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MHK > SEC Filings for MHK > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for MOHAWK INDUSTRIES INC

Form 10-Q for MOHAWK INDUSTRIES INC


4-Aug-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, including 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, 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 June 28, 2014, net earnings attributable to the Company were $152.8 million, or diluted earnings per share ("EPS") of $2.08, compared to the net earnings attributable to the Company of $84.6 million, or diluted EPS of $1.16, for the three months ended June 29, 2013. The increase in diluted EPS for the three months ended June 28, 2014 was primarily attributable to lower restructuring, acquisition and integration-related costs, inventory step-up in the prior year related to the Marazzi acquisition, increased operations productivity and higher volume, partially offset by higher input costs.

For the six months ended June 28, 2014, net earnings attributable to the Company were $233.8 million, or diluted earnings per share ("EPS") of $3.19, compared to the net earnings attributable to the Company of $135.1 million, or diluted EPS of $1.89, for the six months ended June 29, 2013. The increase in diluted EPS for the three months ended June 28, 2014 was primarily attributable to lower restructuring, acquisition and integration-related costs, inventory step-up in the prior year related to the Marazzi acquisition, increased operations productivity, the Marazzi and Spano acquisitions and higher volume, partially offset by higher input costs.

Results of Operations

Quarter Ended June 28, 2014, as compared with Quarter Ended June 29, 2013

Net sales

Net sales for the three months ended June 28, 2014 were $2,048.2 million, reflecting an increase of $71.9 million, or 3.6%, from the $1,976.3 million reported for the three months ended June 29, 2013. The increase was primarily attributable to higher volume of approximately $51 million, the net impact of favorable foreign exchange rates of approximately $14 million and the favorable net impact of price and product mix of approximately $7 million.

Carpet segment-Net sales increased $9.4 million, or 1.2%, to $780.3 million for the three months ended June 28, 2014, compared to $770.9 million for the three months ended June 29, 2013. The increase was primarily attributable to higher volume of approximately $14 million, partially offset by the unfavorable net impact of price and product mix of approximately $5 million.


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Ceramic segment-Net sales increased $36.6 million, or 4.8%, to $796.7 million for the three months ended June 28, 2014, compared to $760.2 million for the three months ended June 29, 2013. The increase was primarily attributable to higher volume of approximately $28 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 $2 million. The volume increases were attributable to higher residential and commercial sales primarily in North America.

Laminate and Wood segment-Net sales increased $30.3 million, or 6.4%, to $501.3 million for the three months ended June 28, 2014, compared to $471.0 million for the three months ended June 29, 2013. The increase was primarily attributable to the net impact of favorable foreign exchange rates of approximately $16 million, higher volume of approximately $13 million and the favorable net impact of price and product mix of approximately $1 million. The $13 million increase in volume in the quarter was primarily attributable to the Spano acquisition.

Gross profit

Gross profit for the three months ended June 28, 2014 was $574.8 million (28.1% of net sales), an increase of $60.8 million or 11.8%, compared to gross profit of $514.1 million (26.0% of net sales) for the three months ended June 29, 2013. As a percentage of net sales, gross profit increased 210 basis points. The increase in gross profit dollars was primarily attributable to operations productivity of approximately $23 million, higher sales volume of approximately $20 million, fair value inventory step-up adjustment in the prior year related to the Marazzi acquisition of approximately $19 million and lower restructuring, acquisition and integration-related costs of approximately $7 million, the net impact of favorable foreign exchange rates of approximately $4 million and the favorable net impact of price and product mix of approximately $4 million, partially offset by higher input costs of approximately $15 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 28, 2014 were $352.6 million (17.2% of net sales), compared to $380.9 million (19.3% of net sales) for the three months ended June 29, 2013. As a percentage of net sales, selling, general and administrative expenses decreased 210 basis points. The decrease in selling, general and administrative expenses in dollars was primarily attributable to lower restructuring, acquisition and integration-related costs and improved efficiencies.

Operating income

Operating income for the three months ended June 28, 2014 was $222.2 million (10.9% of net sales) reflecting an increase of $89.1 million, or 66.9%, compared to operating income of $133.2 million (6.7% of net sales) for the three months ended June 29, 2013. The increase in operating income was primarily attributable to lower restructuring, acquisition and integration-related costs of approximately $29 million, increases in operations productivity of approximately $23 million, sales volume increases of approximately $20 million, fair value inventory step-up adjustment in the prior year related to the Marazzi acquisition of approximately $19 million, improved efficiencies in selling, general and administrative expenses of approximately $8 million and the favorable net impact of price and product mix of approximately $4 million, partially offset by higher input costs of approximately $15 million.

