Whirlpool Corp.

July 24, 2009

Kevin Beech kbeech@behindthenumbers.com ___________________________________________________________________ _________________________________ Whirlpool Corp. (WHR -- $54.76) reported net earnings of $78 million, down over 33% from the $117 million reported in the prior year period. Management reported declining demand, foreign currency translation and continuing material cost increases all pressured earnings during the quarter. EPS fell by 32%, decreasing from $1.53 during 2Q08 to $1.04 during 2Q09. Net sales declined 18% from $5.1 billion to $4.2 billion in the current quarter. The company reported the impact of cost savings initiatives, a shift in product mix and a change to the depreciable life of productive equipment combined to boost reported earnings during the quarter. 1. Unit sales in Europe and North America led the declines while Latin America mustered a slight gain following Brazilian incentive plan 2. Help from price / mix changes will begin to lap during 2H09 3. Cost reduction efforts are improving current margins and earnings, but the pace of COGS savings is moderating while revenue declines continue 4. One-time changes to depreciation method and tax rate contributed $46 million of the company’s $78 million quarterly net profit 5. Brazilian sales tax incentive plan is preventing the company from tapping BEFEIX tax credits and appears to have pulled sales forward

Industry and WHR Volumes Still Down Significantly, Europe Continues to Decline
Whirlpool reported total revenues of $4.2 billion in the quarter down 18% from the prior year’s quarter. Even adjusting for the high impact of foreign currency translation, total revenues declined by 10%. Europe led the way down on an absolute revenue basis as the combination of weak unit volume sales and foreign exchange translation continue to show no signs of easing. Year Over Year Change In Revenue Q209 Q208 6/30/2009 6/30/2008 North America Europe Latin America Asia Consolidated $2,403 $786 $844 $184 $4,169 $2,895 $1,051 $1,005 $178 $5,076 % Change Absolute (17)% (25)% (16)% 3% (18)% % Change Adj. F/X (14)% (13)% 1% 19% (10)%

Although Latin America again registered significant revenue declines, on a currency adjusted basis the segment did relatively well, posting a 1% revenue increase. The company reported that with the remainder of the region posting weak unit and revenue comparisons Brazil, which implemented a sales tax incentive scheme to spur consumer spending, was able to more than offset the weakness found throughout the rest of the region. On a constant currency basis, the consolidated results continue to struggle, logging a double digit decline for the third quarter in a row. Stripping out the temporary benefit which the company received from the Brazilian sales tax plan and sequential consolidated revenue growth would look very similar between Q109 and Q209. Quite frankly, sales are still cratering even against easy comps in many areas. Year Over Year Constant Revenue Growth Q209 Q109 6/30/2009 3/31/2009 North America Europe Latin America Asia Consolidated (14)% (13)% 1% 19% (10)% (17)% (12)% (9)% 3% (14)% Q408 12/31/2008 (16)% (7)% (14)% 7% (13)% Q308 9/30/2008 (7)% 0% 11% 16% (2)%

