ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
380,842
|
|
|
311,945
|
|
Receivables, net
|
817,214
|
|
|
686,165
|
|
Inventories
|
1,139,403
|
|
|
1,113,630
|
|
Prepaid expenses
|
128,497
|
|
|
112,779
|
|
Deferred income taxes
|
112,995
|
|
|
150,910
|
|
Other current assets
|
17,778
|
|
|
22,735
|
|
Total current assets
|
2,596,729
|
|
|
2,398,164
|
|
Property, plant and equipment, net
|
1,657,226
|
|
|
1,712,154
|
|
Goodwill
|
1,371,494
|
|
|
1,375,175
|
|
Tradenames
|
448,425
|
|
|
450,432
|
|
Other intangible assets, net
|
105,832
|
|
|
154,668
|
|
Deferred income taxes and other non-current assets
|
122,906
|
|
|
115,635
|
|
|
$
|
6,302,612
|
|
|
6,206,228
|
|
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
57,673
|
|
|
386,255
|
|
Accounts payable and accrued expenses
|
761,186
|
|
|
715,091
|
|
Total current liabilities
|
818,859
|
|
|
1,101,346
|
|
Deferred income taxes
|
329,190
|
|
|
355,653
|
|
Long-term debt, less current portion
|
1,467,269
|
|
|
1,200,184
|
|
Other long-term liabilities
|
92,359
|
|
|
99,537
|
|
Total liabilities
|
2,707,677
|
|
|
2,756,720
|
|
Commitments and contingencies (Notes 6 and 11)
|
|
|
|
Redeemable noncontrolling interest
|
—
|
|
|
33,723
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $.01 par value; 60 shares authorized; no shares issued
|
—
|
|
|
—
|
|
Common stock, $.01 par value; 150,000 shares authorized; 80,087 and 79,815 shares issued in 2012 and 2011, respectively
|
801
|
|
|
798
|
|
Additional paid-in capital
|
1,266,108
|
|
|
1,248,131
|
|
Retained earnings
|
2,538,634
|
|
|
2,354,765
|
|
Accumulated other comprehensive income, net
|
112,854
|
|
|
135,639
|
|
|
3,918,397
|
|
|
3,739,333
|
|
Less treasury stock at cost; 11,032 and 11,034 shares in 2012 and 2011, respectively
|
323,462
|
|
|
323,548
|
|
Total stockholders’ equity
|
3,594,935
|
|
|
3,415,785
|
|
|
$
|
6,302,612
|
|
|
6,206,228
|
|
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
Net sales
|
$
|
1,473,493
|
|
|
1,442,512
|
|
Cost of sales
|
1,100,656
|
|
|
1,084,889
|
|
Gross profit
|
372,837
|
|
|
357,623
|
|
Selling, general and administrative expenses
|
268,883
|
|
|
266,159
|
|
Operating income
|
103,954
|
|
|
91,464
|
|
Interest expense
|
17,969
|
|
|
25,132
|
|
Other expense
|
322
|
|
|
13,413
|
|
Earnings before income taxes
|
85,663
|
|
|
52,919
|
|
Income tax expense
|
15,359
|
|
|
5,223
|
|
Net earnings
|
70,304
|
|
|
47,696
|
|
Less: Net earnings attributable to noncontrolling interest
|
—
|
|
|
1,050
|
|
Net earnings attributable to Mohawk Industries, Inc.
|
$
|
70,304
|
|
|
46,646
|
|
Basic earnings per share attributable to Mohawk Industries, Inc.
|
$
|
1.02
|
|
|
0.68
|
|
Weighted-average common shares outstanding—basic
|
69,010
|
|
|
68,759
|
|
Diluted earnings per share attributable to Mohawk Industries, Inc.
|
$
|
1.01
|
|
|
0.68
|
|
Weighted-average common shares outstanding—diluted
|
69,337
|
|
|
68,954
|
|
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
Net sales
|
$
|
4,352,321
|
|
|
4,263,961
|
|
Cost of sales
|
3,231,594
|
|
|
3,182,499
|
|
Gross profit
|
1,120,727
|
|
|
1,081,462
|
|
Selling, general and administrative expenses
|
837,079
|
|
|
832,214
|
|
Operating income
|
283,648
|
|
|
249,248
|
|
Interest expense
|
59,311
|
|
|
77,487
|
|
Other (income) expense
|
(1,063
|
)
|
|
13,794
|
|
Earnings before income taxes
|
225,400
|
|
|
157,967
|
|
Income tax expense
|
40,896
|
|
|
23,639
|
|
Net earnings
|
184,504
|
|
|
134,328
|
|
Less: Net earnings attributable to noncontrolling interest
|
635
|
|
|
3,337
|
|
Net earnings attributable to Mohawk Industries, Inc.
|
$
|
183,869
|
|
|
130,991
|
|
Basic earnings per share attributable to Mohawk Industries, Inc.
|
$
|
2.67
|
|
|
1.91
|
|
Weighted-average common shares outstanding—basic
|
68,952
|
|
|
68,725
|
|
Diluted earnings per share attributable to Mohawk Industries, Inc.
|
$
|
2.66
|
|
|
1.90
|
|
Weighted-average common shares outstanding—diluted
|
69,247
|
|
|
68,946
|
|
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Net earnings
|
$
|
70,304
|
|
|
47,696
|
|
|
184,504
|
|
|
134,328
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
42,382
|
|
|
(146,826
|
)
|
|
(22,773
|
)
|
|
6,544
|
|
Pension prior service cost and actuarial gain (loss)
|
8
|
|
|
(101
|
)
|
|
(12
|
)
|
|
(10
|
)
|
Other comprehensive income (loss)
|
42,390
|
|
|
(146,927
|
)
|
|
(22,785
|
)
|
|
6,534
|
|
Comprehensive income (loss)
|
112,694
|
|
|
(99,231
|
)
|
|
161,719
|
|
|
140,862
|
|
Less: comprehensive income attributable to the noncontrolling interest
|
—
|
|
|
1,050
|
|
|
635
|
|
|
3,337
|
|
Comprehensive income (loss) attributable to Mohawk Industries, Inc.
