Mohawk Industries, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 29, 2012; comparisons are with the periods ended October 1, 2011, except balance-sheet comparisons, which are with December 31, 2011. Amounts below are in millions unless stated otherwise.
Business context and financial performance
Mohawk manufactures and sells flooring through its Mohawk, Dal-Tile and Unilin segments. Management described the flooring market as difficult, citing economic uncertainty, weak housing and construction conditions, consumer confidence and material-price volatility.
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,473.5 | $1,442.5 | $4,352.3 | $4,264.0 |
| Gross profit / margin | $372.8 / 25.3% | $357.6 / 24.8% | $1,120.7 / 25.8% | $1,081.5 / 25.4% |
| Operating income / margin | $104.0 / 7.1% | $91.5 / 6.3% | $283.6 / 6.5% | $249.2 / 5.8% |
| Net earnings attributable to Mohawk | $70.3 | $46.6 | $183.9 | $131.0 |
| Diluted EPS | $1.01 | $0.68 | $2.66 | $1.90 |
| Interest expense | $18.0 | $25.1 | $59.3 | $77.5 |
Q3 sales grew 2.1%; higher volume and favorable price/product mix were partly offset by unfavorable foreign exchange. Nine-month sales also rose 2.1%, as price/mix and volume gains were partly offset by currency effects. Management attributed improved earnings to volume, price/mix, productivity, lower interest costs and more favorable foreign-exchange results versus the prior year; higher material costs partly offset gains over nine months.
Segments and material changes
- Mohawk: Q3 sales fell 0.4% to $751.8 million, while operating income rose to $43.8 million from $30.9 million. Nine-month sales declined 0.8% to $2,186.2 million, while operating income increased to $106.2 million from $79.2 million. Lower volume reflected carpet-transition timing and weaker rug demand; price/mix and productivity supported profitability.
- Dal-Tile: Q3 sales increased 9.3% to $417.5 million and operating income rose to $37.5 million from $33.1 million. Nine-month sales grew 9.9% to $1,214.7 million and operating income rose to $99.9 million from $82.9 million, reflecting stronger U.S. channels and Mexican-market growth.
- Unilin: Q3 sales were nearly flat at $328.6 million, but operating income declined to $28.9 million from $33.0 million. Nine-month sales rose 0.2% to $1,020.4 million while operating income fell to $96.6 million from $105.5 million. Foreign exchange and input costs pressured results.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $298.5 million, versus $138.2 million a year earlier. The improvement reflected higher earnings and working-capital changes, partly offset by a Belgian tax deposit.
- Investing cash outflow was $142.0 million, including $135.0 million of capital expenditures and a $7.0 million investment in a Brazilian laminate facility. Financing cash outflow was $87.7 million. Cash increased $68.9 million to $380.8 million.
- At September 29, cash was $380.8 million; current assets were $2,596.7 million and current liabilities $818.9 million. Total debt carrying value was approximately $1,524.9 million: $57.7 million current and $1,467.3 million long-term.
- The $900 million revolving credit facility and term loan had $670.2 million utilized, including borrowings and letters of credit, leaving $376.0 million available. The facility matures in July 2016 and requires minimum interest coverage of 3.0:1 and maximum net leverage of 3.75:1.
- Management stated that cash, operating cash generation and available credit should cover capital expenditures, working capital and debt service for the next 12 months. Cash held in Europe was $320.3 million; estimated repatriation cost was approximately $112 million.
Outlook, risks and unusual items
- Management expected remaining-2012 capital spending, excluding acquisitions, of approximately $55–$65 million, mainly for equipment, capacity expansion and manufacturing improvements. No specific earnings or sales guidance was provided.
- On October 29, 2012, Mohawk announced an agreement to acquire Pergo for $150 million cash. Pergo had approximately $320 million in 2011 sales; the deal was expected to close by Q1 2013, subject to approvals and closing conditions. Management expected it to be accretive in its first year.
- Mohawk changed the functional currency of its Mexico operations from the U.S. dollar to the Mexican peso effective April 1, 2012; the reported financial-statement impact was not significant.
- A Belgian tax authority assessment for 2008 was set aside and the company received a refund of its tax-and-interest deposit. After quarter-end, the authority notified Mohawk of its intent to assess under a revised theory for certain years. Mohawk disputes the position; it said the outcome could materially affect results, liquidity or cash flows in a given period, though it did not expect a material adverse effect on financial condition.
- U.S. and Canadian polyurethane-foam antitrust class actions seek unspecified damages, including treble damages in the U.S. Mohawk denies the allegations. The company said it could not estimate any loss beyond accrued amounts and that a material effect on results, cash flows or liquidity in a period was possible.
- Nine-month restructuring charges were $12.5 million. Mohawk also announced planned consolidation of Dal-Tile mosaic-tile production after quarter-end and expected a restructuring charge in Q4 2012.
- Key disclosed risks include weak housing and construction demand, inability to recover raw-material, energy or fuel-cost increases, foreign-exchange movements, credit-rating or covenant pressure, supplier disruption, acquisition integration, litigation and international tax exposure. The filing states that seasonality differs by segment, with the third quarter traditionally weaker for Unilin.
Investor facts to verify
- Whether improving sales and operating margins persist, particularly given Unilin’s weaker operating income and ongoing foreign-exchange and input-cost pressure.
- Cash conversion and working-capital trends, including the effect and timing of Belgian tax matters and the reported European cash repatriation cost.
- Debt-facility availability, covenant headroom and financing effects of the Pergo acquisition.
- Pergo’s closing, integration and first-year accretion assumptions, and the amount of the expected Dal-Tile restructuring charge.
- Developments in the Belgian tax dispute and polyurethane-foam antitrust litigation, including any changes to potential financial exposure.