Mohawk Industries, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter ended October 2, 2010; year-to-date results cover the nine months ended that date. Comparatives are the quarter and nine months ended September 26, 2009. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions. The company manufactures and distributes flooring through its Mohawk, Dal-Tile and Unilin segments.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,309.6m | $1,382.6m | $4,056.9m | $3,996.9m |
| Gross profit (margin) | $344.9m (26.3%) | $369.5m (26.7%) | $1,060.9m (26.2%) | $890.5m (22.3%) |
| Operating income (margin) | $85.2m (6.5%) | $68.1m (4.9%) | $228.5m (5.6%) | ($3.1m) |
| Net income attributable to Mohawk | $51.1m | $34.3m | $139.7m | ($25.3m) |
| Diluted EPS | $0.74 | $0.50 | $2.03 | ($0.37) |
| Interest expense | $30.0m | $32.3m | $103.0m | $92.5m |
| Operating cash flow | Not separately presented for the quarter | $210.4m | $412.7m |
Balance sheet at October 2: Cash and equivalents were $365.8m, current assets $2,294.2m and current liabilities $1,131.3m. Total debt carrying value was approximately $1,654.6m, including $351.5m current and $1,303.2m long-term. Total equity was $3,315.5m.
Material changes and drivers
- Q3 sales fell 5.3%, mainly from lower volume amid weak residential demand and unfavorable foreign exchange, partly offset by price and product mix. Gross profit declined $24.5m; higher manufacturing and raw-material costs and lower volume outweighed price/mix gains and other offsets.
- Q3 operating income rose $17.1m, as SG&A fell $41.6m (13.8%) following cost reductions and restructuring. Segment operating income improved at Mohawk and Dal-Tile, but declined at Unilin.
- Nine-month sales rose 1.5%, while operating results recovered from a prior-year loss. The filing attributes much of the comparison to 2009 charges, including a $110.2m carpet sales allowance and a $12.4m inventory write-off; lower 2010 restructuring charges also helped. Comparisons therefore include significant prior-period unusual items.
- Year-to-date operating cash flow decreased $202.3m, primarily due to higher working-capital needs, including inventory buildup, partly offset by improved earnings. Cash declined $165.6m from year-end 2009.
Outlook, risks and unusual items
- Management described housing and flooring demand as weak and the economic recovery as uncertain, while stating the company was positioned to benefit from a recovery. It provided no specific sales or earnings guidance. Remaining 2010 capital spending, excluding acquisitions, was expected to be $65m–$75m.
- Management said cash on hand, operating cash generation and ABL availability should cover working-capital and capital-expenditure needs over the next 12 months. The $600m secured ABL facility had $487.4m available at October 2; after a subsequent reserve for the 2011 notes, availability was $207.4m as of October 14.
- The $298.2m balance of 5.75% senior notes was due January 15, 2011. On October 14, after quarter-end, the company deposited $27.9m in restricted cash and reserved $280m of ABL capacity for repayment; the agent deemed this adequate for the facility’s maturity provision. The $400m 7.20% notes mature in April 2012, with a related ABL acceleration condition if not addressed by January 2012. Refinancing, liquidity, borrowing-base and covenant risks remain material.
- Debt totaled approximately $1.655bn at carrying value. The company repurchased about $200m of 5.75% notes in April at a premium, recording $7.5m of extinguishment loss and related fees; year-to-date interest expense increased partly for this charge and higher borrowing costs.
- Hurricane Alex flooding temporarily disrupted the Dal-Tile Monterrey facility; it was fully operational late in Q3. A roughly $25m insurance settlement covered property damage and business interruption; management said the event did not materially affect financial position or results.
- A $5.8m U.S. customs refund gain was recorded in Q3 and year to date; further recoveries are uncertain. IRS settlements for tax years 1999–2006 led to $59.5m of payments through the first nine months, with a further $6.3m paid in Q4. The company recorded a $8.3m year-to-date tax benefit despite pretax income, including benefits from settling tax contingencies.
- Other notable exposures include continued weak residential and commercial construction, raw-material and energy cost volatility, competition and pricing pressure, foreign exchange, acquisitions, product warranty and litigation claims, and potential asset impairment. The filing says disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the reserved cash and ABL capacity were used to repay or refinance the January 2011 notes, and the resulting borrowing availability and financing costs.
- Whether demand, sales volume and raw-material costs improved or worsened after quarter-end, particularly across Mohawk, Dal-Tile and Unilin.
- How much of reported earnings depended on insurance proceeds, customs refunds, tax settlements and other non-recurring items.
- Whether working-capital investment, especially inventory, converted into sales and cash flow, and whether expected capital spending stayed within the stated range.
- Developments in the 2012 notes and ABL facility maturity conditions, covenant headroom, and credit ratings.
- Any subsequent changes in warranty claims, litigation or other contingencies; management notes that such matters could materially affect results in a particular period.