|
$
|
112,694
|
|
|
(100,281
|
)
|
|
161,084
|
|
|
137,525
|
|
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
Cash flows from operating activities:
|
|
|
|
Net earnings
|
$
|
184,504
|
|
|
134,328
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
Restructuring
|
12,455
|
|
|
15,513
|
|
Depreciation and amortization
|
216,415
|
|
|
222,804
|
|
Deferred income taxes
|
7,335
|
|
|
(732
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
1,116
|
|
Loss on disposal of property, plant and equipment
|
1,773
|
|
|
956
|
|
Stock-based compensation expense
|
11,210
|
|
|
8,129
|
|
Other
|
—
|
|
|
(1,257
|
)
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
Receivables, net
|
(97,280
|
)
|
|
(161,398
|
)
|
Tax deposits
|
(31,820
|
)
|
|
—
|
|
Inventories
|
(24,723
|
)
|
|
(114,682
|
)
|
Accounts payable and accrued expenses
|
39,632
|
|
|
37,764
|
|
Other assets and prepaid expenses
|
(12,463
|
)
|
|
(6,293
|
)
|
Other liabilities
|
(8,491
|
)
|
|
1,940
|
|
Net cash provided by operating activities
|
298,547
|
|
|
138,188
|
|
Cash flows from investing activities:
|
|
|
|
Additions to property, plant and equipment
|
(134,998
|
)
|
|
(182,260
|
)
|
Acquisitions, net of cash acquired
|
—
|
|
|
(24,097
|
)
|
Investment in joint venture
|
(7,007
|
)
|
|
—
|
|
Net cash used in investing activities
|
(142,005
|
)
|
|
(206,357
|
)
|
Cash flows from financing activities:
|
|
|
|
Payments on Senior Credit Facility
|
(1,059,650
|
)
|
|
(1,158,354
|
)
|
Proceeds from Senior Credit Facility
|
1,334,500
|
|
|
1,428,849
|
|
Repayment of senior notes
|
(336,270
|
)
|
|
(15,000
|
)
|
Payments on term loan and other debt
|
(216
|
)
|
|
(298,295
|
)
|
Debt issuance costs
|
(1,018
|
)
|
|
(8,218
|
)
|
Purchase of non-controlling interest
|
(35,000
|
)
|
|
—
|
|
Distribution to non-controlling interest
|
(423
|
)
|
|
(4,763
|
)
|
Change in restricted cash
|
—
|
|
|
27,954
|
|
Change in outstanding checks in excess of cash
|
1,029
|
|
|
17,155
|
|
Proceeds from stock transactions
|
9,356
|
|
|
2,703
|
|
Net cash used in financing activities
|
(87,692
|
)
|
|
(7,969
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
47
|
|
|
(1,923
|
)
|
Net change in cash and cash equivalents
|
68,897
|
|
|
(78,061
|
)
|
Cash and cash equivalents, beginning of period
|
311,945
|
|
|
354,217
|
|
Cash and cash equivalents, end of period
|
$
|
380,842
|
|
|
276,156
|
|
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto, and the Company’s description of critical accounting policies, included in the Company’s 2011 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
On March 19, 2012, the Company purchased the non-controlling interest within the Dal-Tile segment for
$35,000
.
Accounting Standards Update (“ASU”) No. 2011-05, “
Comprehensive Income (Topic 220)—Presentation of Comprehensive Income
” (“ASU 2011-05”) requires comprehensive income to be presented as a single continuous financial statement or in two separate but consecutive statements. The option of presenting other comprehensive income in the statement of stockholders’ equity was eliminated. The Company adopted ASU 2011-05 in the first quarter of 2012 and chose to present comprehensive income (loss) as two separate but consecutive statements.
Foreign Currency Translation: 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. The Company believes that the completion of a second plant in Mexico and growth in sales to the local Mexican market indicated a significant change in the economic facts and circumstances that justified the change in the functional currency. Consistent with the Company's policy on foreign currency translation disclosed in the Company's 2011 Annual Report filed on Form 10-K, the new functional currency will be translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders' equity, within other comprehensive income. The effects of the change in functional currency were not significant to the Company's condensed consolidated financial statements.
Receivables, net are as follows:
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Customers, trade
|
$
|
802,605
|
|
|
696,856
|
|
Income tax receivable
|
613
|
|
|
1,703
|
|
Other
|
54,835
|
|
|
31,311
|
|
|
858,053
|
|
|
729,870
|
|
Less allowance for discounts, returns, claims and doubtful accounts
|
40,839
|
|
|
43,705
|
|
Receivables, net
|
$
|
817,214
|
|
|
686,165
|
|
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Finished goods
|
$
|
707,742
|
|
|
670,877
|
|
Work in process
|
107,679
|
|
|
113,311
|
|
Raw materials
|
323,982
|
|
|
329,442
|
|
Total inventories
|
$
|
1,139,403
|
|
|
1,113,630
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
4.
|
Goodwill and intangible assets
|
The components of goodwill and other intangible assets are as follows:
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mohawk
|
|
Dal-Tile
|
|
Unilin
|
|
Total
|
Balances as of December 31, 2011
|
|
|
|
|
|
|
|
Goodwill
|
$
|
199,132
|
|
|
1,186,913
|
|
|
1,316,555
|
|
|
2,702,600
|
|
Accumulated impairment losses
|
(199,132
|
)
|
|
(531,930
|
)
|
|
(596,363
|
)
|
|
(1,327,425
|
)
|
|
$
|
—
|
|
|
654,983
|
|
|
720,192
|
|
|
1,375,175
|
|
|
|
|
|
|
|
|
|
Currency translation during the period
|
$
|
—
|
|
|
—
|
|
|
(3,681
|
)
|
|
(3,681
|
)
|
|
|
|
|
|
|
|
|
Balances as of September 29, 2012
|
|
|
|
|
|
|
|
Goodwill
|
$
|
199,132
|
|
|
1,186,913
|
|
|
1,312,874
|
|
|
2,698,919
|
|
Accumulated impairment losses
|
(199,132
|
)
|
|
(531,930
|
)
|
|
(596,363
|
)
|
|
(1,327,425
|
)
|
|
$
|
—
|
|
|
654,983
|
|
|
716,511
|
|
|
1,371,494
|
|
Intangible assets:
|
|
|
|
|
Indefinite life assets not subject to amortization:
|
Tradenames
|
Balance as of December 31, 2011
|
$
|
450,432
|
|
Currency translation during the period
|
(2,007
|
)
|
Balance as of September 29, 2012
|
$
|
448,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
Customer
relationships
|
|
Patents
|
|
Other
|
|
Total
|
Balances as of December 31, 2011
|
$
|
64,958
|
|
|
88,544
|
|
|
1,166
|
|
|
154,668
|
|
Amortization during the period
|
(33,908
|
)
|
|
(13,943
|
)
|
|
(91
|
)
|
|
(47,942
|
)
|
Currency translation during the period
|
(171
|
)
|
|
(733
|
)
|
|
10
|
|
|
(894
|
)
|
Balances as of September 29, 2012
|
$
|
30,879
|
|
|
73,868
|
|
|
1,085
|
|
|
105,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Amortization expense
|
$
|
15,683
|
|
|
17,746
|
|
|
47,942
|
|
|
53,120
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
5.
|
Accounts payable and accrued expenses
|
Accounts payable and accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Outstanding checks in excess of cash
|
$
|
18,619
|
|
|
17,590
|
|
Accounts payable, trade
|
397,865
|
|
|
372,616
|
|
Accrued expenses
|
184,455
|
|
|
154,560
|
|
Product warranties
|
34,449
|
|
|
30,144
|
|
Accrued interest
|
12,431
|
|
|
34,235
|
|
Deferred tax liability
|
6,184
|
|
|
8,760
|
|
Accrued compensation and benefits
|
107,183
|
|
|
97,186
|
|
Total accounts payable and accrued expenses
|
$
|
761,186
|
|
|
715,091
|
|
The Company warrants certain qualitative attributes of its products for up to
50 years
. The Company records a provision for estimated warranty and related costs in accrued expenses, based on historical experience, and periodically adjusts these provisions to reflect actual experience.
