Fitch Ratings has affirmed the ratings of Mohawk Industries, Inc. (NYSE:
MHK), including the company's Issuer Default Rating (IDR), at 'BBB-'.
The Rating Outlook remains Positive. A complete list of rating actions
follows at the end of this release.
KEY RATING DRIVERS
The ratings for Mohawk reflect the company's leading market position in
most of its major business segments, strong brand recognition, and
end-market diversity. Risks include the cyclicality of the company's
end-markets, a relatively weak global economy (especially Europe), and
aggressive growth strategy.
The Positive Outlook reflects Fitch's expectation that the company will
maintain or further improve its leverage from current levels. Mohawk's
leverage increased from 2.0x at year-end 2012 to around 3.3x for the
latest 12 months (LTM) period ending June 30, 2013 after acquiring three
companies during the first half of 2013. Leverage has gradually declined
to 2.3x at the end of 2013 and 2.1x for the Sept. 27, 2014 LTM period.
Fitch expects leverage will be at or below 2x at year-end 2014. Mohawk's
ratings may be upgraded in the next six months if leverage is sustained
at or below this level.
IMPROVING CREDIT METRICS
Mohawk's credit metrics have shown significant improvement since it
completed three major acquisitions in 2013. Mohawk's leverage peaked at
3.3x for the LTM period ending June 30, 2013 (with minimal EBITDA
contribution from the acquisitions) and has gradually declined to 2.3x
at year-end 2013 and 2.1x for the Sept. 27, 2014 LTM period as the
company fully integrated the acquisitions and reduced debt levels. Fitch
expects leverage will decline further to about 2.0x at the end of 2014
and will be sustained at or below this level in 2015.
EBITDA to interest remains strong at 13.9x for the Sept. 27, 2014 LTM
period. This compares to 10.7x at year-end 2013 and 8.7x at the
conclusion of 2012. Fitch expects interest coverage will be about 14x at
year-end 2014 and will be above 14x in 2015.
ADEQUATE LIQUIDITY
Mohawk has adequate liquidity and is able to meet its financial
obligations, although the company has significant short-term borrowings
and debt maturing in the next two years. As of Sept. 27, 2014, Mohawk
had $105.6 million of cash, of which $60.1 million was held outside the
U.S.
The company also has a $1 billion commercial paper (CP) program that is
backed by its $1 billion five-year revolving credit facility that
matures in 2018. As of Sept. 27, 2014, Mohawk had $381.4 million of
borrowing availability under its revolving credit facility, which takes
into account $569.1 million of CP borrowings, $10.4 million of revolver
borrowings, and $39.2 million of letters of credit. Fitch expects Mohawk
will have continued access to its revolver as the company has sufficient
cushion under the facility's financial covenants.
About 50% of the company's debt will mature in the next 15 months.
Additionally, Mohawk has $569.1 million of CP borrowings as of Sept. 27,
2014. Mohawk's $500 million securitization facility (fully drawn)
matures in December 2015. Fitch expects the company will renew the
securitization facility prior to its maturity date. The next debt
maturity is in January 2016, when $700 million of senior notes become
due. The company has demonstrated its ability to access the capital
markets, and Fitch expects Mohawk will refinance part of the notes in
advance of its 2016 maturity.
Mohawk generated $19 million of free cash flow (FCF) for the LTM period
ending Sept. 27, 2014 compared with $158.7 million (2.2% of revenues)
during 2013 and $379.3 million (6.6%) during 2012. Fitch currently
expects FCF will be roughly 1% of revenues this year, due to higher
capital expenditures (capex). Management expects capex will total about
$550 million this year or 7% of revenues. By comparison, capex
represented 5% of revenues in 2013, 3.6% in 2012 and 4.9% in 2011. The
higher capex this year is due to investments to replace high-cost assets
(including assets from the three acquisitions closed last year),
construction of new plants, and capital investments to support changing
product trends in its carpet business. Fitch projects FCF will
approximate about 5%-6% of revenues in the next few years.
LEADERSHIP POSITION
Management estimates that the company is the world's largest flooring
manufacturer. Mohawk is the largest manufacturer of ceramic tiles and
the second largest carpet and rug manufacturer, as well as a leading
producer of laminate flooring in Europe and the U.S. Fitch believes that
this leadership position provides the company with competitive
advantages such as a broad array of product offerings, access to a wider
range of distribution channels, and a strong platform to execute its
growth initiatives and geographic expansion.
