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| MHK > SEC Filings for MHK > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-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 earnings of $34.3 million or diluted earnings per share ("EPS") of $0.50 for the third quarter of 2009, compared to net loss of $1,484.8 million or diluted (loss) EPS of $(21.70) for the third quarter of 2008. The net loss for the three months ended September 27, 2008, included a $1,418.9 million impairment charge to reduce the carrying amount of the Company's goodwill and intangible assets and a charge of $253 million to record a tax valuation allowance against the carrying amount of a deferred tax asset recognized in the fourth quarter of 2007. In addition, the change in EPS resulted from the impact of lower sales volumes, which the Company believes is attributable to continued weakness in the U.S. residential remodeling and new construction markets, commercial real estate market and European demand and the net effect of price and product mix, partially offset by lower raw material, energy and selling general and administrative costs.
For the nine months ended September 26, 2009, the Company reported net loss of $25.3 million or diluted (loss) EPS of $0.37 compared to net loss of $1,330.6 million or diluted (loss) EPS of $(19.45) for the nine months ended September 27, 2008. The net loss for the nine months ended September 27, 2008, included a $1,418.9 million goodwill and intangible asset impairment charge and the $253 million tax valuation allowance charge noted above. In addition, the change in loss per share resulted from the impact of lower sales volumes, which the Company believes is attributable to continued weakness in the U.S. residential remodeling and new construction markets, commercial real estate market and European demand and a net increase in warranty requirements for certain commercial carpet tiles. As a result of these current economic conditions, the Company continues to adjust 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 these commercial carpet tiles and replaced 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.
For the nine months ended September 26, 2009, the Company generated $413 million of operating cash flow which it used to reduce debt by $103 million and build cash. At September 26, 2009, the Company had cash and cash equivalents of $306 million. In addition, the Company tightened capital expenditures to align its manufacturing, distribution and selling infrastructure to market conditions.
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. As a result of the current economic conditions, the Company anticipates recording restructuring charges of approximately $25 million in the fourth quarter of 2009. Early in the fourth quarter, the Company approved a plan to restructure certain Mohawk segment assets for approximately $10 million. In addition, the Company anticipates recording further restructuring charges of approximately $15 million relating to certain assets, lease commitments and severance costs in its manufacturing and distribution infrastructure.
Results of Operations
Quarter Ended September 26, 2009, as Compared with Quarter Ended September 27, 2008
Net Sales
Net sales for the quarter ended September 26, 2009 were $1,382.6 million, reflecting a decrease of $380.5 million, or 21.6%, from the $1,763.0 million reported for the quarter ended September 27, 2008. The decrease was primarily driven by a decline in sales volumes of approximately $245 million due to the continued weakness in the U.S. residential remodeling and new construction markets, commercial real estate market and European demand, a decline of approximately $116 million due to unfavorable price and product mix as customers trade down to lower priced products and a decline of approximately $17 million due to unfavorable foreign exchange rates.
Mohawk Segment - Net sales decreased $197.9 million, or 20.8%, to $755.9 million in the current quarter compared to $953.8 million in the third quarter of 2008. The decrease was primarily driven by a decline in sales volumes of approximately $121 million due to the continued weakness in the U.S. residential remodeling and new construction markets and the declining commercial real estate market and a decline of approximately $71 million due to unfavorable price and product mix as customers trade down to lower priced products and selling prices on commoditized products have compressed.
Dal-Tile Segment - Net sales decreased $110.4 million, or 23.4%, to $361.6 million in the current quarter compared to $472.0 million in the third quarter of 2008. The decrease was primarily driven by a decline in sales volumes of approximately $85 million due to the continued weakness in the U.S. residential remodeling and new construction markets and the declining commercial real estate market and a decline of approximately $21 million due to unfavorable price and product mix as customers trade down to lower priced products.
Unilin Segment - Net sales decreased $76.0 million, or 21.2%, to $281.8 million in the current quarter compared to $357.8 million in the third quarter of 2008. The decrease was driven by a decline in sales volumes of approximately $42 million due to the continued weakness in the U.S. residential remodeling and new construction markets and slowing European demand, a decline of approximately $22 million due to the net effect of unfavorable price and product mix and a decline of approximately $12 million due to unfavorable foreign exchange rates.
Gross profit
Gross profit for the third quarter of 2009 was $369.5 million (26.7% of net sales) and represented a decrease of $69.6 million or 15.9% compared to gross profit of $439.1 million (24.9% of net sales) for the prior year's third quarter. Gross profit in the current quarter was unfavorably impacted by a decrease of approximately $77 million resulting from a decline in sales volume, a decline of approximately $53 million due to unfavorable price and product mix and a decrease of approximately $6 million for restructuring charges, partially offset by lower manufacturing costs of approximately $55 million. The increase in gross profit percentage is primarily attributable to lower raw material costs and manufacturing costs.