The activity related to warranty obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Balance at beginning of period
|
$
|
34,867
|
|
|
32,052
|
|
|
30,144
|
|
|
37,265
|
|
Warranty claims paid during the period
|
(15,166
|
)
|
|
(13,247
|
)
|
|
(43,952
|
)
|
|
(43,994
|
)
|
Pre-existing warranty accrual adjustment during the period
|
—
|
|
|
300
|
|
|
—
|
|
|
3,784
|
|
Warranty expense during the period
|
14,748
|
|
|
10,140
|
|
|
48,257
|
|
|
32,190
|
|
Balance at end of period
|
$
|
34,449
|
|
|
29,245
|
|
|
34,449
|
|
|
29,245
|
|
|
|
7.
|
Stock-based compensation
|
The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of the Financial Accounting Standards Board Accounting Standards Codification topic (“ASC”) 718-10. Compensation expense is recognized on a straight-line basis over the options’ or other awards’ estimated lives for fixed awards with ratable vesting provisions.
Under the Company’s 2007 Incentive Plan (“2007 Plan”), the Company's principal stock compensation plan prior to May 9, 2012, the Company reserved up to a maximum of
3,200
shares of common stock for issuance upon the grant or exercise of stock options, restricted stock, restricted stock units (“RSUs”) and other types of awards, to directors and key employees through
2017
. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of the grant and generally vest between
three
and
five years
with a
10
-year contractual term. Restricted stock and RSUs are granted with a price equal to the market price of the Company’s common stock on the date of the grant and generally vest between
three
and
five years
. On May 9, 2012, the Company's stockholders approved the 2012 Long-Term Incentive Plan (“2012 Plan”), which allows the Company to reserve up to a maximum of 3,200 shares of common stock for issuance upon the grant or exercise of awards under the 2012 Plan. No additional awards may be granted under the 2007 Plan after May 9, 2012. As of
September 29, 2012
, there have been no awards granted under the 2012 Plan.
Under the 2007 Plan, the Company granted
83
and
76
options to employees at a weighted-average grant-date fair value of
$28.71
and
$25.39
per share for the
nine months ended
September 29, 2012
and
October 1, 2011
, respectively. There were
no
options granted during the
three months ended
September 29, 2012
and
October 1, 2011
. The Company recognized stock-based compensation costs related to stock options of
$516
(
$327
net of taxes) and
$443
(
$281
net of taxes) for the
three months ended
September 29, 2012
and
October 1, 2011
, respectively, and
$1,648
(
$1,044
net of taxes) and
$1,452
(
$920
net of taxes) for the
nine months ended
September 29, 2012
and
October 1, 2011
, respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense for stock options granted to employees and outside
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
directors, net of estimated forfeitures, was
$2,624
as of
September 29, 2012
, and will be recognized as expense over a weighted-average period of approximately
1.7
years.
The fair value of the option award is estimated on the date of grant using the Black-Scholes-Merton valuation model. Expected volatility is based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate option exercise and forfeiture rates within the valuation model.
Under the 2007 Plan, the Company granted
261
and
196
RSUs at a weighted-average grant-date fair value of
$65.98
and
$57.35
per unit for the
nine months ended
September 29, 2012
and
October 1, 2011
, respectively. There were
no
RSUs granted during the
three months ended
September 29, 2012
and
October 1, 2011
. The Company recognized stock-based compensation costs related to the issuance of RSUs of
$2,294
(
$1,453
net of taxes) and
$1,628
(
$1,032
net of taxes) for the
three months ended
September 29, 2012
and
October 1, 2011
, respectively, and
$9,542
(
$6,045
net of taxes) and
$6,608
(
$4,186
net of taxes) for the
nine months ended
September 29, 2012
and
October 1, 2011
, respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense for unvested RSUs granted to employees, net of estimated forfeitures, was
$17,778
as of
September 29, 2012
, and will be recognized as expense over a weighted-average period of approximately
3.1
years.
The Company did not grant any restricted stock awards for the
nine months ended
September 29, 2012
and
October 1, 2011
. Compensation expense for restricted stock awards for the
three months
and
nine months ended
September 29, 2012
and
October 1, 2011
, respectively, was not significant.
|
|
8.
|
Other (income) expense
|
Other (income) expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Foreign currency (gains) losses, net
|
$
|
(219
|
)
|
|
12,500
|
|
|
(6,921
|
)
|
|
10,717
|
|
All other, net
|
541
|
|
|
913
|
|
|
5,858
|
|
|
3,077
|
|
Total other expense (income)
|
$
|
322
|
|
|
13,413
|
|
|
(1,063
|
)
|
|
13,794
|
|
Basic net earnings per share (“EPS”) is calculated using net earnings available to common stockholders divided by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is similar to basic EPS except that the weighted-average number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method. Common stock options and unvested restricted shares (units) that were not included in the diluted EPS computation because the price was greater than the average market price of the common shares for the
three months ended
September 29, 2012
and
October 1, 2011
were
902
and
1,200
, respectively. Common stock options and unvested restricted shares (units) that were not included in the diluted EPS computation because the price was greater than the average market price of the common shares for the
nine months ended
September 29, 2012
and
October 1, 2011
were
948
and
1,183
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Net earnings available to common stockholders
|
$
|
70,304
|
|
|
46,646
|
|
|
183,869
|
|
|
130,991
|
|
Weighted-average common shares outstanding-basic and diluted:
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—basic
|
69,010
|
|
|
68,759
|
|
|
68,952
|
|
|
68,725
|
|
Add weighted-average dilutive potential common shares—options and RSUs to purchase common shares, net
|
327
|
|
|
195
|
|
|
295
|
|
|
221
|
|
Weighted-average common shares outstanding-diluted
|
69,337
|
|
|
68,954
|
|
|
69,247
|
|
|
68,946
|
|
Basic earnings per share attributable to Mohawk Industries, Inc.
|
$
|
1.02
|
|
|
0.68
|
|
|
2.67
|
|
|
1.91
|
|
Diluted earnings per share attributable to Mohawk Industries, Inc.
|
$
|
1.01
|
|
|
0.68
|
|
|
2.66
|
|
|
1.90
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has
three
reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carriers or rail transportation. The segment’s product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America and Mexico 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 independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate and hardwood flooring, roofing systems, insulation panels and other wood products, primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.
The accounting policies for each operating segment are consistent with the Company’s policies for the consolidated financial statements. Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses attributable to each segment are estimated and allocated accordingly. Segment performance is evaluated based on operating income.
