Whirlpool Corporation
WHIRLPOOL CORP /DE/ (Form: 10-Q, Received: 04/26/2010 16:38:09)
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-3932

 

 

WHIRLPOOL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   38-1490038
(State or other jurisdiction of incorporation of organization)   (I.R.S. Employer Identification No.)

2000 M-63

Benton Harbor, Michigan

  49022-2692
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (269) 923-5000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

    Accelerated filer  ¨

Non-accelerated filer  ¨  (Do not check if a smaller  reporting company)

    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class of common stock

 

Shares outstanding at April 22, 2010

Common stock, par value $1 per share

 

75,113,594

 

 

 


Table of Contents

QUARTERLY REPORT ON FORM 10-Q

WHIRLPOOL CORPORATION

Three Months Ended March 31, 2010

INDEX OF INFORMATION INCLUDED IN REPORT

 

          Page

PART I - FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
  

Consolidated Condensed Statements of Income

   3
  

Consolidated Condensed Balance Sheets

   4
  

Consolidated Condensed Statements of Cash Flows

   5
  

Notes to the Consolidated Condensed Financial Statements

   6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    22

Item 4.

   Controls and Procedures    22

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings    23

Item 1A.

   Risk Factors    23

Item 2.

   Unregistered Sale of Securities, Use of Proceeds and Issuer Purchases of Equity Securities    23

Item 3.

   Defaults Upon Senior Securities    23

Item 4.

   Other Information    23

Item 5.

   Exhibits    23

Signatures

   24

 

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FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. Certain statements contained in the annual report, including those within the forward-looking perspective section within this Management’s Discussion and Analysis, and other written and oral statements made from time to time by us or on our behalf do not relate strictly to historical or current facts and may contain forward-looking statements that reflect our current views with respect to future events and financial performance. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast,” and similar words or expressions. Our forward-looking statements generally relate to our growth strategies, financial results, product development, and sales efforts. These forward-looking statements should be considered with the understanding that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.

This document contains forward-looking statements about Whirlpool Corporation and its consolidated subsidiaries (“Whirlpool”) that speak only as of this date. Whirlpool disclaims any obligation to update these statements. Forward-looking statements in this document may include, but are not limited to, statements regarding expected earnings per share, cash flow, productivity and material and oil-related prices. Many risks, contingencies and uncertainties could cause actual results to differ materially from Whirlpool’s forward-looking statements. Among these factors are: (1) changes in economic conditions which affect demand for our products, including the strength of the building industry and the level of interest rates; (2) the effects of the global economic crisis on our customers, suppliers and the availability of credit; (3) Whirlpool’s ability to continue its relationship with significant trade customers and the ability of these trade customers to maintain or increase market share; (4) intense competition in the home appliance industry reflecting the impact of both new and established global competitors, including Asian and European manufacturers; (5) the ability of Whirlpool to manage foreign currency fluctuations; (6) product liability and product recall costs; (7) litigation and legal compliance risk; (8) the ability of Whirlpool to achieve its business plans, productivity improvements, cost control, leveraging of its global operating platform, and acceleration of the rate of innovation; (9) inventory and other asset risk; (10) fluctuations in the cost of key materials (including steel, oil, plastic, resins, copper and aluminum) and components and the ability of Whirlpool to offset cost increases; (11) the ability of suppliers of critical parts, components and manufacturing equipment to deliver sufficient quantities to Whirlpool in a timely and cost-effective manner; (12) health care cost trends, regulatory changes and variations between results and estimates that could increase future funding obligations for pension and post retirement benefit plans; (13) Whirlpool’s ability to obtain and protect intellectual property rights; (14) information technology system failures and data security breaches; (15) global, political and/or economic uncertainty and disruptions, especially in Whirlpool’s significant geographic regions, including uncertainty and disruptions arising from natural disasters or terrorist attacks; (16) the effects of governmental investigations or related actions by third parties; (17) the impact of labor relations; (18) our ability to attract, develop and retain executives and other qualified employees; (19) changes in the legal and regulatory environment including environmental and health and safety regulations.

We undertake no obligation to update any forward-looking statement, and investors are advised to review disclosures in our filings with the Securities and Exchange Commission. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. Therefore, investors should not consider the foregoing factors to be an exhaustive statement of all risks, uncertainties, or factors that could potentially cause actual results to differ from forward-looking statements. Additional information concerning these and other factors can be found in “Risk Factors” in Item 1A of this report.

Unless otherwise indicated, the terms “Whirlpool,” “we,” “us,” and “our” refer to Whirlpool Corporation and its consolidated subsidiaries.

 

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

WHIRLPOOL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

THREE MONTHS ENDED MARCH 31

(Millions of dollars, except per share data)

 

     2010     2009  

Net sales

   $ 4,272      $ 3,569   

Expenses

    

Cost of products sold

     3,633        3,045   

Selling, general and administrative (exclusive of intangible amortization)

     371        327   

Intangible amortization

     7        7   

Restructuring costs

     20        24   
                

Operating profit

     241        166   

Other income (expense)

    

Interest and sundry income (expense)

     (12     (47

Interest expense

     (58     (62
                

Earnings before income taxes and other items

     171        57   

Income tax benefit

     (3     (16
                

Net earnings

     174        73   

Less: Net earnings available to noncontrolling interests

     (10     (5
                

Net earnings available to Whirlpool common stockholders

   $ 164      $ 68   
                

Per share of common stock

    

Basic net earnings available to Whirlpool common stockholders

   $ 2.17      $ 0.92   
                

Diluted net earnings available to Whirlpool common stockholders

   $ 2.13      $ 0.91   
                

Dividends

   $ 0.43      $ 0.43   
                

Weighted-average shares outstanding (in millions)

    

Basic

     75.4        74.2   

Diluted

     76.8        74.7   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements

 

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WHIRLPOOL CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Millions of dollars, except share data)

 

     (Unaudited)
March 31,

2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and equivalents

   $ 1,191      $ 1,380   

Accounts receivable, net of allowance for uncollectible accounts of $71 and $76 at March 31, 2010 and December 31, 2009, respectively

     2,440        2,500   

Inventories

     2,437        2,197   

Deferred income taxes

     331        295   

Other current assets

     641        653   
                

Total current assets

     7,040        7,025   
                

Other assets

    

Goodwill

     1,731        1,729   

Other intangibles, net of accumulated amortization of $139 and $132 at March 31, 2010 and December 31, 2009, respectively

     1,786        1,796   

Other assets

     1,442        1,427   
                

Total other assets

     4,959        4,952   
                

Property, plant and equipment

    

Land

     75        77   

Buildings

     1,197        1,207   

Machinery and equipment

     8,129        8,193   

Accumulated depreciation

     (6,322     (6,360
                

Total property, plant and equipment, net

     3,079        3,117   
                

Total assets

   $ 15,078      $ 15,094   
                

Liabilities and stockholders’ equity

    

Current liabilities

    

Accounts payable

   $ 3,323      $ 3,308   

Accrued expenses

     638        632   

Accrued advertising and promotions

     306        475   

Employee compensation

     569        501   

Notes payable

     17        23   

Current maturities of long-term debt

     334        378   

Other current liabilities

     699        624   
                

Total current liabilities

     5,886        5,941   
                

Noncurrent liabilities

    

