Cold Cycle for Whirlpool Earnings

The washing-machine outfit's earnings quality continues to be poor.
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Once again, poor earnings quality predicts an earnings shortfall.

Witness

Whirlpool

(WHR) - Get Report

, which warned late Tuesday that 2001 earnings growth would fall well short of its 10%-15% target. The stock dropped $2.56, or 4%, Wednesday.

Detox

criticized Whirlpool's earnings quality Tuesday and raised the possibility that the company would have problems meeting forecasts.

But the story doesn't stop here. Depressingly, the quality of Whirlpool's third-quarter earnings remained icky. Ergo, it can't be long before we get more bad news from the Benton Harbor, Mich.-based appliance maker. The company didn't return a call seeking comment.

Whirlpool reported third-quarter core earnings of $1.46 per share. But after adjusting for a raft of noncore items and other hard-to-justify contributions, it could be argued that the core number was around 95 cents, if not lower.

First, the tax rate came down to 34% from 36% in the year-ago quarter, benefiting earnings to the tune of 4 cents. Next, Whirlpool allowed its provision against trade receivables to drop to $93 million in the third quarter, or 5% of receivables, from $108 million, or 7% of receivables, a year ago. Adding to the provision hits earnings. Thus, keeping it at the year-earlier figure of $108 million could have led to a 14-cent hit to net income.

Then there's the strange case of the double restructuring charge. In a separate line item in its income statement, Whirlpool broke out $5 million of restructuring costs, which it excluded from its core earnings number. Fair enough. But there was another, oddly placed, charge. This $9 million charge was excluded from the cost-of-goods-sold line item used in calculations of core income. After tax, this amounts to 9 cents per share.

The company didn't break out the contributions made to core earnings by its pension plan and Brazilian tax credits. Let's assume that the pension benefit again contributed the usual 13 cents to earnings and tax credits added the same as in the second quarter -- 11 cents. Altogether, these five items add up to 51 cents per share. Subtract that from the reported core earnings of $1.46 per share and the company only made 95 cents.

And Latin American operations are still getting a large, but hard-to-quantify, boost from currency movements. Operating profits from the region soared 28% from the year-ago period, even as revenue tanked 19%. This can happen because many of the Latin American costs are paid in the Brazilian currency, the real, which has cheapened against the dollar, thus bringing down the dollar cost in Whirlpool accounts.

Meanwhile, much of the revenue from the region is booked in dollars. One way to adjust for the currency impact would be to replace the third-quarter 2002 Latin American operating margin of 9.5% with the year-ago number of 6%. That 6% margin on 2001 Latin American revenue of $336 million would yield operating profits of $20 million, or $12 million less than reported. Without that $12 million, net income would have been 12 cents lower.

The earnings machine is stuck on spin cycle.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.