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MHK > SEC Filings for MHK > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for MOHAWK INDUSTRIES INC

Form 10-Q for MOHAWK INDUSTRIES INC


5-May-2014

Quarterly Report


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

Overview

Mohawk Industries, Inc. ("Mohawk" or the "Company") is a leading global flooring manufacturer that creates products to enhance residential and commercial spaces around the world. The Company's vertically integrated manufacturing and distribution processes provide competitive advantages in carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring. The Company's industry-leading innovation has yielded products and technologies that differentiate its' brands in the marketplace and satisfy all flooring related remodeling and new construction requirements. The Company's brands are among the most recognized in the industry and include American Olean®, Bigelow®, Daltile®, Durkan®, Karastan®, Kerama Marazzi®, Lees®, Marazzi®, Mohawk®, Pergo®, Quick-Step® and Unilin®. During the past decade, the Company has transformed its business from an American carpet manufacturer into the world's largest flooring company with operations in Australia, Brazil, Canada, China, Europe, India, Malaysia, Mexico, Russia and the United States. The Company had annual net sales in 2013 of $7.3 billion.

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 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


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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, medium-density fiberboard ("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.

For the three months ended March 29, 2014, net earnings attributable to the Company were $81.1 million, or diluted earnings per share ("EPS") of $1.11, compared to the net earnings attributable to the Company of $50.5 million, or diluted EPS of $0.72, for the three months ended March 30, 2013. The increase in diluted EPS for the three months ended March 29, 2014 was primarily attributable to the Marazzi and Spano acquisitions, increased operations productivity and the favorable net impact of price and product mix, partially offset by higher input costs.

Results of Operations

Quarter Ended March 29, 2014, as compared with Quarter Ended March 30, 2013

Net sales

Net sales for the three months ended March 29, 2014 were $1,813.1 million, reflecting an increase of $326.3 million, or 21.9%, from the $1,486.8 million reported for the three months ended March 30, 2013. The increase was primarily attributable to higher volume of approximately $317 million mainly driven by the Marazzi and Spano acquisitions and the net impact of favorable foreign exchange rates of approximately $10 million, partially offset by the unfavorable net impact of price and product mix of approximately $1 million.

Carpet segment-Net sales decreased $20.4 million, or 2.9%, to $674.9 million for the three months ended March 29, 2014, compared to $695.3 million for the three months ended March 30, 2013. The decrease was primarily attributable to lower volume of approximately $22 million, partially offset by the favorable net impact of price and product mix of approximately $2 million. The decrease in volume during the quarter was primarily attributable to the severe winter weather in North America.

Ceramic segment-Net sales increased $283.2 million, or 68.8%, to $695.1 million for the three months ended March 29, 2014, compared to $411.9 million for the three months ended March 30, 2013. The increase was primarily attributable to higher volume of approximately $282 million and the favorable net impact of price and product mix of approximately $3 million, partially offset by the net impact of unfavorable foreign exchange rates of approximately $2 million. Of the $282 million increase in volume, approximately $272 million was attributable to the Marazzi acquisition. The remaining volume increases were attributable to modest growth in the residential and commercial channels which were negatively impacted during the quarter by severe winter weather in North America.

Laminate and Wood segment-Net sales increased $63.5 million, or 15.7%, to $468.0 million for the three months ended March 29, 2014, compared to $404.5 million for the three months ended March 30, 2013. The increase was primarily attributable to higher volume of approximately $57 million and the net impact of favorable foreign exchange rates of approximately $12 million, partially offset by the unfavorable net impact of price and product mix of approximately $5 million. The $57 million increase in volume in the quarter was primarily attributable to the Spano acquisition, partially offset by the severe winter weather in North America.

Gross profit

Gross profit for the three months ended March 29, 2014 was $481.4 million (26.5% of net sales), an increase of $104.3 million or 27.7%, compared to gross profit of $377.1 million (25.4% of net sales) for the three months ended March 30, 2013. As a percentage of net sales, gross profit increased 110 basis points. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $89 million that was predominately attributable to the Marazzi and Spano acquisitions, operations productivity of approximately $22 million and the favorable net impact of price and product mix of approximately $8 million, partially offset by higher input costs of approximately $14 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 29, 2014 were $350.6 million (19.3% of net sales), compared to $290.2 million (19.5% of net sales) for the three months ended March 30, 2013. As a percentage of net sales, selling, general and administrative expenses decreased 20 basis points primarily due to increased sales volume. The increase in selling, general and administrative expenses in dollars was primarily attributable to acquisition volume.


