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MHK > SEC Filings for MHK > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for MOHAWK INDUSTRIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MOHAWK INDUSTRIES INC


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a leading producer of floor covering products for residential and commercial applications in the United States and residential applications in Europe. The Company is the second largest carpet and rug manufacturer and one of the largest manufacturers, marketers and distributors of ceramic tile, natural stone and hardwood flooring in the United States, as well as a leading producer of laminate flooring in the U.S. and Europe. The Company has recently expanded its international presence through investments in Australia, Brazil, China, France, Mexico and Russia. The Company had annual net sales in 2012 of $5.8 billion.

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 carriers 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 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 Company-owned service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate, 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.

In 2011, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (53%), resilient and rubber (14%), ceramic tile (12%), hardwood (10%), 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.

For the three months ended March 30, 2013, net earnings attributable to the Company were $50.5 million, or diluted earnings per share ("EPS") of $0.72, compared to the net earnings attributable to the Company of $40.4 million, or diluted EPS of $0.58, for the three months ended March 31, 2012. The increase in EPS was primarily attributable to operations and selling, general and administrative productivity, higher sales volume, lower amortization costs and the favorable net impact of price and product mix, partially offset by increases in costs to support new product introductions and geographic expansion, increases in restructuring and acquisition/integration costs and the net impact of unrealized foreign exchange gains/losses. Recent Developments
On January 10, 2013, the Company completed its purchase of Pergo, a leading manufacturer of laminate flooring in the United States and the Nordic countries. The total value of the acquisition was approximately $150 million in cash. Pergo complements our specialty distribution network in the United States, leverages our geographic position in Europe, expands our geographic reach to the Nordic countries and India and enhances our patent portfolio. The acquisition's results and a preliminary purchase price allocation are included in the condensed consolidated financial statements as of March 30, 2013.
On December 20, 2012, the Company entered into a definitive share purchase agreement to acquire Fintiles S.p.A and its subsidiaries (collectively, the "Marazzi Group"), a global manufacturer, distributor and marketer of ceramic tile. On April 3, 2013, pursuant to the terms of the purchase agreement dated December 20, 2012, the Company completed the acquisition of the Marazzi Group for approximately $1.5 billion with a combination of cash and common stock of the Company.
On January 28, 2013 the Company entered into an agreement to purchase Spano Invest NV, a Belgian panel board manufacturer. On May 3, 2013, pursuant to the terms of the agreement dated January 28, 2013, the Company completed the acquisition of Spano for approximately $164 million in cash.

In connection with the closing of the Marazzi acquisition on April 3, 2013, the Company decided to revise the names of its segments and, beginning in the second quarter of 2013, will refer to the Mohawk segment as the Carpet segment, the Dal-


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Tile segment as the Ceramic segment and the Unilin segment as the Laminate and Wood segment. Only the names of the segments are affected by the change and therefore no prior period financial information will change.

Results of Operations

Quarter Ended March 30, 2013, as Compared with Quarter Ended March 31, 2012

Net sales

Net sales for the three months ended March 30, 2013 were $1,486.8 million, reflecting an increase of $77.8 million, or 5.5%, from the $1,409.0 million reported for the three months ended March 31, 2012. The increase was primarily driven by higher volume of approximately $50 million primarily related to the Pergo acquisition, the favorable net impact of price and product mix of approximately $26 million and the impact of favorable foreign exchange rates of approximately $2 million.

Mohawk Segment-Net sales decreased $4.5 million, or 0.6%, to $695.3 million for the three months ended March 30, 2013, compared to $699.9 million for the three months ended March 31, 2012. The decrease was primarily driven by lower volume of approximately $28 million, which was partially offset by the favorable net impact of price and product mix of approximately $23 million. The lower volume was primarily attributable to the timing of carpet product transitions in the home center channel and lower demand for rug products in the mass merchandise channel.

