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MHK > SEC Filings for MHK > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for MOHAWK INDUSTRIES INC

Form 10-Q for MOHAWK INDUSTRIES INC


4-Nov-2013

Quarterly Report


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

Overview

The Company is the world's largest flooring manufacturer. The Company is the largest manufacturer of ceramic tile and the second largest carpet and rug manufacturer, as well as a leading producer of laminate flooring in Europe and the U.S. The Company continues to expand its international presence in Australia, Brazil, China, France, India, Malaysia, Mexico and Russia through acquisitions and internal expansion. The Company had annual net sales in 2012 of $5.8 billion.

In connection with the Marazzi acquisition, the Company revised the names of its segments and, beginning in the second quarter of 2013, now refers to the Mohawk segment as the Carpet segment, the Dal-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 changed.

The Company has three reporting segments: the Carpet segment, the Ceramic segment and the Laminate and Wood segment. The Carpet segment designs, manufactures, sources, distributes and markets its floor covering product lines, which principally include carpets, modular carpet tiles, rugs, mats and carpet pads, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carriers or rail transportation. This 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 Ceramic segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America, Europe, and Russia. This segment's product lines are sold to various selling channels including independent distributors, home center retailers, tile and flooring retailers and contractors. The Laminate and Wood segment designs, manufactures, sources, licenses, distributes and markets laminate and hardwood flooring, roofing systems, insulation panels and other wood products, primarily in Europe and North America. This segment's product lines are sold through various selling channels including retailers, independent distributors and home centers.

In 2012, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (52%), resilient and rubber (14%), ceramic tile (13%), 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 September 28, 2013, net earnings attributable to the Company were $119.1 million, or diluted earnings per share ("EPS") of $1.63, compared to the net earnings attributable to the Company of $70.3 million, or diluted EPS of $1.01, for the three months ended September 29, 2012. For the nine months ended September 28, 2013, net earnings attributable to the Company were $254.1 million, or diluted EPS of $3.53, compared to the net earnings attributable to the Company of $183.9 million, or diluted EPS of $2.66, for the nine months ended September 29, 2012. The increase in diluted EPS for the three and nine months ended September 28, 2013 was primarily attributable to the Marazzi, Pergo and Spano acquisitions, increased operations productivity, higher legacy sales volume, the favorable net impact of price and product mix and lower amortization expense, partially offset by higher restructuring, acquisition and integration-related costs, inventory step-up related to the Marazzi acquisition, higher input costs and higher interest expense. Recent Acquisitions
On January 10, 2013, the Company completed its purchase of Pergo, a leading manufacturer of laminate flooring in the U.S. and the Nordic countries. The total value of the acquisition was approximately $150 million. Pergo complements the Company's specialty distribution network in the U.S., leverages its geographic position in Europe, expands its geographic reach to the Nordic countries and India and enhances its patent portfolio. The acquisition's results and a preliminary purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition. On April 3, 2013, the Company completed the acquisition of Marazzi, a global manufacturer, distributor and marketer of ceramic tile. The total value of the acquisition was approximately $1.5 billion. The Marazzi acquisition makes the Company a global leader in ceramic tile. The addition of Marazzi will allow the Company to expand its U.S. distribution, source ceramic tile from a worldwide base, and provide industry leading innovation and design to all of its global ceramic customers. The acquisition will provide opportunities to improve performance by leveraging best practices, operational expertise, product innovation and manufacturing assets across the enterprise. The acquisition's results and a preliminary


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purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition.
On May 3, 2013, the Company completed the acquisition of Spano, a Belgian panel board manufacturer. The total value of the acquisition was approximately $160 million. Spano extends the Laminate and Wood segment's customer base into new channels of distribution and adds technical expertise and product knowledge which the Company can leverage. The synergies between the Laminate and Wood segment and Spano create opportunities to optimize manufacturing assets and processes, raw materials and operational efficiencies. The acquisition's results and a preliminary purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition.

Results of Operations

Quarter Ended September 28, 2013, as compared with Quarter Ended September 29, 2012

Net sales

Net sales for the three months ended September 28, 2013 were $1,961.5 million, reflecting an increase of $488.0 million, or 33.1%, from the $1,473.5 million reported for the three months ended September 29, 2012. The increase was primarily driven by higher volume of approximately $447 million mainly attributable to the Marazzi, Pergo and Spano acquisitions, the favorable net impact of price and product mix of approximately $27 million and the impact of favorable foreign exchange rates of approximately $14 million.

Carpet segment-Net sales increased $21.0 million, or 2.8%, to $772.8 million for the three months ended September 28, 2013, compared to $751.8 million for the three months ended September 29, 2012. The increase was primarily driven by the favorable net impact of price and product mix of approximately $20 million and higher volume of approximately $1 million.