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Net sales:
|
|
|
|
|
|
|
|
Mohawk
|
$
|
751,787
|
|
|
754,470
|
|
|
2,186,160
|
|
|
2,203,699
|
|
Dal-Tile
|
417,533
|
|
|
381,891
|
|
|
1,214,746
|
|
|
1,105,775
|
|
Unilin
|
328,582
|
|
|
329,514
|
|
|
1,020,380
|
|
|
1,018,443
|
|
Intersegment sales
|
(24,409
|
)
|
|
(23,363
|
)
|
|
(68,965
|
)
|
|
(63,956
|
)
|
|
$
|
1,473,493
|
|
|
1,442,512
|
|
|
4,352,321
|
|
|
4,263,961
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Mohawk
|
$
|
43,810
|
|
|
30,946
|
|
|
106,228
|
|
|
79,187
|
|
Dal-Tile
|
37,452
|
|
|
33,073
|
|
|
99,912
|
|
|
82,911
|
|
Unilin
|
28,892
|
|
|
33,048
|
|
|
96,613
|
|
|
105,507
|
|
Corporate and intersegment eliminations
|
(6,200
|
)
|
|
(5,603
|
)
|
|
(19,105
|
)
|
|
(18,357
|
)
|
|
$
|
103,954
|
|
|
91,464
|
|
|
283,648
|
|
|
249,248
|
|
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Assets:
|
|
|
|
Mohawk
|
$
|
1,760,828
|
|
|
1,769,065
|
|
Dal-Tile
|
1,783,147
|
|
|
1,732,818
|
|
Unilin
|
2,586,084
|
|
|
2,533,070
|
|
Corporate and intersegment eliminations
|
172,553
|
|
|
171,275
|
|
|
$
|
6,302,612
|
|
|
6,206,228
|
|
|
|
11.
|
Commitments, contingencies and other
|
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Beginning in August 2010, a series of civil lawsuits were initiated in several U.S. federal courts alleging that certain manufacturers of polyurethane foam products and competitors of the Company’s carpet underlay division had engaged in price fixing in violation of U.S. antitrust laws. Mohawk has been named as a defendant in a number of the individual cases (the first filed on August 26, 2010), as well as in two consolidated amended class action complaints, the first filed on February 28, 2011, on behalf of a class of all direct purchasers of polyurethane foam products, and the second filed on March 21, 2011, on behalf of a class of indirect purchasers. All pending cases in which the Company has been named as a defendant have been filed in or transferred to the U.S. District Court for the Northern District of Ohio for consolidated pre-trial proceedings under the name
In re: Polyurethane Foam Antitrust Litigation
, Case No. 1:10-MDL-02196.
In these actions, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek three times the amount of unspecified damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. In April 2011, the Company filed a motion to dismiss the class action claims brought by the direct purchasers, and in May 2011, the Company moved to dismiss the claims brought by the indirect purchasers. On July 19, 2011, the Court issued a written opinion denying all defendants’ motions to dismiss. In December 2011, the Company was named as a defendant in a Canadian Class action,
Hi ! Neighbor Floor Covering Co. Limited v. Hickory Springs Manufacturing Company, et al
., filed in the Superior Court of Justice of Ontario, Canada and
Options Consommateures v. Vitafoam, Inc. et.al.
, filed in the Superior Court of Justice of Quebec, Montreal, Canada, both of which allege similar claims against the Company as raised in the U.S. actions and seek unspecified damages and punitive damages. The Company denies all of the allegations in these actions and will vigorously defend itself.
The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses that are reasonably estimable. These contingencies are subject to significant uncertainties and we are unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
In January 2012, the Company received a
€24,000
assessment from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position and in order to eliminate the accrual of additional interest on the assessed amount, the Company remitted payment of the tax assessment, plus applicable interest of
€2,912
(collectively, the “Deposit”). In July 2012, the Company received notification of the Belgian tax authority's intention to extend the statute of limitations back to and including the tax year 2005. On September 10, 2012, the Company received notice from the Belgian tax authority setting aside the 2008 assessment and refunding the Deposit to the Company. Accordingly, the prepayment that the Company recorded in the first quarter of 2012 in the amount of the Deposit has been reclassified as a current other receivable as of September 29, 2012.
Subsequent to the quarter ended September 29, 2012, the Company received notifications from the Belgian taxing authority of its intent to assess the Company under a revised theory for certain years in the extended statute of limitations period. The Company disagrees with the views of the Belgian tax authority on this matter and will continue to vigorously defend itself. Although there can be no assurances, the Company believes the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, liquidity or cash flows in a given quarter or year.
For the
three and nine
months ended
September 29, 2012
, the Company recorded pre-tax business restructuring charges of
$4,229
and
$12,455
of which
$2,984
and
$9,620
was recorded as cost of sales and
$1,245
and
$2,835
was recorded as selling, general and administrative expenses for the same periods, respectively. For the
three and nine
months ended
October 1, 2011
, the Company recorded pre-tax business restructuring charges of
$2,186
and
$15,513
respectively, of which
$1,185
and
$13,064
was recorded as cost of sales and
$1,001
and
$2,449
was recorded as selling, general and administrative expenses for the same periods, respectively. The charges for 2012 and 2011 primarily relate to the Company’s actions taken to lower its cost structure and improve the efficiency of its manufacturing and distribution operations as the Company adjusts to current economic conditions.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The restructuring activity for the
nine months ended
September 29, 2012
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
impairments
|
|
Asset write-downs
|
|
Severance
|
|
Other
restructuring
costs
|
|
Total
|
Balance as of December 31, 2011
|
$
|
10,956
|
|
|
—
|
|
|
2,378
|
|
|
1,511
|
|
|
14,845
|
|
Provision - Unilin Segment
|
—
|
|
|
138
|
|
|
1,775
|
|
|
38
|
|
|
1,951
|
|
Provision - Mohawk Segment
|
—
|
|
|
6,687
|
|
|
4,069
|
|
|
(252
|
)
|
|
10,504
|
|
Cash payments
|
(2,795
|
)
|
|
—
|
|
|
(4,996
|
)
|
|
(773
|
)
|
|
(8,564
|
)
|
Non-cash items
|
—
|
|
|
(6,825
|
)
|
|
—
|
|
|
—
|
|
|
(6,825
|
)
|
Balance as of September 29, 2012
|
$
|
8,161
|
|
|
—
|
|
|
3,226
|
|
|
524
|
|
|
11,911
|
|
The Company expects the remaining severance costs, lease impairments and other restructuring costs to be paid over the next four years.
Subsequent to the balance sheet date, the Company announced plans to consolidate mosaic tile production in the Dal-Tile segment in order to streamline manufacturing capabilities. The Company is finalizing its estimates and expects to record a restructuring charge in the fourth quarter of 2012.
Senior Credit Facility
On
July 8, 2011
, the Company entered into a
five
-year, senior, secured revolving credit facility (the “Senior Credit Facility”). The Senior Credit Facility provides for a maximum of
$900,000
of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of
$8,218
in connection with its Senior Credit Facility. These costs were deferred and, along with unamortized costs of
$12,277
related to the Company’s prior senior, secured revolving credit facility, are being amortized over the term of the Senior Credit Facility.
On
January 20, 2012
, the Company entered into an amendment to the Senior Credit Facility that provides for an incremental term loan facility in the aggregate principal amount of
$150,000
. The Company paid financing costs of
$1,018
in connection with the amendment to its Senior Credit Facility. These costs were deferred and are being amortized over the remaining term of the Senior Credit Facility. The incremental term loan facility provides for eight scheduled quarterly principal payments of
$1,875
, with the first such payment due on June 30, 2012, followed by four scheduled quarterly principal payments of
$3,750
, with remaining quarterly principal payments of
$5,625
prior to maturity.
