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| MHK > SEC Filings for MHK > Form 10-Q on 4-May-2012 | All Recent SEC Filings |
4-May-2012
Quarterly Report
Overview
In 2010, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (55%), resilient and rubber (13%), ceramic tile (12%), hardwood (9%), stone (6%) and laminate (5%). Each of these categories is influenced by the average selling price per square foot, the residential builder and homeowner remodeling markets, housing starts and housing resales, average house size and home ownership. In addition, the level of sales in the floor covering industry, both in the U.S. and Europe, is influenced by consumer confidence, spending for durable goods, interest rates and availability of credit, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.
The U.S. floor covering industry experienced declining demand beginning in the fourth quarter of 2006 with sales declining from $25.7 billion in 2006 to $17.1 billion in 2010. Industry conditions have remained difficult due to many factors, including uncertainty caused by economic conditions in the U.S., the European debt crisis, material price volatility, unemployment and consumer confidence, all of which have created headwinds to industry growth.
The Company has three reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The segment's product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America and Mexico through its network of regional distribution centers and Company-operated service centers using Company-operated trucks, common carriers or rail transportation. The segment's product lines are sold through independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate and hardwood flooring, roofing systems, insulation panels and other wood products, primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.
For the three months ended March 31, 2012, net earnings attributable to the Company were $40.4 million, or diluted earnings per share ("EPS") of $0.58, compared to the net earnings attributable to the Company of $23.4 million, or diluted EPS of $0.34, for the three months ended April 2, 2011. The increase in EPS was primarily attributable to the favorable net impact of price and product mix, higher sales volume which more than offset the unfavorable impact of raw materials inflation and the benefit of lower restructuring charges and lower interest costs on the Company's outstanding debt.
Results of Operations
Quarter Ended March 31, 2012, as Compared with Quarter Ended April 2, 2011
Net sales
Net sales for the three months ended March 31, 2012 were $1,409.0 million, reflecting an increase of $65.4 million, or 4.9%, from the $1,343.6 million reported for the three months ended April 2, 2011. The increase was primarily driven by the positive net impact of price and product mix of approximately $38 million and higher volume of approximately $41 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $14 million.
Mohawk Segment-Net sales increased $8.7 million, or 1.3%, to $700.0 million for the three months ended March 31, 2012, compared to $691.2 million for the three months ended April 2, 2011. The increase was primarily driven by the positive net impact of price and product mix of approximately $34 million, offset by lower volume of approximately $26 million. The lower volume was primarily attributable to lower demand of rug products in the mass merchandise channel.
Dal-Tile Segment-Net sales increased $48.5 million, or 14.1%, to $392.9 million for the three months ended March 31, 2012, compared to $344.4 million for the three months ended April 2, 2011. The increase was primarily driven by volume increases of approximately $52 million due to increases in home centers' sales, expansion in the Mexican market, improvement in the commercial market and warmer weather.
Unilin Segment-Net sales increased $11.6 million, or 3.6%, to $337.4 million for the three months ended March 31, 2012, compared to $325.8 million for the three months ended April 2, 2011. The increase was primarily driven by volume increases of approximately $19 million and the positive net impact of price and product mix of approximately $5 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $12 million. The volume increase was primarily attributable to European laminate flooring, insulation panels and other board sales.
Gross profit
Gross profit for the three months ended March 31, 2012 was $359.4 million (25.5% of net sales) and increased by $17.8 million or 5.2% compared to gross profit of $341.6 million (25.4% of net sales) for the three months ended April 2, 2011. The increase in gross profit dollars was primarily attributable to the favorable net impact of price and product mix of approximately $25 million, volume increases of approximately $10 million, lower restructuring charges of approximately $6 million and improved manufacturing costs of approximately $6 million. Partially offsetting these favorable items were higher inflationary costs of approximately $28 million primarily related to raw materials.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2012 were $287.5 million (20.4% of net sales), compared to $285.5 million (21.2% of net sales) for the three months ended April 2, 2011. As a percentage of sales, selling, general and administrative expenses decreased compared to the prior year primarily as a result of the Company's ability to leverage higher sales and various cost savings initiatives.
Operating income
Operating income for the three months ended March 31, 2012 was $72.0 million (5.1% of net sales) reflecting an increase of $15.9 million, or 28.3%, compared to operating income of $56.1 million (4.2% of net sales) for the three months ended April 2, 2011. The increase was primarily driven by the favorable net impact of price and product mix of approximately $25 million, higher volume of approximately $10 million and lower restructuring charges of approximately $7 million, partially offset by higher inflationary costs of approximately $28 million primarily related to raw materials.
Mohawk Segment-Operating income was $25.3 million (3.6% of segment net sales) for the three months ended March 31, 2012 reflecting an increase of $8.2 million compared to operating income of $17.0 million (2.5% of segment net sales) for the three months ended April 2, 2011. The increase was primarily driven by the favorable net impact of price and product mix of approximately $23 million, lower manufacturing and selling, general and administrative costs of approximately $8 million and lower restructuring charges of approximately $7 million, partially offset by higher inflationary costs of approximately $23 million primarily related to raw materials and lower volume of $6 million.
Dal-Tile Segment-Operating income was $26.0 million (6.6% of segment net sales) for the three months ended March 31, 2012 reflecting an increase of $8.3 million compared to operating income of $17.7 million (5.1% of segment net sales) for the three months ended April 2, 2011. The increase was primarily driven by volume increases of approximately $14 million and operations productivity of approximately $2 million, partially offset by higher selling, general and administrative costs of $8 million attributed to increased volume and marketing investments.
Unilin Segment-Operating income was $27.1 million (8.0% of segment net sales) for the three months ended March 31, 2012 reflecting an increase of $0.9 million compared to operating income of $26.3 million (8.1% of segment net sales) for the three months ended April 2, 2011. The increase was primarily driven by the favorable net impact of price and product mix of approximately $3 million and volume increases of approximately $2 million, partially offset by higher inflationary costs of approximately $3 million and unfavorable foreign exchange rates of approximately $1 million.
Interest expense
Interest expense was $22.5 million for the three months ended March 31, 2012, reflecting a decrease of $4.1 million compared to interest expense of $26.6 million for the three months ended April 2, 2011. The decrease in interest expense in 2012 was due to lower interest costs on the Company's outstanding debt.
Income tax expense
For the three months ended March 31, 2012, the Company recorded income tax expense of $10.3 million on earnings before income taxes of $51.3 million for an effective tax rate of 20.1%, as compared to an income tax expense of $5.0 million on earnings before income taxes of $29.5 million, resulting in an effective tax rate of 16.8% for the three months ended April 2, 2011. The difference in the effective tax rate for the comparative period is primarily due to the geographic dispersion of earnings and losses for the current 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.
Net cash used in operating activities in the first three months of 2012 was $44.5 million, including a tax deposit of €26.5 million paid to the Belgian tax authority as discussed in Note 11 in the notes to the condensed consolidated financial statements, compared to $67.4 million in the first three months of 2011. The favorable change in operating activities is primarily attributable to improved earnings and better utilization of working capital.
Net cash used in investing activities in the first three months of 2012 was $43.3 million compared to $52.8 million in the first three months of 2011. Cash used in investing activities primarily relates to various geographic capacity expansions. Capital spending during the remainder of 2012, excluding acquisition expenditures, is expected to range from approximately $180 million to $200 million and is intended to be used primarily to purchase equipment, add geographic capacity and to streamline manufacturing capabilities.
Net cash provided by financing activities in the first three months of 2012 was $72.0 million compared to $8.4 million in the first three months of 2011. The proceeds from the incremental term loan facility of $150.0 million discussed below were used to pay down the revolving portion of the Senior Credit Facility. The increase in total borrowings on the Senior Credit Facility was primarily used for the purchase of the non-controlling interest within the Dal-Tile segment for $35.0 million and funding of working capital.
On July 8, 2011, the Company entered into a five-year, senior, secured revolving credit facility (the "Senior Credit Facility"). The Senior Credit Facility provides for a maximum of $900.0 million of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of $8.3 million in connection with its Senior Credit Facility. These costs were deferred and, along with unamortized costs of $12.3 million related to the Company's prior senior, secured revolving credit facility, are being amortized over the term of the Senior Credit Facility.
On January 20, 2012, the Company entered into an amendment to the Senior Credit Facility that provides for an incremental term loan facility in the aggregate principal amount of $150.0 million. The Company paid financing costs of $1.0 million in connection with the amendment to its Senior Credit Facility. These costs were deferred and are being amortized over the remaining term of the Senior Credit Facility. The incremental term loan facility provides for eight scheduled quarterly principal payments of $1.875 million, with the first such payment due on June 30, 2012, followed by four scheduled quarterly principal payments of $3.750 million, with all remaining quarterly principal payments of $5.625 million prior to maturity.