Carpet segment-Operating income was $62.8 million (8.1% of segment net sales) for the three months ended June 28, 2014 reflecting an increase of $8.0 million compared to operating income of $54.9 million (7.1% of segment net sales) for the three months ended June 29, 2013. The increase in operating income was primarily attributable to operations productivity of approximately $12 million and higher volume of approximately $3 million and improved efficiencies in selling, general and administrative expenses of approximately $3 million, partially offset by higher input costs of approximately $6 million and the unfavorable net impact of price and product mix of approximately $4 million.

Ceramic segment-Operating income was $106.4 million (13.4% of segment net sales) for the three months ended June 28, 2014 reflecting an increase of $60.1 million compared to operating income of $46.3 million (6.1% of segment net sales) for the three months ended June 29, 2013. The increase in operating income was primarily attributable to lower restructuring, acquisition and integration-related costs of approximately $23 million, fair value inventory step-up adjustment in the prior year related to the Marazzi acquisition of approximately $19 million, sales volume increases of approximately $10 million, operations productivity of approximately $9 million and the favorable net impact of price and product mix of approximately $4 million, partially offset by higher input costs of approximately $5 million.

Laminate and Wood segment-Operating income was $60.8 million (12.1% of segment net sales) for the three months ended June 28, 2014 reflecting an increase of $19.5 million compared to operating income of $41.4 million (8.8% of segment


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net sales) for the three months ended June 29, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $6 million, lower restructuring, acquisition and integration costs of approximately $7 million, the favorable net impact of price and product mix of approximately $4 million, operations productivity of approximately $2 million and the net impact of favorable foreign exchange rates of approximately $2 million, partially offset by higher input costs of approximately $4 million.

Interest expense

Interest expense was $20.7 million for the three months ended June 28, 2014, reflecting a decrease of $4.6 million compared to interest expense of $25.3 million for the three months ended June 29, 2013. The decrease was primarily attributable to lower debt levels and lower interest rates.

Other (income) expense

Other income was $1.6 million for the three months ended June 28, 2014, reflecting a favorable change of $0.5 million compared to other income of $1.1 million for the three months ended June 29, 2013.

Income tax expense

For the three months ended June 28, 2014, the Company recorded income tax expense of $50.2 million on earnings from continuing operations before income taxes of $203.1 million for an effective tax rate of 24.7%, as compared to an income tax expense of $23.2 million on earnings from continuing operations before income taxes of $109.0 million, for an effective tax rate of 21.3% for the three months ended June 29, 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.

Six Months Ended Ended June 28, 2014, as compared with Six Months Ended June 29, 2013

Net sales

Net sales for the six months ended June 28, 2014 were $3,861.3 million, reflecting an increase of $398.2 million, or 11.5%, from the $3,463.1 million reported for the six months ended June 29, 2013. The increase was primarily attributable to higher volume of approximately $368 million mainly driven by the Marazzi and Spano acquisitions and the net impact of favorable foreign exchange rates of approximately $25 million and the favorable net impact of price and product mix of approximately $5 million.

Carpet segment-Net sales decreased $11.0 million, or 0.7%, to $1,455.2 million for the six months ended June 28, 2014, compared to $1,466.2 million for the six months ended June 29, 2013. The decrease was primarily attributable to lower volume of approximately $8 million and the unfavorable net impact of price and product mix of approximately $3 million.

Ceramic segment-Net sales increased $319.8 million, or 27.3%, to $1,491.8 million for the six months ended June 28, 2014, compared to $1,172.0 million for the six months ended June 29, 2013. The increase was primarily attributable to higher volume of approximately $310 million and the favorable net impact of price and product mix of approximately $14 million, partially offset by the net impact of unfavorable foreign exchange rates of approximately $4 million. Of the $310 million increase in volume, approximately $272 million was attributable to the Marazzi acquisition. The remaining volume increases were attributable to higher residential and commercial sales.

Laminate and Wood segment-Net sales increased $93.8 million, or 10.7%, to $969.3 million for the six months ended June 28, 2014, compared to $875.5 million for the six months ended June 29, 2013. The increase was primarily attributable to higher volume of approximately $70 million and the net impact of favorable foreign exchange rates of approximately $29 million, partially offset by the unfavorable net impact of price and product mix of approximately $5 million. The increase in volume was primarily attributable to the Spano acquisition.

Gross profit

Gross profit for the six months ended June 28, 2014 was $1,056.2 million (27.4% of net sales), an increase of $165.0 million or 18.5%, compared to gross profit of $891.1 million (25.7% of net sales) for the six months ended June 29, 2013. As a percentage of net sales, gross profit increased 170 basis points. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $109 million that was predominately attributable to the Marazzi and Spano acquisitions, operations productivity of approximately $45 million, fair value inventory step-up adjustment in the prior year related to the


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Marazzi acquisition of approximately $19 million, the favorable net impact of price and product mix of approximately $12 million, the net impact of favorable foreign exchange rates of approximately $8 million and lower restructuring, acquisition and integration-related costs of approximately $6 million, partially offset by higher input costs of approximately $29 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 28, 2014 were $703.2 million (18.2% of net sales), compared to $671.1 million (19.4% of net sales) for the six months ended June 29, 2013. As a percentage of net sales, selling, general and administrative expenses decreased 120 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to acquisition volume, partially offset by lower restructuring, acquisition and integration-related costs and improved efficiencies.

