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MHK > SEC Filings for MHK > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for MOHAWK INDUSTRIES INC

Form 10-K for MOHAWK INDUSTRIES INC


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview
The Company has three reporting segments: the Carpet segment, the Ceramic segment and the Laminate and Wood segment. The Carpet segment designs, manufactures, sources and markets its floor covering product lines, including carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, which it distributes primarily in North America through its


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Index to Financial Statements

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, shop at home, buying groups, commercial dealers and commercial end users. The Ceramic segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, which it distributes primarily in North America, Europe and Russia 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-operated service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Laminate and Wood segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, roofing elements, insulation boards, MDF, chipboards and other wood products, which it distributes primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers. Net earnings attributable to the Company were $348.8 million, or diluted EPS of $4.82 for 2013 compared to net earnings attributable to the Company of $250.3 million, or diluted EPS of $3.61 for 2012. The increase in EPS was primarily attributable to the acquisitions discussed below, increased operations productivity, higher legacy sales volume, the favorable net impact of price and product mix and lower amortization expense, partially offset by restructuring, acquisition and integration costs attributable to the acquisitions, higher input costs and losses attributable to the sale of a discontinued operation. For the year ended December 31, 2013, the Company generated $525.2 million of cash from operating activities. As of December 31, 2013, the Company had cash and cash equivalents of $54.1 million, of which $22.8 million was in the United States and $31.3 million was in foreign countries. 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 $145 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 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 Europe, 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 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 chipboard 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.


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Index to Financial Statements

Results of Operations
Following are the results of operations for the last three years:

                                                   For the Years Ended December 31,
                                       2013                      2012                      2011
                                                            (In millions)
Statement of operations
data:
Net sales                    $ 7,348.8       100.0  %   $ 5,788.0       100.0 %   $ 5,642.3       100.0 %
Cost of sales (1)              5,428.0        73.9  %     4,297.9        74.3 %     4,225.4        74.9 %
Gross profit                   1,920.8        26.1  %     1,490.1        25.7 %     1,416.9        25.1 %
Selling, general and
administrative expenses (2)    1,373.9        18.7  %     1,110.6        19.2 %     1,101.3        19.5 %
Operating income                 546.9         7.4  %       379.5         6.6 %       315.6         5.6 %
Interest expense (3)              92.2         1.3  %        74.7         1.3 %       101.6         1.8 %
Other expense (4)                  9.1         0.1  %         0.3           - %        14.1         0.2 %
Earnings from continuing
operations before income
taxes                            445.6         6.1  %       304.5         5.3 %       199.9         3.5 %
Income tax expense                78.4         1.1  %        53.6         0.9 %        21.7         0.4 %
Earnings from continuing
operations                       367.2         5.0  %       250.9         4.3 %       178.2         3.2 %
Loss from discontinued
operations, net of income
tax benefit of $1,050            (17.9 )      (0.2 )%           -           - %           -           - %
Net earnings including
noncontrolling interest          349.3         4.8  %       250.9         4.3 %       178.2         3.2 %
Less: Net earnings
attributable to the
noncontrolling interest            0.5           -  %         0.6           - %         4.3         0.1 %
Net earnings (loss)
attributable to Mohawk
Industries, Inc.             $   348.8         4.7  %   $   250.3         4.3 %   $   173.9         3.1 %
(1) Cost of sales includes:
Restructuring, acquisition
and integration charges      $    49.2         0.7  %   $    14.8         0.3 %   $    17.5         0.3 %
     Acquisition inventory
step-up                           31.0         0.4  %           -           - %           -           - %
(2) Selling, general and
administrative expenses
include:
Restructuring, acquisition
and integration charges           62.8         0.9  %         3.7         0.1 %         5.7         0.1 %
Lease charges                        -           -  %           -           - %         6.0         0.1 %
(3) Interest expense
includes:
Debt extinguishment costs            -           -  %           -           - %         1.1           - %
Deferred loan cost write-off       0.5           -  %           -           - %           -           - %
Interest on 3.85% senior
notes (pre-acquisition)            3.6           -  %           -           - %           -           - %
(4) Other expense (income)
includes:
Unrealized foreign currency
losses                               -           -  %           -           - %         9.1         0.2 %
Restructuring, acquisition
and integration charges            1.5           -  %           -           - %           -           - %

Year Ended December 31, 2013, as Compared with Year Ended December 31, 2012

Net sales

Net sales for 2013 were $7,348.8 million, reflecting an increase of $1,560.8 million, or 27.0%, from the $5,788.0 million reported for 2012. The increase was primarily attributable to higher volume of approximately $1,450 million mainly driven by the Marazzi, Pergo and Spano acquisitions, the favorable net impact of price and product mix of approximately $77


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million and the net impact of favorable foreign exchange rates of approximately $34 million. Of the $1,450 million increase in volume, approximately $1,293 million was attributable to the Marazzi, Pergo and Spano acquisitions.