The Senior Credit Facility is scheduled to mature on July 8, 2016. The Company can terminate and prepay the Senior Credit Facility at any time without payment of any termination or prepayment penalty (other than customary breakage costs in respect of loans bearing interest at a rate based on LIBOR).
At the Company's election, revolving loans under the Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between 1.25% and 2.0%, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus 0.5%, and a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.25% and 1.0%. The Company also pays a commitment fee to the Lenders under the Senior Credit Facility on the average amount by which the aggregate commitments of the Lenders' exceeds utilization of the Senior Credit Facility ranging from 0.25% to 0.4% per annum. The applicable margin and the commitment fee are determined based on the Company's Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increases).
All obligations of the Company and the other borrowers under the Senior Credit Facility are required to be guaranteed by all of the Company's material domestic subsidiaries and all obligations of borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors.
Due to the rating agency upgrade announced on March 14, 2012 by Standard & Poor's Financial Services, LLC ("S&P"), the security interests in domestic accounts receivable and inventories, certain shares of capital stock (or equivalent ownership interests) of the domestic borrowers' and domestic guarantors' subsidiaries, and proceeds of any of the foregoing securing obligations under the Senior Credit Facility were released. The Company will
be required to reinstate such security interests if there is a ratings downgrade
such that: (a) both (i) the Moody's Investor's Service, Inc. ("Moody's") rating
is Ba2 and (ii) the S&P rating is BB, (b) (i) the Moody's rating is Ba3 or lower
and (ii) the S&P rating is below BBB- (with a stable outlook or better) or
(c) (i) the Moody's rating is below Baa3 (with a stable outlook or better) and
(ii) the S&P rating is BB- or lower.
The Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company's business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter, as defined in the Senior Credit Facility. The Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
As of March 31, 2012, the amount utilized under the Senior Credit Facility including the term loan was $509.0 million resulting in a total of $541.0 million available under the Senior Credit Facility. The amount utilized included $411.7 million of borrowings, $46.8 million of standby letters of credit guaranteeing the Company's industrial revenue bonds and $50.5 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. As of April 16, 2012, subsequent to the repayment of the outstanding senior 7.20% notes discussed below, the amount utilized under the Senior Credit Facility including the term loan was $827.1 million.
On January 17, 2006, the Company issued $900.0 million aggregate principal amount of 6.125% notes due January 15, 2016. Interest payable on these notes is subject to adjustment if either Moody's or S&P, or both, upgrades or downgrades the rating 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 $0.1 million per quarter per $100.0 million of outstanding notes. In 2009, interest rates increased by an aggregate amount of 75 basis points as a result of downgrades by Moody's and S&P. In the first quarter of 2012, interest rates decreased by 50 basis points as a result of the upgrades from S&P and Moody's. Any future downgrades in the Company's credit ratings could 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 7.20% notes due April 15, 2012. During 2011, the Company repurchased $63.7 million of its senior 7.20% notes, at an average price equal to 102.72% of the principal amount. On April 16, 2012, the Company repaid the $336.3 million principal amount of outstanding senior 7.20% notes, together with accrued interest of $12.1 million, at maturity using available borrowings under its Senior Credit Facility. As a result, the Company classified the outstanding senior 7.20% notes as long-term debt as of March 31, 2012.
The Company may continue, from time to time, to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amount involved may be material.
As of March 31, 2012, the Company had invested cash of $275.0 million, of which $264.4 million was held in money market AAA rated cash investments in Europe. While the Company's plans are to permanently reinvest the cash held in Europe, the estimated cost of repatriation for the cash invested in Europe would be approximately $93 million. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its Senior Credit Facility will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over the next twelve months.
Contractual Obligations
There have been no significant changes to the Company's contractual obligations as disclosed in the Company's 2011 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 2011 Annual Report filed on Form 10-K.
Impact of Inflation
Inflation affects the Company's manufacturing costs, distribution costs and operating expenses. The Company expects raw material prices, many of which are petroleum based, to fluctuate based upon worldwide supply and demand of commodities utilized in the Company's production processes. Although the Company attempts to pass on increases in raw material, energy and fuel-related costs to its customers, the Company's ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company's products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. In the past, the Company has often been able to enhance productivity and develop new product innovations to help offset increases in costs resulting from inflation in its operations.
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's 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.
Forward-Looking Information
Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies, and similar matters, and those that include the words "could," "should," "believes," "anticipates," "expects" and "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; inflation in raw material prices and other input costs; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company's products; impairment charges; integration of acquisitions; international operations; introduction of new products; rationalization of operations; tax, product and other claims; litigation; and other risks identified in Mohawk's SEC reports and public announcements.
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