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.
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-'.
Additional information is available 'www.fitchratings.com'. 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