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| MHK > SEC Filings for MHK > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
Overview
The Company is a leading producer of floor covering products for residential and commercial applications in the U.S. and Europe with net sales in 2008 of $6.8 billion. The Company is the second largest carpet and rug manufacturer, a leading manufacturer, marketer and distributor of ceramic tile, natural stone and hardwood flooring in the U.S. and a leading producer of laminate flooring in the U.S. and Europe.
The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment manufactures, markets and distributes its product lines primarily in North America, which include carpet, rugs, pad, ceramic tile, hardwood, resilient and laminate, through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment product lines are sold through various selling channels, which include floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment manufactures, markets and distributes its product lines primarily in North America, which include ceramic tile, porcelain tile and stone products, through its network of regional distribution centers and approximately 250 company-operated sales service centers using company-operated trucks, common carriers or rail transportation. The segment product lines are purchased by floor covering retailers, home centers, independent distributors, tile specialty dealers, tile contractors, and commercial end users. The Unilin segment manufactures, markets and distributes its product lines primarily in North America and Europe, which include laminate flooring, wood flooring, roofing systems and other wood products through various selling channels, which include retailers, home centers and independent distributors.
The Company reported net loss of $105.9 million or diluted loss per share of $1.55 for the first quarter of 2009, compared to net earnings of $65.4 million or $0.95 earnings per share for the first quarter of 2008. The change in earnings per share resulted primarily from the impact of lower sales volumes, which the Company believes is attributable to slowing U.S. residential housing, commercial and European demand, an increase in warranty requirements for certain commercial carpet tiles and the impact of two fewer shipping days in the first quarter of 2009 compared to the same period in 2008. Accordingly, the Company has adjusted its working capital levels to reflect the current sales demands and production levels of its business.
At the end of the first quarter of 2009, the Company recognized a higher trend of incidents related to the use of new technology in certain commercial carpet tiles and recorded a $110.2 million carpet sales allowance and a $12.4 million inventory write-off. The Company discontinued sales of the commercial carpet tile possessing this new technology and has substituted it with an established technology. The amounts recorded reflect the Company's best reasonable estimate but the actual amount of claims and related costs could vary from such estimates.
Although the Company cannot determine with certainty as to when the deteriorating market conditions will stabilize and begin to improve, the Company believes it is well-positioned in the long-term as the industry improves. The Company continues to monitor expenses and manufacturing capacity based on current industry conditions and will continue to adjust as required.
Results of Operations
Quarter Ended March 28, 2009, as Compared with Quarter Ended March 29, 2008
Net Sales
Net sales for the quarter ended March 28, 2009 were $1,208.3 million, reflecting a decrease of $529.8 million, or 30.5%, from the $1,738.1 million reported for the quarter ended March 29, 2008. The decrease was primarily driven by a decline in sales volumes of approximately $343 million due to the continued decline in the U.S. residential market, softening commercial demand and slowing European demand, a decrease of approximately $110 million due to an increase in warranty requirements described above in the overview, a decline of approximately $47 million due to unfavorable price and product mix and a decline of approximately $30 million due to unfavorable foreign exchange rates.
Mohawk Segment - Net sales decreased $310.7 million, or 34.3%, to $594.3 million in the current quarter compared to $905.0 million in the first quarter of 2008. The decrease was primarily driven by a decline in sales volumes of approximately $180 million due to the continued decline in the U.S. residential market and softening commercial demand, a decrease of approximately $110 million due to an increase in warranty requirements described above in the overview and a decline of approximately $21 million due to the net effect of price and product mix.
Dal-Tile Segment - Net sales decreased $90.6 million, or 20.2%, to $358.5 million in the current quarter compared to $449.1 million in the first quarter of 2008. The decrease was primarily driven by a decline in sales volumes of approximately $74 million due to the continued decline in the U.S. residential market and softening commercial demand and a decline of approximately $10 million due to unfavorable product mix as customers trade down.
Unilin Segment - Net sales decreased $135.3 million, or 33.5%, to $268.5 million in the current quarter compared to $403.8 million in the first quarter of 2008. The decrease was driven by a decline in sales volumes of approximately $89 million due to the continued decline in the U.S. residential market and slowing European demand, a decline of approximately $30 million due to unfavorable foreign exchange rates and a decline of approximately $16 million due to the net effect of price and product mix.
Gross profit
Gross profit for the first quarter of 2009 was $153.7 million (12.7% of net sales) and represented a decrease of $306.1 million compared to gross profit of $459.8 million (26.5% of net sales) for the prior year's first quarter. Gross profit in the current quarter was unfavorably impacted by a decrease of approximately $115 million resulting from a decline in sales volume, a decline of approximately $110 million due to an increase in warranty requirements described above in the overview, a decrease of approximately $30 million for higher manufacturing costs as a result of the lower volumes and a decline of approximately $30 million due to the net effect of price and product mix.
Selling, general and administrative expenses
Selling, general and administrative expenses for the first quarter of 2009 were $299.6 million (24.8% of net sales), reflecting a decrease of $35.9 million, or 10.7%, compared to $335.5 million (19.3% of net sales) for the prior year's first quarter. The decrease in selling, general and administrative expenses is attributable to various cost savings initiatives implemented by the Company, offset by approximately $6 million due to unfavorable foreign exchange rates.