Long-term debt

     2,498        2,502   

Pension benefits

     1,547        1,557   

Postretirement benefits

     708        693   

Other liabilities

     648        641   
                

Total noncurrent liabilities

     5,401        5,393   
                

Commitments and contingencies (see Note 5)

    

Stockholders’ equity

    

Common stock, $1 par value, 250 million shares authorized, 105 million shares issued at March 31, 2010 and December 31, 2009, 75 million shares outstanding at March 31, 2010 and December 31, 2009

     105        105   

Additional paid-in capital

     2,074        2,067   

Retained earnings

     4,324        4,193   

Accumulated other comprehensive income (loss)

     (980     (868

Treasury stock, 30 million shares at March 31, 2010 and December 31, 2009

     (1,828     (1,833
                

Total Whirlpool stockholders’ equity

     3,695        3,664   
                

Noncontrolling interests

     96        96   
                

Total stockholders’ equity

     3,791        3,760   
                

Total liabilities and stockholders’ equity

   $ 15,078      $ 15,094   
                

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements

 

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WHIRLPOOL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED MARCH 31

(Millions of dollars)

 

     2010     2009  

Operating activities

    

Net earnings

   $ 174      $ 73   

Adjustments to reconcile net earnings to cash provided by (used in) operating activities:

    

Depreciation and amortization

     134        115   

Curtailment gain

     (29     (92

Decrease in LIFO inventory reserve

     (5     —     

Changes in assets and liabilities:

    

Accounts receivable

     24        114   

Inventories

     (271     (27

Accounts payable

     66        (362

Restructuring charges, net of cash paid

     (5     (16

Taxes deferred and payable, net

     (7     (12

Accrued pension

     (3     (7

Employee compensation

     85        62   

Other

     (92     (120
                

Cash provided by (used in) operating activities

     71        (272
                

Investing activities

    

Capital expenditures

     (146     (112

Proceeds from sale of assets

     1        13   

Investment in related businesses

     (5     —     
                

Cash used in investing activities

     (150     (99
                

Financing activities

    

Repayments of long-term debt

     (46     (1

Dividends paid

     (33     (32

Purchase of noncontrolling interest shares

     (12     —     

Common stock issued

     7        —     

Net (repayments) proceeds from short-term borrowings

     (6     458   

Other

     —          (5
                

Cash (used in) provided by financing activities

     (90     420   
                

Effect of exchange rate changes on cash and equivalents

     (20     (2
                

(Decrease) increase in cash and equivalents

     (189     47   

Cash and equivalents at beginning of period

     1,380        146   
                

Cash and equivalents at end of period

   $ 1,191      $ 193   
                

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements

 

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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

(1) BASIS OF PRESENTATION

General Information

The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in the Financial Supplement of our Form 10-K for the year ended December 31, 2009.

We have eliminated all material intercompany transactions in our Consolidated Condensed Financial Statements. We do not consolidate the financial statements of any company in which we have an ownership interest of 50% or less unless we control that company. We did not control any company in which we had an ownership interest of 50% or less for any period presented in our Consolidated Condensed Financial Statements.

Management believes that the accompanying Consolidated Condensed Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.

New Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of revised Level 3 disclosure requirements which are effective for interim and annual reporting periods beginning after December 15, 2010. Comparative disclosures are not required in the year of adoption. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.

In June 2009, the FASB issued Accounting Standards Codification (“ASC”) 810, “Consolidation”, regarding the consolidation of variable interest entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.

In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (formerly SFAS No. 166, “Accounting for Transfers of Financial Assets”). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods beginning after November 15, 2009. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.

(2) GOODWILL

The following table summarizes the net carrying amount of goodwill:

 

Reporting unit - Millions of dollars

   March 31,
2010
   December 31,
2009

North America

   $ 1,727    $ 1,724

Embraco

     4      5
             

Total

   $ 1,731    $ 1,729
             

 

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(3) FAIR VALUE MEASUREMENTS

Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is established, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are identified in the table below and are as follows:

 

  (a) Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

 

  (b) Cost approach—amount that would be required to replace the service capacity of an asset (replacement cost)

 

  (c) Income approach—techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models)

Assets and liabilities measured at fair value on a recurring basis are as follows:

 

Millions of dollars

   Total    Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
   Valuation
Technique
 
              
              

March 31, 2010

              

Money market funds (1)

   $ 356    $ 356    $ —      $ —      (a

Net derivative contracts

     101      —        101      —      (a

Available for sale investments

     32      32      —        —      (a

December 31, 2009

              

Money market funds (1)

   $ 355    $ 355    $ —      $ —      (a

Net derivative contracts

     97      —        97      —      (a

Available for sale investments

     25      25      —        —      (a

 

(1)

Money market funds are primarily comprised of U.S. government obligations.

Other Fair Value Measurements

The fair value of long-term debt (including current maturities) was $3,040 million and $3,060 million as of March 31, 2010 and December 31, 2009, respectively, and was estimated using discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements.

(4) INVENTORIES

 

Millions of dollars

   March 31,
2010
    December 31,
2009
 

Finished products

   $ 2,045      $ 1,853   

Raw materials and work in process

     532        489   
                
     2,577        2,342   

Less excess of FIFO cost over LIFO cost

     (140     (145
                

Total inventories

   $ 2,437      $ 2,197   
                

The increase in inventories, compared to December 31, 2009, is driven primarily by increased production levels.

 

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(5) COMMITMENTS AND CONTINGENCIES

Guarantees

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 March 31, 2010 and December 31, 2009, the guaranteed amounts totaled $280 million and $309 million, respectively. Our only recourse with respect to these arrangements would be legal or administrative collection efforts directed against the customer.

We provide guarantees of indebtedness and lines of credit for various consolidated subsidiaries. The maximum amount of credit facilities available under these lines for consolidated subsidiaries totaled $1.4 billion at March 31, 2010 and December 31, 2009. Our total outstanding bank indebtedness under guarantees totaled $13 million and $18 million at March 31, 2010 and December 31, 2009, respectively.

As of May 16, 2008, we guaranteed a $50 million five year revolving credit facility between certain financial institutions and a not-for-profit entity in connection with a community and economic development project (“Harbor Shores”). The fair value of the guarantee is nominal. The purpose of Harbor Shores is to stimulate employment and growth in the areas of Benton Harbor and St. Joseph, Michigan. In the event of default, we must satisfy the guarantee of the credit facility up to the amount borrowed at the date of default.

Warranty Reserves

Product warranty reserves are generally established in the same period that revenue from the sale of the related products is recognized. The amounts of those reserves are based on established terms and our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.

The following table represents a reconciliation of the changes in product warranty reserves for the periods presented:

 

Millions of dollars

   2010     2009  

Balance at January 1

   $ 189      $ 215   

Warranties issued during the period

     165        100   

Settlements made during the period

     (96     (101

Other changes

     7        (2
                

Balance at March 31

   $ 265      $ 212   
                

Current portion

   $ 227      $ 186   

Non-current portion

     38        26   
                

Total

   $ 265      $ 212   
                

During the March 2010 quarter we accrued $75 million associated with a supplier-related quality and potential product safety issue that is included within warranties issued during the period. See Product Recalls below for additional information.

Product warranty reserves are included within other current liabilities and other noncurrent liabilities in our Consolidated Condensed Balance Sheet at March 31, 2010.

