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liable for any direct or indirect trading losses caused by any information contained in this report. We have a short interest in Whirlpool stock
and therefore stand to realize gains in the event that the price of the stock declines. Please refer to our full disclaimer located on the last
page of this report.

Summary
Soapbox Research is always on the lookout for companies (and management)
behaving badly. While we don’t discriminate based on industry or geography, Company:
our most successful calls have been focused on consumer facing, easy to Whirlpool Corp
understand businesses. Take, for example, Newell Brands, whose stock has
declined 60% following our report in November 2017. Today, we have Ticker: WHR
identified another consumer business which we believe faces fundamental Industry:
issues but uses clever accounting tricks to conceal these problems from Consumer
investors: Whirlpool (“WHR” or “the Company”). Discretionary
Whirlpool has long been a well-recognized name in America’s kitchens and Stock Price as of
laundry rooms. In fact, in 2018, 54% of Whirlpool’s revenue came from 9/10/2019:
North America. However, recent macro developments have caused issues $147.34
for WHR in North America, and we believe we are only in the early innings
of the problems that lie ahead for the Company. Market Cap:
$9.3bn
Whirlpool has not been upfront with investors in communicating these issues.
Instead, the Company has focused on metrics that obfuscate the economic Daily Volume:
realities of Whirlpool’s declining business and embellish results. Not only 95,904,721
are these metrics misleading to investors, but Whirlpool’s reliance on these (3 month avg.)
measures have led the Company to overcompensate management despite
Price Target:
poor performance. Specifically, we will demonstrate:
$66.62
• Due to inappropriate addbacks, in 2018, the divergence between
Ongoing EBIT and GAAP EBIT grew to a staggering 373%.

• Made up metric “Ongoing EPS” was $17.88 / share more than


GAAP EPS!

• Competition from Samsung and LG will only continue to increase as


they ramp up production at their new US factories, leading to
margin deterioration for Whirlpool.

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The Spin Cycle: Whirlpool Focuses Investors’ Attention on Made up Metrics
Whirlpool measures its value creation by focusing on three metrics: sales growth, EBIT margin, and FCF
as a percentage of sales. Whirlpool presents these metrics at the beginning of its annual reports as can
be seen in the excerpt below which appears within the first ten pages of WHR’s most recent 10-K.

These measures also take center stage on earnings calls and investor presentations as Management tells
shareholders they are making great progress in creating value.

For example, on the 4Q-2018 earnings call, management touts,

“We delivered very strong free cash flow of $853 million for the year, driven by disciplined
working capital management including significant improvement in inventory and the favorable
timing of certain payments. The actions we took in 2018 coupled with favorable exit rates in
Europe give us confidence that we deliver results in 2019 that put us back on track to our long-
term goals.”

This continues on the Q1-2019 earnings call as Mark Bitzer states,

“Ongoing EBIT margin was 6.3% for the quarter, compared to 6% last year, driven by very strong
price/mix. Overall, we are very pleased with our first quarter results and believe we are well
positioned to deliver on our full-year commitment.”

…And again in Q2-2019:

“In line with our long-term goal, we delivered global revenue growth excluding currency of 3.5%,
a strong price mix more than offset unit volume declines. Ongoing EBIT margin was 7% for the
quarter, a year-over-year increase of approximately 30 basis points. Overall, we are obviously
very pleased with our second quarter results and believe we are well positioned to deliver our
upwardly revised full-year commitments.”

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In addition to misleading investors by relying on Ongoing EBIT and free cash flow, we believe WHR relies
on another made up metric, Ongoing Earnings Per Diluted Share to further mask WHR’s true business
trajectory. Whirlpool highlights this absurd metric on earnings calls and investor presentations and the
sell-side community has come to rely upon it in establishing price targets and gauging Company
performance. For example, in WHR’s Q12019 Earnings Call, Marc Bitzer, WHR’s CEO started by boasting
about “another quarter with strong results, including a record first quarter ongoing earnings per share
of $3.11.” Then, a research note from JPMorgan followed that stated “We expect a positive reaction by
the stock tomorrow… WHR reported 1Q Operating EPS of $3.11, above the Street’s $2.86 and our
$3.03E.”