AGGRESSIVE GROWTH STRATEGY
The company has historically grown its business internally and through
acquisitions. During the first half of 2013, Mohawk completed three
acquisitions for a total purchase price of roughly $1.81 billion
(Marazzi for $1.5 billion; Pergo for $150 million and Spano NV for $160
million). These acquisitions significantly improved the company's market
position and also extended Mohawk's customer base into new channels of
distribution.
However, Mohawk's credit metrics temporarily weakened due to the debt
incurred from these acquisitions but has gradually improved as the
company integrated the acquisitions and reduced debt.
Mohawk has demonstrated in the past that it has the discipline to reduce
leverage levels following a major acquisition. Following the Unilin
acquisition in 2005, leverage increased from 1.2x at year-end 2004 to
4.3x at the end of 2005. Leverage was reduced to 2.5x at the end of 2006
and to 2.1x at year-end 2007. Fitch expects Mohawk will continue to
focus on debt reduction during the next few years, although the company
may use excess FCF for smaller, bolt-on acquisitions.
EXPECTED CONTINUED IMPROVEMENT IN MOHAWK'S U.S. END-MARKETS
The company markets its products primarily to the U.S. construction
industry, with a majority of sales directed to the residential repair
and remodel segment and the remainder directed to new residential
construction and commercial markets. Sales in North America accounted
for approximately 70% of 2013 pro forma sales.
Fitch projects single-family starts will improve 3% to 636,000 in 2014
while multifamily volume grows about 17.5% to 361,000. Total 2014 starts
should approximate 1 million. New home sales are forecast to advance
about 1.5% to 436,000, while existing home sales volume is expected to
decline 6% to 4.785 million, largely due to fewer distressed homes for
sale. Fitch projects home improvement spending will grow 6% and private
nonresidential construction will expand 8% this year.
Fitch expects further improvement in the U.S. construction sector next
year, with total housing starts projected to grow 14% to 1.14 million
units. New home sales are forecast to expand 18% in 2015 while existing
home sales rise 5%. Home improvement spending is projected to increase
6% while private nonresidential construction is expected to improve 6%
next year.
EUROPEAN EXPOSURE
Following Mohawk's acquisition of Marazzi, Pergo and Spano in 2013,
Western Europe now represents about 20% of the company's net sales.
International operations (which include other geographies outside North
America) now account for about 30% of sales. In 2011, international
operations represented about 18% of Mohawk's revenues. During the third
quarter of 2014 (3Q'14), management indicated that the European and
Russian flooring markets remained soft. Fitch expects continued weakness
in these markets, as Eurozone GDP is only projected to improve 1.3%,
while Russia's GDP is forecast to grow 1% in 2015.
RATING SENSITIVITIES
Future ratings and Outlooks will be influenced by broad end-market
trends, as well as company specific activity, particularly FCF trends
and uses, and liquidity position.
An upgrade of the ratings to 'BBB' may be considered in the next six
months if Mohawk maintains or shows further improvement in financial
results and operating metrics, including debt to EBITDA levels
consistently at or below 2x and interest coverage above 9x, while
maintaining a robust liquidity position.
On the other hand, the rating Outlook could be stabilized if the
recovery in the company's end markets are weaker than Fitch's
expectations, leading to EBITDA margins between 11%-12%, debt to EBITDA
levels consistently in the 2.5x-3.0x range, and interest coverage of
7.0x-9.0x. The Outlook could also be revised to Stable if the company
completes a sizeable acquisition funded by debt, leading to leverage
levels consistently in the 2.5x-3.0x range, and interest coverage of
7.0x-9.0x.
Negative rating actions may also be considered if the recovery in the
U.S. construction market dissipates and affects volumes, and/or
sustained materials and energy cost pressures contract margins, leading
to weaker than expected credit metrics, including EBITDA margins below
10%, debt to EBITDA levels consistently above 3.0x and/or interest
coverage below 6.0x.
Fitch has affirmed the following ratings for Mohawk with a Positive
Outlook:
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Unsecured revolving credit facility at 'BBB-'.
Fitch has also assigned the following ratings:
--Short-term IDR of 'F3';
--Commercial paper rating of 'F3'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=933176
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