Legal Contingencies

Government authorities in various jurisdictions are conducting antitrust investigations of the global compressor industry, including our compressor business headquartered in Brazil (“Embraco”). In 2009, Embraco sales represented approximately 7% of our global net sales.

In February 2009, competition authorities in Brazil, the United States and Europe began to seek documents from us in connection with their investigations. A grand jury subpoena from the United States Department of Justice requested documents for the time period from 2003 to 2009. Competition authorities in other jurisdictions have sought similar information.

In September 2009, the Brazilian competition commission (CADE) agreed to terminate the administrative investigation of our compressor business. Under the terms of the settlement agreement, Whirlpool affiliates and certain executives located in Brazil acknowledged a violation of Brazilian antitrust law in the Brazilian compressor market by some Embraco employees. The settlement agreement provides for the affiliates to make contributions totaling 100 million Brazilian reais to a Brazilian government fund. The contributions translated to approximately $56 million, all of which was recorded as an expense in 2009. We are cooperating with the ongoing government investigations in other jurisdictions and have taken actions, and will continue to take actions, to minimize our potential exposure.

 

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Since the government investigations became public in February 2009, we have been named as a defendant in numerous related antitrust lawsuits in various jurisdictions seeking damages in connection with the pricing of compressors from 1996 to 2009. Several other compressor manufacturers who are the subject of the government investigations have also been named as defendants in the litigation. United States federal lawsuits instituted on behalf of purported purchasers and containing class action allegations have been combined in one proceeding in the United States District Court for the Eastern District of Michigan. We intend to defend the lawsuits vigorously.

The final outcome and impact of these matters, and related claims and investigations that may be brought in the future are subject to many variables, and cannot be predicted with certainty. An accrual has been established only where we have determined that a loss is probable and the amount of loss can be reasonably estimated. As of March 31, 2010, we have accrued charges of approximately $94 million related to these matters. While it is currently not possible to reasonably estimate the aggregate amount of costs which we may incur in connection with these matters, such costs could have a material adverse effect on our financial position, liquidity, or results of operations.

The Brazilian Constitution provides a general basis for recognizing tax credits on the purchase of raw materials used in production (“IPI tax credit”). Certain raw materials that are exempt or have a zero tax basis in the production process qualify for these IPI tax credits. Based on legal precedent, in 2003 and 2004, we recognized tax credits in an aggregate amount of $26 million adjusted for currency. The Brazilian tax authority subsequently challenged the recording of IPI tax credits. No credits were recognized in 2005 through 2009. In 2009, we entered into an agreement under a special Brazilian government program providing for extended payment terms and reductions in penalties and interest to encourage taxpayers to resolve disputed IPI tax credit amounts. Charges recorded related to this program for the year ended December 31, 2009 include $27 million in tax that was recorded in cost of products sold, $16 million in interest expense and $4 million in penalties recorded in interest and sundry income (expense) in our Consolidated Statements of Income. During the December 2009 quarter, based on newly issued regulations, we settled with the Brazilian tax authority to resolve these and other disputed tax amounts. As a result of this settlement agreement, we recorded an increase in value added taxes owed of approximately $4 million in cost of goods sold, a reduction in interest expense totaling $18 million related to interest abatement, a reduction in interest and sundry income (expense) of $4 million related to penalty abatement and related income tax expense of $5 million under this special program. The settlement is in the process of being ratified by the Brazilian tax authority.

In 1989, a Brazilian affiliate (now a subsidiary) brought an action against a financial institution in Brazil seeking a “Declaration of Non-Enforceability of Obligations” relating to loan documentation entered into without authority by a senior officer of the affiliate. In September 2000, an adverse decision in the declaratory action became final. In 2001, the financial institution began a collection action and we responded with a counterclaim. The lower court dismissed the counterclaim in 2002 and the Superior Court confirmed the lower court decision in December 2005. The Superior Court dismissed our counterclaim in 2007. In late 2008, the lower court issued a decision in the collection action in favor of the financial institution in the amount of 283 million Brazilian reais (approximately $159 million), plus judicial adjustments, which could be significant. We have appealed this decision. Based on our outside counsel’s assessment of the case, the amount previously accrued for our estimated exposure for this litigation remains unchanged. However, the amount of the final award, if any, may be materially different than the amount we have accrued.

We are currently defending a number of class action suits in federal and state courts alleging breach of warranty, fraud and violation of state consumer protection acts. There are no allegations of any personal injury or property damage. However, unspecified compensatory damages are being sought. We believe these suits are without merit. We intend to vigorously defend these actions.

We are involved in various other legal actions arising in the normal course of business. Management, after taking into consideration legal counsel’s evaluation of such actions, is of the opinion that the outcome of these matters will not have a material adverse effect, if any, on our Consolidated Condensed Financial Statements.

Product Recalls

We regularly engage in investigations of potential quality and safety issues as part of our ongoing effort to deliver quality products to customers. We are currently investigating a limited number of potential quality and safety issues. As necessary, we undertake to effect repair or replacement of appliances in the event that an investigation leads to the conclusion that such action is warranted.

We currently expect to undertake a corrective action to address a supplier-related quality and potential product safety issue. We have accrued $75 million for this matter based on our current estimate of the costs of the action.

On March 10, 2009, we announced, in a joint press release issued with the United States Product Safety Commission, a voluntary recall of 1.8 million refrigerators sold in the United States and Canada between 2001 and 2004. The recall is due to a defect

 

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in an electrical relay component purchased from a supplier. In 2009, we increased the estimate of the affected population by 0.8 million due to a determination that the defective part which caused the product recall also resulted in similar failures in another type of refrigerator. There have been no other significant changes in assumptions other than increasing the affected population. As a result, we have accrued $69 million as the estimated cost of this recall of which $35 million ($23 million in the March 2009 quarter) and $32 million, respectively was recorded in 2009 and 2008. We have accrued $2 million as a charge to cost of products sold in the March 2010 quarter. Our actual costs related to this action will depend on several factors, including the number of consumers who respond to the recall, the costs of repair and administration, and whether costs will be recovered from the supplier.

(6) HEDGES AND DERIVATIVE FINANCIAL INSTRUMENTS

Derivative instruments are accounted for at fair value based on market rates. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (“OCI”) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in earnings.

Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss we could incur if a counterparty were to default on a derivative contract. We generally deal with investment grade counterparties and monitor the overall credit risk and exposure to individual counterparties. We do not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized gains, if any, on such derivative contracts. We do not require, nor do we post, collateral or security on such contracts.

Hedging Strategy

We are exposed to certain risks relating to our ongoing business operations. As a result, we enter into derivative transactions to manage certain of these exposures that arise in the normal course of business. The primary risks managed by using derivative instruments are foreign currency exchange rate, commodity price and domestic and foreign interest rate risks. Fluctuations in these rates and prices can affect our operating results and financial condition. We manage the exposure to these market risks through operating and financing activities and through the use of derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

Foreign currency exchange rate risk

We incur expenses associated with the procurement and production of products in a limited number of countries, while we sell in the local currencies of a large number of countries. Our primary foreign currency exchange exposures result from cross-currency sales of products. As a result, we enter into foreign exchange contracts to hedge certain firm commitments and forecasted transactions to acquire products and services that are denominated in foreign currencies.

