TEXT - Fitch rates Mohawk Industries proposed snr notes offering

Mon Jan 28, 2013 11:57am EST

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Jan 28 - Fitch Ratings has assigned a 'BBB-' rating to Mohawk Industries,
Inc.'s (NYSE:  MHK) proposed offering of senior unsecured notes due
2023.  The new issue will be equal in right of payment with all other senior
unsecured debt.  The company intends to use the proceeds of the notes issuance
to partially fund the $1.5 billion acquisition of the Marazzi Group (Marazzi). 

The Rating Outlook is Stable.  A complete list of ratings follows at the end of 
this release.   

SENSITIVITY/RATING DRIVERS 

The rating for Mohawk reflects 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 weak global 
economy, aggressive growth strategy, and integration risks and projected 
increase in leverage associated with recently announced acquisitions. 

The Stable Outlook reflects the expected continued improvement in housing, home 
improvement and commercial construction markets in 2013. The Stable Outlook also
incorporates the expectation that Mohawk will continue to generate free cash 
flow (FCF: cash flow from operations less capex and dividends) and maintain 
solid liquidity. In addition, the Outlook incorporates the expectation that 
leverage as measured by debt to EBITDA will fall below 3x 12 months following 
the completion of the acquisitions of Marazzi, Pergo, and Spano Invest NV 
(Spano).

AGGRESSIVE GROWTH STRATEGY

The company announced today that it has entered into an agreement to acquire 
Spano for approximately $168 million in cash.  Spano manufactures and 
distributes chip and melamine board, which are used to produce furniture and 
building products primarily for the Belgian market.  Spano had approximately 
Eur180 million ($231 million) of sales in 2012.

This follows the December 2012 announcement that Mohawk has agreed to acquire 
Marazzi for approximately $1.5 billion, with a combination of cash and equity.  
Marazzi is a leading manufacturer and marketer of ceramic tile in all its major 
geographies, including Russia, the United States, Italy, France and Spain. 
Marazzi's 2011 revenues were about Eur833 million ($1.16 billion) and its EBITDA
was approximately Eur129 million ($179.8 million). 

In January 2013, Mohawk also completed the acquisition of Pergo for $150 million
in cash.  Pergo is a leading manufacturer of premium laminate flooring and had 
2011 sales of about $320 million in the U.S. and Europe.  

These acquisitions all offer good strategic rationales.  Their additions 
facilitate Mohawk's geographic expansion and diversification, broaden its 
product offerings and also provide the company with a strong profitable position
in growing emerging markets.  The acquisitions of the three companies will 
increase Mohawk's exposure to Europe to roughly 20% of its annual pro forma 
revenues. 

While Fitch views these transactions as strategically positive for Mohawk, the 
company's credit protection measures are expected to weaken in the near term due
to the increased debt load associated with these acquisitions.  Furthermore, 
there are integration risks as the company expects to complete these 
acquisitions during the first half of 2013.       

NEAR-TERM WEAKNESS IN CREDIT METRICS

The Marazzi acquisition is expected to be funded with roughly $900 million of 
new debt, $300 million of cash and $325 million of Mohawk stock. 

Fitch expects the company's credit metrics will weaken in the near term due to 
the debt incurred from the Marazzi acquisition. Debt to EBITDA as calculated by 
Fitch will be roughly 2.8x on a pro forma basis (including EBITDA from Marazzi, 
Pergo and Spano) for 2012 compared to 2.2x for the latest-12-month (LTM) period 
ending Sept. 29, 2012. 

Fitch currently expects leverage will decline below 2.5x at year-end 2013, 
assuming full-year results of the Marazzi and Spano acquisitions. Interest 
coverage is also expected to weaken to 6.5x-7.0x during 2013 compared with 7.6x 
for the LTM period ending Sept. 29, 2012. Nevertheless, these credit metrics 
remain appropriate for the 'BBB-' rating category.

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 to focus on debt reduction during the next few years,
although the company may use excess FCF for smaller, bolt-on acquisitions. 

ADEQUATE FINANCIAL FLEXIBILITY

Mohawk has adequate liquidity with $380.8 million of cash as of Sept. 29, 2012 
and $376 million available under its $900 million revolving credit facility that
matures in July 2016. Fitch expects the company will have continued access to 
the revolver as Mohawk has sufficient cushion under its existing bank covenants.


The company's liquidity is further enhanced by a new $300 million accounts 
receivable securitization facility.  In addition, Mohawk has no major debt 
maturities until 2016, when $900 million of senior notes and its senior credit 
facility become due.

The company continues to generate significant FCF, reporting FCF of $232.9 
million for the LTM period ending Sept. 29, 2012. This compares to FCF of $25.4 
million during fiscal 2011 and $163.5 million during fiscal 2010. Fitch 
currently expects Mohawk will generate FCF between $200 million to $250 million 
during 2012 and perhaps a slightly higher level in 2013. 

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.  

Fitch currently projects total housing starts will increase 16.7% in 2013 while 
new home sales advance 22% and existing home sales improve roughly 7%.  Fitch 
projects home improvement spending will grow 4% and private nonresidential 
construction will expand 5% this year.  

GUIDELINES FOR FURTHER RATING ACTIONS

While Fitch does not currently anticipate a positive rating action in the next 
12-18 months, a positive rating action may be considered if the company shows 
significant improvement in its operating results, leading to sustained 
improvement in credit metrics (particularly debt-to-EBITDA levels below 2x and 
interest coverage above 7x). 

Negative rating actions could occur if the recoveries in Mohawk's end-markets 
are not sustained, leading to weaker than expected credit metrics. Additionally,
Fitch may consider a negative rating action if the company is unable to 
integrate the acquisitions and reduce leverage below 3x once the company has 
full-year results of Marazzi, Pergo and Spano. 

DEBT ISSUE RATINGS

Fitch currently rates Mohawk with a Stable Outlook as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Unsecured term loan facility 'BBB-';
--Senior unsecured notes 'BBB-'.
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