The Senior Credit Facility is scheduled to mature on July 8, 2016. The Company can terminate and prepay the Senior Credit Facility at any time without payment of any termination or prepayment penalty (other than customary breakage costs in respect of loans bearing interest at a rate based on LIBOR).
At the Company’s election, revolving loans under the Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between
1.25%
and
2.0%
, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus
0.5%
, and a monthly LIBOR rate plus
1.0%
, plus an applicable margin ranging between
0.25%
and
1.0%
. The Company also pays a commitment fee to the lenders under the Senior Credit Facility on the average amount by which the aggregate commitments of the lenders exceed utilization of the Senior Credit Facility ranging from
0.25%
to
0.4%
per annum. The applicable margin and the commitment fee are determined based on the Company’s Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increases).
All obligations of the Company and the other borrowers under the Senior Credit Facility are required to be guaranteed by all of the Company’s material domestic subsidiaries, and all obligations of borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors.
Due to the rating agency upgrade announced on March 14, 2012 by Standard & Poor’s Financial Services, LLC (“S&P”), the security interests in domestic accounts receivable and inventories, certain shares of capital stock (or equivalent ownership interests) of the domestic borrowers’ and domestic guarantors’ subsidiaries, and proceeds of any of the foregoing securing obligations under the Senior Credit Facility were released. The Company will be required to reinstate such security interests if there is a ratings downgrade such that: (a) both (i) the Moody’s Investors Service, Inc. (“Moody’s”) rating is Ba2 and (ii) the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
S&P rating is BB, (b) (i) the Moody’s rating is Ba3 or lower and (ii) the S&P rating is below BBB- (with a stable outlook or better) or (c) (i) the Moody’s rating is below Baa3 (with a stable outlook or better) and (ii) the S&P rating is BB- or lower.
The Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least
3.0
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, as defined in the Senior Credit Facility. The Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
As of
September 29, 2012
, the amount utilized under the Senior Credit Facility including the term loan was
$670,213
resulting in a total of
$376,037
available under the Senior Credit Facility. The amount utilized included
$572,850
of borrowings,
$46,823
of standby letters of credit guaranteeing the Company’s industrial revenue bonds and
$50,540
of standby letters of credit related to various insurance contracts and foreign vendor commitments.
Senior Notes
On January 17, 2006, the Company issued
$900,000
aggregate principal amount of
6.125%
notes due
January 15, 2016
. Interest payable on these notes is subject to adjustment if either Moody’s or S&P, or both, upgrades or downgrades the rating assigned to the notes. Each rating agency downgrade results in a
0.25%
increase in the interest rate, subject to a maximum increase of
1%
per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each
0.25%
increase in the interest rate of these notes would increase the Company’s interest expense by approximately
$63
per quarter per
$100,000
of outstanding notes. In 2009, interest rates increased by an aggregate amount of
75
basis points as a result of downgrades by Moody’s and S&P. In the first quarter of 2012, interest rates decreased by
50
basis points as a result of the upgrades from S&P and Moody’s. Any future downgrades in the Company’s credit ratings could increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.
In 2002, the Company issued
$400,000
aggregate principal amount of its senior
7.20%
notes due
April 15, 2012
. During 2011, the Company repurchased
$63,730
of its senior
7.20%
notes, at an average price equal to
102.72%
of the principal amount. On April 16, 2012, the Company repaid the
$336,270
principal amount of outstanding senior
7.20%
notes, together with accrued interest of
$12,106
, at maturity using available borrowings under its Senior Credit Facility.
ASC 825-10, formerly the FASB Staff Position FAS 107-1 and Accounting Principles Board Opinion 28-1, “
Interim Disclosures About Fair Value of Financial Instruments
”
,
requires disclosures about fair value of financial instruments in interim reporting periods of publicly-traded companies.
The fair values and carrying values of our debt instruments are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2012
|
|
December 31, 2011
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
7.20% senior notes, payable April 15, 2012; interest payable semiannually
|
$
|
—
|
|
|
—
|
|
|
336,606
|
|
|
336,270
|
|
6.125% notes, payable January 15, 2016; interest payable semiannually
|
1,006,200
|
|
|
900,000
|
|
|
963,900
|
|
|
900,000
|
|
Five-year senior secured credit facility, due July 8, 2016
|
572,850
|
|
|
572,850
|
|
|
298,000
|
|
|
298,000
|
|
Industrial revenue bonds, capital leases and other
|
52,092
|
|
|
52,092
|
|
|
52,169
|
|
|
52,169
|
|
Total long-term debt
|
1,631,142
|
|
|
1,524,942
|
|
|
1,650,675
|
|
|
1,586,439
|
|
Less current portion
|
57,673
|
|
|
57,673
|
|
|
386,591
|
|
|
386,255
|
|
Long-term debt, less current portion
|
$
|
1,573,469
|
|
|
1,467,269
|
|
|
1,264,084
|
|
|
1,200,184
|
|
The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these instruments.
14. Subsequent Event
On October 29, 2012, the Company announced it had entered into an agreement to purchase Pergo, a manufacturer of laminate flooring, for
$150 million
in cash. Pergo's 2011 sales were approximately
$320 million
in the U.S and Europe. This transaction is expected to close no later than first quarter of 2013 and is subject to customary governmental approvals and closing conditions.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
The Company is a leading producer of floor covering products for residential and commercial applications in the United States and residential applications in Europe. The Company is the second largest carpet and rug manufacturer and one of the largest manufacturers, marketers and distributors of ceramic tile, natural stone and hardwood flooring in the U.S., as well as a leading producer of laminate flooring in the U.S. and Europe. The Company is expanding its international presence through investments in Australia, Brazil, China, Mexico and Russia. The Company had annual net sales in 2011 of $5.6 billion.
The Company has three reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carriers or rail transportation. The segment’s product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America and Mexico 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 independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate and hardwood flooring, roofing systems, insulation panels and other wood products, primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.
In 2011, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (53%), resilient and rubber (14%), ceramic tile (12%), hardwood (10%), stone (6%) and laminate (5%). Each of these categories is influenced by the average selling price per square foot, the residential builder and homeowner remodeling markets, housing starts and housing resales, average house size and home ownership. In addition, the level of sales in the floor covering industry, both in the U.S. and Europe, is influenced by consumer confidence, spending for durable goods, interest rates and availability of credit, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.
The U.S. floor covering industry experienced declining demand beginning in the fourth quarter of 2006 with sales declining from $25.7 billion in 2006 to $17.9 billion in 2011. Industry conditions have remained difficult due to many factors, including uncertainty caused by economic conditions in the U.S., the European debt crisis, material price volatility, unemployment and consumer confidence, all of which have created headwinds to industry growth.
For the
three months ended
September 29, 2012
, net earnings attributable to the Company were
$70.3 million
, or diluted earnings per share (“EPS”) of
$1.01
, compared to the net earnings attributable to the Company of
$46.6 million
, or diluted EPS of
$0.68
, for the
three months ended
October 1, 2011
. The
increase
in EPS was primarily attributable to higher sales volume, the favorable net impact of price and product mix, operations productivity, lower interest costs and the change in the net impact of unrealized foreign exchange gains/losses.
