Mohawk Industries, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the three and six months ended July 2, 2011. Mohawk manufactures and sells flooring through its Mohawk, Dal-Tile and Unilin segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $1,469.8M | $1,477.9M | $2,878.8M | $2,821.4M |
| Gross profit / margin | $388.5M / 26.4% | $382.2M / 25.9% | $747.9M / 26.0% | $723.8M / 25.7% |
| Operating income / margin | $107.7M / 7.3% | $101.7M / 6.9% | $179.7M / 6.2% | $157.8M / 5.6% |
| Net earnings attributable to Mohawk | $73.2M | $60.9M | $113.6M | $84.3M |
| Diluted EPS | $1.06 | $0.88 | $1.64 | $1.22 |
| Interest expense | $18.8M | $25.8M | $41.3M | $52.4M |
| Operating cash flow | Not separately reported for the quarter | $95.6M | $28.6M |
- Q2 sales declined 0.5%, while first-half sales grew 2.0%. First-half growth reflected approximately $82M of favorable price and mix and $25M of higher volume, partly offset by approximately $50M of unfavorable foreign exchange.
- First-half operating income increased 13.9%; management cited pricing and mix, productivity, volume and lower restructuring charges, partly offset by approximately $46M of inflationary costs, primarily raw materials.
- Segment trends were mixed: first-half Mohawk sales fell 1.0% as volume weakened; Dal-Tile sales rose 10.1% on volume growth; Unilin sales rose 0.4%, with volume and pricing largely offset by foreign exchange. Unilin operating income declined versus the prior period.
Financial position and liquidity
- At June 30, cash and cash equivalents were $319.5M, current assets $2,534.2M and current liabilities $790.6M. Total assets were $6,264.8M and stockholders’ equity $3,476.3M.
- Total debt carrying value was $1,627.7M, including $57.2M current and $1,570.5M long-term, compared with $1,586.4M at December 31, 2011. The company repaid $336.3M of 7.20% notes at maturity in April using credit-facility borrowings.
- The $900M revolving credit facility, including its term loan, had $773.5M utilized and $274.7M available at quarter-end. Facility covenants require interest coverage of at least 3.0:1 and net leverage no higher than 3.75:1.
- First-half investing cash outflow was $94.7M, including $87.7M of capital expenditures and a $7.0M investment in a Brazilian laminate facility. Financing activities provided $13.2M; cash increased $7.5M.
- Operating cash flow improved year over year, but included a €26.5M Belgian tax deposit; higher receivables and inventories also used cash. Management expected remaining 2012 capital spending, excluding acquisitions, of approximately $115M–$135M and said cash, operating cash flow and facility availability should cover needs for the next 12 months.
Outlook, commentary and material risks
- No specific revenue or earnings guidance was provided. Management described a difficult industry environment, citing economic uncertainty, the European debt crisis, housing and construction conditions, consumer confidence, and material-cost volatility.
- Management planned further capacity expansion and manufacturing efficiency investments. A Mohawk-segment facility consolidation announced after quarter-end was expected to result in a restructuring charge in Q3 2012; the amount was not yet determined.
- Raw-material inflation remains a key margin risk: the company may not be able to pass cost increases through fully or promptly. Foreign exchange also reduced reported sales and earnings comparisons.
- In Q2, foreign-currency translation adjustments were a negative $120.1M; first-half adjustments were negative $65.2M. The company changed Mexico’s functional currency from the U.S. dollar to the peso effective April 1; management said the change’s financial-statement effect was not significant.
- Mohawk faces U.S. and Canadian polyurethane-foam antitrust litigation seeking unspecified, potentially treble damages. The company denies the allegations and intends to defend itself; it said the ultimate outcome was not expected to materially affect financial condition, but could materially affect results in a quarter or year.
- The company paid a Belgian tax assessment and interest totaling approximately €26.5M while contesting the assessment; a separate investigation relating to 2009 was ongoing. Management said the outcomes could affect results in a given period.
- Other disclosed risks include cyclical flooring demand, competition, supplier concentration, credit access and covenant compliance, international operations and currency exposure, environmental and product claims, and protection of intellectual property. Certain Unilin patents expire in 2017, and the company is developing alternative licensing revenue sources.
Investor verification priorities
- Track whether price and mix and productivity continue to offset raw-material inflation, particularly in Mohawk and Unilin.
- Monitor cash conversion and working-capital needs, including collection of receivables, seasonal inventory, and the Belgian tax deposit and dispute.
- Verify debt levels, facility availability, covenant headroom, and the impact of the shift from maturing notes to credit-facility borrowing.
- Assess execution and returns on planned capital spending, geographic expansion, the Brazilian investment and the announced facility consolidation.
- Follow developments in antitrust litigation, Belgian tax matters, and the replacement of licensing revenues from patents expiring in 2017.