Carpet Segment-Net sales increased $74.0 million, or 2.5%, to $2,986.1 million for 2013, compared to $2,912.1 million for 2012. The increase was primarily attributable to the favorable net impact of price and product mix of approximately $58 million and higher volume of approximately $16 million.

Ceramic Segment-Net sales increased $1,060.7 million, or 65.6%, to $2,677.1 million for 2013, compared to $1,616.4 million for 2012. The increase was primarily attributable to higher volume of approximately $1,033 million, the favorable net impact of price and product mix of approximately $27 million and the net impact of favorable foreign exchange rates of approximately $1 million. Of the $1,033 million increase in volume, approximately $897 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 $442.0 million, or 32.7%, to $1,792.3 million for 2013, compared to $1,350.3 million for 2012. The increase was primarily attributable to volume increases of approximately $418 million and the impact of favorable foreign exchange rates of approximately $33 million, partially offset by the unfavorable net impact of price and product mix of approximately $9 million. Of the $418 million increase in volume, approximately $396 million was attributable to the Pergo and Spano acquisitions.

Quarterly net sales and the percentage changes in net sales by quarter for 2013 versus 2012 were as follows (dollars in millions):

                  2013        2012     Change
First quarter  $ 1,486.8    1,409.0      5.5 %
Second quarter   1,976.3    1,469.8     34.5 %
Third quarter    1,961.5    1,473.5     33.1 %
Fourth quarter   1,924.2    1,435.7     34.0 %
Total year     $ 7,348.8    5,788.0     27.0 %

Gross profit

Gross profit for 2013 was $1,920.8 million (26.1% of net sales), an increase of $430.8 million or 28.9%, compared to gross profit of $1,490.1 million (25.7% of net sales) for 2012. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $427 million that is predominately attributable to the acquisitions, operations productivity of approximately $82 million and the favorable net impact of price and product mix of approximately $45 million, partially offset by higher input costs of approximately $59 million, inventory step-up related to the Marazzi acquisition of approximately $31 million and higher restructuring, acquisition and integration-related costs of approximately $34 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for 2013 were $1,373.9 million (18.7% of net sales), compared to $1,110.6 million (19.2% of net sales) for 2012. Selling, general and administrative expenses decreased as a percentage of net sales compared to the prior year primarily due to increased sales volume. The increase in selling, general and administrative expenses in dollars was primarily attributable to acquisition volume and the related restructuring and integration-related costs, partially offset by lower amortization costs.

Operating income

Operating income for 2013 was $546.9 million (7.4% of net sales) reflecting an increase of $167.4 million, or 44.1%, compared to operating income of $379.5 million (6.6% of net sales) for 2012. The increase in operating income was primarily attributable to higher sales volume of approximately $208 million that is predominately attributable to the Marazzi, Pergo and Spano acquisitions, increases in operations productivity of approximately $82 million, the favorable net impact of price and product mix of approximately $45 million and lower amortization expense of approximately $34 million, partially offset by higher restructuring, acquisition and integration-related costs of approximately $93 million, inventory step-up related to the Marazzi acquisition of approximately $31 million and higher input costs of approximately $59 million.


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Carpet Segment-Operating income was $209.0 million (7.0% of segment net sales) for 2013 reflecting an increase of $50.8 million, or 32.1%, compared to operating income of $158.2 million (5.4% of segment net sales) for 2012. The increase in operating income was primarily attributable to operations productivity of approximately $38 million, the favorable net impact of price and product mix of approximately $33 million, and higher sales volume of approximately $9 million, partially offset by higher input costs of approximately $29 million.

Ceramic Segment-Operating income was $209.8 million (7.8% of segment net sales) for 2013 reflecting an increase of $88.9 million, or 73.5%, compared to operating income of $121.0 million (7.5% of segment net sales) for 2012. The increase in operating income was primarily attributable to volume increases of approximately $161 million that were predominately driven by the Marazzi acquisition, the favorable net impact of price and product mix of approximately $21 million and operations productivity of approximately $15 million, partially offset by higher restructuring and integration-related costs of approximately $37 million, inventory step-up related to the Marazzi acquisition of approximately $31 million, increases in selling, general and administrative costs of approximately $17 million primarily attributable to sales volume increases and market expansion opportunities in the legacy business and higher input costs of approximately $15 million.

Laminate and Wood Segment-Operating income was $159.4 million (8.9% of segment net sales) for 2013 reflecting an increase of $33.0 million, or 26.1%, compared to operating income of $126.4 million (9.4% of segment net sales) for 2012. The increase in operating income was primarily attributable to higher sales volume of approximately $40 million predominately driven by the Pergo and Spano acquisitions, lower amortization expense of approximately $34 million, increases in operations productivity of approximately $30 million, partially offset by higher restructuring and integration-related costs of approximately $53 million and higher input costs of approximately $15 million.