it will likely face pricing and margin pressures in order to remain competitive. Last Year’s Pricing Initiatives Poised to Anniversary During 2H One ray of sunlight in an otherwise gloomy marketplace has been the shift toward higher efficiency (and higher priced) models. however given the fact we are now comping against significant increases in the second half of last year. the company’s improved pricing and mix has helped to staunch some of the bleeding.902 4. 2Q09 Constant Currency Revenue vs.842 $473 11.169 3. the loss of this volume and mix component makes holding the line on revenue growth that much more difficult. The company’s second quarter gross margin was impacted by lower Brazilian tax credits and greater foreign exchange transaction losses which more than offset pricing and mix gains during the quarter. LLC July 24. 2009 Europe in particular continues to deteriorate as the USD continues to strengthen relative to the Euro making it difficult for WHR to remain price competitive with its offerings. With unit sales continuing to decline.8)% Positive Pricing / Mix Europe (13)% (13. Q209 6/30/2009 Revenue COGS Gross Income Gross Margin $4. Volume Change Revenue (Constant Volume Currency) Change North America (14)% (16.052 $517 14.” Material cost inputs have moderated as well. “As we indicated on our previous call we expect price mix to remain a positive factor for our full year results. As the number of units sold has plummeted.615 $554 13.569 3.0% Q308 9/30/2008 $4. Cost Savings Not Leading To Sustained Profit Growth On top of hopes for revenue stabilization. which makes taking additional pricing actions that much more difficult.5% Q408 12/31/2008 $4. Kevin Beech Behind the Numbers.1% Negative Pricing / Mix Asia 19% 17. but now even that benefit is poised to lap.) The sequential improvement from Q408 to Q109 was particularly noteworthy as the final quarter of 2008 represented the lowest gross margin WHR reported over the last three years. (Changes to inventory accounting helped here too as described in the next section. the company’s CEO noted.6% Positive Pricing / Mix The uptick in volume and mix began to develop in earnest starting in 3Q08 and the company will begin lapping that benefit in its upcoming quarter. The table below compares the decline in revenue versus unit volume to show those markets benefiting from pricing and mix.Whirlpool Corp.6)% Positive Pricing / Mix Latin America 1% 6. the bulls have been heartened by the reported improvements in gross margins as management has implemented companywide cost reduction initiatives.224 $678 13. Pricing increases taken last year have helped prop up revenue to some degree even as unit sales have declined.3% Q109 3/31/2009 $3. The company is also facing negotiations on maintaining its relationship with Sears as a supplier of the Kenmore brand and to the extent that the company attempts to maintain this business. As Jeff Fetig.8% 2 . we do expect the effect to be less positive in the second half than its been in the first half.315 3.

Particularly. the fact that the company continues to experience a similar level of warranty expense. or $0. The third concern relates to warranty costs which will sneak back into the income statement as a drag on operating profit. will lead to disappointment.840 4.8% Q207 6/30/2007 Revenue COGS Gross Income Gross Margin $4. we simply point out that this one-time accounting change is another example of low quality reported earnings.149 $694 14. up from $8 million in 1Q09.076 4. Our experience with material and operational cost reductions has been an increased number of warranty costs as parts and components are redesigned to meet lower material expense targets. First as mentioned by WHR management in their quarterly review.771 $618 14. Accounting Adjustments Were Responsible for $24 Million of WHR’s Reported $78 million in Q1 profits By changing to the modified units of production accounting method WHR received a favorable P&L impact of $24 million during the quarter (57bp of margin gain).8% Q307 9/30/2007 $4. but relying on these material and cost efficiencies to offset revenue declines.128 $726 15. year over year warranty settlements during the period were nearly unchanged. This is particularly true given the significant declines which WHR continues to experience. Assuming the company has a remaining $42 million benefit to be received over the next two quarters. the company will begin lapping the mix improvement in 2H09 which will blunt the future impact. seeking to improve efficiencies to drive greater profitability is always a positive. While cost reduction efforts will flow through.487 $838 15.32 of the company’s $1. but is reducing its accrual for future charges is problematic. as an emphasis on innovative engineering may create a benefit over the very short term. Kevin Beech Behind the Numbers.389 ($214) $197 $210 Even as the company has continued to reduce the number of units sold over the prior year.854 4. 3 .2% Q107 3/31/2007 $4.954 4. 2009 Q208 6/30/2008 Revenue COGS Gross Income Gross Margin $5.2% Q306 9/30/2006 $4.155 $685 14.007 $607 13. Second. whereas the revenue deterioration continues to accelerate in markets such as Europe. we have three concerns.Whirlpool Corp. LLC July 24.7% Q406 12/31/2006 $4. The company expects the full year impact to be approximately $74 million in 2009 under the current production forecast This accounting change represented nearly 31% of the company’s quarterly profit.854 ($213) $181 $185 $4. Year over Year Warranty Expense and Reserve Q209 Q208 6/30/2009 6/30/2008 Revenue Warranty Settlements New Warranty Net Warranty Reserve $4.324 $752 14.269 $685 13.3% Even as the combination of improved sales mix and cost controls have helped keep gross margin from deteriorating further.04 EPS during the quarter.389 3.325 4. Without passing judgment on which method is the most appropriate depreciation regimen to use. but attempts to stretch these gains will result in a greater number of warranty recalls and other product failures.1% Q407 12/31/2007 $5. While the company produced many fewer units during the period.843 4. the sequential impact of the accounting change will begin to decline from this quarter’s reported $24 million gain.0% Q108 3/31/2008 $4.614 4. they tend to decline.

