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Fitch Affirms Mohawk's IDR at 'BBB-'; Outlook to Positive
November 26, 2013 / 4:10 PM / in 4 years

Fitch Affirms Mohawk's IDR at 'BBB-'; Outlook to Positive

(The following statement was released by the rating agency) NEW YORK, November 26 (Fitch) 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 has been revised to Positive from Stable. A complete list of rating actions follows at the end of this release. KEY 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 relatively weak global economy, aggressive growth strategy, and near-term increase in leverage associated with acquisitions completed this year. The Positive Outlook reflects Fitch's expectation that the company will quickly improve its credit metrics following the completion of three acquisitions during the first half of 2013, which initially increased debt levels by $1.2 billion relative to year-end 2012. Leverage as measured by Fitch-calculated debt to EBITDA peaked at around 3.3x for the latest 12 months (LTM) ending June 29, 2013, which included debt incurred but minimal earnings contribution from the acquisitions. Leverage has declined to 2.7x for the LTM period ending Sept. 28, 2013, reflecting some EBITDA contribution from the acquisitions and debt reduction of about $187 million during the third quarter. Fitch expects leverage will be around 2.5x at year-end 2013. The Positive Outlook incorporates Fitch's expectation that leverage will approach 2x by the end of 2014 and will be sustained at or below this level thereafter. 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. The company's credit metrics, however, have weakened in the near term due to the debt incurred from these acquisitions. Leverage as measured by debt to EBITDA was 2.7x for the LTM ending Sept. 28, 2013 compared with 2x at year-end 2012. Fitch expects leverage will settle at around 2.5x at the end of 2013 and will approach 2x or lower by year-end 2014. 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 focus on debt reduction during the next few years, although the company may use excess free cash flow (FCF) for smaller, bolt-on acquisitions. STRONG FINANCIAL FLEXIBILITY Mohawk has strong liquidity with $63.6 million of cash as of Sept. 28, 2013 and $456.1 million available under its $1 billion revolving credit facility that matures in September 2018. Fitch expects the company will have continued access to the revolver as Mohawk has sufficient cushion under its existing bank covenants. In addition, Mohawk has no major debt maturities until 2015, when its securitization facility ($300 million outstanding) matures. The next debt maturity is in 2016, when $900 million of senior notes become due. The company continues to generate significant FCF, reporting FCF of $287.36 million for the LTM ending Sept. 28, 2013. This compares to FCF of $379.3 million during fiscal 2012, $25.4 million during fiscal 2011 and $163.5 million during fiscal 2010. Fitch currently expects Mohawk will generate FCF between $25 million to $40 million during 2013 as a result of higher working capital and capital expenditures associated with the acquisitions. Fitch expects Mohawk will generate FCF of approximately 2%-3% of revenues in fiscal 2014. 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 2012 pro forma sales. Fitch currently projects total housing starts will increase 17.8% in 2013, while new home sales advance 19.6% and existing home sales improve roughly 8.5%. Fitch projects home improvement spending will grow 4% and private nonresidential construction will expand 2% this year. Fitch expects further improvement in the U.S. construction sector next year, with total housing starts projected to grow 16.6% to 1.07 million units. New home sales are forecast to expand 20% in 2014 while existing home sales growth should moderate to 5%. Home improvement spending is projected to increase 5% while private nonresidential construction is expected to improve 5% next year. 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 6-12 months if the company shows sustained improvement in financial results and operating metrics, including EBITDA margins of 13%-14%, debt to EBITDA levels trending at or below 2x, and interest coverage above 8x. On the other hand, negative rating actions could occur if the recoveries in Mohawk's U.S. end-markets dissipate, leading to weaker than expected credit metrics, including EBITDA margins below 10%, debt to EBITDA levels consistently above 3x, and/or interest coverage below 6x. 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-'. Contact: Primary Analyst Robert Rulla, CPA Director +1-312-606-2311 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Robert Curran Managing Director +1-212-908-0515 Committee Chairperson Timothy Greening Managing Director +1-312-368-3205 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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