S&P Upgrades Mohawk Industries (MHK) to 'BBB+'; Outlook is Stabl

August 11, 2016 10:37 AM EDT

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S&P Global Ratings raised its ratings, including the corporate credit rating, on Mohawk Industries Inc. (NYSE: MHK) to 'BBB+' from 'BBB.' The outlook is stable. We also affirmed our 'A-2' short-term corporate credit rating on the company and our 'A-2' short-term rating on the company's commercial paper.

"The outlook is stable, reflecting our expectation that EBITDA growth and periodic debt-financed acquisitions will keep adjusted cash flow and leverage ratios in a range that support the 'BBB+' rating and modest financial risk profile, including debt to EBITDA generally in the 1.5x to 2x range, EBITDA to interest coverage of at least 10x, and FFO to debt of 45%," said S&P Global Ratings credit analyst Pablo Garces. "We expect Mohawk will benefit over the next two years from growth in repair and remodeling markets, recovering U.S. residential and commercial construction, and robust international growth."

We could lower our rating on Mohawk if we reassessed the company's financial risk as intermediate over the next 24 months, demonstrated by sustained leverage above 2x over a 12-month period. A recessionary environment leading to an unexpected and sharp decrease in demand and a sales decline of about 5% or extreme raw material volatility causing operating earnings to decline about 3% could lead to such an event. We do expect Mohawk to remain acquisitive and an acquisition could bring debt to EBITDA above 2x. However, we would expect Mohawk to use its strong cash flows to reduce leverage below 2x fairly rapidly, as it has done with past acquisitions.

We could raise our ratings on Mohawk Industries if we reassessed the company's business risk as strong over the next 24 months due to the company's diversification of its end markets or product mix outside of flooring and further sustained improvement in its profit margins. We could also raise our rating if Mohawk's leverage were reduced and maintained below 1.5x, indicative of a minimal financial risk profile.



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