Interest expense

Interest expense was $92.2 million for 2013, reflecting an increase of $17.5 million compared to interest expense of $74.7 million for 2012. The increase in interest expense was primarily attributable to increased borrowings related to the three acquisitions, partially offset by lower interest rates on the Company's outstanding debt attributable to the shift from the higher interest rate senior 7.20% notes to the 2011 Senior Credit Facility and the positive effect of the ratings upgrades on interest associated with the 6.125% notes.

Other expense

Other expense was $9.1 million for 2013, reflecting a change of $8.8 million compared to other expense of $0.3 million for 2012. The change was primarily attributable to net change in foreign currency gains/losses.

Income tax expense

For 2013, the Company recorded income tax expense of $78.4 million on earnings from continuing operations before income taxes of $445.6 million for an effective tax rate of 17.6%, as compared to an income tax expense of $53.6 million on earnings from continuing operations before income taxes of $304.5 million, resulting in an effective tax rate of 17.6% for 2012.

Loss from discontinued operations, net of income tax benefit

For 2013, the Company recorded a loss from discontinued operations, net of income tax benefit of $17.9 million as discussed in Note 4 of Notes to Consolidated Financial Statements.
Year Ended December 31, 2012, as Compared with Year Ended December 31, 2011 Net sales

Net sales for 2012 were $5,788.0 million, reflecting an increase of $145.7 million, or 2.6%, from the $5,642.3 million reported for 2011. The increase was primarily driven by the favorable net impact of price and product mix of approximately $146 million and higher volume of approximately $92 million, partially offset by the net impact of unfavorable foreign exchange rates of approximately $92 million.

Carpet Segment-Net sales decreased $15.6 million, or 0.5%, to $2,912.1 million for 2012, compared to $2,927.7 million for 2011. The decrease was primarily driven by lower volume of approximately $142 million, which was partially offset by the favorable net impact of price and product mix of approximately $126 million. The volume decreases were primarily


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attributable to the timing of carpet product transitions in the home center channel and lower demand for rug products in the retail channel.

Ceramic Segment-Net sales increased $162.1 million, or 11.1%, to $1,616.4 million for 2012, compared to $1,454.3 million for 2011. The increase was primarily driven by volume increases of approximately $157 million and the favorable net impact of price and product mix of approximately $11 million, partially offset by the net impact of unfavorable foreign exchange rates of approximately $6 million. The volume increases were primarily attributable to improvement in the U.S. commercial and residential channels and growth in the Mexican market.

Laminate and Wood Segment-Net sales increased $5.5 million, or 0.4%, to $1,350.3 million for 2012, compared to $1,344.8 million for 2011. The increase was primarily driven by volume increases of approximately $84 million and the favorable net impact of price and product mix of approximately $8 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $86 million. The volume increases were primarily attributable to flooring products primarily in Russia, Australia and North America, as well as increases in wood panel and insulation products.
Quarterly net sales and the percentage changes in net sales by quarter for 2012 versus 2011 were as follows (dollars in millions):

                  2012        2011     Change
First quarter  $ 1,409.0    1,343.6     4.9  %
Second quarter   1,469.8    1,477.9    (0.5 )%
Third quarter    1,473.5    1,442.5     2.1  %
Fourth quarter   1,435.7    1,378.3     4.2  %
Total year     $ 5,788.0    5,642.3     2.6  %

Gross profit

Gross profit for 2012 was $1,490.1 million (25.7% of net sales), an increase of $73.2 million or 5.2%, compared to gross profit of $1,416.9 million (25.1% of net sales) for 2011. The increase in gross profit dollars was primarily attributable to the favorable net impact of price and product mix of approximately $62 million, operations productivity of approximately $52 million and higher sales volume of approximately $22 million, partially offset by higher input costs of approximately $42 million and the impact of unfavorable foreign exchange rates of approximately $19 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for 2012 were $1,110.6 million (19.2% of net sales), compared to $1,101.3 million (19.5% of net sales) for 2011. Selling, general and administrative expenses decreased as a percentage of net sales compared to the prior year primarily due to increased sales volume. 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 of approximately $31 million, partially offset by favorable foreign exchange rates of approximately $15 million and lower amortization costs of approximately $9 million.

Operating income

Operating income for 2012 was $379.5 million (6.6% of net sales) reflecting an increase of $64.0 million, or 20.3%, compared to operating income of $315.5 million (5.6% of net sales) for 2011. The increase in operating income was primarily driven by the favorable net impact of price and product mix of approximately $62 million, operations productivity of approximately $52 million and sales volume increases of approximately $22 million, partially offset by higher input costs of approximately $42 million and increases in selling costs to support new product introductions, geographic expansion and higher sales volume of approximately $31 million.

