Whirlpool Corporation (WHR) reported a net loss of $161 million or $2.10 per share in the second quarter of 2011, compared with net earnings of $205 million or $2.64 per share in the prior-year quarter.
However, the reported net loss included the Brazilian collection dispute settlement of $3.78 per share and increased accruals of $1.08 per share related to the recent developments in the ongoing Embraco antitrust matters.
Excluding these special items, adjusted earnings in the reported quarter stood at $2.76 per share, exactly in line with the Zacks Consensus Estimate. Adjusted operating profit was $223 million versus $298 million a year ago.
The company’s results were favorably impacted by cost reduction and productivity initiatives and increased monetization of certain tax credits. However, these were offset by lower product price/mix and higher material and oil-related costs.
Revenues in the quarter increased marginally by 4% to $4.7 billion and were in line with the Zacks Consensus Estimate of $4.7 billion.
Performance by Region
Revenues in the North American region decreased 7% year over year to $2.4 billion as unit shipments declined 5% in the North American industry. In addition, unit shipments of major appliances dipped 10% in the U.S. during the quarter. The company expects U.S. industry unit shipments to decrease between 1% and 2% for fiscal 2011.
Adjusted operating profit fell significantly to $76 million in the reported quarter from $167 million in the second quarter of 2010. Results were favorably impacted by cost reduction and productivity initiatives and lower incentive compensation, which were more than offset by lower industry volume, unfavorable product price/mix and higher material costs.
Revenues in the Europe, Middle East and Africa region improved 14% year over year to $841 million, partly driven by a 2% rise in unit shipments for the region. The operating profit remained almost unchanged at $20 million, which was attributable to lower product price/mix and higher material costs. This was partially offset by cost reduction and productivity initiatives. The company currently expects industry growth in the range of 1%–2% for fiscal 2011.
Revenues in the Latin American region climbed 25% year over year to $1.3 billion, mainly driven by a 21% improvement in unit shipments for the region. Operating profit increased marginally to $166 million from $165 million in the prior-year quarter, based on increased monetization of certain tax credits as well as cost reduction and productivity initiatives. These were partially offset by higher material costs and lower product/price mix. The company continues to anticipate appliance industry shipments to increase in the range of 5%–10% for full-year 2011.
Revenues from the Asian region dropped 2% year over year to $257 million. The deterioration was primarily attributable to poor industry demand in India, resulting in a 4% decrease in unit shipments to Asia. Operating profit remained flat year over year at $15 million due to favorable product price/mix, offset by higher material costs and lower unit volumes during the quarter. The company currently anticipates industry unit shipments in Asia to increase approximately 4% to 6% for fiscal 2011.
Financial Position
Whirlpool had cash and cash equivalents of $845 million as of June 31, 2011, compared with $1.4 billion as of December 31, 2010. Long-term debt declined to $2.1 billion as of June 30, 2011 from $2.2 billion as of December 31, 2010. However, inventories increased slightly to $3.07 billion at the end of the second quarter of 2011 from $2.8 billion at the end of the fourth quarter of 2010.
In the first six months of the year, the company had cash outflow of $234 million from operating activities compared with an inflow of $170 million in the year-ago period, primarily due to lower accrued pension and higher taxes deferred and payable. Meanwhile, capital expenditures decreased to $259 million in the period under study from $267 million incurred in the year-ago period.
Earnings and Cash Flow Guidance
Whirlpool Corporation projected earnings per share between $12.00 and $13.00 for fiscal 2011. In addition, the company expects to generate free cash flow between $400 million and $500 million for the same period. The company also expects to generate cash flow from operating activities in the range of $740 million–$860 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 (ELUXY), LG, Samsung and General Electric Co. (GE). The company holds the No. 1 rank in North America and Latin America, and is also placed among the leading home appliances makers in India and Europe.
Whirlpool is steadily gaining business momentum after the economic downturn. Its demand trends recovered in the U.S. as well as in Europe. Whirlpool comprises 41.5% of U.S. appliance sales while LG Electronics and Samsung have only 8.7% and less than 1%, respectively.
The company also focuses on research and development with an objective to upgrade the existing product line and introduce new and innovative products.
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 (SHLD), Lowe’s Companies Inc. (LOW), The Home Depot, Inc. (HD), Casas Bahia, Best Buy Co. Inc. (BBY) and Ikea, who have significant leverage as buyers. This makes the company all the more vulnerable to risk.
We have a Neutral recommendation on the shares of Whirlpool Corporation for the long term.
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