On first look, these seem like perfectly reasonable metrics by which to judge business performance.
However, a closer examination reveals that these seemingly standard measures are actually derived
using numerous addbacks and adjustments at management’s discretion. For example, despite
presenting the margin expansion goal as “EBIT Margin”, digging deeper in the financials, we find that
Management actually uses an obscure calculation of “Ongoing EBIT” to calculate this margin expansion
metric. The same goes for free cash flow, which relies on irregular adjustments not typically seen in free
cash flow calculations.

Naturally, as one would expect from made up metrics, these measures have conveyed a favorable story
about Whirlpool and its prospects, and WHR’s stock price has appreciated more than 30% year-to-date.
Sell side estimates have followed, increasing nearly 20% since the start of the year.

However, a closer look reveals the absurdity of these metrics and WHR’s (and the market’s) overreliance
on non-GAAP adjustments over multiple reporting periods.

Scrubbing WHR’s Ongoing EBIT and Ongoing Earnings Per Diluted Share
First, taking a closer look at the divergence between GAAP EBIT and Ongoing EBIT, we see that the
difference has been growing over the last three years, and that in 2018, Ongoing EBIT was a staggering
373% above GAAP EBIT.

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The components responsible for these large differences include an addback of goodwill impairment
charges in 2018 as well as addbacks of restructuring expenses in 2016, 2017, and 2018.

According to Management, Ongoing EBIT is meant to “exclude items that may not be indicative of, or
are unrelated to, results from [WHR’s] ongoing operations and provide a better baseline for analyzing
trends in [the] underlying businesses.” However, upon closer inspection, we find the opposite to be
true. In fact, looking back over the last decade, WHR has incurred restructuring expenses every year
since 2001! Given this, we don’t understand why restructuring expenses are eliminated to arrive at
Ongoing EBIT when they have clearly been an ongoing part of WHR’s business over multiple business
cycles and have trended upwards over time as depicted below.

The same deficiencies we have identified in WHR’s Ongoing EBIT metric also flow through to WHR’s
Ongoing Business Diluted EPS. On top of that, the Company also layers on absurd non-GAAP tax rates to
further inflate the Ongoing Business Diluted EPS metric. For example, in 2018, the Company paid
$138mm in GAAP taxes / $206mm in cash taxes. However, to compute the Ongoing Business Diluted
EPS, WHR inexplicably only subtracts out $73mm in taxes, which equates to a 2018 normalized tax rate
of approximately 6.6%. Considering that neither WHR’s GAAP tax rate nor its cash tax rate have ever
been this low and are unlikely to ever reach such levels in the future, we think it is absurd to use a 6.6%
rate to represent the ongoing business and do not understand the rationale behind doing so.

Below, we highlight the divergent trend between WHR’s GAAP Diluted EPS and Ongoing Business
Diluted EPS and the adjustments WHR uses to account for the differences:

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Relevance of Ongoing EBIT and Ongoing Business EPS

The problem with WHR adding back restructuring expenses as if they were one-time items is twofold.

First of all, many sell side analysts value WHR on either a forward EV / EBITDA multiple or using a
combination of forward EV / EBITDA and P/E multiples. WHR’s treatment of restructuring expenses as
one-time items has resulted in a similar treatment by research analysts who add back these expenses to
forecast EBITDA. This has, in our opinion, resulted in erroneously inflated price targets.

Second of all, as can be seen from the relevant excerpts taken from WHR’s proxies shown below,
Ongoing EBIT, along with Free Cash Flow, which we discuss later, determine the short-term incentive
component of management’s compensation:

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Had $247mm of 2018’s restructuring expense not been added back into ongoing EBIT, WHR’s actual
Ongoing EBIT would have been $1,072mm, falling below the 0% payout threshold. The same is true for
2017 when WHR added back $275mm of restructuring expenses. In 2016, taking out the $173mm
restructuring expense addback would have resulted in a payout of 19.4% instead of the 85% that
actually occurred.

In short, adding back restructuring expenses to calculate Ongoing EBIT has resulted in management
taking money out of shareholders’ pockets and putting it in their own. In its 2018 proxy, WHR disclosed
that in 2019, the Company Performance Factor will increase to 200% from 150%, allowing for
shareholders to be fleeced by Management to an even greater extent.

For Ongoing Business EPS, we see similar implications. As already mentioned, most sell-side analysts
rely on EBITDA or a combination of EBITDA and P/E to set WHR’s price targets and assess the Company’s
quarterly performance. Inflating this P/E metric by adding back restructuring expenses and using
ridiculous tax rate assumptions has served to artificially increase stock price targets and portray
Whirlpool’s performance to be better than reality.

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In addition to misleading the market, WHR’s Ongoing Business EPS calculation serves to further benefit
management since it is a key performance indicator used in determining their compensation. As we
showed above, while ongoing EBIT and free cash flow are key determinants in Management’s short-
term incentive compensation, Ongoing Earnings Per Share is a key component when determining
Management’s long-term incentives (see excerpt below from WHR’s 2019 proxy)

For the 2016-2018 period, according to WHR’s proxy (excerpt below), the Company earned $42.96 in
Cumulative Ongoing EPS, resulting in Management receiving 75% of the payout target. However, if we
back out the restructuring expense addbacks, and use cash taxes paid instead of the senseless tax-rate
suggested by Management, we would have seen Cumulative Ongoing EPS equal to $29.57, and a 0%
payout to Management.

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Scrubbing WHR’s Free Cash Flow
WHR’s shenanigans do not end with its addback of ongoing restructuring expenses to Ongoing EBIT and
passing off artificially low tax rates as representative of the ongoing business. The Company also
extends its liberal financial metric definitions in characterizing Free Cash Flow. Like Ongoing EBIT and
EPS, Free Cash Flow is another key metric that Management uses to assess performance and plays a
central role in the Company’s narrative to investors. To calculate Free Cash Flow, WHR uses GAAP cash
provided from operating activities after capital expenditures but also adds in proceeds from the sale of
assets / businesses and changes in restricted cash, two measures which do not accurately reflect WHR’s
ongoing business.

When taken in combination with the Company’s (erroneous) rationale in adding back restructuring
expenses to Ongoing EBIT, we find this view of Free Cash Flow seems rather ironic. WHR eliminates
restructuring expenses from Ongoing EBIT because it believes these are non-recurring (despite having
recurred every year since 2001 and forecasted to continue). However, WHR includes in Free Cash Flow
proceeds from asset / business sales and changes in restricted cash which are indeed non-recurring
items or do not actually represent cash available to the Company.

Comparing Free Cash Flow reported by WHR and what we believe to be the true free cash flow
generated by WHR shows a similar trend to our EBIT analysis: a large and growing discrepancy between
the two measures.

In its 10-K, Whirlpool notes that the “change in restricted cash is related to the private placement funds
paid by Whirlpool to acquire majority control of Whirlpool China (formerly Hefei Sanyo) in 2014 and
which are used to fund capital expenditures and technical resources to enhance Whirlpool China’s
research and development and working capital, as required by the terms of the Hefei Sanyo acquisition
completed in October 2014.” Given this, WHR’s choice to include changes in restricted cash when

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calculating free cash flow is especially puzzling since not only is this non-recurring in nature, but it
doesn’t actually represent cash inflows to the Company.

Relevance of Addbacks to Free Cash Flows


Similar with what we have seen with WHR’s Ongoing EBIT, its Free Cash Flow is the second key
component in determining the short-term incentive portion of management’s compensation. Had free
cash flows been calculated without adding back asset sale proceeds or restricted cash flow changes,
management would have earned payouts of 60%, 40% and 70% in 2016, 2017, and 2018, respectively –
significantly lower than the 83%,66% and 101% they actually realized.

Additionally, aside from its impacts on Management pay, relying on WHR’s definition of Ongoing Free
Cash Flow masks the true amount of cash that is available to WHR for stock repurchases, dividends and
debt service which have all grown rapidly over the last three years. Dividends and stock buybacks have
contributed to keeping WHR’s stock price elevated. We think declining free cash flows could jeopardize
the Company’s ability to repurchase shares and maintain its 3.5% dividend yield. Below, a comparison
of WHR’s free cash flow with the Company’s debt levels, dividends and buybacks helps to illustrate why
we are concerned.

Whirlpool Business Fundamentals

Our analysis shows that if we take away the made-up metrics that have embellished WHR’s headline
numbers over the last several years, eliminate the nonsensical addbacks, tax rates, and “normalized”

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figures, WHR’s business fundamental have suffered. However, we believe that the worst is yet to come
as competition from foreign entrants into the US market, namely LG and Samsung, intensifies.

