Is Whirlpool's Liquidity Circling the Drain?

Whirlpool LogoWhirlpool, distributor of KitchenAid and Maytag products, said Tuesday that the global credit crisis was intensifying, with weak consumer demand for its durable goods spreading from North America to European markets. As a result, the home appliance maker reduced full year outlook for earnings per share and free cash flow for 2008.

Chief Executive Jeff Fettig told analysts on the third-quarter 2008 earnings call the company was implementing previously announced cost-based price increases and cost control initiatives, such as plant closings, yet he failed to discuss the potential impact on the company's profitability and cash flow generation should the credit crisis adversely impact Latin American operations. The company guarantees the credit purchases made by manufacturing customers at its Brazilian subsidiary Embraco, a global leader in the market of hermetic compressors for refrigeration:

  • We have guarantee arrangements in a Brazilian subsidiary. As a standard business practice in Brazil, the subsidiary guarantees customer lines of credit at commercial banks to support purchases following its normal credit policies. If a customer were to default on its line of credit with the bank, our subsidiary would be required to satisfy the obligation with the bank, and the receivable would revert back to the subsidiary. At September 30, 2008 and December 31, 2007, the guaranteed amounts totaled $257 million and $331 million, respectively. Our only recourse with respect to these arrangements would be legal or administrative collection efforts directed against the customer. -- 3Q:08 Form 10-Q regulatory filing
Through the nine months ending September 30, free cash flow was a usage of $349 million, compared with a usage of $83 million in the prior year. CFO Roy Templin said the principal drivers of the increased usage of cash were lower cash earnings, higher capital expenditures (as the company accelerated cost reduction initiatives), and higher absolute levels of working capital. Templin added that the company expected to convert 2008 earnings of $5.75 to $6.00 a share into free cash flow in the range of 0 to $50 million for the full year. Given such a high deficit in spending, I suspect this number is too optimistic.

Against the backdrop of a volatile global economic environment, management refused to address any specifics regarding Whirlpool's 2009 outlook. Embreco exports 70 percent of its compressors, and holds a 30-market share in Europe. Should demand trends weaken at home in Latin America and in Asia -- the only two regions of growth -- and/or manufacturing companies default on credit advances, Whirlpool's liquidity could quickly come unplugged.