Mohawk Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013; filed August 7, 2013. Mohawk manufactures and sells flooring products through Carpet, Ceramic, and Laminate and Wood segments. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,976.3 | $1,469.8 | $3,463.1 | $2,878.8 |
| Gross profit | $514.1 | $388.5 | $891.1 | $747.9 |
| Gross margin | 26.0% | 26.4% | 25.7% | 26.0% |
| Operating income | $133.2 | $107.7 | $220.0 | $179.7 |
| Operating margin | 6.7% | 7.3% | 6.4% | 6.2% |
| Net earnings attributable to Mohawk | $84.6 | $73.2 | $135.1 | $113.6 |
| Diluted EPS | $1.16 | $1.06 | $1.89 | $1.64 |
Q2 sales rose 34.5% and net earnings rose about 15.5% year over year. First-half sales increased 20.3% and net earnings increased about 19.0%. Reported Q2 diluted EPS includes a $0.02 loss from discontinued operations; first-half diluted EPS likewise includes a $0.02 loss.
- Cash flow: First-half operating cash flow was $113.9, versus $95.6 a year earlier. Capital expenditures were $146.1, leaving operating cash flow less capital expenditures of negative $32.2. Investing cash outflow was $595.6, including $449.5 of acquisitions.
- Liquidity: Cash was $168.7 at June 29, down from $477.7 at year-end. Current assets were $3,270.2 and current liabilities $1,345.0.
- Debt: Debt carrying value was $2,533.8, including $83.2 current; long-term debt less current portion was $2,450.6. Cash less debt was approximately negative $2,365.0. The company had $317.8 available under its $900.0 senior credit facility, excluding the separate term loan; its $300.0 receivables securitization facility was fully utilized.
- Margins and costs: Q2 gross margin fell 0.4 percentage points and operating margin fell 0.6 points year over year. Management cited input-cost inflation, acquisition-related restructuring and integration costs, and Marazzi inventory step-up costs as offsets to growth and productivity.
Material changes and segment results
Three acquisitions expanded the company during the period: Pergo (January; approximately $150 million), Marazzi (April; approximately $1.5 billion) and Spano (May; approximately $160 million). Marazzi was funded through cash, newly issued shares, and assumed debt; it contributed $309.9 of sales and a $6.7 net loss from continuing operations for the reported period. The company issued 2.874 million shares as part of the Marazzi consideration. Segment names changed in Q2; the filing states that this did not change prior-period financial information.
- Carpet: Q2 sales were $770.9, up 5.0%; operating income was $54.9, up from $37.1, with margin improving to 7.1% from 5.1%.
- Ceramic: Q2 sales were $760.2, up 88.0%, including approximately $310 million of Marazzi sales; operating income was $46.3, up from $36.4, while margin declined to 6.1% from 9.0%.
- Laminate and Wood: Q2 sales were $471.0, up 32.9%, largely from Pergo and Spano; operating income was $41.4 versus $40.6, while margin declined to 8.8% from 11.4%.
Outlook, commentary and risks
- Management expected remaining 2013 capital spending of approximately $235–$245 million, primarily for equipment, geographic capacity and manufacturing improvements. It said cash, operating cash generation and credit availability should cover capital, working-capital and debt-service needs over the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management attributed earnings growth to acquisitions, higher legacy sales volume, productivity, favorable price and product mix, and lower amortization. Offsets included higher input costs, acquisition and restructuring costs, Marazzi inventory step-up, and higher interest expense.
- Risks highlighted include economic and flooring-industry conditions, competition, raw-material, energy and fuel costs, the ability to pass cost increases through to customers, acquisition integration, international operations, and tax and product claims. Results are seasonal and exposed to housing, construction, consumer spending and foreign exchange conditions.
- Mohawk faces U.S. and Canadian polyurethane-foam antitrust litigation seeking unspecified damages, including treble damages in the U.S. The company denies the allegations; it said losses beyond accrued amounts could not be estimated and that outcomes could materially affect results, cash flows or liquidity in a period.
- Belgian tax authorities issued assessments for 2005 and 2009 of €46.1 million and €35.6 million, excluding possible interest and penalties, and subsequently proposed adjustments for 2006, 2007 and 2010. The company disputes the positions and intends to contest them; it noted possible adverse effects on results, liquidity or cash flows in a period.
- Of $168.7 million cash, $121.7 million was held outside the U.S. and intended to be permanently reinvested. Estimated repatriation cost was approximately $42.6 million.
Investor verification points
- Assess how much reported growth and profitability is attributable to acquisitions versus legacy operations, including Marazzi’s reported loss and the pending purchase-price allocations.
- Track integration, restructuring and inventory step-up charges; approximately $11.0 million of Marazzi inventory step-up remained expected to enter cost of sales in Q3 2013.
- Monitor debt, cash generation, facility availability and covenant headroom following the acquisition borrowing and fully drawn receivables securitization facility.
- Review developments and potential financial exposure from Belgian tax disputes and antitrust litigation; the filing does not quantify possible losses beyond recorded provisions.
- Compare subsequent input-cost trends, pricing and segment margins with management’s stated cost pressures and capital-spending plans.