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Operating income

Operating income for the three months ended March 29, 2014 was $130.7 million (7.2% of net sales) reflecting an increase of $43.9 million, or 50.5%, compared to operating income of $86.8 million (5.8% of net sales) for the three months ended March 30, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $27 million predominately attributable to the Marazzi and Spano acquisitions, increases in operations productivity of approximately $22 million and the favorable net impact of price and product mix of approximately $8 million, partially offset by higher input costs of approximately $14 million.

Carpet segment-Operating income was $34.3 million (5.1% of segment net sales) for the three months ended March 29, 2014 reflecting an increase of $9.0 million compared to operating income of $25.2 million (3.6% of segment net sales) for the three months ended March 30, 2013. The increase in operating income was primarily attributable to operations productivity of approximately $10 million and lower restructuring charges of approximately $6 million, partially offset by lower sales volume of approximately $9 million.

Ceramic segment-Operating income was $60.7 million (8.7% of segment net sales) for the three months ended March 29, 2014 reflecting an increase of $30.7 million compared to operating income of $30.0 million (7.3% of segment net sales) for the three months ended March 30, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $26 million predominately attributable to the Marazzi acquisition, operations productivity of approximately $6 million and the favorable net impact of price and product mix of approximately $6 million, partially offset by higher input costs of approximately $6 million.

Laminate and Wood segment-Operating income was $44.1 million (9.4% of segment net sales) for the three months ended March 29, 2014 reflecting an increase of $5.4 million compared to operating income of $38.7 million (9.6% of segment net sales) for the three months ended March 30, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $10 million and operations productivity of approximately $6 million, partially offset by higher restructuring, acquisition and integration costs of approximately $6 million and higher input costs of approximately $6 million.

Interest expense

Interest expense was $22.1 million for the three months ended March 29, 2014, reflecting an increase of $2.9 million compared to interest expense of $19.2 million for the three months ended March 30, 2013. The increase was primarily attributable to increased debt levels to finance the acquisitions.

Other expense

Other expense was $4.9 million for the three months ended March 29, 2014, reflecting a favorable change of $1.5 million compared to other expense of $6.4 million for the three months ended March 30, 2013.

Income tax expense

For the three months ended March 29, 2014, the Company recorded income tax expense of $22.7 million on earnings from continuing operations before income taxes of $103.7 million for an effective tax rate of 21.9%, as compared to an income tax expense of $10.7 million on earnings from continuing operations before income taxes of $61.3 million, for an effective tax rate of 17.5% for the three months ended March 30, 2013. The difference in the effective tax rate for the comparative period is attributable to the geographic dispersion of earnings and losses for the quarters.

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, commercial paper, bank credit lines, term and senior notes and credit terms from suppliers.

Net cash used in operating activities in the first three months of 2014 was $71.0 million, compared to net cash used in operating activities of $38.9 million in the first three months of 2013. The increase was primarily attributable to changes in working capital, partially offset by higher earnings.


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Net cash used in investing activities in the first three months of 2014 was $122.1 million compared to net cash used in investing activities of $211.1 million in the first three months of 2013. The decrease was primarily attributable to acquisitions of $147.8 million in the prior year, partially offset by higher capital expenditures of $58.8 million in the current year. Capital spending during the remainder of 2014 is expected to range from approximately $360 million to $380 million and is intended to support growth and margin expansion including increases in carpet fiber and yarn capacity, increasing tile capacity and the addition of a luxury vinyl tile ("LVT") facility in Europe.

Net cash provided by financing activities in the first three months of 2014 was $213.0 million compared to net cash provided by financing activities of $938.0 million in the first three months of 2013. The decrease was primarily attributable to the proceeds from the 3.85% Senior Notes and proceeds from the 2011 Senior Credit Facility used to fund the Marazzi acquisition in the prior year.

Commercial Paper

On February 28, 2014, the Company entered into definitive documentation to establish a commercial paper program for the issuance of unsecured commercial paper in the United States capital markets. Under the program, the Company may issue commercial paper notes from time to time in an aggregate amount not to exceed $1,000.0 million outstanding at any time, subject to availability under the 2013 Senior Credit Facility, which the Company uses as a liquidity backstop. The commercial paper notes will have maturities ranging from one day to 397 days and will not be subject to voluntary prepayment by the Company or redemption prior to maturity. The commercial paper notes will rank pari passu with all of the Company's other unsecured and unsubordinated indebtedness.

