Mohawk Industries, Inc. — Q2 2011 Form 10-Q
Reporting period: Second quarter and six months ended July 2, 2011; comparisons are with the periods ended July 3, 2010. Mohawk manufactures and sells flooring through its Mohawk, Dal-Tile and Unilin segments. Amounts below are in millions of dollars except per-share data and percentages.
Key financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $1,477.9 | $1,400.1 | $2,821.4 | $2,747.3 |
| Gross profit / margin | $382.2 / 25.9% | $374.8 / 26.8% | $723.8 / 25.7% | $716.0 / 26.1% |
| Operating income / margin | $101.7 / 6.9% | $89.7 / 6.4% | $157.8 / 5.6% | $143.3 / 5.2% |
| Interest expense | $25.8 | $39.0 | $52.4 | $72.9 |
| Net earnings attributable to Mohawk | $60.9 | $68.1 | $84.3 | $88.6 |
| Diluted EPS | $0.88 | $0.95 | $1.22 | $1.24 |
Q2 sales rose 5.6%, while first-half sales rose 2.7%. Operating income improved in both comparisons, but gross margin contracted as inflation in raw materials and energy outpaced pricing and cost savings. First-half operating cash flow was $28.6 million, down from $89.0 million; capital expenditures were $112.5 million, versus $47.1 million. Cash and cash equivalents were $285.4 million at July 2, compared with $354.2 million at year-end 2010.
Balance sheet, debt and liquidity
- Total assets were $6,389.0 million and total liabilities $2,839.7 million at July 2, 2011. Current assets were $2,447.2 million and current liabilities $1,224.5 million.
- Carrying value of total debt was $1,608.3 million, including $453.2 million current and $1,155.2 million long-term. The $298.2 million of 5.75% notes due January 2011 was repaid at maturity during the first quarter.
- At July 2, $239.9 million was available under the then-current $600 million ABL revolver. On July 8, after quarter-end, Mohawk replaced it with a $900 million secured revolving facility maturing in July 2016. As of July 8, $492.9 million was available, including after outstanding borrowings and letters of credit.
- The new facility requires interest coverage of at least 3.0-to-1 and net leverage no greater than 3.75-to-1. Mohawk said it expected available cash, operating cash flow and facility availability to meet needs for the next 12 months.
- $400 million of 7.20% senior notes mature April 15, 2012. Management expected to have resources to repay them, but noted there was no assurance that any needed debt offering could be completed. Credit-rating downgrades had increased note interest rates by a cumulative 0.75%.
Material changes and management commentary
- Q2 sales growth reflected approximately $36 million of favorable foreign exchange, $25 million from price and product mix, and $17 million from volume. Unilin had the strongest reported segment sales growth, up 17.7%; Mohawk rose 1.4% and Dal-Tile 4.4%.
- For the first half, sales growth was led by Unilin, up 12.2%; Dal-Tile rose 2.7%, while Mohawk sales declined 1.0%, primarily due to lower volume and continued weakness in the U.S. residential market.
- Management attributed improved operating income to pricing and mix, manufacturing and SG&A savings, and restructuring. These benefits were partly offset by inflation: approximately $45 million in Q2 and $85 million in the first half, primarily from raw materials and energy.
- Interest expense declined year over year due to lower debt and financing costs. Prior-year comparisons included a $30 million tax-contingency settlement benefit and a $7.5 million debt-extinguishment premium; these items help explain why reported earnings and EPS declined despite higher operating income.
- First-half 2011 restructuring charges were $13.3 million, primarily associated with cost reductions and manufacturing and distribution efficiency. Remaining restructuring costs were expected to be paid over five years.
- Capital spending for the remainder of 2011, excluding acquisitions, was expected to be approximately $160–$180 million, for equipment, geographic capacity and manufacturing improvements. No specific earnings or sales guidance was provided.
Risks, contingencies and other notable items
- Mohawk was named in seven polyurethane-foam antitrust cases and two consolidated class-action complaints alleging price fixing. Plaintiffs seek treble damages on unspecified alleged overcharges, fees and injunctive relief. The company denied the allegations and said it would defend itself. On July 19, 2011, after quarter-end, the court denied defendants’ motions to dismiss. Mohawk said the matter could materially affect results in a quarter or year, although it did not expect a material adverse effect on financial condition.
- Key stated risks include continued weakness in housing and flooring demand; inability to pass through raw-material, energy and fuel cost increases; competition; credit availability, refinancing and covenant compliance; foreign-exchange exposure; supply interruptions; litigation; and environmental and other regulatory costs.
- Management expected the U.S. flooring industry to improve in 2011, but emphasized that the timing and scale of a sustained recovery remained uncertain. The filing also notes seasonal patterns across the segments.
- Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether pricing and productivity gains can offset continuing raw-material and energy inflation without further margin erosion.
- Progress in U.S. residential flooring demand, especially the volume trend in the Mohawk segment.
- Cash conversion and working-capital movements, given the sharp year-over-year decline in first-half operating cash flow and increased receivables and inventory.
- Refinancing or repayment plans for the $400 million notes maturing in April 2012, and compliance with the new facility’s financial covenants.
- Developments, potential exposure and any subsequent financial-statement effects of the polyurethane-foam antitrust litigation.
- Execution of the planned $160–$180 million remainder-of-year capital program and its expected returns.