Mohawk Industries, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Mohawk makes and distributes flooring products through its Mohawk, Dal-Tile and Unilin segments. The filing also reports fourth-quarter results; it does not provide a separate full set of fourth-quarter cash-flow or balance-sheet metrics.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $5.642 billion | $5.319 billion | +6.1% |
| Gross profit / margin | $1.417 billion / 25.1% | $1.403 billion / 26.4% | Margin down 1.3 percentage points |
| Operating income / margin | $315.5 million / 5.6% | $314.2 million / 5.9% | Income roughly flat |
| Net earnings attributable to Mohawk | $173.9 million | $185.5 million | Down 6.2% |
| Diluted EPS | $2.52 | $2.65 | Down 4.9% |
| Operating cash flow | $301.0 million | $319.7 million | Down $18.7 million |
For 2011, cash used in investing was $299.7 million, including $275.6 million of capital expenditures and $24.1 million for acquisitions. Cash used in financing was $33.1 million. Year-end cash and equivalents were $311.9 million, of which $276.6 million was held outside the United States. Working capital was $1.297 billion.
Total debt, including current maturities, was $1.586 billion, down from $1.654 billion. Current debt was $386.3 million. The $900 million senior secured revolving facility had $298.0 million drawn and $504.7 million available after letters of credit. The filing reported stockholders’ equity of $3.416 billion. Debt less cash was approximately $1.275 billion, calculated from reported balances.
Fourth-quarter 2011 net sales were $1.378 billion, versus $1.262 billion a year earlier; net earnings were $42.9 million and diluted EPS was $0.62, versus $45.8 million and $0.66. The filing reports quarterly gross profit of $335.4 million.
Changes versus the prior comparable period
- Sales grew in all three segments: Mohawk +2.9% to $2.928 billion; Dal-Tile +6.4% to $1.454 billion; and Unilin +13.2% to $1.345 billion. Unilin’s increase reflected price and mix, volume and favorable foreign exchange.
- Consolidated sales growth reflected approximately $143 million of higher volume, $127 million of favorable price and product mix, and $53 million of favorable foreign exchange.
- Gross margin fell despite higher gross profit dollars. Approximately $206 million of inflationary costs, mainly raw materials, substantially offset favorable pricing and mix, manufacturing savings, volume and foreign exchange.
- Operating income was nearly unchanged. Mohawk segment operating income declined to $109.9 million from $122.9 million; Dal-Tile rose to $101.3 million from $97.3 million; Unilin rose to $127.1 million from $114.3 million.
- Interest expense fell to $101.6 million from $133.2 million, primarily due to lower debt levels and borrowing costs; 2010 included a $7.5 million debt-extinguishment premium.
- 2010 benefited from a $30 million tax-contingency settlement benefit and an approximately $8 million pretax customs-refund benefit, neither of which recurred at the same level in 2011. The 2010 results also included approximately $9 million of insurance proceeds related to a Mexican facility flood.
Outlook, risks and unusual items
- Management expected 2012 capital spending, excluding acquisitions, of approximately $225 million to $245 million for equipment, geographic capacity and manufacturing efficiency. It stated that cash, operating cash flow and available credit should cover capital, working-capital and debt-service needs for the next 12 months. No specific earnings or sales guidance was provided.
- Management described flooring-industry conditions as difficult, citing weak housing and construction activity, economic uncertainty, unemployment, consumer confidence and Europe’s debt crisis. The business is exposed to raw-material, energy and fuel inflation and may not be able to pass all cost increases to customers.
- Debt and refinancing deserve attention: $386.3 million of debt was classified as current at year-end, including $336.3 million of 7.20% notes due April 15, 2012. The company said it expected to repay the notes using available cash and credit or debt offerings, while acknowledging no assurance that any needed offering would be available on acceptable terms. A January 2012 facility amendment added a $150 million term-loan facility.
- The revolving facility requires an interest-coverage ratio of at least 3.0-to-1 and net leverage no greater than 3.75-to-1, and includes other restrictive covenants. Credit-rating downgrades could raise borrowing costs; note rates had already increased by a combined 0.75 percentage point following prior downgrades.
- Cash location may constrain flexibility: management said the company intended to permanently reinvest foreign cash and estimated repatriation costs of approximately $91 million for European cash investments. It also planned a first-quarter 2012 payment of €26.5 million to Belgian tax authorities while contesting a tax assessment.
- Mohawk was named in U.S. and Canadian polyurethane-foam antitrust cases seeking unspecified damages, including treble damages in the U.S. The company denied the allegations and said it would defend itself; it believed the ultimate outcome would not materially affect financial condition but could materially affect results in a particular period. Environmental matters and other legal contingencies were also disclosed.
- In the fourth quarter, the company recorded a $6.0 million charge to correct an immaterial operating-lease accounting error; it said the correction did not affect cash flows. Restructuring charges were $23.2 million in 2011. The annual goodwill and indefinite-lived-intangible impairment review indicated no impairment.
- Revenue depends substantially on replacement and remodeling demand. Other disclosed risks include competition, foreign currency movements, supplier concentration, international operations, acquisition integration, environmental compliance, product claims and intellectual-property protection. The UNICLIC patent family was not expected to expire until 2017; the company identified developing alternative licensing revenue as important.
Most important facts for investors to verify
- Whether 2012 refinancing and repayment of the April 2012 note maturity proceeded as planned, and the effect of the subsequent $150 million term loan on total debt and covenant headroom.
- Whether price increases and productivity gains can keep pace with raw-material inflation without further gross-margin erosion.
- How much foreign-held cash is practically available for U.S. obligations, considering management’s stated reinvestment plans and estimated repatriation cost.
- Developments in the antitrust litigation and Belgian tax disputes, including any changes to accruals, cash requirements or reported earnings.
- The filing text contains conflicting cover-page share-count data in a duplicated passage, including an apparent zero-share entry; verify the authoritative cover page and outstanding-share count. The later cover-page passage reports 68,818,141 shares outstanding as of February 20, 2012.