Operating income

Operating income for the six months ended June 28, 2014 was $353.0 million (9.1% of net sales) reflecting an increase of $132.9 million, or 60.4%, compared to operating income of $220.0 million (6.4% of net sales) for the six months ended June 29, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $48 million, increases in operations productivity of approximately $44 million, lower restructuring, acquisition and integration-related costs of approximately $28 million, fair value inventory step-up adjustment in the prior year related to the Marazzi acquisition of approximately $19 million, the favorable net impact of price and product mix of approximately $12 million, improved efficiencies in selling, general and administrative expenses of approximately $10 million and the net impact of favorable foreign exchange rates of approximately $5 million, partially offset by higher input costs of approximately $29 million.

Carpet segment-Operating income was $97.1 million (6.7% of segment net sales) for the six months ended June 28, 2014 reflecting an increase of $17.0 million compared to operating income of $80.1 million (5.5% of segment net sales) for the six months ended June 29, 2013. The increase in operating income was primarily attributable to operations productivity of approximately $23 million, improved efficiencies in selling, general and administrative expenses of approximately $6 million and lower restructuring charges of approximately $6 million, partially offset by higher input costs of approximately $7 million and lower sales volume of approximately $6 million and the unfavorable net impact of price and product mix of approximately $3 million.

Ceramic segment-Operating income was $167.1 million (11.2% of segment net sales) for the six months ended June 28, 2014 reflecting an increase of $90.8 million compared to operating income of $76.3 million (6.5% of segment net sales) for the six months ended June 29, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $36 million partially attributable to the Marazzi acquisition, lower restructuring, acquisition and integration-related costs of approximately $21 million, inventory step-up in the prior year related to the Marazzi acquisition of approximately $19 million, operations productivity of approximately $15 million and the favorable net impact of price and product mix of approximately $10 million, partially offset by higher input costs of approximately $12 million.

Laminate and Wood segment-Operating income was $105.0 million (10.8% of segment net sales) for the six months ended June 28, 2014 reflecting an increase of $24.9 million compared to operating income of $80.1 million (9.1% of segment net sales) for the six months ended June 29, 2013. The increase in operating income was primarily attributable to sales volume increases of approximately $16 million, operations productivity of approximately $7 million, the net impact of favorable foreign exchange rates of approximately $4 million and the favorable net impact of price and product mix of approximately $4 million, partially offset by higher input costs of approximately $10 million.

Interest expense

Interest expense was $42.8 million for the six months ended June 28, 2014, reflecting a decrease of $1.7 million compared to interest expense of $44.5 million for the six months ended June 29, 2013.

Other (income) expense

Other expense was $3.3 million for the six months ended June 28, 2014, reflecting a favorable change of $2.0 million compared to other expense of $5.3 million for the six months ended June 29, 2013.


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Income tax expense

For the six months ended June 28, 2014, the Company recorded income tax expense of $72.9 million on earnings from continuing operations before income taxes of $306.9 million for an effective tax rate of 23.8%, as compared to an income tax expense of $34.0 million on earnings from continuing operations before income taxes of $170.3 million, for an effective tax rate of 20.0% for the six months ended June 29, 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 provided by operating activities in the first six months of 2014 was $97.9 million, compared to net cash provided by operating activities of $113.9 million in the first six months of 2013. The decrease was primarily attributable to changes in working capital, partially offset by higher earnings.

Net cash used in investing activities in the first six months of 2014 was $249.7 million compared to net cash used in investing activities of $595.6 million in the first six months of 2013. The decrease was primarily attributable to acquisitions of $449.5 million in the prior year, partially offset by higher capital expenditures of $103.6 million in the current year. Capital spending during the remainder of 2014 is expected to range from approximately $290 million to $310 million and is intended to support sales and income growth, promote new product innovations, upgrade the assets of the acquired businesses, increase carpet yarn and ceramic tile capacity and fund the addition of a luxury vinyl tile ("LVT") plant.

Net cash provided by financing activities in the first six months of 2014 was $168.4 million compared to net cash provided by financing activities of $207.6 million in the first six months of 2013.

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 June 28, 2014, the amount utilized under the commercial paper program was $560.0 million with a weighted-average interest rate and maturity period of 0.67% and 54 days, respectively.

Senior Credit Facility

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 $1,000.0 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 $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


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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 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 June 28, 2014, the amount utilized under the 2013 Senior Credit Facility was $66.7 million resulting in a total of $933.3 million available under the 2013 Senior Credit Facility. The amount utilized included $27.4 million of borrowings and $39.2 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The Company considers the . . .

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