Mohawk Industries, Inc. — Q3 2011 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended October 1, 2011. Mohawk manufactures and sells floor-covering products through its Mohawk, Dal-Tile, and Unilin segments. The company reported continued difficult industry conditions amid weak housing demand and economic uncertainty.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2010 periods.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,442.5 | $1,309.6 | $4,264.0 | $4,056.9 |
| Gross profit | $357.6 | $344.9 | $1,081.5 | $1,060.9 |
| Gross margin | 24.8% | 26.3% | 25.4% | 26.2% |
| Operating income | $91.5 | $85.2 | $249.2 | $228.5 |
| Operating margin | 6.3% | 6.5% | 5.9% | 5.6% |
| Net earnings attributable to Mohawk | $46.6 | $51.1 | $131.0 | $139.7 |
| Diluted EPS | $0.68 | $0.74 | $1.90 | $1.99 |
| Interest expense | $25.1 | $30.0 | $77.5 | $103.0 |
- Sales and margins: Q3 sales rose 10.2%, driven by approximately $75 million of higher volume, $35 million from price and mix, and $23 million of favorable currency. Gross profit increased, but gross margin declined as raw-material inflation outweighed pricing, volume, and manufacturing savings. For the nine months, sales rose 5.1% and operating income rose 9.1%, while gross margin fell.
- Segment trends: Q3 sales increased in all segments: Mohawk 5.7%, Dal-Tile 10.7%, and Unilin 19.1%. Unilin operating income rose to $33.0 million from $24.6 million; Mohawk and Dal-Tile segment operating income edged down. Nine-month Unilin sales and operating income grew strongly, while Mohawk sales were nearly flat amid U.S. residential-market weakness.
- Cash flow: Nine-month operating cash flow was $138.2 million, down from $210.4 million. Receivables used $161.4 million and inventories used $114.7 million of cash. Investing activities used $206.4 million, including $182.3 million of capital expenditures and $24.1 million for an acquisition. Cash declined $78.1 million to $276.2 million.
- Liquidity and debt: Current assets were $2,440.6 million and current liabilities $1,213.2 million at October 1. Debt carrying value was $1,611.3 million, including $438.3 million current; cash was $276.2 million. The new $900 million revolving facility had $522.9 million available, after $377.1 million utilization including borrowings and letters of credit.
Changes, outlook, and material items
- Q3 earnings and diluted EPS declined year over year. Management attributed the change principally to unrealized foreign-exchange losses and higher input inflation, partly offset by price and mix, manufacturing-cost reductions, sales volume, and lower interest costs. Q3 2010 included approximately $9 million of Mexican-flood insurance proceeds and a $5.8 million U.S. Customs refund.
- Nine-month 2011 earnings were below 2010 despite higher operating income. The 2010 comparison included an approximately $30 million tax benefit, flood-insurance proceeds, a Customs refund, and a debt-extinguishment premium; 2011 faced higher raw-material inflation and currency-related losses.
- Management expected remaining-2011 capital spending, excluding acquisitions, of approximately $60 million to $85 million. It stated that cash, operating cash generation, and available revolving credit should meet capital, working-capital, and debt-service needs over the next 12 months.
- $336.3 million of 7.20% notes, after subsequent repurchases, were due April 15, 2012. The company said it expected to repay them using available resources or debt offerings, but cautioned that refinancing access was not assured. It repurchased $15.0 million of these notes during the quarter and a further $48.7 million after quarter-end.
- After quarter-end, the company expected a roughly $7 million fourth-quarter tax benefit from settling IRS matters for 2004–2006. It also announced a Mohawk facility exit and expected a fourth-quarter restructuring charge; the amount was not yet finalized.
- Material contingencies include federal antitrust litigation alleging polyurethane-foam price fixing. Mohawk denies the allegations; the court denied defendants’ motions to dismiss. The company said the matter could materially affect results in a particular period, though it did not expect a material adverse effect on financial condition. Belgian tax authorities also proposed adjustments to the company’s 2008–2009 tax base; Mohawk planned to contest them.
Key investor verification points
- Track whether pricing and productivity improvements can offset persistent raw-material, energy, and other cost inflation, and whether gross margins recover.
- Assess cash conversion and working-capital trends, particularly receivables and inventory growth, alongside planned capital expenditure.
- Verify refinancing or repayment of the April 2012 notes and monitor compliance with the revolving facility’s leverage and interest-coverage covenants.
- Follow developments in the polyurethane-foam antitrust litigation and Belgian tax dispute, including any changes to recorded provisions or potential exposure.
- Confirm the final cost and timing of the announced facility exit and the expected tax benefit from the IRS settlement.