For the
nine months ended
September 29, 2012
, net earnings attributable to the Company were
$183.9 million
, or diluted EPS of
$2.66
, compared to the net earnings attributable to the Company of
$131.0 million
, or diluted EPS of
$1.90
for the
nine months ended
October 1, 2011
. The
increase
in EPS was primarily attributable to higher sales volume, the favorable net impact of price and product mix, operations productivity, lower interest costs and the change in the net impact of unrealized foreign exchange gains/losses, partially offset by higher material input costs.
Foreign Currency Translation: 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. The Company believes that the completion of a second plant in Mexico and growth in sales to the local Mexican market indicated a significant change in the economic facts and circumstances that justified the change in the functional currency. Consistent with the Company\'s policy on foreign currency translation disclosed in the Company's 2011 Annual Report filed on Form 10-K, the new functional currency will be translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders' equity, within other comprehensive income. The effects of the change in functional currency were not significant to the Company's condensed consolidated financial statements.
Results of Operations
Quarter Ended
September 29, 2012
, as Compared with Quarter Ended
October 1, 2011
Net sales
Net sales for the
three months ended
September 29, 2012
were
$1,473.5 million
, reflecting
an increase
of
$31.0 million
, or
2.1%
, from the
$1,442.5 million
reported for the
three months ended
October 1, 2011
. The
increase
was primarily driven by higher volume of approximately $32 million and the favorable net impact of price and product mix of approximately $32 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $33 million.
Mohawk Segment
—Net sales
decrease
d
$2.7 million
, or
0.4%
, to
$751.8 million
for the three months ended
September 29, 2012
, compared to
$754.5 million
for the
three months ended
October 1, 2011
. The
decrease
was primarily driven by lower volume of approximately $28 million, which was partially offset by the favorable net impact of price and product mix of approximately $25 million. The lower volume was primarily attributable to the timing of carpet product transitions in the home center channel and lower demand for rug products in the retail channel.
Dal-Tile Segment
—Net sales
increase
d
$35.6 million
, or
9.3%
, to
$417.5 million
for the
three months ended
September 29, 2012
, compared to
$381.9 million
for the
three months ended
October 1, 2011
. The
increase
was primarily driven by volume increases of approximately $34 million and the favorable net impact of price and product mix of approximately $4 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $2 million. The volume increases were primarily attributable to improvement in the U.S. commercial and residential channels and growth in the Mexican market.
Unilin Segment
—Net sales
decrease
d
$0.9 million
, or
0.3%
, to
$328.6 million
for the
three months ended
September 29, 2012
, compared to
$329.5 million
for the
three months ended
October 1, 2011
. The
decrease
was primarily driven by the impact of unfavorable foreign exchange rates of approximately $31 million, which was partially offset by volume increases of approximately $28 million and the favorable net impact of price and product mix of approximately $2 million. The volume increases were primarily attributable to sales increases in U.S. laminate and wood, insulation products, sales in our Russian market and home center channel expansion.
Gross profit
Gross profit for the
three months ended
September 29, 2012
was
$372.8 million
(
25.3%
of net sales),
an increase
of
$15.2 million
or
4.3%
, compared to gross profit of
$357.6 million
(
24.8%
of net sales) for the
three months ended
October 1, 2011
. The
increase
in gross profit dollars was primarily attributable to operations productivity of approximately $10 million, higher sales volume of approximately $8 million and the favorable net impact of price and product mix of approximately $6 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $7 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the
three months ended
September 29, 2012
were
$268.9 million
(
18.2%
of net sales), compared to
$266.2 million
(
18.5%
of net sales) for the
three months ended
October 1, 2011
. 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, partially offset by favorable foreign exchange rates.
Operating income
Operating income for the
three months ended
September 29, 2012
was
$104.0 million
(
7.1%
of net sales) reflecting
an increase
of
$12.5 million
, or
13.7%
, compared to operating income of
$91.5 million
(
6.3%
of net sales) for the
three months ended
October 1, 2011
. The
increase
in operating income was primarily driven by operations productivity of approximately $10 million, sales volume increases of approximately $8 million and the favorable net impact of price and product mix of approximately $6 million, partially offset by increases in costs to support new product introductions and geographic expansion of approximately $5 million and increases in manufacturing start-up costs of approximately $3 million.
Mohawk Segment
—Operating income was
$43.8 million
(
5.8%
of segment net sales) for the
three months ended
September 29, 2012
reflecting
an increase
of
$12.9 million
compared to operating income of
$30.9 million
(
4.1%
of segment net sales) for the
three months ended
October 1, 2011
. The
increase
in operating income was primarily driven by the favorable net impact of price and product mix of approximately $8 million, lower input costs and higher operations productivity of
approximately $12 million, partially offset by lower sales volume of approximately $4 million.
Dal-Tile Segment
—Operating income was
$37.5 million
(
9.0%
of segment net sales) for the
three months ended
September 29, 2012
reflecting
an increase
of
$4.4 million
compared to operating income of
$33.1 million
(
8.7%
of segment net sales) for the
three months ended
October 1, 2011
. The
increase
in operating income was primarily driven by sales volume increases of approximately $6 million, partially offset by increases in costs to support new product introductions and geographic expansion of approximately $3 million.
Unilin Segment
—Operating income was
$28.9 million
(
8.8%
of segment net sales) for the
three months ended
September 29, 2012
reflecting
a decrease
of
$4.1 million
compared to operating income of
$33.0 million
(
10.0%
of segment net sales) for the
three months ended
October 1, 2011
. The
decrease
in operating income was primarily driven by unfavorable foreign exchange rates of approximately $4 million, higher input costs of approximately $4 million and the unfavorable net impact of price and product mix of approximately $3 million, partially offset by operations productivity of approximately $4 million and sales volume increases of approximately $4 million.
Interest expense
Interest expense was
$18.0 million
for the
three months ended
September 29, 2012
, reflecting
a decrease
of
$7.1 million
compared to interest expense of
$25.1 million
for the
three months ended
October 1, 2011
. The
decrease
in interest expense in 2012 was due to lower interest rates on the Company’s outstanding debt. The lower interest rates were primarily attributable to the shift from higher interest rate senior notes to the Senior Credit Facility and the rating agency upgrades discussed in Liquidity and Capital Resources.
Other expense
Other expense was
$0.3 million
for the
three months ended
September 29, 2012
, reflecting a change of
$13.1 million
compared to other expense of
$13.4 million
for the
three months ended
October 1, 2011
. The change was primarily attributable to net foreign currency losses of approximately
$13 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.
Income tax expense
For the
three months ended
September 29, 2012
, the Company recorded income tax expense of
$15.4 million
on earnings before income taxes of
$85.7 million
for an effective tax rate of
17.9%
, as compared to an income tax expense of
$5.2 million
on earnings before income taxes of
$52.9 million
, resulting in an effective tax rate of
9.9%
for the
three months ended
October 1, 2011
. The difference in the effective tax rate for the comparative period is primarily due to the geographical dispersion of earnings and losses in the current period, an Internal Revenue Service ("IRS") refund received in the third quarter of 2011, and adjustments made in the third quarter of 2011 in conjunction with the Company's projected full year tax rate analysis.
