CHICAGO--(BUSINESS WIRE)--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.
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.
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.
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.
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