To paraphrase a certain former U.S. president: "There they go again." Just like (NASDAQ:FLWS) last month, and (NASDAQ:DSCM) yesterday, Whirlpool (NYSE:WHR) led off its 2004 earnings announcement with a statement that may have been spelled "Record 2004 Sales" but that clearly meant "earnings and free cash flow decline."

You have to pity the poor PR department denizen who has to think up positive ways to spin numbers like these:

  • Quarterly sales rose 8.1%, of which 3.1% came from currency fluctuations.
  • Annual sales rose 8.6%, of which 2.6% came from the same source.
  • Quarterly profits declined 18%.
  • Annual profits declined by a penny (to $5.90 per diluted share).
  • And free cash flow slowed by 12%, falling from last year's $321 million to $283 million.

Considering what the PR department had to work with, I guess you can't blame it for going back to the old "record sales" well. But remember: We don't invest our hard-earned cash in companies, hoping that they will just sell more stuff. We invest our money in companies, hoping they will use it to earn us more profits. So far, Whirlpool is having a hard time fulfilling that second objective.

The primary obstacle preventing Whirlpool from growing its profits, as we've noted before, is the rising cost of raw materials. Steel and aluminum from which to manufacture appliances. Oil to fuel the manufacturing and transport the goods. Combined, these higher costs of doing business lopped 100 basis points off each of Whirlpool's gross and operating margins, driving them down to 21.6% and 5.7%, respectively, for the year.

The effects of higher raw-materials costs on Whirlpool, in comparison with its competitors, are telling. Over in Europe, where stronger currencies make dollar-denominated prices for some commodities relatively cheaper than in the U.S., Sweden's Electrolux (NASDAQ:ELUX) has been able to keep its gross margins about 200 basis points higher than Whirlpool's. Back in the U.S., competitor Maytag (NYSE:MYG) enjoys no such advantage and is suffering even more mightily than Whirlpool, posting gross margins of only 14%.

Whilrpool has decided to take measures to mitigate its high raw-materials costs, however, announcing 5%-to-10% price increases on its products in most major markets earlier this year. And that may prove to be the company's silver lining in the end. Because raw-materials costs are cyclical, what's pricey now will tomorrow become cheaper. I'll bet you a silver dollar, though, that once the prices of steel and oil begin to reverse and fall, the price of a Whirlpool washer will not be quick to follow.

Want to wallow in Whirlpool's misery a little longer? Try reading:

Fool contributor Rich Smith doesn't own shares in any company mentioned in this article.