September 13, 2011

Mohawk Industries, Inc. 

 

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Differentiation  

Mohawk differentiates itself in the marketplace through innovative products, a broad product portfolio 

and unrivaled retail support. One of the reasons MHK has been able to outperform the flooring industry through 

the recent downturn is its intense focus on product development and innovation. Among some of the new 

products recently introduced by the Company are Smartstrand Triexta in carpeting, Reveal Imaging for tiles 

and UniClic in the Unilin segment. Smartstrand fiber is based on a new material manufactured with DuPont 

Sorona fiber, a new polyester fiber. Currently, Triexta is exclusively offered by MHK. The material offers better 

durability, stain protection and softness compared to other polyester fibers. The Company is able to 

manufacture the product cost effectively because it is made with corn, which requires less energy.  From the 

consumers’ perspective, Smartstrand reduces the life cycle costs of the product due to his superior durability 

and stain resistance. MHK’s reflective imaging for ceramic tiles brings the latest in digital imaging technology 

and one of the most sophisticated design application processes in the industry by produce the most natural, 

realistic tile. The technique creates a three dimensional appearance with intricate visual detail and unmatched 

color definition. Finally, in the Unilin business, in addition to new finishes and species, the engineered products 

in Mohawk’s wood introduction also feature a new glueless installation system based on UniClic technology, 

recognized as the installer’s favorite click system for laminate. This patented method allows for fast, easy 

angled or sliding installing on the sides of the panels.  

Another point of differentiation for Mohawk is the scope of products it offers retailers to attract 

customers into their stores. MHK owns a broad portfolio of high quality, well known products at various price 

points, allowing different brands to go under different market places as well as strategies of how to use those 

brands and to keep them differentiated in the marketplace, without cannibalizing each other.  With a broad 

product portfolio, MHK is able to segment the marketplace, both geographically as well as within various 

channels, and also use different products from channel to channel. For example, within the Company’s carpet 

business, the Karastan brand is positioned at the high end while the Aladdin brand is on the low end. Over the 

course of the business cycle, Mohawk is able to participate as consumer either trade down or up.  

Finally, MHK also provides retailer support to help the retailers sell flooring products. As CEO 

Lorberbaum described in a recent interview,  

“We offer total store concepts, boutiques and individual product collections to meet the 

needs of different retailers. These offerings also include store design, coordinated merchandising, 

comprehensive selling systems, consumer benefits, geographic exclusivity, unique products, 

retail and sales training, co-branding, promotion and advertising, to name a few.”

3

  

Approximately half of the industry’s sales are made by floor covering stores, which are generally 

smaller and do not have the scale to merchandise the products cost effectively. As a result, MHK’s retail 

support can be crucial to these stores’ success. 

Balance Sheet Continues to Improve and Robust Free Cash Flow Generation 

Mohawk generates robust free cash flow. Over the last 10 years, the Company has generated close to 

$3.8 billion in free cash flow, or $54 per share, which is greater than the Company’s current market 

capitalization.  

  2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

CFFO 

331.2  

549.5  

309.4  

242.8  

561.5  

782.0  

880.4  

576.1  

672.2  

319.7  

Capex (52.9) (111.9) (114.6) (106.6) (247.3) (165.8) (163.1) (217.8) (108.9) (156.2) 

FCF 

278.3  

437.6  

194.8  

136.2  

314.2  

616.2  

717.3  

358.3  

563.3  

163.5  

Source: Company reports 

This has allowed the Company to repay close to $2.0 billion of debt since 2005, or $27 per share. As a 

result, net debt has declined from a peak of $3.3 billion at the end of 2005 to just $1.3 billon at July 2, 2011. In 

addition, the Company has invested about $1.5 billion in capital expenditures to upgrade its facilities, improve 

                                                      

3

 Textile World, April 2003 

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Mohawk Industries, Inc. 

 

 - 54 - 

the efficiency of its manufacturing processes and increase manufacturing capacity in low cost regions (Mexico 

and Russia).  

Net Debt Capex 

$3,406

$2,852

$2,306

$1,955

$1,872

$1,654

$1,323

2.6x

1.7x

1.3x

1.2x

.9x

.9x

1.0x

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2005

2006

2007

2008

2009

2010

LTM 2Q11

$ M

ill

ion

s

.0x

.5x

1.0x

1.5x

2.0x

2.5x

3.0x

Net Debt

Net Debt/EBITDA

$247

$166

$163

$218

$109

$156

3.7%

2.2%

3.2%

2.9%

2.0%

2.1%

$0

$50

$100

$150

$200

$250

$300

2005

2006

2007

2008

2009

2010

$ M

ill

ion

s

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Capex

Capex as % sales

Source: Company reports 

Much of the Company’s free cash generated is due to excess depreciation and amortization expense 

relative to capital expenditure requirements. Over the last ten years, MHK has averaged $59.2 million in 

excess depreciation and amortization. This excess D&A is derived from the acquisitions the Company has 

made since 1992, with the largest being Dal-Tile in 2002 and Unilin in 2005. For 2011, D&A is expected to be 

near $300 million and capex is expected to approximate $280 million. 2011 capex is elevated due to three 

large projects, totaling $120 million, MHK is undertaking to support future growth.  

 

 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

D&A 84.2 

101.9 

106.6 

123.1 

150.7 275.0  306.4 295.1  298.7  296.0 

Capex (52.9) (111.9) (114.6) (106.6) (247.3) (165.8) (163.1) (217.8) (108.9) (156.2)

Excess D&A 

31.3 

(10.0) 

(8.0)

16.5 (96.6)

109.2 143.3  77.3 189.8 139.8 

Source: Company reports 

 

Over the next five years, we project Mohawk can generate approximately $1.8 billion cumulatively in 

free cash flow, or about $26 per share. Management’s top priority for cash generated is acquisitions, which 

includes tuck-in acquisitions in markets it is currently in (both geographically and product lines), and new 

geographies in high-growth world marketplaces that it currently does not participate in. However, management 

also stated that if it is unable to find the right acquisition at the right price, it will continue to repay debt or 

buyback stock. At the end of 2010, the Company had 3.5 million shares left on its share repurchase 

authorization. Since the Board of Directors authorized a 15 million stock repurchase program in 1999, MHK 

has repurchased approximately 11.5 million shares for about $334.7 million, or $29.10 per share. These 

repurchases helped offset share dilution issued for acquisitions. Since the $2.6 billion of Unilin in 2005, the 

Company has not repurchased any shares.. With the Company’s stock price trading below 6.5x our estimated 

2011 EBITDA and leverage near historic lows, we would not be surprised to see the Company repurchase 

shares on the open market.  

Operating Performance and ROIC 

When Jeff Lorberbaum was appointed President and COO in 1995, Mohawk generated low to mid 

single digit operating profit margin it had been focused more on acquisitions than it did on operations. 

Lorberbaum quickly improved profitability by rationalizing manufacturing capacity, closing several mills and 

consolidating operations at the most efficient plants. He also expanded Aladdin's warehousing and distribution 

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