We enter into certain undesignated non-functional currency asset and liability hedges that relate primarily to short-term payables, receivables, inventory and intercompany loans. These forecasted cross-currency cash flows relate primarily to foreign currency denominated expenditures and intercompany financing agreements, royalty agreements and dividends.

Commodity price risk

We enter into forward contracts on various commodities to manage the price risk associated with forecasted purchases of materials used in our manufacturing process. The objective of these hedges is to reduce the variability of cash flows associated with the forecasted purchase of commodities.

Interest rate risk

We may enter into interest rate swap agreements to manage interest rate risk exposure. Our interest rate swap agreements effectively modify our exposure to interest rate risk, primarily through converting certain of our floating rate debt to a fixed rate basis, and certain fixed rate debt to a floating rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements involve either the receipt or payment of floating rate amounts in exchange for fixed rate interest payments or receipts, respectively, over the life of the agreements without an exchange of the underlying principal amounts. We also may utilize a cross-currency interest rate swap agreement to manage our exposure relating to certain intercompany debt denominated in one foreign currency that will be repaid in another foreign currency.

 

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The following table summarizes our outstanding derivative contracts and their effects on our Consolidated Condensed Balance Sheet at March 31, 2010:

 

Millions of dollars

        Fair Value of (1)        

Term

   Notional
Amount
   Hedge
Assets
   Hedge
Liabilities
  

Type of
Hedge (2)

  
              

Designated derivatives

              

Foreign exchange forwards/options

   $ 1,290    $ 30    $ 60    (CF)/(FV)    Various, up to 21 months

Commodity swaps/options

     572      133      3    (CF)/(FV)    Various, up to 33 months
                      

Total designated derivatives

      $ 163    $ 63      
                      

Undesignated derivatives

              

Foreign exchange forwards/options

   $ 925    $ 2    $ 6       Various, up to 7 months

Commodity swaps/options

     18      8      3       Various, up to 21 months
                      

Total undesignated derivatives

        10      9      
                      

Total derivatives

      $ 173    $ 72      
                      

 

(1) Periodic adjustments from fair valuing hedge assets and liabilities are recorded in other current assets and other assets or other current liabilities and other liabilities. As of March 31, 2010, hedge assets of $122 million and $51 million were recorded in other current assets and other assets, respectively, and hedge liabilities of $66 million and $6 million were recorded in other current liabilities and other liabilities, respectively.
(2) Designated derivatives are either considered cash flow (CF) or fair value hedges (FV).

The following table summarizes our outstanding derivative contracts and their effects on our Consolidated Condensed Balance Sheet at December 31, 2009:

 

Millions of dollars

        Fair Value of (1)        

Term

   Notional
Amount
   Hedge
Assets
   Hedge
Liabilities
  

Type of
Hedge (2)

  
              

Designated derivatives

              

Foreign exchange forwards/options

   $ 1,090    $ 40    $ 54    (CF)/(FV)    Various, up to 15 months

Commodity swaps/options

     486      109      2    (CF)/(FV)    Various, up to 29 months
                      

Total designated derivatives

      $ 149    $ 56      
                      

Undesignated derivatives

              

Foreign exchange forwards/options

   $ 801    $ 6    $ 4       Various, up to 5 months

Commodity swaps/options

     24      4      2       Various, up to 24 months
                      

Total undesignated derivatives

        10      6      
                      

Total derivatives

      $ 159    $ 62      
                      
(1) Periodic adjustments from fair valuing hedge assets and liabilities are recorded in other current assets and other assets or other current liabilities and other liabilities. As of December 31, 2009, hedge assets of $119 million and $40 million were recorded in other current assets and other assets, respectively, and hedge liabilities of $61 million and $1 million were recorded in other current liabilities and other liabilities, respectively.
(2) Designated derivatives are either considered cash flow (CF) or fair value hedges (FV).

 

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The effects of derivative instruments on our Consolidated Condensed Statement of Income for the March 2010 quarter are as follows:

 

Cash Flow Hedges - Millions of dollars

   Gain (Loss)
Recognized in OCI
(Effective Portion)
    Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (1)
        Gain (Loss)
Recognized in Income
(Ineffective  Portion) (2)

Foreign exchange forwards/options

   $ (24   $ (10   (a)(b)
  $ 2

Commodity swaps/options

     42        18      (b)     3
                        
   $ 18      $ 8        $ 5
                        

 

(1) Gains and losses reclassified from accumulated OCI into income are recorded in (a) interest and sundry income (expense) or (b) cost of products sold.
(2) Gains and losses recognized in income related to the ineffective portion of hedges are recorded in interest and sundry income (expense).

 

Fair Value Hedges - Millions of dollars

   Gain (Loss) Recognized
on Derivative (3)
    Gain (Loss) Recognized
on Related
Hedged Items (3)
  

Hedged Item

Foreign exchange forwards/options

   $ (6   $ 6    Non-functional currency assets and liabilities

 

(3) Gains and losses recognized in income are recorded in interest and sundry income (expense).

 

Undesignated Hedges - Millions of dollars

   Gain (Loss)
Recognized on
Undesignated  Hedges (4)
 

Foreign exchange forwards/options

   $ (9

Commodity swaps

     1   
        
   $ (8
        

 

(4) Mark to market gains and losses are recorded in interest and sundry income (expense).

The effects of derivative instruments on our Consolidated Condensed Statement of Income for the March 2009 quarter are as follows:

 

Cash Flow Hedges - Millions of dollars

   Gain (Loss)
Recognized in  OCI
(Effective Portion)
    Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (1)
        Gain (Loss)
Recognized in Income
(Ineffective Portion) (2)

Foreign exchange forwards/options

   $ (13   $ 5      (a)(b)   $ —  

Commodity swaps/options

     24        (51 )     (b)     1

Interest rate swaps

     1        —        (c)     —  
                        
   $ 12      $ (46     $ 1
                        

 

(1) Gains and losses reclassified from accumulated OCI into income are recorded in (a) interest and sundry income (expense), (b) cost of products sold or (c) interest expense.
(2) Gains and losses recognized in income related to the ineffective portion of hedges are recorded in interest and sundry income (expense).

 

Fair Value Hedges - Millions of dollars

   Gain (Loss) Recognized
on Derivative (3)
    Gain (Loss) Recognized
on Related
Hedged Items (3)
  

Hedged Item

Foreign exchange forwards/options

   $ (3   $ 3    Non-functional currency assets and liabilities

 

(3) Gains and losses recognized in income are recorded in interest and sundry income (expense).

 

Undesignated Hedges - Millions of dollars

   Gain (Loss)
Recognized on
Undesignated  Hedges (4)
 

Foreign exchange forwards/options

   $ (15

Commodity swaps

     (6
        
   $ (21
        

 

(4) Mark to market gains and losses are recorded in interest and sundry income (expense).

 

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The net amount of unrealized gain or loss on derivative instruments included in accumulated OCI related to contracts maturing, and expected to be realized during the next twelve months is a gain of $72 million at March 31, 2010.

(7) STOCKHOLDERS’ EQUITY

Comprehensive Income and Stockholders’ Equity

Comprehensive income primarily includes (1) our reported net earnings, (2) foreign currency translation, (3) changes in the effective portion of our open derivative contracts designated as cash flow hedges, (4) changes in our unrecognized pension and other postretirement benefits and (5) changes in fair value of our available for sale securities.