The proceeds from the sale of commercial paper notes will be available for general corporate purposes. The Company used the initial proceeds from the sale of commercial paper notes to repay borrowings under its 2013 Senior Credit Facility and certain of its industrial revenue bonds. As of March 29, 2014, the amount utilized under the commercial paper program was $591.1 million with a weighted-average interest rate and maturity period of 0.59% and 19 days, respectively.

Senior Credit Facilities

On September 25, 2013, the Company entered into a $1,000.0 million, 5-year, senior revolving credit facility (the "2013 Senior Credit Facility"). The 2013 Senior Credit Facility provides for a maximum of $1,000,000.0 of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of $1.8 million in connection with its 2013 Senior Credit Facility. These costs were deferred and, along with unamortized costs of $11.4 million related to the Company's 2011 Credit Facility, are being amortized over the term of the 2013 Senior Credit Facility.

At the Company's election, revolving loans under the 2013 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 1.00% and 1.75%, or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, and a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75%. The Company also pays a commitment fee to the Lenders under the 2013 Senior Credit Facility on the average amount by which the aggregate commitments of the Lenders' exceed utilization of the 2013 Senior Credit Facility ranging from 0.125% to 0.25% per annum. The applicable interest rate and the commitment fee are determined based on whichever of the Company's Consolidated Net Leverage Ratio or its senior unsecured debt rating (or if not available, corporate family rating) results in the lower applicable margins and commitment fee (with applicable margins and the commitment fee increasing as that ratio increases or those ratings decline, as applicable).

The obligations of the Company and its subsidiaries in respect of the 2013 Senior Credit Facility are unsecured.

If at any time (a) both (i) the 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 obligations of the Company and the other Borrowers under the 2013 Senior Credit Facility will be required to be guaranteed by all of the Company's material domestic subsidiaries and all obligations of Borrowers that are foreign subsidiaries will be required to be guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors.

The 2013 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


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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.

The 2013 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.

The 2013 Senior Credit Facility is scheduled to mature on September 25, 2018. However, the maturity date will accelerate, resulting in the acceleration of any unamortized deferred financing costs, to October 16, 2015, if on that date any of the Company's 6.125% notes due January 15, 2016 remains outstanding and the Company has not delivered to the Administrative Agent a certificate demonstrating that, after giving pro forma effect to the repayment in cash in full on that date of all of the 6.125% notes that remain outstanding, the amount the Company would be permitted to draw under the 2013 Senior Credit Facility, together with the aggregate consolidated amount of unrestricted cash and cash equivalents of the Company, would exceed $200.0 million. While there can be no assurance, the Company currently believes that if any of the 6.125% notes remains outstanding on October 16, 2015, the amount the Company would be permitted to draw under the 2013 Senior Credit Facility, together with the aggregate consolidated amount of the Company's unrestricted cash and cash equivalents, would exceed $200.0 million on October 16, 2015.

As of March 29, 2014, the amount utilized under the 2013 Senior Credit Facility was $83.5 million resulting in a total of $916.5 million available under the 2013 Senior Credit Facility. The amount utilized included $35.8 million of borrowings and $47.7 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The Company considers outstanding borrowings under its commercial paper program to be a reduction of the available capacity on its 2013 Senior Credit Facility.

Senior Notes

On January 31, 2013, the Company issued $600.0 million aggregate principal amount of 3.85% Senior Notes due February 1, 2023. The Company paid financing costs of $6.0 million 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 Company. 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. The current rate in effect is 6.125%. 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.

Accounts Receivable Securitization

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 $300.0 million 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 29, 2014, the amount utilized under the Securitization Facility was $300.0 million.

In connection with the acquisition of Marazzi, the Company became a party to an off-balance sheet accounts receivable securitization facility ("Marazzi Securitization Facility") pursuant to which the Company services receivables sold to a third party. As of March 29, 2014, the amounts utilized under the Marazzi Securitization Facility was €5.5 million. The Company is in the process of terminating this 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.


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As of March 29, 2014, the Company had cash of $72.6 million, of which $40.0 million was held outside the United States. While the Company's plans are to permanently reinvest the cash held outside the United States, the estimated cost of repatriation for the cash as of March 29, 2014 was approximately $14.0 million. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its 2013 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 2013 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 2013 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 Carpet and Ceramic segments, its results of operations for the first quarter tend to be the weakest followed by the fourth quarter. The second and third quarters typically produce higher net sales and operating income in these segments. These results are primarily due to consumer residential spending patterns which have historically decreased during the holiday season and the first two months following. The Laminate and Wood segment's second quarter typically produces the highest net sales and earnings followed by a moderate third and fourth quarter and a weaker first quarter.

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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