Mohawk Industries, Inc. — Q1 2011 Form 10-Q
Business context and period: Mohawk manufactures and sells flooring products through its Mohawk, Dal-Tile and Unilin segments. This unaudited report covers the three months ended April 2, 2011, compared with the three months ended April 3, 2010. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Net sales | $1,343.6 | $1,347.2 |
| Gross profit / margin | $341.6 / 25.4% | $341.2 / 25.3% |
| Operating income / margin | $56.1 / 4.2% | $53.6 / 4.0% |
| Net earnings attributable to Mohawk | $23.4 | $20.5 |
| Diluted EPS | $0.34 | $0.30 |
| Interest expense | $26.6 | $33.9 |
| Cash used in operating activities | $67.4 | $46.2 |
| Capital expenditures | $52.8 | $23.3 |
| Cash and cash equivalents | $256.2 | $354.2 at Dec. 31, 2010 |
| Total debt, carrying value | $1,629.9 | $1,653.6 at Dec. 31, 2010 |
| Current assets / current liabilities | $2,339.7 / $792.5 | $2,248.6 / $1,048.9 at Dec. 31, 2010 |
- Revenue was nearly unchanged year over year. Management attributed the modest decline mainly to lower volume, especially in the U.S. residential market, partly offset by improved price and product mix.
- Raw-material inflation weighed on results: management estimated approximately $40 million of higher costs, partly offset by approximately $30 million from price and mix and approximately $21 million from restructuring and cost-saving initiatives.
- Segment sales and operating income: Mohawk $691.2 million and $17.0 million; Dal-Tile $344.4 million and $17.7 million; Unilin $325.8 million and $26.3 million. Mohawk sales fell 3.5%; Dal-Tile sales rose 0.9%; Unilin sales rose 6.5%.
- Operating cash outflow increased year over year, with cash tied up in receivables and inventories. Investing outflow rose with increased spending, including for additional extrusion capacity. Financing cash flow was positive $8.4 million, including revolving-credit activity and repayment of notes.
- At April 2, 2011, the company had $217.9 million of availability under its $600 million ABL facility; $275.0 million was borrowed and $107.1 million of capacity was used by letters of credit. The filing reports total ABL utilization of $382.1 million.
Changes, outlook and notable items
- Mohawk repaid the remaining $298.2 million of its 5.75% notes at maturity in Q1, using cash and ABL borrowings. Lower debt-related interest expense contributed to improved earnings.
- The company had $400 million of 7.20% senior notes due April 15, 2012. The ABL facility’s September 2013 maturity can accelerate to January 15, 2012 unless those notes are repaid, refinanced, defeased or adequately reserved for by then. Management believed it could arrange the required resources but cautioned that financing was not assured.
- Management expected U.S. industry conditions to improve during 2011, while emphasizing uncertainty about the timing and durability of a recovery. Capital spending for the remainder of 2011, excluding acquisitions, was expected to be approximately $220–$235 million.
- Q1 restructuring charges were $6.8 million, primarily aimed at reducing costs and improving manufacturing and distribution efficiency. The filing says remaining severance, lease-impairment and other restructuring costs are expected to be paid over five years.
- Principal risks include continued weakness in housing and flooring demand, inability to pass through raw-material and energy cost increases, refinancing and covenant risk, credit-rating changes, competition, supply and foreign-exchange exposure, and potential legal, environmental or impairment charges. No material legal proceedings were reported; management said contingencies were provided for probable losses, though a given period’s results could be materially affected.
Key facts for investors to verify
- Progress toward refinancing, reserving for or repaying the $400 million notes due in April 2012, and the resulting effect on ABL maturity and liquidity.
- Whether price increases and product mix can offset raw-material inflation without further weakening sales volumes.
- Conversion of receivables and inventories into cash, given Q1 operating cash outflow and increased working-capital investment.
- Execution and returns from the planned $220–$235 million of remaining-2011 capital expenditures.
- Performance by segment and whether restructuring savings persist as demand and input costs change.