The following table summarizes our comprehensive income for the periods presented:

 

     Three months ended
March 31,
 

Millions of dollars

   2010     2009  

Net earnings as reported

   $ 174      $ 73   

Currency translation adjustments – net

     (79     (84

Cash flow hedges – net

     5        39   

Pension and other postretirement benefits plans – net

     (49     (13

Available for sale securities

     9        (4
                

Comprehensive income (loss)

     60        11   

Less: Comprehensive income (loss) available to noncontrolling interests

     8        7   
                
    

Comprehensive income (loss) available to Whirlpool common stockholders

   $ 52      $ 4   
                

The following table summarizes the changes in stockholders’ equity:

 

Millions of dollars

   Total     Whirlpool
Common
Stockholders
    Noncontrolling
Interests
 

Stockholders’ equity, December 31, 2009

   $ 3,760      $ 3,664      $ 96   
                        

Net earnings

     174        164        10   

Other comprehensive income (loss)

     (114     (112     (2
                        

Comprehensive income (loss)

     60        52        8   

Purchase of noncontrolling interest

     (8     —          (8

Treasury stock

     5        5        —     

Additional paid-in capital

     7        7        —     

Dividends declared on common stock

     (33     (33     —     
                        

Stockholders’ equity, March 31, 2010

   $ 3,791      $ 3,695      $ 96   
                        

Noncontrolling Interests

During the December 2009 quarter, our Latin America region entered into a definitive agreement to purchase 1.8% of the outstanding noncontrolling interest in Brasmotor S.A. for $12 million. This transaction closed on January 15, 2010 and raised our ownership interest in Brasmotor S.A. to 95.6%.

Net Earnings per Share

Basic and diluted net earnings per share were calculated as follows:

 

     Three months ended
March 31,

Millions of dollars and shares

   2010    2009

Numerator for basic and diluted earnings per share – net earnings available to Whirlpool common stockholders

   $ 164    $ 68
             

Denominator for basic earnings per share – weighted-average shares

     75.4      74.2

Effect of dilutive securities – stock-based compensation

     1.4      0.5
             

Denominator for diluted earnings per share – adjusted weighted-average shares

     76.8      74.7
             

 

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Diluted net earnings per share of common stock include the dilutive effect of stock options and stock-based compensation. For the March 2010 and 2009 quarters, approximately 2,027,000 stock options and 4,089,000 stock options, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices rendered them anti-dilutive.

(8) RESTRUCTURING CHARGES

Under our ongoing global operating platform initiatives, we implemented certain restructuring initiatives to strengthen our leadership position in the global appliance industry. We plan to continue a comprehensive worldwide effort to optimize our regional manufacturing facilities, supply base, product platforms and technology resources to support our global brands and customers. We incurred total restructuring charges of $20 million and $24 million during the March 2010 and 2009 quarters, respectively. These charges are included in restructuring costs in our Consolidated Condensed Statements of Income and primarily consist of charges to shift refrigeration capacity within North America and dishwasher capacity within Europe.

On October 27, 2008, management committed to a workforce reduction plan whereby we will reduce our employee base by approximately 5,000 employees and contractors worldwide from the fourth quarter of 2008 through the beginning of 2010. We expect to incur approximately $99 million in employee termination costs, $14 million in asset impairment costs and $3 million in other associated costs for a total of $116 million that will be incurred as a result of this workforce reduction. We incurred no charges during the March 2010 quarter associated with this workforce reduction. As of March 31, 2010, approximately $15 million of these workforce reduction costs remain, all of which will result in future cash expenditures. We expect to incur additional costs of $15 million in our Europe region throughout 2010 related to these initiatives. For additional information about restructuring charges by operating segment, see Note 11.

On August 28, 2009, we announced changes to our North America manufacturing operations which will result in the closure of our manufacturing facility in Evansville, Indiana in mid-2010. We expect that approximately 1,100 full-time positions will be eliminated as a result of the closure. We estimate that we will incur approximately $50 million in total costs in connection with the exit of this facility comprised of $19 million in employee termination costs, $14 million in equipment relocation costs, $5 million in asset impairment costs, and $12 million in other associated costs. We incurred $12 million associated with this closure during the March 2010 quarter. We expect to recognize approximately $15 million of these costs during the remainder of 2010 and $3 million of these costs in 2011 and estimate that approximately $32 million of the estimated $50 million in total cost will result in cash expenditures. As of March 31, 2010, approximately $18 million of these closure costs remain, all of which will result in future cash expenditures.

A summary of the changes to our restructuring liability balance for the March 2010 quarter is as follows:

 

Millions of dollars

   January 1,
Balance
   Charge to
Earnings
   Cash
Paid
    Non-Cash     Translation     March  31,
Balance

Termination costs

   $ 68    $ 16    $ (20   $ —        $ (3   $ 61

Non-employee exit costs

     15      4      (3     (2     —          14
                                            

Total

   $ 83    $ 20    $ (23   $ (2   $ (3   $ 75
                                            

(9) INCOME TAXES

The effective income tax rate for the March 2010 quarter was a benefit of 1.6% compared to a benefit of 27.1% for the March 2009 quarter. The decrease in the benefit from 2009 is primarily due to higher earnings and related tax expense. At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full year and the impact of discrete items, if any, and adjust the quarterly rate, as necessary.

Over the next twelve months it is reasonably possible that we will settle unrecognized tax benefits totaling approximately $30 million associated with certain tax examinations and other events.

 

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(10) PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The components of net periodic pension cost and the cost of other postretirement benefits for the March 2010 and 2009 quarters are as follows:

 

     Three months ended March 31,  
   U.S. Pension Benefits     Foreign  Pension
Benefits
    Other Postretirement
Benefits
 

Millions of dollars

   2010     2009     2010     2009     2010     2009  

Service cost

   $ 0.7      $ 2.8      $ 1.6      $ 1.4      $ 2.6      $ 3.4   

Interest cost

     49.9        51.6        4.9        4.6        10.1        12.9   

Expected return on plan assets

     (47.3     (49.2     (2.5     (2.3     —          —     

Amortization of prior service cost (credit)

     (0.7     —          0.1        0.1        (9.5     (7.7

Amortization of net loss

     7.4        8.3        0.6        0.9        —          —     

Settlement and curtailment loss (gain)

     —          0.2        0.4        (1.7     (29.0     (91.7
                                                

Net periodic cost

   $ 10.0      $ 13.7      $ 5.1      $ 3.0      $ (25.8   $ (83.1
                                                

On August 28, 2009, we announced the closure of our manufacturing facility in Evansville, Indiana, which triggered a curtailment gain in our United States retiree healthcare plan to be recognized as the employees terminate. During the March 2010 quarter, approximately half of the full-time positions in Evansville were eliminated, resulting in the recognition of a curtailment gain of $29 million. The curtailment gain was recognized in our Consolidated Condensed Statement of Income as a component of cost of goods sold with an offset in our Consolidated Condensed Balance Sheet to other comprehensive income, net of tax.