Nine Months Ended
September 29, 2012
, as Compared with
Nine Months Ended
October 1, 2011
Net sales
Net sales for the
nine months ended
September 29, 2012
were
$4,352.3 million
, reflecting
an increase
of
$88.3 million
, or
2.1%
, from the
$4,264.0 million
reported for the
nine months ended
October 1, 2011
. The
increase
was primarily driven by the favorable net impact of price and product mix of approximately $113 million and higher volume of approximately $58 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $83 million.
Mohawk Segment
—Net sales
decrease
d
$17.5 million
, or
0.8%
, to
$2,186.2 million
for the
nine months ended
September 29, 2012
, compared to
$2,203.7 million
for the
nine months ended
October 1, 2011
. The
decrease
was primarily driven by lower volume of approximately $115 million, partially offset by the favorable net impact of price and product mix of approximately $97 million. The lower volume was primarily attributable to the timing of carpet product transitions in the home center channel and lower demand for rug products in the retail channel.
Dal-Tile Segment
—Net sales
increase
d
$108.9 million
, or
9.9%
, to
$1,214.7 million
for the
nine months ended
September 29, 2012
, compared to
$1,105.8 million
for the
nine months ended
October 1, 2011
. The
increase
was primarily
driven by volume increases of approximately $109 million and the favorable net impact of price and product mix of approximately $7 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $7 million. The volume increases were primarily attributable to improvement in the U.S. commercial and residential channels and growth in the Mexican market.
Unilin Segment
—Net sales
increase
d
$2.0 million
, or
0.2%
, to
$1,020.4 million
for the
nine months ended
September 29, 2012
, compared to
$1,018.4 million
for the
nine months ended
October 1, 2011
. The
increase
was primarily driven by volume increases of approximately $69 million and the favorable net impact of price and product mix of approximately $9 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $76 million. The volume increases were primarily attributable to laminate and wood flooring and insulation products.
Gross profit
Gross profit for the
nine months ended
September 29, 2012
was
$1,120.7 million
(
25.8%
of net sales),
an increase
of
$39.2 million
or
3.6%
, compared to gross profit of
$1,081.5 million
(
25.4%
of net sales) for the
nine months ended
October 1, 2011
. The
increase
in gross profit dollars was primarily attributable to the favorable net impact of price and product mix of approximately $46 million, operations productivity of approximately $35 million and higher sales volume of approximately $18 million, partially offset by higher material input costs of approximately $44 million and the impact of unfavorable foreign exchange rates of approximately $15 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the
nine months ended
September 29, 2012
were
$837.1 million
(
19.2%
of net sales), compared to
$832.2 million
(
19.5%
of net sales) for the
nine months ended
October 1, 2011
. 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, partially offset by favorable foreign exchange rates.
Operating income
Operating income for the
nine months ended
September 29, 2012
was
$283.6 million
(
6.5%
of net sales) reflecting
an increase
of
$34.4 million
, or
13.8%
, compared to operating income of
$249.2 million
(
5.8%
of net sales) for the
nine months ended
October 1, 2011
. The
increase
in operating income was primarily driven by the favorable net impact of price and product mix of approximately $46 million, operations productivity of approximately $35 million and higher sales volume of approximately $18 million, partially offset by higher input costs of approximately $44 million and increases in costs to support new product introductions and geographic expansion of approximately $14 million and increases in manufacturing start-up costs of approximately $5 million.
Mohawk Segment
—Operating income was
$106.2 million
(
4.9%
of segment net sales) for the
nine months ended
September 29, 2012
reflecting
an increase
of
$27.0 million
compared to operating income of
$79.2 million
(
3.6%
of segment net sales) for the
nine months ended
October 1, 2011
. The
increase
in operating income was primarily driven by the favorable net impact of price and product mix of approximately $51 million, operations productivity of approximately $17 million and lower restructuring costs of approximately $5 million, partially offset by lower sales volume of approximately $27 million and higher input costs of approximately $24 million.
Dal-Tile Segment
—Operating income was
$99.9 million
(
8.2%
of segment net sales) for the
nine months ended
September 29, 2012
reflecting
an increase
of
$17.0 million
compared to operating income of
$82.9 million
(
7.5%
of segment net sales) for the
nine months ended
October 1, 2011
. The
increase
in operating income was primarily driven by sales volume increases of approximately $30 million and operations productivity of approximately $7 million, partially offset by increases in costs to support new product introductions and geographic expansion of approximately $12 million and higher input costs of approximately $6 million.
Unilin Segment
—Operating income was
$96.6 million
(
9.5%
of segment net sales) for the
nine months ended
September 29, 2012
reflecting
a decrease
of
$8.9 million
compared to operating income of
$105.5 million
(
10.4%
of segment net sales) for the
nine months ended
October 1, 2011
. The
decrease
in operating income was primarily driven by higher input costs of approximately $13 million, unfavorable foreign exchange rates of approximately $9 million, increases in costs to support new product introductions and geographic expansion of approximately $5 million and the unfavorable net impact of price and product mix of approximately $4 million, partially offset by sales volume increases of approximately $14 million and operations productivity of approximately $11 million.
Interest expense
Interest expense was
$59.3 million
for the
nine months ended
September 29, 2012
, reflecting
a decrease
of
$18.2 million
compared to interest expense of
$77.5 million
for the
nine months ended
October 1, 2011
. The
decrease
in interest expense in 2012 was due to lower interest rates on the Company’s outstanding debt. The lower interest rates were primarily attributable to the shift from higher interest rate senior notes to the Senior Credit Facility and the rating agency upgrades discussed in Liquidity and Capital Resources.
Other (income) expense
Other (income) was
$(1.1) million
for the
nine months ended
September 29, 2012
, reflecting a change of
$14.9 million
compared to other expense of
$13.8 million
for the
nine months ended
October 1, 2011
. The change was primarily attributable to net foreign currency losses of approximately
$17.6 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.
Income tax expense
For the
nine months ended
September 29, 2012
, the Company recorded income tax expense of
$40.9 million
on earnings before income taxes of
$225.4 million
for an effective tax rate of
18.1%
, as compared to an income tax expense of
$23.6 million
on earnings before income taxes of
$158.0 million
, resulting in an effective tax rate of
15.0%
for the
nine months ended
October 1, 2011
. The difference in the effective tax rate for the comparative period is primarily due to the geographical dispersion of earnings and losses, an IRS refund received in the third quarter of 2011, and adjustments made in the third quarter of 2011 in conjunction with the Company's projected full year tax rate analysis.
Liquidity and Capital Resources
The Company’s primary capital requirements are for working capital, capital expenditures and acquisitions. The Company’s capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes and credit terms from suppliers.
Net cash
provided by
operating activities in the first
nine months of 2012
increase
d
$160.4 million
to
$298.5 million
, compared to net cash
provided by
operating activities of
$138.2 million
in the first
nine months of 2011
. The favorable change in operating activities is primarily attributable to improved earnings and changes in net working capital, partially offset by a tax deposit of €26.5 million paid to the Belgian tax authority as discussed in Note 11 in the notes to the condensed consolidated financial statements. For the
nine months ended
September 29, 2012
, the
$97.3 million
increase in receivables is primarily related to seasonality.
