Fitch Upgrades Mohawk's IDR to 'BBB'; Revises Outlook to Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has upgraded the ratings of Mohawk Industries, Inc. (Mohawk, NYSE: MHK), including the company's Issuer Default Rating (IDR), to 'BBB'. The Rating Outlook is revised to Stable from Positive.

Fitch has also assigned a 'BBB' rating to Mohawk's EUR500 million 2% senior unsecured notes due 2022. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The ratings upgrade reflects Mohawk's improving financial and credit metrics and Fitch's expectation that the company will maintain (or improve) these credit metrics. Mohawk's Rating Outlook had been Positive since November 2013, and Fitch previously noted that the company's IDR may be upgraded to 'BBB' if the company's leverage is trending towards 2.0x and interest coverage remains above 9x, while maintaining a robust liquidity position. Mohawk's debt to EBITDA was 1.9x and interest coverage was 13.4x for the latest 12 month (LTM) period ending April 4, 2015.

The ratings for Mohawk reflect 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 (especially Europe), and Mohawk's aggressive growth strategy.

The Stable Outlook reflects Fitch's expectation that demand for Mohawk's products will continue to grow in the near to intermediate term as the U.S. construction market maintains its moderate recovery. The Stable Outlook also incorporates Mohawk's solid liquidity position.

IVC ACQUISITION

On Jan. 13, 2015, Mohawk reached a definitive agreement to acquire all of the capital stock of IVC Group for EUR1.008 billion or approximately $1.108 billion. Approximately EUR908 million ($998 million) of the purchase price is expected to be paid in cash, with the remaining EUR100 million ($110 million) to be paid with 805,811 shares of Mohawk stock.

Founded in 1997, IVC is a major producer of sheet vinyl, luxury vinyl tile (LVT) and laminate flooring, with manufacturing operations in Europe and the United Sates. IVC is a major sheet vinyl producer in Europe and the U.S. and is a leading player in the rapidly growing LVT flooring category in Europe. IVC is also in the final stages of completing a new LVT plant in the U.S. IVC had approximately $735 million of sales during 2014.

On June 2, 2015, Mohawk issued EUR500 million of senior unsecured notes due 2022 with an interest rate of 2%. Mohawk will use net proceeds from this notes offering, together with borrowings under its commercial paper (CP) Program/revolving credit facility ($1.1 billion available as of April 4, 2015) to fund the cash portion of the IVC acquisition.

Fitch views this transaction as strategically positive for Mohawk. The acquisition further expands Mohawk's standing as a leading global flooring manufacturer and positions the company to be a major participant in the growing LVT category and the expanding fiberglass sheet vinyl business. IVC's laminate flooring products, which are marketed in the mid-price range category, also complement Mohawk's high-end laminate floor offering.

IMPACT ON RATINGS

Mohawk expects to fund the IVC acquisition with roughly $1 billion of debt and $110 million of equity. While Fitch views the transaction as strategically positive for Mohawk, the acquisition temporarily weakens the company's credit metrics as a result of higher debt levels. Fitch expects leverage as measured by debt to EBITDA on a pro forma basis will increase to about 2.4x from 1.9x at year-end 2014. EBITDA to interest coverage was 12.2x during 2014 and is projected to decline to about 10.0x on a pro forma basis. The ratings upgrade reflects Fitch's expectation that Mohawk will reduce its leverage to 2.0x (or below) within roughly 12 months following the completion of the IVC acquisition.

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.

However, Mohawk's credit metrics temporarily weakened due to the debt incurred from these acquisitions but had gradually improved as the company integrated the acquisitions and subsequently reduced debt.

Mohawk has demonstrated in the past that it has the discipline to reduce leverage levels following a major acquisition. Most recently, Mohawk's leverage increased from 2.0x at year-end 2012 to around 3.3x for the LTM period ending June 30, 2013 after the acquisitions of Marazzi, Pergo and Spano. Leverage has gradually declined to 2.3x at year-end 2013 and 1.9x at the conclusion of 2014 as the company fully integrated the acquisitions and reduced debt levels. Additionally, 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 by the end of 2006 and to 2.1x at year-end 2007.

While the company had demonstrated discipline in the past, the risk is that Mohawk becomes a serial acquirer and will continually pursue acquisition opportunities that will frequently push its leverage to the higher end (or perhaps above) its 2.0x-3.0x leverage target. Fitch expects the company will remain disciplined in its growth strategy and will consistently manage its balance sheet towards the lower end of its leverage target.

In addition to the pending IVC acquisition, Mohawk completed the acquisition of a 90% ownership interest in Kai Group, an eastern European ceramic tile floor manufacturer, for EUR175.5 million (approximately $192.9 million) in May 2015. The manufacturer has a low cost position in the Bulgarian and Romanian ceramic tile floor markets.

ADEQUATE LIQUIDITY

Mohawk has adequate liquidity and is able to meet its financial obligations, although the company has significant short-term borrowings and debt maturing in the next seven months. As of April 4, 2015, the company had cash of $107.0 million, of which $79.3 million was held outside the U.S.