On February 9, 2009, we announced the suspension of the annual credit to retiree health savings accounts “RHSA” for the majority of active participants. The result of the indefinite suspension was a one-time curtailment gain of $89 million included in net periodic cost with an offset to other comprehensive income, net of tax. During the March 2009 quarter, we recorded $80 million of this gain in our Consolidated Condensed Statement of Income as a component of cost of products sold and $9 million was recorded as a component of selling, general and administrative expenses. Additionally, during the March 2009 quarter, we modified benefits for certain employees which resulted in a reduction in the postretirement benefit obligation of $44 million with an offset to other comprehensive income, net of tax.

During the remainder of 2010, we expect to recognize an additional curtailment gain totaling $33 million.

(11) OPERATING SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance.

We identify such segments based upon geographical regions of operations because each operating segment manufactures home appliances and related components, but serves strategically different markets. The chief operating decision maker evaluates performance based upon each segment’s operating income, which is defined as income before interest and sundry income (expense), interest expense, income taxes, minority interests and restructuring costs. Total assets by segment are those assets directly associated with the respective operating activities. The “Other/Eliminations” column primarily includes corporate expenses, assets and eliminations, as well as all restructuring expenses. Intersegment sales are eliminated within each region except compressor sales out of Latin America, which are included in Other/Eliminations.

As described above, our chief operating decision maker reviews each operating segment’s performance based upon operating income which excludes restructuring expenses. These restructuring expenses are included in operating profit on a consolidated basis and included in the Other/Eliminations column in the tables below. For the March 2010 quarter, the operating segments recorded total restructuring expenses (See Note 8) as follows: North America - $12 million, Europe - $7 million and Corporate - $1 million, for a total of $20 million. For the March 2009 quarter, the operating segments recorded total restructuring expenses as follows: North America - $14 million, Europe - $7 million and Latin America - $3 million, for a total of $24 million.

 

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     OPERATING SEGMENTS
     North
America
   Europe    Latin
America
   Asia    Other/
Eliminations
    Total
Whirlpool

Three Months Ended March 31 - Millions of dollars

                

Net sales

                

2010

   $ 2,251    $ 739    $ 1,141    $ 192    $ (51   $ 4,272

2009

     2,104      696      689      120      (40     3,569

Intersegment sales

                

2010

   $ 48    $ 79    $ 60    $ 40    $ (227   $ —  

2009

     35      79      51      37      (202     —  

Depreciation and amortization

                

2010

   $ 70    $ 26    $ 23    $ 4    $ 11      $ 134

2009

     62      22      17      5      9        115

Operating profit (loss)

                

2010

   $ 94    $ 27    $ 167    $ 11    $ (58   $ 241

2009

     164      —        57      5      (60     166

Total assets

                

March 31, 2010

   $ 8,056    $ 3,009    $ 3,048    $ 758    $ 207      $ 15,078

December 31, 2009

     8,123      3,216      2,887      690      178        15,094

Capital expenditures

                

2010

   $ 102    $ 17    $ 16    $ 3    $ 8      $ 146

2009

     46      21      11      1      33        112

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Whirlpool Corporation (“Whirlpool”) is the world’s leading manufacturer of major home appliances with revenues of $17 billion and net earnings available to Whirlpool common stockholders of $328 million for the year ended December 31, 2009. We are a leading producer of major home appliances in North America and Latin America and have a significant presence in markets throughout Europe and India. We have received worldwide recognition for accomplishments in a variety of business and social efforts, including leadership, diversity, innovative product design, business ethics, social responsibility and community involvement. We conduct our business through four reportable segments, which we define based on geography. For additional information about our operating segments, see Note 11 of the Notes to the Consolidated Condensed Financial Statements.

Our global branded consumer products strategy is to introduce innovative new products, increase brand customer loyalty, expand our presence in foreign markets, enhance our trade management platform, improve total cost and quality by expanding and leveraging our global operating platform and where appropriate, make strategic acquisitions and investments.

We monitor country-specific economic factors such as gross domestic product, consumer confidence, retail trends, housing starts and completions, sales of existing homes and mortgage interest rates as key indicators of industry demand. In addition to profitability, we also focus on country, brand, product and channel sales when assessing and forecasting financial results.

We continue to experience macroeconomic challenges which have impacted the global economy, the capital markets and global demand for our products. Although we have made significant progress in reducing cost to better align with global demand, and in improving our liquidity position, we expect that we will continue to experience the effects of liquidity strain on our suppliers, continued low consumer confidence and consumer discretionary spending.

RESULTS OF OPERATIONS

For the March 2010 quarter, consolidated net sales were $4.3 billion, increasing from $3.6 billion in 2009. Consolidated net earnings available to Whirlpool common stockholders were $164 million, or $2.13 per diluted share, increasing from $68 million or $0.91 per diluted share in 2009. The following discussion highlights significant drivers of our operating performance.

Consolidated Net Sales

Consolidated net sales increased 19.7% compared to 2009 primarily due to a 17.8% increase in units sold and the favorable impact of foreign currency, partially offset by lower product price/mix. Excluding the impact of foreign currency, consolidated net sales increased 11.4% in 2010.

The following table summarizes consolidated net sales by region:

 

     Three Months Ended March 31,  

Millions of dollars

   2010     2009     Change  

North America

   $ 2,251      $ 2,104      7.0

Europe

     739        696      6.1   

Latin America

     1,141        689      65.4   

Asia

     192        120      60.1   

Other/eliminations

     (51     (40   —     
                  

Consolidated

   $ 4,272      $ 3,569      19.7
                  

Significant regional trends were as follows:

 

   

North America net sales increased by 7.0% compared to 2009, primarily due to a 10.8% increase in units sold and the favorable impact of foreign currency, partially offset by lower product price/mix. The increase in units sold is due to higher industry demand resulting from strengthening economies in the United States, Mexico and Canada. Excluding the impact of foreign currency, North America net sales increased 4.7% in 2010.

 

   

Europe net sales increased by 6.1% compared to 2009, primarily due to the favorable impact of foreign currency and a 1.2% increase in units sold, partially offset by lower product price/mix. Excluding the impact of foreign currency, Europe net sales decreased 1.9% in 2010.

 

   

Latin America net sales increased by 65.4% compared to 2009, primarily due to a 49.9% increase in units sold and the favorable impact of foreign currency, partially offset by lower product price/mix. During the March 2010 and 2009 quarters, we monetized $41 million and $35 million of BEFIEX credits, respectively. We expect to continue

 

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recognizing credits as they are monetized. As of March 31, 2010, $645 million of BEFIEX credits remain. Future actions by the Brazilian government could limit our ability to monetize these export credits. Excluding the impact of foreign currency, Latin America net sales increased 39.5% in 2010.

 

   

Asia net sales increased by 60.1% compared to 2009, primarily due to a 49.0% increase in units sold and the favorable impact of foreign currency. Excluding the impact of foreign currency, Asia net sales increased 49.2% in 2010.

Gross Margin

The consolidated gross margin percentage increased in 2010 primarily due to cost reduction initiatives and productivity improvements, partially offset by lower product price/mix. In addition, certain one time items unfavorably impacted gross margin including a 2010 charge to correct a supplier-related quality and potential product safety issue, lower curtailment gains in 2010 associated with a postretirement benefit plan, partially offset by a foreign operating tax settlement in 2009. These one time items resulted in a net reduction in gross margin of $77 million, or 1.8 percentage points.