Net cash
used in
investing activities in the first
nine months of 2012
was
$142.0 million
compared to net cash
used in
investing activities of
$206.4 million
in the first
nine months of 2011
. Cash used in investing activities primarily relates to various geographic capacity expansions. Capital spending during the remainder of 2012, excluding acquisition expenditures, is expected to range from approximately $55 million to $65 million and is intended to be used primarily to purchase equipment, add geographic capacity and to streamline manufacturing capabilities. During the second quarter of 2012, the Company's Unilin segment made a $7.0 million equity investment in a laminate flooring facility in Brazil.
Net cash
used in
financing activities in the first
nine months of 2012
was
$87.7 million
compared to net cash
used in
financing activities of
$8.0 million
in the first
nine months of 2011
. The proceeds from the incremental term loan facility of $150.0 million discussed below were used to pay down the revolving portion of the Senior Credit Facility. The increase in total borrowings on the Senior Credit Facility was primarily used to pay down the Company's senior
7.20%
notes due April 15, 2012, as well as the purchase of the non-controlling interest within the Dal-Tile segment for
$35.0 million
and funding of working capital.
On July 8, 2011, the Company entered into a five-year, senior, secured revolving credit facility (the “Senior Credit Facility”). The Senior Credit Facility provides for a maximum of
$900.0 million
of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of
$8.2 million
in connection with its Senior Credit Facility. These costs were deferred and, along with unamortized costs of
$12.3 million
related to the Company’s prior senior, secured revolving credit facility, are being amortized over the term of the Senior Credit Facility.
On January 20, 2012, the Company entered into an amendment to the Senior Credit Facility that provides for an incremental term loan facility in the aggregate principal amount of
$150.0 million
. The Company paid financing costs of
$1.0 million
in connection with the amendment to its Senior Credit Facility. These costs were deferred and are being amortized over the remaining term of the Senior Credit Facility. The incremental term loan facility provides for eight scheduled quarterly principal payments of
$1.875 million
, with the first such payment due on June 30, 2012, followed by four scheduled quarterly principal payments of
$3.750 million
, with remaining quarterly principal payments of
$5.625 million
prior to maturity.
The Senior Credit Facility is scheduled to mature on July 8, 2016. The Company can terminate and prepay the Senior Credit Facility at any time without payment of any termination or prepayment penalty (other than customary breakage costs in respect of loans bearing interest at a rate based on LIBOR).
At the Company’s election, revolving loans under the Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between 1.25% and 2.0%, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus 0.5%, and a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.25% and 1.0%. The Company also pays a commitment fee to the lenders under the Senior Credit Facility on the average amount by which the aggregate commitments of the lenders’ exceed utilization of the Senior Credit Facility ranging from 0.25% to 0.4% per annum. The applicable margin and the commitment fee are determined based on the Company’s Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increases).
All obligations of the Company and the other borrowers under the Senior Credit Facility are required to be guaranteed by all of the Company’s material domestic subsidiaries and all obligations of borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors.
Due to the rating agency upgrade announced on March 14, 2012 by Standard & Poor’s Financial Services, LLC (“S&P”), the security interests in domestic accounts receivable and inventories, certain shares of capital stock (or equivalent ownership interests) of the domestic borrowers’ and domestic guarantors’ subsidiaries, and proceeds of any of the foregoing securing obligations under the Senior Credit Facility were released. The Company will be required to reinstate such security interests if there is a ratings downgrade such that: (a) both (i) the Moody’s Investor’s Service, Inc. (“Moody’s”) rating is Ba2 and (ii) the S&P rating is BB, (b) (i) the Moody’s rating is Ba3 or lower and (ii) the S&P rating is below BBB- (with a stable outlook or better) or (c) (i) the Moody’s rating is below Baa3 (with a stable outlook or better) and (ii) the S&P rating is BB- or lower.
The Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least
3.00
to 1.0 and a Consolidated Net Leverage Ratio of no more than
3.75
to 1.0, each as of the last day of any fiscal quarter, as defined in the Senior Credit Facility. The Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
As of
September 29, 2012
, the amount utilized under the Senior Credit Facility including the term loan was
$670.2 million
, resulting in a total of
$376.0 million
available under the Senior Credit Facility. The amount utilized included
$572.9 million
of borrowings,
$46.8 million
of standby letters of credit guaranteeing the Company’s industrial revenue bonds and
$50.5 million
of standby letters of credit related to various insurance contracts and foreign vendor commitments.
On January 17, 2006, the Company issued
$900.0 million
aggregate principal amount of
6.125%
notes due January 15, 2016. Interest payable on these notes is subject to adjustment if either Moody’s or S&P, or both, upgrades or downgrades the rating assigned to the notes. Each rating agency downgrade results in a
0.25%
increase in the interest rate, subject to a maximum increase of
1%
per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately
$0.1
million per quarter per $100.0 million of outstanding notes. In 2009, interest rates increased by an aggregate amount of
75
basis points as a result of downgrades by Moody’s and S&P. In the first quarter of 2012, interest rates decreased by
50
basis points as a result of the upgrades from S&P and Moody’s. Any future downgrades in the Company’s credit ratings could increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.
In 2002, the Company issued
$400.0 million
aggregate principal amount of its senior
7.20%
notes due April 15, 2012.
During 2011, the Company repurchased
$63.7 million
of its senior
7.20%
notes, at an average price equal to 102.72% of the principal amount. On April 16, 2012, the Company repaid the
$336.3 million
principal amount of outstanding senior
7.20%
notes, together with accrued interest of
$12.1 million
, at maturity using available borrowings under its Senior Credit Facility.
The Company may continue, from time to time, to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amount involved may be material.
As of
September 29, 2012
, the Company had invested cash of
$328.0 million
, of which
$320.3 million
was held in investment grade money market cash investments in Europe. While the Company’s plans are to permanently reinvest the cash held in Europe, the estimated cost of repatriation for the cash invested in Europe would be approximately
$112 million
. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its Senior Credit Facility will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over the next twelve months.
On October 29, 2012, the Company announced it had entered into an agreement to purchase Pergo, a manufacturer of laminate flooring, for
$150 million
in cash. Pergo's 2011 sales were approximately
$320 million
in the U.S. and Europe. The business is expected to be accretive in the first year. This transaction is expected to close no later than first quarter of 2013 and is subject to customary governmental approvals and closing conditions.
Contractual Obligations
There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 2011 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 2011 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 Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest. The second, third and fourth quarters typically produce higher net sales and operating income in these segments. These results are primarily due to consumer residential spending patterns for floor covering, which historically have decreased during the first two months of each year following the holiday season. The Unilin segment’s second and fourth quarters typically produce higher net sales and earnings followed by a moderate first quarter and a weaker third quarter. The third quarter is traditionally the weakest due to the European holiday in late summer.
Forward-Looking Information
Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies, and similar matters, and those that include the words “could,” “should,” “believes,” “anticipates,” “expects” and “estimates” or similar expressions constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could
cause future results to differ: changes in economic or industry 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.