Mohawk Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 28, 2014; comparisons are to periods ended June 29, 2013. Amounts below are in U.S. dollars unless noted.
Business context and results
Mohawk is a global flooring manufacturer with Carpet, Ceramic, and Laminate and Wood segments. Results included Marazzi, acquired in April 2013, and other recent acquisitions. The company sold a non-core sanitary ware business in January 2014; its results are classified as discontinued operations.
- Q2: Net sales rose 3.6% to $2.048 billion. Gross profit was $574.8 million (28.1% margin, versus 26.0%); operating income was $222.2 million (10.9% margin, versus 6.7%). Net earnings attributable to Mohawk were $152.8 million, or diluted EPS of $2.08, compared with $84.6 million and $1.16.
- First half: Net sales rose 11.5% to $3.861 billion. Gross profit was $1.056 billion (27.4% margin, versus 25.7%); operating income was $353.0 million (9.1% margin, versus 6.4%). Net earnings attributable to Mohawk were $233.8 million, or diluted EPS of $3.19, compared with $135.1 million and $1.89.
- Segment operating income, Q2 / first half: Carpet $62.8 million / $97.1 million; Ceramic $106.4 million / $167.1 million; Laminate and Wood $60.8 million / $105.0 million. All three segments reported higher operating income than in the comparable periods.
Cash flow, liquidity and debt
- First-half operating cash flow was $97.9 million, down from $113.9 million. Working-capital outflows included $200.7 million from receivables and $74.6 million from inventories.
- Capital expenditures were $249.7 million, versus $146.1 million in the prior-year first half. Investing cash outflow was $249.7 million, compared with $595.6 million, which included substantial prior-year acquisition spending. Financing provided $168.4 million; cash ended the period at $70.0 million.
- Total debt carrying value was $2.427 billion at June 28, 2014, up from $2.260 billion at year-end 2013. Current debt and commercial paper were $619.2 million; long-term debt was $1.808 billion. Commercial paper outstanding was $560 million at a 0.67% weighted-average rate and 54-day weighted-average maturity. The $300 million receivables securitization facility was fully utilized.
- The $1.0 billion revolving credit facility had $66.7 million utilized, including letters of credit. The filing says commercial paper reduces available capacity; effective remaining capacity after that reduction is approximately $373 million. Cash included $44.2 million held outside the U.S.; estimated repatriation cost was $15.5 million. Management said cash, operating cash generation and revolver availability should cover requirements for the next 12 months.
Material changes and management commentary
- Q2 sales growth reflected higher volume, favorable foreign exchange and modest favorable price/mix. First-half sales growth was primarily volume-driven, including Marazzi and Spano acquisitions. Carpet first-half sales declined slightly.
- Management attributed improved profitability to productivity, higher volume, lower restructuring and integration costs, and the prior-year Marazzi inventory step-up charge. Higher input costs partially offset gains: approximately $15 million in Q2 and $29 million in the first half. First-half SG&A increased in dollars due mainly to acquisition volume, but declined as a share of sales.
- Interest expense fell year over year, primarily in Q2, reflecting lower debt levels and rates. Effective tax rates increased to 24.7% for Q2 and 23.8% for the first half, versus 21.3% and 20.0%, respectively; the filing attributes the difference to the geographic mix of earnings and losses.
Outlook, risks and unusual items
- Management expected remaining 2014 capital spending of approximately $290–$310 million, for growth, product innovation, acquired-asset upgrades, added carpet-yarn and ceramic-tile capacity, and a luxury vinyl tile plant. No numerical earnings or revenue guidance was provided.
- Input-cost inflation, including raw materials, energy and fuel, may not always be recoverable through pricing. Other stated risks include economic and industry conditions, competition, acquisition integration, international operations, product and tax claims, litigation, and capital-expenditure timing.
- Belgian tax assessments cover multiple years, including a May 2014 reassessment of €30.1 million for 2008 and assessments for 2005–2010. Mohawk is contesting them and said the ultimate outcome is not expected to materially affect financial condition, but could materially affect results, liquidity or cash flows in a period.
- U.S. and Canadian polyurethane-foam antitrust cases seek unspecified damages; U.S. purchaser classes were certified in April 2014 and Mohawk appealed. The company said it could not estimate losses beyond amounts accrued and that a period’s results, cash flows or liquidity could be materially affected.
- On July 15, 2014, after quarter-end, Mohawk notified the trustee of its intent to redeem approximately $200 million of 6.125% notes due 2016, subject to a redemption premium. The 2013 credit facility also has covenants and a conditional maturity-acceleration provision tied to those notes.
- ASC 606 revenue-recognition guidance was issued in May 2014; Mohawk planned adoption at the start of fiscal 2017 and was assessing the impact.
Most important facts for investors to verify
- How much of the earnings and sales growth reflects sustainable organic volume and productivity versus acquisitions, prior-year inventory step-up and lower one-time costs.
- Working-capital conversion and planned capital expenditures, given operating cash flow below net earnings and substantial receivables and inventory balances.
- Debt and refinancing capacity after accounting for commercial paper, the fully drawn securitization facility, the 2016 notes and credit-facility covenants.
- Developments and potential financial exposure from the Belgian tax disputes and antitrust litigation.
- Whether higher input costs can be offset by pricing, product mix and productivity, and the eventual effects of adopting ASC 606.