The following table summarizes gross margin percentages by region:

 

     Three Months Ended March 31,  
     2010     2009     Change  

North America

   11.2   15.1   (3.9 )pts 

Europe

   14.0      10.7      3.3   

Latin America

   21.7      15.2      6.5   

Asia

   18.2      19.4      (1.2

Consolidated

   15.0      14.7      0.3   

Significant regional trends were as follows:

 

   

North America gross margin percentage decreased primarily due to the net impact of certain one time items including a 2010 charge to correct a supplier-related quality and potential product safety issue, a 2009 refrigerator recall charge and lower 2010 curtailment gains associated with a postretirement benefit plan. These one time items resulted in a net reduction in gross margin of $103 million, or 4.6 percentage points. Additionally, gross margin was negatively impacted by lower product price/mix. The above items were partially offset by continued cost reductions and improved productivity. See Notes 5 and 10 to the Consolidated Condensed Financial Statements for additional information related to product recalls and curtailment gains, respectively.

 

   

Europe gross margin percentage increased primarily due to continued cost reductions, improvements in productivity and the favorable impact of foreign currency.

 

   

Latin America gross margin percentage increased primarily due to improvements in raw materials costs and productivity, a $26 million 2009 charge associated with a foreign operating tax settlement and the favorable impact of foreign currency. The above items were partially offset by lower product price/mix. See Note 5 to the Consolidated Condensed Financial Statements for additional information related to the foreign operating tax settlement.

 

   

Asia gross margin percentage decreased due to lower product price/mix and higher raw materials costs, partially offset by improved productivity and the favorable impact of foreign currency.

Selling, General and Administrative

The following table summarizes selling, general and administrative expenses as a percentage of sales by region:

 

     Three Months Ended March 31,  
          As a %          As a %  

Millions of dollars

   2010    of Sales     2009    of Sales  

North America

   $ 152    6.7   $ 147    7.0

Europe

     77    10.4        74    10.7   

Latin America

     80    7.0        48    6.9   

Asia

     24    12.4        19    15.4   

Other/eliminations

     38    —          39    —     
                          

Consolidated

   $ 371    8.7   $ 327    9.2
                          

 

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For the March 2010 quarter, consolidated selling, general and administrative expenses, as a percent of consolidated net sales, decreased compared to 2009 primarily as a result of improved leverage due to increases in net sales. Total consolidated selling, general and administrative expenses increased during the March 2010 quarter primarily due to the unfavorable impacts of foreign currency.

Restructuring

Restructuring initiatives resulted in charges of $20 million for the March 2010 quarter, reflecting ongoing efforts to optimize our global operating platform. This amount has been identified as a separate component of operating profit and primarily consists of charges to shift refrigeration capacity within North America and dishwasher capacity within Europe. For additional information about restructuring activities see Note 8 to the Consolidated Condensed Financial Statements.

Interest and Sundry Income (Expense)

Interest and sundry income (expense) decreased $35 million compared to 2009 primarily due to the favorable impact of foreign currency and higher interest income.

Interest Expense

Interest expense decreased $4 million compared to 2009 due to a one time interest charge recorded in 2009 related to a foreign operating tax settlement and lower average debt levels, partially offset by higher interest rates.

Income Taxes

The effective income tax rate for the March 2010 quarter was a benefit of 1.6% compared to a benefit of 27.1% for the March 2009 quarter. The decrease in the benefit from 2009 is primarily due to higher earnings and related tax expense. For additional information about income taxes see Note 9 to the Consolidated Condensed Financial Statements.

Net Earnings Available to Whirlpool Common Stockholders

Net earnings available to Whirlpool common stockholders for the March 2010 quarter were $164 million or $2.13 per diluted share, compared to $68 million, or $0.91 per diluted share in 2009 due to the factors described above.

UPDATE: FORWARD-LOOKING PERSPECTIVE

For the full year 2010, we expect earnings per diluted share to be in the range of $8.00 to $8.50 compared with our previous guidance of $6.50 to $7.00. We currently expect free cash flow for the year to be in the range of $500 to $600 million, compared with our previous guidance of $400 to $500 million. We are also updating our outlook for demand. Within the Latin America region, we expect industry demand to increase from 2009 levels by approximately 10% compared with our previous estimate of a 5-10% increase. We expect North American appliance shipments to increase 3-5% compared with our previous expectation of 2-4%. We anticipate full-year 2010 industry demand in Asia to increase by approximately 5-8% compared with our previous expectation of 3-5% from 2009 levels. Material cost inflation is expected to be at the higher end of the $200 to $300 million range we previously provided.

The table below reconciles projected 2010 cash provided by operations determined in accordance with generally accepted accounting principles (GAAP) in the United States to free cash flow, a non-GAAP measure. Management believes that free cash flow provides shareholders with a relevant measure of liquidity and a useful basis for assessing Whirlpool’s ability to fund its activities and obligations. There are limitations to using non-GAAP financial measures, including the difficulty associated with comparing companies that use similarly named non-GAAP measures whose calculations may differ from our calculations. We define free cash flow as cash provided by continuing operations after capital expenditures and proceeds from the sale of assets/businesses. The projections shown here are based upon many estimates and are inherently subject to change based on future decisions made by management and the board of directors of Whirlpool, and significant economic, competitive and other uncertainties and contingencies.

 

Millions of dollars

   2010 Outlook  

Cash provided by operating activities

   $ 1,050      —      $ 1,150   

Capital expenditures

     (550   —        (600

Proceeds from sale of assets/businesses

     —        —        50   
                   

Free cash flow

   $ 500      —      $ 600   
                   

 

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FINANCIAL CONDITION AND LIQUIDITY

Our objective is to finance our business through operating cash flow and the appropriate mix of long-term and short-term debt. By diversifying the maturity structure, we avoid concentrations of debt, reducing liquidity risk. We have varying needs for short-term working capital financing as a result of the nature of our business. The volume and timing of refrigeration and air conditioning production impacts our cash flows and consists of increased production in the first half of the year to meet increased demand in the summer months.

We have experienced negative global economic trends in the recent quarters. To succeed in this environment we have aggressively taken steps to further reduce all areas of cost, production capacity and working capital. Outside the United States, short-term funding is provided by bank borrowings on uncommitted lines of credit. We believe that our operating cash flow, together with access to sufficient sources of liquidity, will be adequate to meet our ongoing funding requirements.

As of March 31, 2010, there was no balance outstanding under our credit facility and we are in compliance with the financial covenants for all periods presented.

Pension and Postretirement Benefit Plans

On August 28, 2009, we announced the closure of our manufacturing facility in Evansville, Indiana, which triggered a curtailment gain in our United States retiree healthcare plan to be recognized as the employees terminate. During the March 2010 quarter, approximately half of the full-time positions in Evansville were eliminated, resulting in the recognition of a curtailment gain of $29 million. The curtailment gain was recognized in our Consolidated Condensed Statement of Income as a component of cost of goods sold with an offset in our Consolidated Condensed Balance Sheet to other comprehensive income, net of tax.

On February 9, 2009, we announced the indefinite suspension of the annual credit to retirement health savings accounts for the majority of active participants. The result of the suspension was a curtailment gain of $89 million.

During the remainder of 2010, we expect to recognize an additional curtailment gain totaling $33 million.

For additional information about pension and postretirement benefit plans, see Note 10 to the Consolidated Condensed Financial Statements.

