MOHAWK INDUSTRIES INC annual report, FY2012

Business context and reporting period

Mohawk Industries, Inc. (NYSE: MHK) filed its Form 10-K for the fiscal year ended December 31, 2012. It manufactures and sells floor-covering products across three segments: Mohawk (carpet and other flooring), Dal-Tile (ceramic and stone tile), and Unilin (laminate, hardwood, licensing, and related products). Approximately 83% of 2012 sales came from North America and 17% from elsewhere.

Financial performance and key metrics

Sales rose 2.6%. Management attributed the operating improvement mainly to favorable pricing and product mix, manufacturing productivity, and higher volume, partly offset by higher input costs and spending on new products and geographic expansion. Interest expense declined to $74.7 million from $101.6 million. The effective tax rate increased to 17.6% from 10.8%, largely reflecting the geographic mix of earnings and favorable tax items in 2011.

Segment sales and operating income for 2012 were: Mohawk $2.912 billion and $158.2 million; Dal-Tile $1.616 billion and $121.0 million; Unilin $1.350 billion and $126.4 million. Dal-Tile sales grew 11.1%, while Mohawk sales declined 0.5%; Unilin sales were nearly flat. Mohawk and Dal-Tile operating income increased, while Unilin operating income edged down.

Fourth-quarter sales were $1.436 billion versus $1.378 billion a year earlier; net earnings were $66.4 million versus $42.9 million. Diluted EPS was $0.96 versus $0.62.

Material changes versus the prior comparable period

• Gross margin increased 0.6 percentage points and operating margin increased 1.0 percentage point year over year.
• Operating cash flow rose substantially, reflecting higher earnings and improved working capital. Investing cash outflow was $215.3 million; financing cash outflow was $216.8 million.
• Mohawk segment sales were pressured by lower volume, including the timing of carpet transitions in the home-center channel and weaker rug demand. Dal-Tile benefited from improved U.S. residential and commercial demand and growth in Mexico.
• Unfavorable foreign exchange reduced reported consolidated sales by approximately $92 million, partly offsetting volume and pricing gains.

Outlook, management commentary, risks, contingencies, and unusual items

• Management expected 2013 capital spending of approximately $275–$295 million, excluding pending acquisition expenditures, primarily for equipment, geographic capacity, and manufacturing improvements. The filing does not provide earnings or sales guidance.
• Mohawk completed its approximately $150 million cash acquisition of Pergo in January 2013. The proposed Marazzi Group acquisition, valued at approximately €1.17 billion ($1.504 billion), was expected to close in the first half of 2013 subject to approvals and closing conditions. The company also agreed to acquire Belgian panel-board maker Spano Invest for €125 million ($168 million), with closing expected in the second half of 2013.
• On January 31, 2013, the company issued $600 million of 3.85% senior notes due 2023. The notes include a special mandatory redemption provision if the Marazzi acquisition does not close by the specified deadline or the purchase agreement is terminated.
• Year-end cash included $435.1 million held outside the U.S.; the company estimated repatriation of European cash would cost approximately $145.6 million in taxes. Management said cash, operating cash flow, and available credit were expected to cover requirements over the next 12 months.
• Key risks include cyclicality in housing, construction, and remodeling; competitive pricing; raw-material, energy, and fuel cost inflation; foreign exchange; international operations; acquisition integration and financing; and potential impairment of goodwill or intangibles. The company reported no 2012 goodwill or indefinite-lived intangible impairment.
• The company was defending U.S. and Canadian polyurethane-foam antitrust cases seeking unspecified damages, including treble damages in the U.S. It said it could not estimate losses beyond recorded accruals; an adverse outcome could affect results, cash flow, or liquidity in a period. Environmental remediation matters were also accrued where probable and estimable; management did not expect them to materially affect financial condition, though period results or cash flow could be affected.
• Restructuring charges were $18.6 million in 2012, compared with $23.2 million in 2011. The filing also disclosed a $6.0 million 2011 operating-lease accounting correction, which management characterized as immaterial and with no cash-flow effect.
• Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls and internal controls.

Important facts for investors to verify

• Whether the Marazzi and Spano transactions closed as expected, and the resulting purchase accounting, funding, leverage, and integration costs.
• Whether operating cash flow and margin improvements continued, particularly given input-cost inflation and uneven segment performance.
• The availability and cost of liquidity after the $280 million year-end receivables-facility draw, the 2023 notes issuance, and acquisition funding; also review covenant headroom and debt maturities.
• Developments in the foam antitrust litigation, Belgian tax assessments, and environmental matters, including any changes to accruals or estimated exposure.
• Foreign cash deployment and repatriation tax exposure, and the effect of foreign-exchange movements on reported results.