Brazil has extended the sales tax incentive program through October whereas previously the program was scheduled to finish in July. the question becomes how long the sales uptick will last. This was down sequentially from $35 million in 1Q09 and $47 million in the prior year’s second quarter. Given that the program appears to be pulling ahead sales into the current period.04 EPS. Management reported monetizing an additional $9 million of Brazilian BEFIEX tax credits. “We’ve got a lot of publicity that stimulated a lot. WHR has experienced a greater financial impact from the use of these tax credits than many of its operating results in recent quarters. The company pointed out that Brazil’s current sales tax incentive program will continue to negatively impact the company’s ability to tap into existing BEFIEX credits. which have become “recurring one-timers”. When asked about the sales tax incentive extension Jeff Fetig.60 of the company’s reported $1. or approximately 58% of the quarter’s earnings. 2009 The company also benefited from a positive tax rate which generated $22 million in tax gains for the company during the quarter. but the amount of these credits in the current quarter was lower due to a sales tax incentive currently being implemented in Brazil. 4 .” While the company is happy to benefit from the additional unit sales. but I personally don’t expect that to have this staying power through October. Kevin Beech Behind the Numbers. the company’s CEO commented. it appears management is more inclined to revert to the full use of the BEFIEX tax credits. We think it will have a positive impact.Whirlpool Corp. BEFIEX Tax Credits Becoming a Key WHR Segment Management again gave significant time during the earnings call to most recent impact from the company’s ongoing use of Brazilian tax credits. The combination of accounting change and a positive tax rate represented $0. it would appear the company is facing a temporary period of slowing sales as payback for the incentive program while not being able to fully capture the prior benefit from the tax credits. However. LLC July 24.

The authors also have not conducted a thorough "review" of the financial statements as defined by standards established by the AICPA. This report is not intended. or a "BUY" or "SELL" recommendation. will be corrected. Other CPAs. its affiliated entities. Dallas. Behind the Numbers. may or may not have audited the financial statements. and from time-to-time purchase or sell any of the securities mentioned in this report. 800-585-5019 5 . Kevin Beech DISCLOSURE Behind the Numbers. LLC is not rendering investment advice based on investment portfolios and is not registered as an investment adviser in any jurisdiction. and the accounts managed by them for stocks that are mentioned in a "Live Update" or on the "Watch List". Middleswart. LLC 8140 Walnut Hill Lane. LLC. and nothing contained herein shall be construed as. or that errors. Texas 75231-4336. its employees. Behind the Numbers. unless otherwise disclosed.Whirlpool Corp. 2009 Behind the Numbers is a research publication structured to provide analytical research to the financial community. LLC July 24. its affiliated entities. and shall not constitute. Copyright 2009. unaffiliated with Mr. and the accounts managed by them may have a position in. Initial positions will not be taken by any of the aforementioned parties until after the report is distributed to clients. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. Behind the Numbers. It is possible that a position could be held by Behind the Numbers. They have not audited the statements and therefore do not express an opinion on them. this research is intended to identify issues that portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. Rather. an offer to sell or a solicitation of an offer to buy any securities referred to in this report. Suite 203. its employees. LLC. if discovered. Information included in this report is derived from many sources believed to be reliable (including SEC filings and other public records) but no representation is made that it is accurate or complete. Upon request we will be pleased to furnish specific information in this regard.

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