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 markets.
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 2013.
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.
Additional information is available 'www.fitchratings.com'. Fitch has conducted a Rating Assessment Service for Mohawk Industries, Inc. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology