2011 is misleading In Q3 2010, the charge for litigation and settlement was $109 million compared to only $27 million in 2011.

The negative Q2 margin is due to the first installment of the two-part payment for loan litigation in Brazil.

Gross margins in Q3 2011 were low compared to historical levels. Net margins have been improved as WHR takes advantage of energy efficiency tax credits in the US and raw material tax cuts in Brazil in the past three years. They have kept net from being worse than it is. These tax benefits may disappear. Congress is debating extension of the energy efficiency credits.

Low payout ratio would be encouraging if it was not for all the little extras this year and next that are draining cash.

[See post for tables]

The ROIC has been high even after all the goodwill and intangibles that were part of the Maytag deal in 2006. The 2010 ROIC was dragged down by a big change in deferred tax assets that increased adjusted cash taxes significantly. This may reverse in 2012.

The 2010 WACC was 9%. Debt to capital is 37%. If I was an investor I would prefer to see debt increased rather than a dividend cut or equity used to raise capital. I think the current unusual cash flow crunch deserves to be addressed with enough debt to see them through 2012. This would be a mistake if Whirlpool’s circumstances were more or less permanent. I doubt they are.


Whirlpool is in a great deal of short-term trouble speaking from a liquidity viewpoint. For the first time in the 17 years I was able to check, the company is cash flow negative and has some big cash sucking obligations coming their way for at least another year.

The demand for major appliance product has dwindled as commodities have continued to climb. This has put their productivity at lows they seldom see.

Liquidity can be solved if business recovers, margins expand and Whirlpool begins to create cash rather than burn it. I can’t emphasize enough this is a position they have not seen in recent history. There is no guide historically speaking that suggests how they will handle it and they are all quiet on the western front regarding 2012. Much of it is impossible to guess. No one can know when and if the consumer will buy big-ticket major appliances.

I would not be surprised if the dividend is cut or disappears. I think it would be a huge mistake. The concern keeps me from rushing out and buying shares today. This would cause damage to the company’s reputation as a solid predictable dividend payer and of course crash the price per share.

Debt will be expensive but they are not over-leveraged and interest coverage is 4.8X. Debt would retard earnings recovery but might be preferable to shattering the share price with a dividend cut

Issuing equity at these low prices does not even warrant consideration.

There is little doubt that these bad boys will be selling for a whole lot more once the situation is clearer and their cash flow crunch has been solved. That may be awhile and involve a deeper hole than they are already in. Timing will be everything.

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