Moody's Raises Mohawk’s Outlook to Positive

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Moody's Raises Mohawk’s Outlook to Positive
New York, NY, May 31--Moody's Investors Service affirmed the Baa2 senior unsecured and other ratings of Mohawk Industries, Inc., but changed the outlook from stable to positive. The outlook change is due to the company's strong credit metrics, its successful integration of the Dal-Tile acquisition and the progress that it has made in integrating the recent Lees commercial carpet acquisition, and the company's ability to generate stable earnings and cash flow despite the cyclical factors impacting the industry in which it operates. Ratings affirmed: Senior unsecured at Baa2. Mohawk's ratings reflect its leading position in the carpet and floor tile businesses; the diversity of its business mix and markets which help protect against changing consumer taste in floor coverings and weakness in any given market segment; its portfolio of well known brand names at various price points; its size, scale and distribution capabilities which provide a competitive advantage in this fragmented industry; the company's long track record of successfully completing and integrating acquisitions; and the company's low cost position due to its vertical integration. The company's ratings also benefit from Mohawk's solid operating performance and conservative financial posture. As of March 31 2004, Adjusted Debt/EBITDAR was 2.1x, RCF/Adjusted Debt was 31% and Free Cash Flow/ Adjusted Debt was 11.5%. Coverage ratios are strong with total coverage of 7.5x and EBIT/interest of 10.3x for the twelve months ended March 31, 2004. Mohawk's ratings also reflect the traditional cyclicality of the floor coverings business which depends on macroeconomic factors such as economic growth, consumer confidence and housing starts; the likelihood that Mohawk will continue to be acquisitive with the financial and integration risks that this entails; and the competitive nature of the fragmented floor coverings industry. Mohawk's ratings are also restrained by its cash management philosophy, which results in minimal cash balances to provide a liquidity cushion. The positive outlook reflects the expectation that the $350 million Lees acquisition, made in November 2003, will be successfully integrated as have Mohawk's other acquisitions. Margins have deteriorated slightly from 2002 levels; growth, as well as the Lees acquisition, has created working capital demands that have impacted cash flow generation. Mohawk's ratings could be upgraded if it makes further progress integrating Lees; if the pace of share repurchases and acquisitions remain conservative; if its cash management philosophy is changed to retain more cash on the balance sheet; and if its leverage remains conservative with Adjusted Debt/EBITDAR of less than 2.25x, Retained Cash Flow/Adjusted Debt in excess of 25%, and Total Coverage of at least 7.0x. Given that the outlook is positive, a downgrade is currently unlikely. However, should the company undertake an aggressive acquisition program that is not conservatively financed, should its operating margins and credit metrics deteriorate, or should the company undertake a significant share repurchase program, the company's outlook or ratings could be negatively impacted.


Related Topics:Coverings, Mohawk Industries, Daltile