Selling, general and administrative expenses
Selling, general and administrative expenses for the third quarter of 2009 were $301.4 million (21.8% of net sales), reflecting a decrease of $19.9 million, or 6.2%, compared to $321.3 million (18.2% of net sales) for the prior year's third quarter. The decrease in selling, general and administrative expenses is primarily driven
by lower sales and various cost savings initiatives implemented by the Company, offset by restructuring costs of approximately $10 million. The increase in selling general and administrative expenses as a percentage of sales is primarily a result of a higher mix of fixed costs on lower net sales.
Impairment of goodwill and intangibles
During the third quarter of 2008, the Company recorded a $1,418.9 million ($1,307.4 million net of income taxes) impairment charge to reduce the carrying amount of the Company's goodwill and intangible assets to their estimated fair value based upon the results of an interim impairment test. The total impairment included $253.6 million in the Mohawk segment, $531.9 million in the Dal-Tile segment and $633.4 million in the Unilin segment.
Operating income
Operating income for the third quarter of 2009 was $68.1 million (4.9% of net sales) compared to an operating loss of $1,301.1 million in the third quarter of 2008. The change was primarily driven by the recognition of an impairment of goodwill and other intangibles of $1,418.9 million in the third quarter of 2008. In addition, operating income in the current period was impacted by a decline of approximately $79 million due to lower sales volumes and a decline of approximately $54 million due to unfavorable price and product mix, partially offset by lower manufacturing and selling, general and administrative costs of approximately $83 million.
Mohawk Segment - Operating income was $16.3 million (2.2% of segment net sales) in the third quarter of 2009 reflecting an increase of $240.6 million compared to operating loss of $224.4 million in the third quarter of 2008. The increase was primarily driven by the recognition of an impairment of goodwill and other intangibles of $254 million in the third quarter of 2008. In addition, operating income in the current period was impacted by a decline of approximately $33 million due to lower sales volumes and a decline of approximately $22 million due to unfavorable price and product mix, partially offset by lower manufacturing and selling, general and administrative costs of approximately $34 million.
Dal-Tile Segment - Operating income was $21.2 million (5.9% of segment net sales) in the third quarter of 2009 reflecting an increase of $501.1 million compared to operating loss of $479.9 million for the third quarter of 2008. The increase was primarily driven by the recognition of an impairment of goodwill and other intangibles of $532 million in the third quarter of 2008. In addition, operating income in the current period was impacted by a decline of approximately $30 million due to lower sales volumes, a decline of approximately $9 million due to unfavorable price and product mix and a decrease of approximately $8 million for restructuring charges, partially offset by lower manufacturing and selling, general and administrative costs of approximately $14 million.
Unilin Segment - Operating income was $34.9 million (12.4% of segment net sales) in the third quarter of 2009 reflecting an increase of $627.5 million compared to operating loss of $592.5 million for the third quarter of 2008. The increase was primarily driven by the recognition of an impairment of goodwill and other intangibles of $633 million in the third quarter of 2008. In addition, operating income in the current period was impacted by a decline of approximately $23 million due to the net effect of price and product mix and a decline in sales volumes of approximately $16 million, partially offset by lower raw material and manufacturing costs of approximately $35 million.
Interest expense
Interest expense for the third quarter of 2009 was $32.3 million compared to $30.5 million in the third quarter of 2008. The increase in interest expense was directly related to higher interest rates on the Company's notes and revolving credit facilities, partially offset by lower average debt levels in the current quarter when compared to the third quarter of 2008.
Income tax expense
For the third quarter of 2009, the Company recorded income tax expense of $2.0 million on earnings before taxes of $37.4 million, resulting in an effective tax rate of 5.4%, as compared to income tax expense of $148.9 million on loss before taxes of $1,334.3 million for the quarter ended September 27, 2008. The change is principally due to the non-deductible 2008 third quarter goodwill impairment charge, the recognition of a $253 million valuation allowance against a deferred tax benefit in the third quarter of 2008, and different geographic distribution of income and expense items.
In the fourth quarter of 2007, the Company moved the intellectual property and treasury operations of an indirectly owned European entity to a new office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin and the move allowed for the consolidation of the historical intellectual property and treasury operations to be combined with those of the holding company's treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax and cost efficiencies. This restructuring resulted in a step up in the subsidiary's taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized at December 31, 2007 was approximately $245 million and the related income tax benefit recognized in the consolidated financial statements was approximately $272 million.