Operating (loss) income
Operating loss for the first quarter of 2009 was $145.9 million reflecting a decrease of $270.2 million compared to operating income of $124.3 million (7.2% of net sales) in the first quarter of 2008. The decrease was primarily driven by a decline in sales volumes of approximately $115 million, a decline of approximately $110 million due to an increase in warranty requirements described above in the overview and a decline of approximately $30 million due to the net effect of price and product mix.
Mohawk Segment - Operating loss was $179.1 million in the first quarter of 2009 reflecting a decrease of $201.3 million compared to operating income of $22.2 million (2.5% of segment net sales) in the first quarter of 2008. The decrease was primarily due to a decline of approximately $110 million due to an increase in warranty requirements described above in the overview, a decline in sales volumes of approximately $51 million, higher manufacturing costs as a result of the lower volumes of approximately $18 million, net of cost savings initiatives, and a decline of approximately $10 million due to the net effect of price and product mix.
Dal-Tile Segment - Operating income was $21.1 million (5.9% of segment net sales) in the first quarter of 2009 reflecting a decrease of $35.8 million compared to operating income of $56.9 million (12.7% of segment net sales) for the first quarter of 2008. The decrease was primarily due to a decline in sales volumes of approximately $32 million and higher manufacturing costs as a result of the lower volumes of approximately $4 million, net of cost savings initiatives.
Unilin Segment - Operating income was $14.6 million (5.4% of segment net sales) in the first quarter of 2009 reflecting a decrease of $35.4 million compared to operating income of $50.0 million (12.4% of segment net sales) for the first quarter of 2008. The decrease was primarily due to a decline in sales volumes of approximately $31 million, a decline of approximately $16 million due to the net effect of price and product mix, partially offset by lower costs for raw materials and cost savings initiatives of approximately $19 million.
Interest expense
Interest expense for the first quarter of 2009 was $30.2 million compared to $33.8 million in the first quarter of 2008. The decrease in interest expense was directly related to lower average debt levels in the current quarter when compared to the first quarter of 2008, partially offset by higher interest rates on the Company's notes.
Income tax (benefit) expense
For the first quarter of 2009, the Company recorded an income tax benefit of $72.8 million on a pre-tax book loss of $177.7 million for an effective tax rate of 41.0%, as compared to a provision of $22.4 million on pre-tax book income of $89.1 for an effective tax rate of 25.1% for the same period in 2008. In accordance with Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" ("APB 28") and FASB Interpretation No. 18, "Accounting for Income Taxes in Interim Periods - an interpretation of APB Opinion No. 28" ("FIN 18"), at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on an interim period. However, in certain circumstances where the Company is unable to make a reliable estimate of the annual effective tax rate, FIN 18 allows the actual effective tax rate for the interim period to be used in the interim period. For the first quarter ended March 28, 2009, the Company calculated its effective rate for the interim period and applied that rate to the interim period results because it was unable to reasonably estimate its annual effective rate due to fluctuations in its annual pre-tax income and loss between quarters, including the effects caused by multiple tax jurisdictions.
Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. The Company's capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes, the sale of trade receivables and credit terms from suppliers.
Cash flows provided by operations for the first three months of 2009 were $37.9 million compared to cash flows used in operations of $80.2 million for the first three months of 2008. The increase in operating cash flows for the first three months of 2009 as compared to the first three months of 2008 is primarily attributable to lower inventories as a result of lower sales demand and improved accounts payable days, partially offset by lower receivables due to lower sales.
Net cash used in investing activities for the first three months of 2009 was $27.1 million compared to $56.0 million for the first three months of 2008. The decrease is due to lower capital spending during 2009 as compared to 2008. Capital spending during the remainder of 2009, excluding acquisitions, is expected to range from $90 million to $100 million, and will be used primarily to purchase equipment and to streamline manufacturing capacity.
Net cash provided by financing activities for the first three months of 2009 was $34.0 million compared to net cash provided by financing activities of $119.0 million for the same period in 2008. The change in cash provided by financing activities as compared to 2008 is primarily attributable to lower borrowings due to lower working capital requirements as a result of lower sales.
On October 28, 2005, the Company entered into a $1.5 billion five-year, senior, unsecured, revolving credit and term loan facility (the "senior unsecured credit facilities"). The senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines. The senior unsecured credit facilities consist of (i) a multi-currency $750.0 million revolving credit facility, which matures on October 28, 2010, (ii) a $389.2 million term loan facility, which was repaid in 2006, and (iii) a Euro 300.0 million term
loan facility, which was repaid in 2008. On December 31, 2008, the Company amended this facility and reduced the $750 million revolving credit facility to $650 million by eliminating the credit commitment of Lehman Brothers Holdings Inc. under the defaulting lender provision of the senior unsecured credit facilities. The Company believes the remaining banks in its revolving credit facility are stable and that the remaining availability is adequate to meet its liquidity requirements.