Carpet Segment-Operating income was $158.2 million (5.4% of segment net sales) for 2012 reflecting an increase of $48.3 million compared to operating income of $109.9 million (3.8% of segment net sales) for 2011. The increase in operating income was primarily driven by the favorable net impact of price and product mix of approximately $67 million, higher operations productivity of approximately $18 million and lower restructuring costs of approximately $15 million, partially offset by lower sales volume of approximately $36 million and higher input costs of approximately $18 million.

Ceramic Segment-Operating income was $121.0 million (7.5% of segment net sales) for 2012 reflecting an increase of $19.7 million compared to operating income of $101.3 million (7.0% of segment net sales) for 2011. The increase in operating


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income was primarily driven by sales volume increases of approximately $42 million and favorable foreign exchange rates of approximately $6 million, partially offset by increases in selling costs to support new product introductions and higher sales volume of approximately $16 million, manufacturing start-up and restructuring costs of approximately $9 million and higher input costs of approximately $7 million.

Laminate and Wood Segment-Operating income was $126.4 million (9.4% of segment net sales) for 2012 reflecting a decrease of $0.7 million compared to operating income of $127.1 million (9.5% of segment net sales) for 2011. The decrease in operating income was primarily driven by higher input costs of approximately $18 million, increases in costs to support new product introductions and geographic expansion of approximately $11 million and unfavorable foreign exchange rates of approximately $10 million, partially offset by operations productivity of approximately $25 million and sales volume increases of approximately $15 million.

Interest expense

Interest expense was $74.7 million for 2012, reflecting a decrease of $26.9 million compared to interest expense of $101.6 million for 2011. The decrease in interest expense in 2012 was due to lower outstanding debt and lower interest rates on that outstanding debt. The lower interest rates were primarily attributable to the shift from higher interest rate senior notes to the 2011 Senior Credit Facility and the rating agency upgrades discussed in "Liquidity and Capital Resources".

Other expense

Other expense was $0.3 million for 2012, reflecting a change of $13.7 million compared to other expense of $14.1 million for 2011. The change was primarily attributable to net foreign currency losses of approximately $16 million. The unrealized foreign currency losses in the prior year were primarily a result of volatility in the Mexican Peso and Canadian Dollar that occurred late in the third quarter of 2011. Prior to the second quarter of 2012, operations carried out in Mexico used the U.S. Dollar as the functional currency. Effective April 1, 2012, the Company changed the functional currency of its Mexico operations to the Mexican Peso. See Note 1(m) of the Notes to the Consolidated Financial Statements.

Income tax expense

For 2012, the Company recorded income tax expense of $53.6 million on earnings before income taxes of $304.5 million for an effective tax rate of 17.6%, as compared to an income tax expense of $21.7 million on earnings before income taxes of $199.9 million, resulting in an effective tax rate of 10.8% for 2011. The difference in the effective tax rate for the comparative period is primarily due to the geographical dispersion of earnings and losses, a favorable IRS audit settlement in 2011, and the expiration of statutes of limitations for both Federal and State tax purposes.

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 and credit terms from suppliers.

Cash flows provided by operating activities for 2013 were $525.2 million compared to $587.6 million provided by operating activities for 2012. The decrease in cash provided by operating activities for 2013 as compared to 2012 is primarily attributable to changes in working capital needs resulting from the acquisitions, partially offset by higher earnings.

Net cash used in investing activities for 2013 was $810.0 million compared to $215.3 million for 2012. The increase in investing activities primarily relates to the 2013 acquisitions and to a lesser extent, capital expenditures.

Net cash used in financing activities for 2013 was $106.8 million compared to $216.8 million for 2012. The change in cash used in financing activities as compared to 2012 is primarily attributable to the purchase of the non-controlling interest within the Ceramic segment for approximately $35.0 million in 2012 and higher proceeds from stock transactions in 2013.

On July 8, 2011, the Company entered into a $900.0 million, 5-year, senior, secured revolving credit facility (the "2011 Senior Credit Facility"). On January 20, 2012, the Company entered into an amendment to the 2011 Senior Credit Facility that provided for an incremental term loan facility in the aggregate principal amount of $150.0 million. On September 25, 2013, the Company entered into a $1,000.0 million, 5-year, senior revolving credit facility (the "2013 Senior Credit Facility") and terminated the 2011 Senior Credit Facility, including the term loan, which was originally set to mature on July 8, 2016. No early termination penalties were incurred as a result of the termination.


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The 2011 Senior Credit Facility provided 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 . . .

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