Mohawk Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended April 2, 2011. Amounts below are in U.S. dollars unless noted.
Business context and results
Mohawk manufactures, sources and sells flooring and related products through its Mohawk, Dal-Tile and Unilin segments. Management described industry conditions as difficult, citing economic uncertainty, weak housing and construction markets, raw-material volatility and consumer confidence.
| Metric | Q1 2012 | Comparable period | Change |
|---|---|---|---|
| Net sales | $1,409.0 million | $1,343.6 million | +4.9% |
| Gross profit / margin | $359.4 million / 25.5% | $341.6 million / 25.4% | +5.2% |
| Operating income / margin | $72.0 million / 5.1% | $56.1 million / 4.2% | +28.3% |
| Net earnings attributable to Mohawk | $40.4 million | $23.4 million | Higher |
| Diluted EPS | $0.58 | $0.34 | Higher |
| Interest expense | $22.5 million | $26.6 million | Lower |
| Operating cash flow | $(44.5) million | $(67.4) million | Less cash used |
| Capital expenditures | $43.3 million | $52.8 million | Lower |
Management attributed improved earnings primarily to favorable price and product mix, higher sales volume, lower restructuring charges and lower interest costs. These benefits were partly offset by about $28 million of higher inflationary costs, primarily raw materials. The effective tax rate was 20.1%, versus 16.8%, reflecting the geographic distribution of earnings and losses.
Segments and material changes
- Mohawk: Sales rose 1.3% to $699.9 million; operating income increased to $25.3 million from $17.0 million. Price and mix gains were partly offset by lower volume, particularly rug demand in mass merchandise.
- Dal-Tile: Sales rose 14.1% to $392.9 million; operating income increased to $26.0 million from $17.7 million. Growth reflected higher home-center sales, Mexican market expansion, commercial-market improvement and warmer weather.
- Unilin: Sales rose 3.6% to $337.4 million; operating income increased to $27.1 million from $26.3 million. Volume gains were partly offset by unfavorable foreign exchange and inflation.
Consolidated sales increased by approximately $65.4 million, reflecting about $38 million from price and mix and $41 million from volume, partly offset by approximately $14 million of unfavorable foreign exchange. There were no restructuring charges in Q1 2012, compared with $6.8 million in Q1 2011.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $304.8 million; current assets were $2,544.6 million and current liabilities were $778.7 million.
- Balance-sheet debt was $1,699.7 million, including $57.3 million current and $1,642.4 million long-term. Operating cash use included a €26.5 million Belgian tax deposit and working-capital outflows, including increases in receivables and inventory.
- The $900 million senior credit facility had $509.0 million utilized and $541.0 million available at March 31, including borrowings and letters of credit. On April 16, the company repaid $336.3 million of 7.20% notes plus accrued interest using facility borrowings; afterward, $827.1 million was utilized. The filing does not state the remaining available amount after that repayment.
- Management expected cash on hand, operating cash generation and facility availability to cover capital expenditures, working capital and debt service for the next 12 months. The facility requires interest coverage of at least 3.0-to-1.0 and net leverage no greater than 3.75-to-1.0.
- Capital spending for the remainder of 2012, excluding acquisitions, was expected to be approximately $180–$200 million. Cash invested in Europe was $275 million, including $264.4 million in European money-market investments; estimated repatriation cost was approximately $93 million. Management intended to permanently reinvest the European cash.
Outlook, risks and unusual items
- No quantified earnings or sales guidance was provided. Mohawk and Dal-Tile typically have weaker first quarters; Unilin’s seasonality differs, with its third quarter typically weakest.
- After quarter-end, the company announced a plan to reduce staple capacity at Mohawk-segment manufacturing facilities and expected to record a restructuring charge in Q2 2012; the amount was not yet finalized.
- The company paid a €24.0 million Belgian tax assessment plus approximately €2.5 million interest to stop further interest accrual, while formally contesting the assessment. It said the deposit earns 7% annual interest if its defense succeeds. Management also disclosed a Belgian tax-base matter concerning 2009.
- U.S. and Canadian polyurethane-foam antitrust actions seek unspecified damages, including treble damages in the U.S. cases. Mohawk denied the allegations and said it would defend itself. Management considered a material effect on financial condition unlikely, but said results in a given quarter or year could be materially affected.
- Key risks include weak housing and construction demand, inability to recover raw-material, energy and fuel cost increases, competition, supplier concentration, foreign exchange, credit access and ratings, debt covenants, international operations, litigation, regulation and intellectual-property exposure. The filing notes that certain Unilin patents expire in 2017 and that replacement revenue sources are being developed.
- Standard & Poor’s and Moody’s upgrades in Q1 reduced interest on the 6.125% notes by 50 basis points and led to release of specified credit-facility security interests. Future downgrades could increase borrowing costs and require security interests to be reinstated.
Important facts for investors to verify
- Post-April 16 credit-facility utilization, remaining availability, debt maturities and compliance with financial covenants.
- Progress and eventual cost of the planned Mohawk capacity reduction and Q2 restructuring charge.
- Resolution, timing and financial exposure of the Belgian tax disputes and polyurethane-foam antitrust litigation.
- Whether price increases and productivity can offset continuing raw-material inflation without weakening volume or margins.
- Use of European cash, potential repatriation costs, and delivery of the $180–$200 million remaining-2012 capital-spending plan.