Mohawk Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparisons are with the three months ended March 30, 2013. Unaudited results. Mohawk manufactures and distributes flooring through Carpet, Ceramic, and Laminate and Wood segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,813.1 million | $1,486.8 million |
| Gross profit / margin | $481.4 million / 26.5% | $377.1 million / 25.4% |
| Operating income / margin | $130.7 million / 7.2% | $86.8 million / 5.8% |
| Net earnings attributable to Mohawk | $81.1 million | $50.5 million |
| Diluted EPS | $1.11 | $0.72 |
| Interest expense | $22.1 million | $19.2 million |
| Operating cash flow | $(71.0) million | $(38.9) million |
| Capital expenditures | $122.1 million | $63.3 million |
Sales increased 21.9%; gross profit rose 27.7% and operating income rose 50.5%. The effective tax rate was 21.9%, versus 17.5%. Cash and cash equivalents were $72.6 million at quarter-end. Total debt carrying value was $2.47 billion, including $654.9 million classified as current; net debt was approximately $2.39 billion.
Segments and material changes
- Carpet: Sales decreased 2.9% to $674.9 million, with management citing lower volume amid severe North American winter weather. Operating income increased to $34.3 million from $25.2 million.
- Ceramic: Sales increased 68.8% to $695.1 million, including approximately $272 million of volume growth attributable to Marazzi. Operating income increased to $60.7 million from $30.0 million.
- Laminate and Wood: Sales increased 15.7% to $468.0 million, with Spano contributing to volume growth. Operating income increased to $44.1 million from $38.7 million.
Management attributed consolidated earnings growth chiefly to the Marazzi and Spano acquisitions, productivity improvements, and favorable price and product mix, partly offset by higher input costs. Marazzi was acquired in April 2013 and Spano in May 2013; their results therefore affect year-over-year comparability. Pergo was acquired in January 2013.
Cash, debt, outlook, and risks
- Operating cash use increased year over year, primarily due to working-capital changes, including higher receivables and inventories. Investing cash use was $122.1 million; financing activities provided $213.0 million.
- A new commercial paper program permits up to $1.0 billion outstanding, subject to credit-facility availability. At quarter-end, $591.1 million was outstanding at a weighted-average rate of 0.59% and average maturity of 19 days. The $1.0 billion revolving credit facility had $83.5 million utilized and $916.5 million reported available; commercial paper reduces available capacity.
- Management expected 2014 capital spending of approximately $360–$380 million, directed toward growth and margin expansion. The company said cash, operating cash generation, and credit-facility availability should meet capital, working-capital, and debt-service needs for the next 12 months.
- Risks include raw-material, energy and fuel cost volatility; acquisition integration; international operations; and litigation and tax matters. Management noted that severe winter weather affected demand. First-quarter results are typically seasonally weaker in Carpet and Ceramic and Laminate and Wood.
- U.S. polyurethane-foam antitrust purchaser classes were certified on April 9, 2014; Mohawk expected to appeal. Damages sought are unspecified, and the company said losses beyond accrued amounts could not be estimated; an adverse outcome could materially affect results, cash flows, or liquidity in a period.
- Belgian tax assessments for 2005, 2006, 2007, 2009, and 2010 were being contested. The company said the outcome could affect results, liquidity, or cash flows in a period, though it did not expect a material adverse effect on financial condition.
- The 2013 revolving facility includes leverage and interest-coverage covenants and a potential maturity acceleration in October 2015 tied to the 6.125% notes due January 2016. Management believed the specified liquidity threshold would be met, but provided no assurance.
Investor verification priorities
- Assess how much reported growth and earnings improvement reflects acquisitions versus organic demand, pricing, and sustainable productivity.
- Track working-capital requirements and operating cash flow against earnings and planned capital spending.
- Verify debt maturities, commercial-paper refinancing exposure, covenant headroom, and the 2015 facility maturity condition.
- Monitor input-cost recovery, segment margins, and demand recovery after winter-related weakness.
- Follow the antitrust class-action appeal and Belgian tax disputes, including any change to accrued liabilities or potential exposure.