Business context and reporting period
Mohawk Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company manufactures and sells flooring across three segments: Mohawk (carpet and other flooring), Dal-Tile (tile and stone), and Unilin (laminate, hardwood and other wood products). Approximately 84% of 2010 sales came from North America and 16% from outside North America.
Industry demand showed signs of recovery in the first half of 2010, but those gains were lost in the second half. Management expected U.S. industry conditions to improve in 2011, while emphasizing that the timing and strength of a sustained recovery remained uncertain.
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $5.319 billion | $5.344 billion |
| Gross profit / margin | $1.403 billion / 26.4% | $1.232 billion / 23.1% |
| Operating income / margin | $314.2 million / 5.9% | $43.7 million / 0.8% |
| Net earnings (loss) attributable to Mohawk | $185.5 million | $(5.5) million |
| Diluted EPS | $2.65 | $(0.08) |
| Cash provided by operating activities | $319.7 million | $672.2 million |
2010 revenue declined 0.5% as reported. The comparison is affected by a $121.2 million carpet sales allowance recorded in 2009; excluding that allowance, 2010 sales were lower by about $146 million. Full-year cost of sales was 73.6% of sales, versus 76.9% in 2009.
Segment sales and operating income in 2010 were: Mohawk, $2.845 billion and $122.9 million; Dal-Tile, $1.367 billion and $97.3 million; Unilin, $1.188 billion and $114.3 million. Mohawk and Dal-Tile sales declined; Unilin sales increased 5.3%, supported by higher volume in developing markets.
Liquidity, debt and cash flow
Year-end cash and cash equivalents were $354.2 million, down from $531.5 million. Working capital was $1.200 billion, including short-term debt. Operating cash flow fell to $319.7 million, primarily due to higher working-capital needs as inventory stabilized and raw-material costs increased. Investing activities used $231.5 million, including $79.9 million invested in a Chinese tile manufacturer; capital expenditures were $156.2 million. Financing activities used $255.2 million, principally for debt repayment.
Total debt, including current maturities, was $1.654 billion at year-end, compared with $1.854 billion a year earlier. The company had $169.6 million available under its $600 million asset-based revolving credit facility at year-end; availability rose to $289.6 million after repayment of the 5.75% notes due January 2011. That repayment was completed after year-end using approximately $170 million of cash and $138 million of facility borrowings. The $400 million 7.20% notes mature in April 2012, and failure to repay, refinance or adequately reserve for them by January 15, 2012 could accelerate the ABL Facility maturity.
Management expected cash, operating cash generation, ABL availability and other financing sources to cover the 2012 notes, working capital and capital needs, but stated there could be no assurance that refinancing would be completed on time. The company forecast 2011 capital spending, excluding acquisitions, of $270–$300 million.
Material changes, outlook and risks
- Profitability improved substantially, driven by lower SG&A, restructuring and cost-saving benefits, and the absence of the large 2009 commercial carpet-tile warranty charge. 2009 included a $121.2 million sales allowance and $12.3 million inventory write-off related to discontinued carpet-tile backing technology.
- 2010 gross profit benefited from approximately $50 million of restructuring and cost savings, while higher manufacturing costs—primarily raw materials—were an approximately $58 million headwind. SG&A declined 8.4% to $1.088 billion.
- The 2010 effective tax rate was 1.4%. The filing attributes this principally to tax benefits from settlement of European tax contingencies, geographic profit mix, and a decrease in the valuation allowance. These items make the tax rate unusually low and may not recur.
- Unusual items included a $7.7 million U.S. customs refund gain and approximately $25 million of insurance proceeds for 2010 flooding at a Dal-Tile facility in Mexico; the company said the flood did not materially affect results or financial position.
- After year-end, Mohawk announced plans to exit a manufacturing facility and expected to record a restructuring charge in first-quarter 2011; the amount was not yet determined.
- Key risks include weak housing, remodeling and commercial construction demand; raw-material, energy and fuel cost inflation and limited ability to pass increases through; intense competition and price pressure; foreign exchange exposure; supplier concentration; and refinancing, credit-rating and ABL covenant risks. Environmental, product warranty, litigation, acquisition and intellectual-property risks are also disclosed.
- No material legal proceedings were reported as pending. Environmental investigation and remediation obligations were accrued where considered probable and estimable; management did not expect them to materially affect operations, though period results could be affected.
Most important facts for investors to verify
- Whether the 2011 demand recovery materialized, particularly given sales declines in the second half of 2010.
- Whether cost savings and pricing offset raw-material inflation without further weakening volume or mix.
- Progress toward refinancing or reserving for the $400 million 7.20% notes before the ABL acceleration deadline, and compliance with facility covenants.
- The amount and timing of the announced Mohawk facility-exit charge and any further restructuring costs.
- Whether the unusually low 2010 tax rate and benefits from tax settlements are repeatable; also monitor uncertain tax positions and valuation allowances.
- Warranty experience following the discontinued carpet-tile backing issue, plus the adequacy of environmental and other contingency accruals.