Dal-Tile Segment-Net sales increased $19.0 million, or 4.8%, to $411.9 million for the three months ended March 30, 2013, compared to $392.9 million for the three months ended March 31, 2012. The increase was primarily driven by higher volume of approximately $12 million, the favorable net impact of price and product mix of approximately $6 million and the impact of favorable foreign exchange rates of approximately $1 million. The volume increases were primarily attributable to continued improvement in the U.S. commercial and residential channels and growth in the Mexican market.

Unilin Segment-Net sales increased $67.1 million, or 19.9%, to $404.5 million for the three months ended March 30, 2013, compared to $337.4 million for the three months ended March 31, 2012. The increase was primarily driven by higher volume of approximately $69 million and the impact of favorable foreign exchange rates of approximately $2 million, partially offset by the unfavorable net impact of price and product mix of approximately $4 million. The volume increases were primarily attributable to the Pergo acquisition.

Gross profit

Gross profit for the three months ended March 30, 2013 was $377.1 million (25.4% of net sales), an increase of $17.6 million or 4.9%, compared to gross profit of $359.4 million (25.5% of net sales) for the three months ended March 31, 2012. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $10 million, operations productivity of approximately $9 million and the favorable net impact of price and product mix of approximately $5 million, partially offset by restructuring and acquisition/integration charges of approximately $4 million and higher input costs of approximately $3 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 30, 2013 were $290.2 million (19.5% of net sales), compared to $287.5 million (20.4% of net sales) for the three months ended March 31, 2012. As a percentage of net sales, selling, general and administrative expenses decreased 90 basis points. The increase in selling, general and administrative expenses in dollars was primarily driven by increases in costs to support new product introductions and geographic expansion and increases in restructuring and acquisition/integration charges, partially offset by lower amortization costs and improvements in productivity.

Operating income

Operating income for the three months ended March 30, 2013 was $86.8 million (5.8% of net sales) reflecting an increase of $14.9 million, or 20.7%, compared to operating income of $72.0 million (5.1% of net sales) for the three months ended March 31, 2012. The increase in operating income was primarily driven by operations and selling, general and administrative productivity of approximately $14 million, sales volume of approximately $10 million, lower amortization expense of approximately $10 million and the favorable net impact of price and product mix of approximately $5 million, partially offset by increases in costs to support the Pergo acquisition, new product introductions and geographic expansion of approximately $14 million and restructuring and acquisition/integration charges of approximately $10 million.


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Mohawk Segment-Operating income was relatively flat at $25.2 million (3.6% of segment net sales) for the three months ended March 30, 2013 compared to operating income of $25.3 million (3.6% of segment net sales) for the three months ended March 31, 2012. The change in operating income was primarily attributable to operations and selling, general and administrative productivity of approximately $8 million and the favorable net impact of price and product mix of approximately $5 million, offset by lower sales volume of approximately $7 million and restructuring charges of approximately $6 million.

Dal-Tile Segment-Operating income was $30.0 million (7.3% of segment net sales) for the three months ended March 30, 2013 reflecting an increase of $3.9 million compared to operating income of $26.0 million (6.6% of segment net sales) for the three months ended March 31, 2012. The increase in operating income was primarily driven by operations and selling, general and administrative productivity of approximately $5 million, the favorable net impact of price and product mix of approximately $3 million and sales volume increases of approximately $3 million, partially offset by increases in input costs of approximately $5 million.

Unilin Segment-Operating income was $38.7 million (9.6% of segment net sales) for the three months ended March 30, 2013 reflecting an increase of $11.5 million compared to operating income of $27.1 million (8.0% of segment net sales) for the three months ended March 31, 2012. The increase in operating income was primarily driven by sales volume of approximately $14 million primarily related to the Pergo acquisition, lower amortization expense of approximately $10 million and operations productivity of approximately $2 million, partially offset by costs to support the Pergo acquisition, new product introductions and geographic expansion of approximately $10 million, restructuring and acquisition/integration charges of approximately $3 million and the unfavorable net impact of price and product mix of approximately $3 million.

