Mohawk Industries, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparative results are for 2013. Mohawk is a global flooring manufacturer with Carpet, Ceramic, and Laminate and Wood segments. About 71% of 2014 sales came from North America and 29% from elsewhere.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $7.803 billion | $7.349 billion |
| Gross profit / margin | $2.154 billion / 27.6% | $1.921 billion / 26.1% |
| Operating income / margin | $772.8 million / 9.9% | $546.9 million / 7.4% |
| Net earnings attributable to Mohawk | $532.0 million | $348.8 million |
| Diluted EPS | $7.25 | $4.82 |
| Cash from operating activities | $662.2 million | $525.2 million |
| Capital expenditures | $561.8 million | $366.6 million |
- Sales rose 6.2%. Higher volume contributed about $498 million, including approximately $328 million from the Marazzi and Spano acquisitions; favorable price and product mix added about $13 million, while foreign exchange reduced sales by about $56 million.
- Gross margin expanded 150 basis points. Management attributed the improvement principally to productivity, volume, favorable price and mix, and lower restructuring and integration costs, partly offset by higher input costs of about $49 million.
- Net cash used in investing activities was $565.7 million, versus $810.0 million in 2013; prior-year acquisition spending was a key difference. Net cash used in financing activities was $25.6 million.
- At year-end, cash was $97.9 million and total debt, including current maturities, was $2.253 billion. Current debt was $851.3 million. The $1.0 billion revolving facility had $465.4 million available after commercial paper and other usage; the $500 million receivables securitization facility was fully utilized.
- Working capital was $1.176 billion, down from $1.765 billion. Total stockholders’ equity was $4.423 billion, compared with $4.470 billion. Foreign currency translation reduced other comprehensive income by $608.0 million and drove accumulated other comprehensive income from $178.7 million to a $429.3 million deficit.
Segments and comparison with prior period
- Carpet: Sales increased 0.9% to $3.014 billion; operating income rose 22.4% to $255.9 million, with an 8.5% segment operating margin versus 7.0%.
- Ceramic: Sales increased 12.6% to $3.015 billion; operating income rose 67.3% to $351.1 million, with an 11.6% margin versus 7.8%. Marazzi accounted for a substantial portion of the sales-volume increase.
- Laminate and Wood: Sales increased 5.5% to $1.891 billion; operating income rose 22.2% to $194.7 million, with a 10.3% margin versus 8.9%.
- Operating income increased 41.3% overall. The comparison benefited from lower restructuring, acquisition and integration costs and the absence of the prior-year Marazzi inventory step-up charge. Higher input costs, unfavorable foreign exchange and a $10 million legal reserve were offsets.
- Fourth-quarter sales were $1.951 billion, up 1.4% year over year; net earnings were $146.9 million versus $94.7 million, and diluted EPS was $2.00 versus $1.29.
Outlook, significant developments and risks
- Management stated that cash on hand, operating cash generation and available revolving credit should be sufficient for capital expenditures, working capital and debt service over the next 12 months. The filing does not provide quantified earnings or revenue guidance.
- After year-end, Mohawk agreed to acquire IVC Group, a vinyl flooring producer, for an estimated transaction value of approximately €1.0 billion, subject to adjustments and customary approvals. IVC reported estimated 2014 revenue of about $700 million. Mohawk also agreed to acquire an Eastern European ceramic tile manufacturer for approximately €195 million, subject to adjustments and approvals.
- Debt and refinancing warrant attention: $645.6 million of 6.125% notes remained due January 2016 after 2014 redemptions. The revolving facility could accelerate to October 2015 if specified conditions concerning those notes and available liquidity are not met. Management believed the required liquidity threshold would be met, but offered no assurance.
- U.S. polyurethane-foam antitrust class actions remain pending. Plaintiffs’ direct-purchaser class alleged damages of up to approximately $867 million, potentially subject to trebling; the court denied summary-judgment motions in February 2015 and trial was scheduled for March 31, 2015. Mohawk says provisions cover probable, estimable losses but cannot estimate additional exposure. Canadian actions were subject to an agreement in principle to settle, not yet finalized.
- Belgian tax assessments covering several years are contested and proceeding before the courts. The filing says the ultimate outcome is not expected to materially affect financial condition, but could materially affect results, cash flows or liquidity in a period.
- Other material risks include housing and remodeling cycles, intense competition and pricing, raw-material and energy costs, foreign exchange, international and emerging-market exposure, acquisition integration, environmental and product claims, and expiration of key laminate-flooring patents. The UNICLIC patent family is expected to expire in 2017; 2014 patent licensing revenue was approximately €109 million.
Important facts for investors to verify
- Progress and financing for the IVC and Eastern European tile acquisitions, including closing conditions, purchase price adjustments, integration costs and incremental debt.
- Refinancing or repayment plans for the remaining 6.125% notes due in January 2016, facility covenant headroom and continued access to the revolving and securitization facilities.
- Outcomes and any updated loss estimates for the U.S. and Canadian antitrust litigation and Belgian tax disputes.
- Whether productivity and price/mix gains can offset input-cost inflation, competitive pricing and adverse currency movements.
- Fourth-quarter impairment testing showed no impairment; monitor goodwill and trademark valuation assumptions as economic and foreign-exchange conditions change.