Mohawk Industries, Inc. — 2013 Form 10-K
Business context and reporting period. Mohawk is a global flooring manufacturer with Carpet, Ceramic, and Laminate and Wood reporting segments. This filing covers the fiscal year ended December 31, 2013; quarterly figures below identify the fourth quarter where available. Approximately 75% of annual sales came from North America and 25% from elsewhere.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $7.349 billion | $5.788 billion |
| Gross profit / margin | $1.921 billion / 26.1% | $1.490 billion / 25.7% |
| Operating income / margin | $546.9 million / 7.4% | $379.5 million / 6.6% |
| Net earnings attributable to Mohawk | $348.8 million | $250.3 million |
| Diluted EPS attributable to Mohawk | $4.82 | $3.61 |
| Cash from operating activities | $525.2 million | $587.6 million |
| Capital expenditures | $366.6 million | $208.3 million |
| Long-term debt, including current portion | $2.260 billion | $1.383 billion |
| Cash and cash equivalents at year-end | $54.1 million | $477.7 million |
Fourth-quarter 2013 sales were $1.924 billion, up 34.0% year over year; gross profit was $512.8 million, net earnings were $94.7 million, and diluted EPS was $1.29.
2013 segment sales and operating income were: Carpet, $2.986 billion and $209.0 million; Ceramic, $2.677 billion and $209.8 million; Laminate and Wood, $1.792 billion and $159.4 million. Corporate and intersegment items reduced operating income by $31.3 million.
Material changes versus 2012
- Sales rose 27.0%. The acquisitions of Marazzi, Pergo, and Spano accounted for approximately $1.293 billion of the $1.450 billion increase in sales volume; price and product mix added about $77 million, and foreign exchange about $34 million.
- Operating income increased 44.1%. Management cited acquisition-related volume, productivity, favorable price and mix, and lower amortization, partly offset by higher input costs, inventory step-up, and restructuring, acquisition, and integration charges.
- Gross margin improved 0.4 percentage points and operating margin 0.8 points. Net earnings include a $17.9 million loss from discontinued operations.
- Operating cash flow declined $62.4 million, mainly because acquisitions increased working-capital needs despite higher earnings. Investing activities used $810.0 million, including acquisition spending; financing activities used $106.8 million.
- Year-end debt increased substantially, while cash declined. The company issued $600 million of 3.85% senior notes due 2023 and entered a new $1.0 billion revolving credit facility.
Liquidity, outlook, risks, and unusual items
- At year-end, $458.5 million was utilized under the revolving facility, leaving $541.5 million available; utilization included borrowings and letters of credit. The separate $300 million U.S. receivables securitization facility was fully drawn.
- Management said cash, operating cash generation, and available credit were expected to cover capital expenditures, working capital, and debt service for the next 12 months. No specific sales or earnings guidance was provided.
- The company reported $2.261 billion of total debt, including current maturities. Its credit facility requires interest coverage of at least 3.0 to 1.0 and net leverage of no more than 3.75 to 1.0. The filing does not provide the year-end actual covenant ratios. The facility may accelerate to October 2015 if specified conditions concerning the 6.125% notes due January 2016 are not met.
- Major risks include housing and remodeling demand, competition and pricing, raw-material, energy and fuel costs, foreign exchange, credit access and covenant compliance, acquisition integration, international and emerging-market exposure, and environmental and product-related claims. Patent licensing is also a consideration: UNICLIC patents were expected to expire in 2017; 2013 licensing revenue was approximately €87 million.
- In January 2014, Mohawk sold a non-core sanitary ware business acquired with Marazzi. The 2013 results include a $17.9 million discontinued-operations loss related to the sale.
- Mohawk is defending U.S. and Canadian polyurethane-foam antitrust claims seeking unspecified damages, including treble damages in the U.S. The company says probable, estimable losses are provided for but cannot estimate any additional loss range; it notes a possible material effect on results, cash flows, or liquidity in a period.
- The company is contesting Belgian tax assessments covering several years. It says the ultimate outcome is not expected to materially affect financial condition, but could materially affect results, liquidity, or cash flows in a period. Goodwill and indefinite-lived intangible impairment testing indicated no impairment in 2013.
- KPMG issued unqualified opinions on the financial statements and internal control. However, the acquired Pergo, Marazzi, and Spano businesses were excluded from management’s internal-control assessment and the auditor’s internal-control audit; together they represented 29.9% of assets (23.4% excluding goodwill and identifiable intangibles) and 17.6% of 2013 sales.
Important facts for investors to verify
- How much of 2013’s growth and earnings improvement is attributable to acquisitions versus legacy operations, and whether integration costs and expected synergies develop as planned.
- The trend in operating cash flow and working capital, especially after the sharp reduction in year-end cash and full utilization of the receivables securitization facility.
- Debt maturities, refinancing plans for the $900 million notes due in 2016, available borrowing capacity, and compliance with facility covenants.
- Potential exposure from the antitrust litigation and Belgian tax disputes, including any changes in accruals or disclosed assessments.
- Progress integrating acquired companies into financial controls, and the timing and financial impact of the UNICLIC patent expiration.