Ceramic segment-Net sales increased $349.5 million, or 83.7%, to $767.0 million for the three months ended September 28, 2013, compared to $417.5 million for the three months ended September 29, 2012. The increase was primarily driven by higher volume of approximately $341 million and the favorable net impact of price and product mix of approximately $9 million. Of the $341 million in volume increases, $299 million was attributable to the Marazzi acquisition. The remaining volume increases were led by strong residential channel growth along with continued improvement in the commercial channel.

Laminate and Wood segment-Net sales increased $122.1 million, or 37.2%, to $450.7 million for the three months ended September 28, 2013, compared to $328.6 million for the three months ended September 29, 2012. The increase was primarily driven by higher volume of approximately $110 million and the impact of favorable foreign exchange rates of approximately $14 million, partially offset by the unfavorable net impact of price and product mix of approximately $2 million. Of the $110 million increase in volume, approximately $108 million was attributable to the Pergo and Spano acquisitions. Legacy sales showed growth in North America offset by softer European sales.

Gross profit

Gross profit for the three months ended September 28, 2013 was $516.9 million (26.4% of net sales), an increase of $144.1 million or 38.6%, compared to gross profit of $372.8 million (25.3% of net sales) for the three months ended September 29, 2012. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $131 million that is mainly attributable to the acquisitions, operations productivity of approximately $35 million, the favorable net impact of price and product mix of approximately $14 million and the impact of favorable foreign exchange rates of approximately $3 million, partially offset by higher input costs of approximately $15 million, inventory step-up related to the Marazzi acquisition of approximately $12 million and higher restructuring, acquisition and integration-related costs of approximately $12 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended September 28, 2013 were $341.0 million (17.4% of net sales), compared to $268.9 million (18.2% of net sales) for the three months ended September 29, 2012. As a percentage of net sales, selling, general and administrative expenses decreased 80 basis points. The increase in selling, general and administrative expenses in dollars was primarily driven by acquisition volume and related restructuring and integration-related costs, partially offset by lower amortization costs.


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Operating income

Operating income for the three months ended September 28, 2013 was $175.9 million (9.0% of net sales) reflecting an increase of $71.9 million, or 69.2%, compared to operating income of $104.0 million (7.1% of net sales) for the three months ended September 29, 2012. The increase in operating income was primarily driven by sales volume of approximately $66 million that is primarily attributable to the acquisitions, increases in operations productivity of approximately $35 million, the favorable net impact of price and product mix of approximately $14 million, lower amortization expense of approximately $10 million, partially offset by higher restructuring, acquisition and integration-related costs of approximately $20 million and inventory step-up related to the Marazzi acquisition of approximately $12 million and higher input costs of approximately $15 million.

Carpet segment-Operating income was $68.8 million (8.9% of segment net sales) for the three months ended September 28, 2013 reflecting an increase of $25.0 million compared to operating income of $43.8 million (5.8% of segment net sales) for the three months ended September 29, 2012. The increase in operating income was primarily attributable to operations productivity of approximately $16 million, the favorable net impact of price and product mix of approximately $10 million, lower restructuring costs of approximately $2 million and higher sales volume of approximately $1 million, partially offset by higher input costs of approximately $6 million.

Ceramic segment-Operating income including restructuring, acquisition and integration-related costs was $75.9 million (9.9% of segment net sales) for the three months ended September 28, 2013 reflecting an increase of $38.5 million compared to operating income of $37.5 million (9.0% of segment net sales) for the three months ended September 29, 2012. The increase in operating income was primarily attributable to volume increases of approximately $55 million that are mainly attributable to the Marazzi acquisition and operations productivity of approximately $5 million, partially offset by higher restructuring and integration-related costs of approximately $3 million, inventory step-up related to the Marazzi acquisition of approximately $12 million.

Laminate and Wood segment-Operating income including restructuring and integration-related costs was $39.0 million (8.7% of segment net sales) for the three months ended September 28, 2013 reflecting an increase of $10.1 million compared to operating income of $28.9 million (8.8% of segment net sales) for the three months ended September 29, 2012. The increase in operating income was primarily attributable to increases in operations productivity of approximately $13 million, higher sales volume of approximately $10 million mainly attributable to the Pergo and Spano acquisitions and lower amortization expense of approximately $10 million, partially offset by higher restructuring and integration-related costs of approximately $18 million and higher input costs of approximately $5 million.

Interest expense

Interest expense was $25.6 million for the three months ended September 28, 2013, reflecting an increase of $7.7 million compared to interest expense of $18.0 million for the three months ended September 29, 2012. The increase was primarily due to interest associated with the 3.85% Senior Notes issued in contemplation of the Marazzi acquisition.

Other expense (income)

Other expense was $1.2 million for the three months ended September 28, 2013, reflecting an unfavorable change of $0.8 million compared to other expense of $0.3 million for the three months ended September 29, 2012.

Income tax expense

For the three months ended September 28, 2013, the Company recorded income tax . . .

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