During the third quarter of 2008, the Company reassessed the need for a valuation allowance against its deferred tax assets. Cash flows had decreased from that projected as of December 31, 2007, primarily due to the slowing worldwide economy and declining sales volume. The Company determined that, given the current and expected economic conditions and the corresponding reductions in cash flows, its ability to realize the benefit of the deferred tax asset related to the transaction described above as well as tax losses generated in the same jurisdiction was not more likely than not. Accordingly the Company recorded a valuation allowance against the deferred tax asset in the amount of $253 million during the quarter ended September 27, 2008.
For the third quarter ended September 26, 2009, the Company calculated its actual effective tax rate for the nine months ended September 26, 2009, resulting in a quarterly tax rate of 5.4%. This rate was used because the Company was unable to reasonably estimate its annual effective tax rate due to fluctuations in its annual pre-tax income and loss between quarters, including the effects caused by multiple taxing jurisdictions. The Company applied the guidance of Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting ("ASC 825-10") and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods - an interpretation of APB Opinion No. 28" ("ASC 740-270"), which requires, at the end of each interim period, the Company to determine an 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, ASC 740-270 allows the actual effective tax rate for the interim period to be used.
Nine Months Ended September 26, 2009, as Compared with Nine Months Ended September 27, 2008
Net Sales
Net sales for the nine months ended September 26, 2009 were $3,996.9 million, reflecting a decrease of $1,344.3 million, or 25.2%, from the $5,341.2 million reported for the nine months ended September 27, 2008. The decrease was primarily driven by a decline in sales volumes of approximately $927 million due to the continued weakness in the U.S. residential remodeling and new construction markets, commercial real estate market and European demand, a decline of approximately $228 million due to unfavorable price and product mix, a decline of approximately $90 million due to unfavorable foreign exchange rates, and a decrease of approximately $87 million due to a net increase in warranty requirements described in the overview.
Mohawk Segment - Net sales decreased $709.3 million, or 25.1%, to $2,118.0 million in the current nine months compared to $2,827.3 million in the first nine months of 2008. The decrease was primarily driven by a
decline in sales volumes of approximately $470 million due to the continued weakness in the U.S. residential remodeling and new construction markets and the declining commercial real estate market, a decline of approximately $125 million due to unfavorable price and product mix as customers trade down to lower priced products and a decrease of approximately $87 million due to a net increase in warranty requirements described above in the overview.
Dal-Tile Segment - Net sales decreased $305.8 million, or 21.8%, to $1,096.8 million in the current nine months compared to $1,402.6 million in the first nine months of 2008. The decrease was primarily driven by a decline in sales volumes of approximately $249 million due to the continued weakness in the U.S. residential remodeling and new construction markets and the declining commercial real estate market, a decline of approximately $40 million due to unfavorable price and product mix as customers trade down to lower priced products and a decline of approximately $17 million due to unfavorable foreign exchange rates.
Unilin Segment - Net sales decreased $343.1 million, or 29.2%, to $830.0 million in the current nine months compared to $1,173.1 million in the first nine months of 2008. The decrease was driven by a decline in sales volumes of approximately $207 million due to the continued weakness in the U.S. residential remodeling and new construction markets and slowing European demand, a decline of approximately $73 million due to unfavorable foreign exchange rates and a decline of approximately $63 million due to the net effect of price and product mix.
Gross profit
Gross profit for the first nine months of 2009 was $890.5 million (22.3% of net sales) and represented a decrease of $491.3 million compared to gross profit of $1,381.8 million (25.9% of net sales) for the prior year's first nine months. Gross profit in the current nine months was unfavorably impacted by a decrease of approximately $287 million resulting from a decline in sales volume, a decline of approximately $136 million due to the net effect of price and product mix, a decline of approximately $99 million due to a net increase in warranty requirements described above in the overview, a decrease of approximately $21 million for restructuring charges and a decline of approximately $17 million due to unfavorable foreign exchange rates, partially offset by lower manufacturing costs of approximately $65 million. The decrease in gross profit percentage is primarily attributable to unfavorable price and product mix, partially offset by lower raw material and manufacturing costs.
Selling, general and administrative expenses
Selling, general and administrative expenses for the first nine months of 2009 were $893.7 million (22.4% of net sales), reflecting a decrease of $99.9 million, or 10.1%, compared to $993.6 million (18.6% of net sales) for the prior year's first nine months. The decrease in selling, general and administrative expenses is primarily driven by lower sales and various cost savings initiatives implemented by the Company, partially offset by approximately $11 million for restructuring charges. The increase in selling general and administrative expenses as a percentage of sales is primarily a result of a higher mix of fixed costs on lower net sales.
