Dec 21 - Fitch Ratings has assigned initial credit ratings to Mohawk
Industries, Inc. (NYSE: MHK) as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Unsecured term loan facility 'BBB-';
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
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 the recently announced acquisition of the
Marazzi Group (Marazzi).
The Stable Outlook reflects the expected improvement in housing, home
improvement and commercial construction markets in 2012 and 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 and Pergo.
The company recently announced that it has entered into a definitive agreement
to acquire Marazzi (a world leader in tile products) for approximately $1.5
billion, with a combination of cash and equity. This follows the October 2012
announcement that it has agreed to acquire Pergo (a laminate flooring company)
for $150 million in cash.
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). 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 to 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
and Pergo) 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 Pergo and Marazzi 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.
The company has demonstrated in the past that it is 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 in the next few years,
although the company may use excess FCF for smaller, bolt-on acquisitions.
Mohawk has solid 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 of between $200 million to $250
million during 2012 and perhaps a slightly higher level in 2013.
Fitch's rating reflects Mohawk's strong competitive position in the U.S.
flooring industry. The company estimates that it is the second largest
manufacturer of flooring products in the U.S. The acquisitions of Pergo and
Marazzi further strengthen Mohawk's position in North America and also
facilitate the company's geographic expansion and diversification.
Fitch's rating also takes into account the cyclicality of Mohawk'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
Fitch's housing forecasts for 2012 have been raised a few times this year but
still assume a below-trend line cyclical rise off a very low bottom. In a
slow-growth economy with somewhat diminished distressed home sales competition,
less competitive rental-cost alternatives, and new and existing home inventories
at historically low levels, total housing starts should improve 27.6%, while new
home sales increase 19.9% and existing home sales grow 9%. For 2013, total
housing starts should increase 16.7%, while new home sales advance 22% and
existing home sales improve roughly 7%.
Fitch projects home improvement spending will increase 4.5% in 2012 and will
grow 4% in 2013. Growth patterns in the intermediate term are likely to be below
what the industry experienced during the previous housing boom and the early
part of the past decade due to the slower growth in the U.S. economy and only
moderately better housing market conditions.
The fundamentals of the U.S. commercial real estate (CRE) market turned positive
during second-half 2011, and the improvement has continued in 2012. The increase
in demand, coupled with the low levels of new commercial construction in recent
years, has fueled strong new commercial construction activity so far this year.
Growth in new commercial construction activity will likely moderate in 2013 due
to the slower growth in the U.S. economy, lingering problems of key European
economies, and continued challenges in the CRE capital markets. Fitch currently
projects private nonresidential construction will expand 14.8% in 2012 and 5% in
Future ratings and Outlooks will be influenced by broad construction market
trends, as well as company specific activity, particularly FCF trends and uses.
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 and Pergo.