As of March 28, 2009, the amount used under the revolving credit facility of the senior unsecured credit facilities was $156.6 million leaving a total of approximately $493.4 million available under the revolving credit facility. The amount used under the revolving credit facility is composed of $39.4 million borrowings, $55.6 million standby letters of credit guaranteeing the Company's industrial revenue bonds and $61.6 million standby letters of credit related to various insurance contracts and foreign vendor commitments.
Borrowings outstanding under the senior unsecured credit facilities bears
interest, at the Company's option, at (i) the greater of (x) prime rate or
(y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an indexed
amount based on the Company's senior, unsecured, long-term debt rating.
On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130.0 million, five-year unsecured, revolving credit facility, maturing on November 8, 2010 (the "Euro revolving credit facility"). This agreement bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under the Euro revolving credit facility and any of the Company's other subsidiaries that become borrowers under the Euro revolving credit facility. As of March 28, 2009, the Company had no borrowings outstanding under this facility and a total of $173 million (USD equivalent) was available to its European operations under the Company's €130 million Euro revolving credit facility.
The Company's senior unsecured credit facilities and the Euro revolving credit facility both contain debt to capital ratio requirements and other customary covenants. The Company was in compliance with these covenants as of March 28, 2009. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.06% to 0.25% depending upon the Company's senior, unsecured long-term debt rating.
The Company has an on-balance sheet trade accounts receivable securitization agreement ("Securitization Facility") which matures on July 27, 2009. As of March 28, 2009, the Company had $77.4 million outstanding secured by trade receivables. The Securitization Facility allows the Company to borrow up to $250.0 million based on available accounts receivable.
On January 17, 2006, the Company issued $500.0 million aggregate principal amount of 5.750% notes due 2011 and $900.0 million aggregate principal amount of 6.125% notes due 2016. Interest payable on each series of the notes is subject to adjustment if either Moody's Investors Service, Inc. or Standard & Poor's Ratings Services, or both, downgrades the rating they have assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company's interest expense by approximately $3.5 million per year. On February 25, 2009, Moody's Investors Service, Inc. downgraded its ratings on the Company's senior unsecured notes to Ba1 from Baa3 with a negative rating outlook. On March 13, 2009, Standard's & Poors's Ratings Services downgraded its ratings on the Company's senior unsecured notes to BB+ from BBB-, with a stable outlook. These downgrades will increase the Company's interest expense by approximately $7.0 million per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company's credit rating could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.
In 2002, the Company issued $400.0 million aggregate principal amount of its senior 7.2% notes due 2012.
The Company believes that cash generated from operations in 2009 and availability under its existing revolving credit facility will be sufficient to meet its capital expenditures and working capital requirements in 2009.
Contractual Obligations
There have been no significant changes to the Company's contractual obligations as disclosed in the Company's 2008 Annual Report filed on Form 10-K.
Critical Accounting Policies and Estimates
There have been no significant changes to the Company's critical accounting policies and estimates during the period. The Company's critical accounting policies and estimates are described in its 2008 Annual Report filed on Form 10-K.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. SFAS No. 157 is effective for the Company's fiscal year beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The Company adoption of SFAS No. 157 for financial assets and liabilities on January 1, 2008 and non-financial assets and liabilities on January 1, 2009 did not have a material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of SFAS No. 141R on January 1, 2009 did not have a material impact on the Company's consolidated financial statements, although the adoption of SFAS 141R will impact the recognition and measurement of future business combinations and certain income tax benefits recognized from prior business combinations.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 160 on January 1, 2009 did not have a material impact on the Company's consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for the first quarter of 2009. The adoption of SFAS No. 161 on January 1, 2009 did not have a material impact on the Company's consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles." The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
Impact of Inflation
Inflation affects the Company's manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004, and the prices increased dramatically during the latter part of 2008, peaking in the second half of 2008. Prices of raw materials have subsequently moderated. For the period from 1999 through the beginning of 2004, the carpet and tile industry experienced moderate inflation in the prices of raw materials and fuel-related costs. In the past, the Company has generally been able to pass along these price increases to its customers and has been able to enhance productivity to help offset increases in costs resulting from inflation in its operations. However, the spike in these prices during 2008 was rapid and relatively brief, which will likely limit the Company's ability to fully recoup these added costs through price increases.
Seasonality
The Company is a calendar year-end company. With respect to its Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest. The second, third and fourth quarters typically produce higher net sales and operating income in these segments. These results are primarily due to consumer residential spending patterns for floor covering, which historically have decreased during the first two months of each year following the holiday season. The Unilin segment second and fourth quarters typically produce higher net sales and earnings followed by a moderate first quarter and a weaker third quarter. The third quarter is traditionally the weakest due to the European holiday in late summer. In light of the current extraordinary economic climate, the Company believes that seasonality in 2009 may not be typical as compared to prior years as more consumers delay purchases.
Forward-Looking Information
Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in economic or industry conditions; competition; raw material prices; energy costs and supply; timing and level of capital expenditures; impairment charges; integration of acquisitions; introduction of new products; rationalization of operations; claims; litigation; and other risks identified in Mohawk's SEC reports and public announcements.
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