Operating (loss) income
Operating loss for the first nine months of 2009 was $3.1 million reflecting an improvement of $1,027.6 million compared to operating loss of $1,030.7 million in the first nine months of 2008. The change was primarily driven by the recognition of an impairment of goodwill and other intangibles of $1,418.9 million in the third quarter of 2008. In addition, operating income in the current year was impacted by a decline of approximately $288 million due to lower sales volumes, a decline of approximately $136 million due to the net effect of price and product mix and a decline of approximately $99 million due to a net increase in warranty requirements described above in the overview, partially offset by lower costs of approximately $163 million.
Mohawk Segment - Operating loss was $142.2 million in the first nine months of 2009 reflecting an improvement of $25.3 million compared to operating loss of $167.5 million in the first nine months of 2008. The change was primarily driven by the recognition of an impairment of goodwill and other intangibles of $254 million in the third quarter of 2008. In addition, operating income in the current year was impacted by a
decline of approximately $132 million due to lower sales volumes, a decline of approximately $99 million due to a net increase in warranty requirements described above in the overview, and a decline of approximately $56 million due to the net effect of price and product mix, partially offset by lower raw material and selling, general and administrative costs of approximately $65 million.
Dal-Tile Segment - Operating income was $72.6 million (6.6% of segment net sales) in the third quarter of 2009 reflecting an increase of $437.4 million compared to operating loss of $364.8 million for the third quarter of 2008. The increase was primarily driven by the recognition of an impairment of goodwill and other intangibles of $532 million in the third quarter of 2008. In addition, operating income in the current year was impacted by a decline of approximately $87 million due to lower sales volumes and a decline of approximately $23 million due to the net effect of price and product mix, partially offset by lower selling general and administrative costs of approximately $13 million and approximately $10 million due to favorable foreign exchange rates.
Unilin Segment - Operating income was $80.6 million (9.7% of segment net sales) in the first nine months of 2009 reflecting an increase of $563.1 million compared to operating loss of $482.5 million for the first nine months of 2008. The increase was primarily driven by the recognition of an impairment of goodwill and other intangibles of $633 million in the third quarter of 2008. In addition, operating income in the current year was impacted by a decline of approximately $69 million due to lower sales volumes, a decline of approximately $58 million due to the net effect of price and product mix, a decrease of approximately $15 million for restructuring charges and a decrease of approximately $11 million due to unfavorable foreign exchange rates, partially offset by lower costs of approximately $84 million.
Interest expense
Interest expense for the first nine months of 2009 was $92.5 million compared to $97.0 million in the first nine months of 2008. The decrease in interest expense was directly related to lower average debt levels in the current nine months when compared to the first nine months of 2008, partially offset by higher interest rates on the Company's notes and revolving credit facilities.
Income tax (benefit) expense
For the nine months ended September 26, 2009, the Company recorded an income tax benefit of $67.7 million on a loss before income taxes of $90.1 million, as compared to income tax expense of $194.2 million for the nine months ended September 27, 2008. The change is principally due to the non-deductible 2008 third quarter goodwill impairment charge, the recognition of a $253 million valuation allowance against a deferred tax benefit in the third quarter of 2008, and different geographic distribution of income and expense items.
For the nine months ended September 26, 2009, the Company calculated and used its effective tax rate for the nine months ended September 26, 2009, because it was unable to reasonably estimate its annual effective tax rate due to fluctuations in its annual pre-tax income and loss between quarters, including the effects caused by multiple taxing jurisdictions. The Company applied the guidance of ASC 825-10 and ASC 740-270, which requires, at the end of each interim period, the Company to determine an 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, ASC 740-270 allows the actual effective tax rate for the interim period to be used in the interim period.
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 and credit terms from suppliers.
Cash flows provided by operations for the first nine months of 2009 were $412.6 million compared to cash flows provided by operations of $377.0 million for the first nine months of 2008. The increase in operating cash flows for the first nine months of 2009 as compared to the first nine months of 2008 is primarily attributable to lower inventories as a result of lower sales demand and increased accounts payable days, partially offset by lower trade receivables due to lower sales with an increase in days sales outstanding.
Net cash used in investing activities for the first nine months of 2009 was $77.2 million compared to $163.7 million for the first nine months of 2008. The decrease is due to lower capital spending as a result of lower sales and tighter management of expenditures during 2009 as compared to 2008. Capital spending during the remainder of 2009, excluding acquisitions, is expected to range from $35 million to $40 million, and plans to be used primarily to purchase equipment and to streamline manufacturing capacity.
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