Sources and Uses of Cash

We expect to meet our cash needs for 2010 from cash flows from operations, cash and equivalents and financing arrangements. Our cash and equivalents were $1.2 billion at March 31, 2010 compared to $193 million at March 31, 2009.

Cash Flows from Operating Activities

Cash provided by operating activities during the March 2010 quarter was $71 million, an increase of $343 million compared to 2009. Cash provided by operations reflects lower cash payments for accounts payable and higher cash earnings, partially offset by higher payments for inventory and an increase in accounts receivable driven by higher sales volumes.

Cash Flows from Investing Activities

Cash used in investing activities during the March 2010 quarter was $150 million compared to $99 million in 2009. The increase in cash used in investing activities was primarily due to higher capital spending and lower proceeds from the sale of assets in 2010.

Cash Flows from Financing Activities

Cash used in financing activities during the March 2010 quarter was $90 million compared to cash provided of $420 million in 2009. The March 2010 quarter reflects net repayments of short-term borrowings and long-term debt repayments totaling $52 million compared to net proceeds of $457 million in 2009. During the March 2010 quarter, we paid dividends to common stockholders totaling $33 million, purchased noncontrolling interest shares in our Latin America segment for $12 million, and received proceeds from the issuance of common stock related to option exercises of $7 million. During 2009, we paid dividends to common stockholders totaling $32 million.

OTHER MATTERS

Government authorities in various jurisdictions are conducting antitrust investigations of the global compressor industry, including our compressor business headquartered in Brazil (“Embraco”). In 2009, Embraco sales represented approximately 7% of our global net sales.

 

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In February 2009, competition authorities in Brazil, the United States and Europe began to seek documents from us in connection with their investigations. A grand jury subpoena from the United States Department of Justice requested documents for the time period from 2003 to 2009. Competition authorities in other jurisdictions have sought similar information.

In September 2009, the Brazilian competition commission (CADE) agreed to terminate the administrative investigation of our compressor business. Under the terms of the settlement agreement, Whirlpool affiliates and certain executives located in Brazil acknowledged a violation of Brazilian antitrust law in the Brazilian compressor market by some Embraco employees. The settlement agreement provides for the affiliates to make contributions totaling 100 million Brazilian reais to a Brazilian government fund. The contributions translated to approximately $56 million, all of which was recorded as an expense in 2009. We are cooperating with the ongoing government investigations in other jurisdictions and have taken actions, and will continue to take actions, to minimize our potential exposure.

Since the government investigations became public in February 2009, we have been named as a defendant in numerous related antitrust lawsuits in various jurisdictions seeking damages in connection with the pricing of compressors from 1996 to 2009. Several other compressor manufacturers who are the subject of the government investigations have also been named as defendants in the litigation. United States federal lawsuits instituted on behalf of purported purchasers and containing class action allegations have been combined in one proceeding in the United States District Court for the Eastern District of Michigan. We intend to defend the lawsuits vigorously.

The final outcome and impact of these matters, and related claims and investigations that may be brought in the future are subject to many variables, and cannot be predicted with certainty. An accrual has been established only where we have determined that a loss is probable and the amount of loss can be reasonably estimated. As of March 31, 2010, we have accrued charges of approximately $94 million related to these matters. While it is currently not possible to reasonably estimate the aggregate amount of costs which we may incur in connection with these matters, such costs could have a material adverse effect on our financial position, liquidity, or results of operations.

The Brazilian Constitution provides a general basis for recognizing tax credits on the purchase of raw materials used in production (“IPI tax credit”). Certain raw materials that are exempt or have a zero tax basis in the production process qualify for these IPI tax credits. Based on legal precedent, in 2003 and 2004, we recognized tax credits in an aggregate amount of $26 million adjusted for currency. The Brazilian tax authority subsequently challenged the recording of IPI tax credits. No credits were recognized in 2005 through 2009. In 2009, we entered into an agreement under a special Brazilian government program providing for extended payment terms and reductions in penalties and interest to encourage taxpayers to resolve disputed IPI tax credit amounts. Charges recorded related to this program for the year ended December 31, 2009 include $27 million in tax that was recorded in cost of products sold, $16 million in interest expense and $4 million in penalties recorded in interest and sundry income (expense) in our Consolidated Statements of Income. During the December 2009 quarter, based on newly issued regulations, we settled with the Brazilian tax authority to resolve these and other disputed tax amounts. As a result of this settlement agreement, we recorded an increase in value added taxes owed of approximately $4 million in cost of goods sold, a reduction in interest expense totaling $18 million related to interest abatement, a reduction in interest and sundry income (expense) of $4 million related to penalty abatement and related income tax expense of $5 million under this special program. The settlement is in the process of being ratified by the Brazilian tax authority.

In 1989, a Brazilian affiliate (now a subsidiary) brought an action against a financial institution in Brazil seeking a “Declaration of Non-Enforceability of Obligations” relating to loan documentation entered into without authority by a senior officer of the affiliate. In September 2000, an adverse decision in the declaratory action became final. In 2001, the financial institution began a collection action and we responded with a counterclaim. The lower court dismissed the counterclaim in 2002 and the Superior Court confirmed the lower court decision in December 2005. The Superior Court dismissed our counterclaim in 2007. In late 2008, the lower court issued a decision in the collection action in favor of the financial institution in the amount of 283 million Brazilian reais (approximately $159 million), plus judicial adjustments, which could be significant. We have appealed this decision. Based on our outside counsel’s assessment of the case, the amount previously accrued for our estimated exposure for this litigation remains unchanged. However, the amount of the final award, if any, may be materially different than the amount we have accrued.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our exposures to market risk since December 31, 2009.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our filings under the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Prior to filing this report, we completed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2010.

 

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information with respect to legal proceedings can be found under the heading “Commitments and Contingencies” in Note 5 to the Consolidated Condensed Financial Statements contained in Part I, Item 1 of this report.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2009. The risk factors disclosed in our Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition or results. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition or results.

Item 2. Unregistered Sale of Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Other Information

None

Item 5. Exhibits

 

a. The following are included herein:

 

Exhibit 31.1    Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2    Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1    Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

WHIRLPOOL CORPORATION

(Registrant)

By  

/s/ ROY W. TEMPLIN

Name:   Roy W. Templin
Title:  

Executive Vice President

and Chief Financial Officer

(Principal Financial Officer)

April 26, 2010

 

24

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeff M. Fettig, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Whirlpool Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 26, 2010

 

/s/ JEFF M. FETTIG

Name:   Jeff M. Fettig
Title:  

Chairman of the Board and

Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Roy W. Templin, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Whirlpool Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 26, 2010

 

/s/ ROY W. TEMPLIN

Name:   Roy W. Templin
Title:  

Executive Vice President

and Chief Financial Officer

Exhibit 32.1

Certifications Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Whirlpool Corporation (the “Company”) for the quarterly period ended March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jeff M. Fettig, as Chief Executive Officer of Whirlpool, and Roy W. Templin, as Chief Financial Officer of Whirlpool, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of Whirlpool.

 

/s/ JEFF M. FETTIG

Name:   Jeff M. Fettig
Title:  

Chairman of the Board and

Chief Executive Officer

Date:   April 26, 2010

/s/ ROY W. TEMPLIN

Name:   Roy W. Templin
Title:  

Executive Vice President and

Chief Financial Officer

Date:   April 26, 2010