Interest expense (income)

Interest expense was $19.2 million for the three months ended March 30, 2013, reflecting a decrease of $3.3 million compared to interest expense of $22.5 million for the three months ended March 31, 2012. Approximately $7 million of the decrease was due to lower interest rates on the Company's outstanding debt, partially offset by interest expense of approximately $4 million associated with the 3.85% Senior Notes issued in contemplation of the Marazzi acquisition. The lower interest rates were primarily attributable to the shift from higher interest rate senior notes to the Senior Credit Facility and the rating agency upgrades discussed in Liquidity and Capital Resources.

Other expense (income)

Other expense was $6.4 million for the three months ended March 30, 2013, reflecting an unfavorable change of $8.2 million compared to other income of $1.8 million for the three months ended March 31, 2012. The change was primarily attributable to the net change in foreign currency gains/losses of approximately $9 million.

Income tax expense

For the three months ended March 30, 2013, the Company recorded income tax expense of $10.7 million on earnings before income taxes of $61.3 million for an effective tax rate of 17.5%, as compared to an income tax expense of $10.3 million on earnings before income taxes of $51.3 million, resulting in an effective tax rate of 20.1% for the three months ended March 31, 2012. The difference in the effective tax rate for the comparative period is primarily due to the geographic dispersion of earnings and losses; a benefit of $2 million from the settlement of certain income tax contingencies in the current period; and a benefit of $1.9 million from the enactment of certain tax provisions that expired on December 31, 2011, including the research and development tax credit, retroactive to the beginning of 2012.

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 2013 was $38.9 million, compared to net cash used in operating activities of $44.5 million in the first three months of 2012.

Net cash used in investing activities in the first three months of 2013 was $211.1 million compared to net cash used in investing activities of $43.3 million in the first three months of 2012. The increase was primarily attributable to the Pergo


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acquisition of $147.8 million and capital expenditures of $63.3 million. Capital spending during the remainder of 2013, including acquisition capital expenditure requirements, is expected to range from approximately $315 million to $325 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 2013 was $938.0 million compared to net cash provided by financing activities of $72.0 million in the first three months of 2012. The increase was primarily attributable to the proceeds from the 3.85% Senior Notes and proceeds from the senior credit facility used to fund the Marazzi acquisition which closed on April 3, 2013.

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 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' exceed 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 3.00 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.


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As of March 30, 2013, the amount utilized under the Senior Credit Facility excluding the term loan was $413.7 million, resulting in a total of $486.3 million available under the Senior Credit Facility. The amount utilized included $316.6 million of borrowings, $46.8 million of standby letters of credit guaranteeing the Company's industrial revenue bonds and $50.3 million of standby letters of credit related to various insurance contracts and foreign vendor commitments.

On December 19, 2012, the Company entered into a three-year on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $300,000 based on available accounts receivable and is secured by the Company's U.S. trade accounts receivable. Borrowings under the Securitization Facility bear interest at commercial paper interest rates, in the case of lenders that are commercial paper conduits, or LIBOR, in the case of lenders that are not commercial paper conduits, in each case, plus an applicable margin of 0.75% per annum. The Company also pays a commitment fee at a per annum rate of 0.30% on the unused amount of each lender's commitment. At March 30, 2013, the amount utilized under the Securitization Facility was $300,000.

On January 31, 2013, the Company issued $600,000 aggregate principal amount of 3.85% Senior Notes due February 1, 2023. The Company paid financing costs of $5,150 in connection with the 3.85% Senior Notes. These costs were deferred and are being amortized over the term of the 3.85% Senior Notes.

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.

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 30, 2013, the Company had invested cash of $1,060.9 million, of which $1,058.9 million was in Europe. Of the $1,058.9 million in Europe, $39.2 million was invested in A-1/P-1 rated money market cash investments. On April 3, 2013, the Company completed the acquisition of the Marazzi Group for approximately $1,500 million including approximately 784 million ($1,004 million) in cash with the remainder in common stock of the Company and assumed debt. 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 as of March 30, 2013 would have been approximately $370.6 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 2012 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 2012 Annual Report filed on Form 10-K.


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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 . . .

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