Mohawk Industries, Inc. — Q1 2013 Form 10-Q
Business context and period: Flooring manufacturer reporting the three months ended March 30, 2013, compared with the three months ended March 31, 2012. The business operates through Mohawk, Dal-Tile and Unilin segments. Amounts below are in U.S. dollars; financial statements are unaudited.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,486.8 million | $1,409.0 million | +5.5% |
| Gross profit / margin | $377.1 million / 25.4% | $359.4 million / 25.5% | Profit +4.9%; margin down 0.1 pp |
| Operating income / margin | $86.8 million / 5.8% | $72.0 million / 5.1% | +20.7% |
| Net earnings attributable to Mohawk | $50.5 million | $40.4 million | +25.1% |
| Diluted EPS | $0.72 | $0.58 | +$0.14 |
| Cash used in operating activities | $38.9 million | $44.5 million | Use decreased by $5.5 million |
- Growth and profitability: Sales rose by $77.8 million, attributed principally to about $50 million of higher volume, including Pergo, about $26 million from price and product mix, and about $2 million from foreign exchange. SG&A was $290.2 million, or 19.5% of sales, versus 20.4% a year earlier.
- Segments: Mohawk sales declined 0.6% to $695.3 million and operating income was essentially flat at $25.2 million. Dal-Tile sales increased 4.8% to $411.9 million and operating income rose to $30.0 million. Unilin sales increased 19.9% to $404.5 million and operating income rose to $38.7 million; the sales increase was primarily driven by Pergo.
- Cash and liquidity at March 30: Cash and equivalents were $1,120.2 million, versus $477.7 million at year-end. Current assets were $3,446.6 million and current liabilities $877.6 million. Operating cash use reflected working-capital outflows, including receivables and inventory.
- Debt: Balance-sheet current and long-term debt totaled approximately $2,306.5 million, versus $1,382.9 million at year-end. Mohawk issued $600 million of 3.85% senior notes due 2023 and had $300 million drawn under its receivables securitization facility. The revolving credit facility had $486.3 million of availability, excluding the term loan. Cash exceeded reported debt by approximately $1,186.7 million before subsequent acquisitions.
- Investing and financing: Investing cash use was $211.1 million, including $147.8 million for Pergo and $63.3 million of capital expenditures. Financing provided $938.0 million, mainly reflecting the new notes and credit-facility activity. Cash balances included $1,058.9 million held in Europe; management estimated a $370.6 million tax cost to repatriate that European cash as of quarter-end.
Material changes, outlook and management commentary
- Management attributed improved operating income to productivity, sales volume, lower amortization and favorable price/product mix, partly offset by acquisition and integration costs, restructuring, expansion and new-product costs, and higher input costs. Interest expense fell to $19.2 million from $22.5 million, while other expense shifted to $6.4 million from $1.8 million of other income, mainly reflecting foreign-currency losses.
- Effective tax rate was 17.5%, compared with 20.1%. The current period included a $2 million benefit from settlement of tax contingencies and a $1.9 million benefit from retroactive tax provisions.
- Pergo was acquired January 10 for approximately $150 million cash. After quarter-end, Mohawk completed the Marazzi acquisition on April 3 for approximately $1.5 billion, using cash, common stock and assumed debt; it completed the Spano acquisition on May 3 for approximately $164 million cash. These transactions materially affect the interpretation of post-quarter liquidity and leverage.
- Mohawk expected remaining 2013 capital spending, including acquisition-related requirements, of approximately $315–$325 million. Management stated cash, operating cash generation and credit availability should be sufficient for capital expenditures, working capital and debt service over the next 12 months. No specific earnings or sales guidance was provided.
- Q1 restructuring charges were $8.2 million, mainly related to cost reductions, manufacturing and administrative efficiency, and Pergo. Subsequent to quarter-end, Mohawk planned to close two Pergo plants in Sweden by July 31, 2013, transfer production to Belgium, and consolidate two roofing plants; additional Q2 restructuring charges were expected but not quantified.
- Risks and contingencies include polyurethane-foam antitrust litigation in the U.S. and Canada, where plaintiffs seek unspecified damages, including treble damages; Mohawk denies the allegations. Belgian tax assessments for 2005 and 2009 totaled €81.7 million before possible interest and penalties; the company protested the assessments. Management said outcomes were not expected to materially affect financial condition but could materially affect results, cash flows or liquidity in a period.
- Other notable items: foreign-currency translation reduced other comprehensive income by $77.7 million in Q1. Management highlighted exposure to commodity, energy and fuel costs, economic and housing conditions, acquisition integration, competition, litigation and international operations. The first quarter is typically the weakest season for the Mohawk and Dal-Tile segments.
Important facts for investors to verify
- Post-acquisition debt, cash, share issuance and integration costs following Marazzi and Spano, compared with the March 30 balance sheet.
- Whether operating cash flow improves as receivables and inventory investment normalize, and whether forecast capital spending remains within the stated range.
- Actual additional restructuring costs and benefits from the Swedish plant closures and roofing-plant consolidation.
- Developments in the antitrust cases and Belgian tax disputes, including any changes to accrued amounts or potential cash exposure.
- Foreign-currency effects and the location, accessibility and potential tax cost of cash held outside the U.S.