In order to understand the state of current and upcoming affairs, we need to look back to January 2018
when in response to a complaint from Whirlpool, the Trump administration approved a combined tariff
and quota on imported washing machines. Under this tariff / quota, the first 1.2 million imported
washing machines faced a tariff of 20%, with all subsequent washing machine imports facing a tariff of
50%. Initially, this worked out very well for Whirlpool as companies such as Samsung and LG that sell
imported washers raised prices to help offset the cost of the tariffs. Whirlpool also raised prices which
without the cost of the tariff, led to improved margins for the Company as approximately 30% of its
revenue comes from laundry appliances.

Longer term however, the protectionist measures that Whirlpool pushed for ended up backfiring as both
LG and Samsung decided to open factories in the US. LG announced the completion of their Tennessee
plant in May of this year:

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Both factories are expected to be running at capacity by early 2020 with each being able to produce
about 1 million washers a year, meaning more competition for Whirlpool.

Historically, Whirlpool has not contended well with competition. The chart below shows that from 2002
to 2006 when foreign appliance imports increased, Whirlpool’s North American EBIT margin declined
over 5% despite help from the strongest housing market in history.

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In addition to increasing competition from domestic production by LG and Samsung, both companies
are expected to continue to import the 1.2 million washers under the quota. So between LG and
Samsung alone, we will see a supply of 3.2 million washers in 2020. Add to that the approximately 1
million washers that GE produces in the US, and approximately 2 million washers from Whirlpool, and
you get a supply of 6.2 million washers versus an annual US demand of about 4 million.

Given that the tariffs are set to reduce in 2020 and expire in 2021, we expect that this excess supply will
continue to build and translate to heavy promotions among the appliance manufacturers, resulting in
deteriorating revenue and margins for Whirlpool. We expect this decline to be worse than what we
witnessed in the 2002 – 2006 time period since we don’t have a raging housing market to absorb some
of this excess supply.

Valuation
Looking ahead to 2019, in its 2018 10-K, WHR Management initially stated that “for the full year 2019,
[they] expect to incur up to $100 million of restructuring charges, as [they] reduce fixed costs primarily
in the EMEA region.” However, in a July 22, 2019 press release, the Company increased its 2019
restructuring expense estimate to $200mm without much explanation. We note that in 2017 and 2018
actual restructuring expenses came in at 38% and 24% ahead of the Company’s respective forecasts and
thus would not be surprised if this trend continues in 2019.

To get to a valuation for WHR, we start with sell side estimates for 2020 North America Revenues and
North America EBIT of $11,515 and $1,376mm respectively, representing a 12% EBIT margin. Given the

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margin deterioration that WHR experienced from foreign competition previously – approximately 100
bps a year (as depicted by the graph on page 11), we adjust North American EBIT by 2% to account for
the increase in foreign competition that Whirlpool has started to encounter in 2019. This results in a
North American EBIT decrease of $230mm which flows through to 2020 estimated total company
adjusted EBITDA to result in a company-wide EBITDA of $1,797mm. As we noted previously, sell-side
adjusted EBITDA adds back restructuring costs, which we estimate to be around $100mm in 2020.
Adjusting for this, we get to a company-wide estimated 2020 EBITDA of $1,697.

According to Bloomberg (screenshot below), WHR is currently trading at a 7.8x multiple of its 2020E sell-
side consensus EBITDA, at the high-end of it’s historical five year EV / FY2 EBITDA range.

Given the Company’s glum business prospects and questionable management payout practices, we
believe that at most, Whirlpool should trade more in line with its five-year historical average multiple –
6.9x. Applying this to our 2020 estimated EBITDA, we get a price target of $66.62 for Whirlpool,
representing just over 50% downside to WHR’s current price.

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Disclaimer:

You are reading a short-biased opinion piece. Obviously, we will make money if the price of Whirlpool declines.
This report and all statements contained herein are the opinion of Soapbox Research, and are not statements of
fact. Our opinions are held in good faith, and we have based them upon publicly available evidence, which we set
out in our research report to support our opinions. We conducted research and analysis based on public
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