The company also has a $1.8 billion commercial paper program that is backed by its $1.8 billion five-year revolving credit facility that matures in 2020. As of April 4, 2015, Mohawk had $1.13 billion of borrowing availability under its revolving credit facility, which takes into account $657.1 million of CP borrowings, $6.6 million of revolver borrowings, and $1.3 million of letters of credit. Fitch expects availability will be reduced to roughly $700 million following the IVC acquisition.

The company has $645.6 million of senior notes maturing in January 2016. Additionally, Mohawk has $657.1 million of CP borrowings as of April 4, 2015. Mohawk's $500 million securitization facility ($492.9 million outstanding as of April 4, 2015) matures in December 2015. Fitch expects the company will renew the securitization facility prior to its maturity date. The company has demonstrated its ability to access the capital markets, and Fitch expects Mohawk will refinance part of the 2016 notes in advance of its January 2016 maturity.

Mohawk generated $138.1 million (1.8% of revenues) of FCF for the LTM period ending April 4, 2015 compared with $100.4 million (1.3%) during 2014, $158.7 million (2.2% of revenues) during 2013 and $379.3 million (6.6%) during 2012. Fitch currently expects Mohawk will generate a FCF margin of 2.5%-3.5% this year and the margin will approximate 4.5%-5.5% of revenues in 2016 and 2017. Fitch expects Mohawk will use its FCF to reduce debt incurred from the IVC acquisition.

SOLID CREDIT METRICS

Mohawk's credit metrics have shown significant improvement since the company completed three major acquisitions in 2013. Mohawk's leverage peaked at around 3.3x for the LTM period ending June 30, 2013 (minimal EBITDA contribution from the acquisitions) and has gradually declined to 2.3x at year-end 2013 and 1.9x at the conclusion of 2014 as the company fully integrated the acquisitions and reduced debt levels. Leverage was 1.9x for the LTM period ending April 4, 2015. Fitch projects leverage will increase to 2.4x on a pro forma basis with the acquisition of IVC. Fitch expects leverage will settle around 2.3x at year-end 2015 and will be below 2.0x at the conclusion of 2016. Fitch expects EBITDA interest coverage will remain above 11.0x in the intermediate term.

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. On a pro forma basis following the IVC acquisition, sales in North America will account for 66% of sales (down from 70% currently).

Fitch expects overall industry construction spending will expand 7% in 2015, driven primarily by continued robust spending in the private sector. Total housing starts are projected to grow 14% while new home sales are forecast to expand 18% in 2015. Existing home sales are projected to rise 4.3% this year. Home improvement spending is also forecast to increase 6% while private non-residential construction is expected to improve 7% in 2015.

EUROPEAN EXPOSURE

Currently, management estimates that about 20% of its sales are generated from Western Europe and about 5% from Russia. Fitch estimates that exposure to these regions will increase slightly, with Western Europe and Russia accounting for about 22.7% and 5.4%, respectively, of overall pro forma sales. Fitch expects continued weakness in these markets, as Eurozone GDP is only projected to improve 1.4% in 2015 while Russia's GDP is forecast to contract 4.5% this year.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--Overall U.S. construction spending increases 7% during 2015;

--Revenues grow low-single-digits on a pro forma basis;

--EBITDA margins in 2015 improve slightly compared with 2014 margins;

--Debt/EBITDA approximates 2.3x and interest coverage sustains above 11.0x at the end of 2015;

--Debt/EBITDA is below 2.0x and interest coverage is above 11.0x by year-end 2016;

--The company reports a FCF margin of 2.5%-3.5% during 2015 and the margin will approximate 4.5%-5.5% during 2016 and 2017;

--Mohawk completes the IVC acquisition.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad residential and commercial construction market trends and how the company manages its capital structure through the cycle, including FCF trends and uses.

Fitch does not anticipate positive rating actions in the intermediate term. However, one may be considered if management commits to lowering its leverage target to below 2.0x through the construction cycle from the current target of 2.0x-3.0x and the company's debt to EBITDA is consistently between 1.0x-2.0x, FFO adjusted leverage is consistently below 3.0x and Mohawk maintains a solid liquidity position.

Negative rating actions may be considered if there is a severe and lengthy downturn in the U.S. construction market, leading to revenue declines in the mid-teens, debt to EBITDA consistently above 2.5x and FFO adjusted leverage sustaining above 3.5x for an extended period. Fitch would expect Mohawk to manage its leverage at or below the low-end of its 2.0x-3.0x leverage (debt to EBITDA) target as we approach the top of the construction cycle so as to allow the company to sustain its leverage comfortably within its target when the cycle declines and EBITDA levels contract.

Negative rating actions may also be considered if there is a change in the company's financial strategy, including leveraged acquisitions and/or debt financed share repurchases that result in debt to EBITDA sustaining above 2.5x and FFO adjusted leverage consistently and meaningfully above 3.5x.

FULL LIST OF RATING ACTIONS

Mohawk Industries, Inc.

--IDR to 'BBB' from 'BBB-';

--Senior unsecured debt to 'BBB' from 'BBB-';

--Unsecured revolving credit facility to 'BBB' from 'BBB-';

Fitch has also assigned a 'BBB' rating to Mohawk's EUR500 million 2% senior unsecured notes due 2022.

The Rating Outlook is revised to Stable from Positive.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985842

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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