Mohawk Industries, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Mohawk is a global flooring manufacturer with three segments: Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW). About 61% of 2018 sales came from the United States and 39% from outside the United States.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $9.984 billion | $9.491 billion | +5.2% |
| Gross profit / margin | $2.838 billion / 28.4% | $2.996 billion / 31.6% | Margin down 3.14 percentage points |
| Operating income / margin | $1.095 billion / 11.0% | $1.354 billion / 14.3% | Income down 19.1% |
| Net earnings attributable to Mohawk | $861.7 million | $971.6 million | Down 11.3% |
| Diluted EPS | $11.47 | $12.98 | Down 11.6% |
| Operating cash flow | $1.181 billion | $1.194 billion | Down $12.3 million |
| Capital expenditures | $794.1 million | $906.0 million | Down $111.9 million |
| Total debt | $3.258 billion | $2.764 billion | Up $494.4 million |
Liquidity: Cash and cash equivalents were $119.1 million; working capital was $1.243 billion. The $1.8 billion revolving facility had $347.7 million available at year-end, including commercial paper within facility utilization. Investing activities used $1.332 billion, including $569.0 million for acquisitions. Financing activities provided $198.0 million, while share repurchases used $274.1 million.
Fourth quarter: Net sales were $2.449 billion, up 3.4% year over year. Net earnings were $229.3 million; diluted EPS was $3.05.
Material changes and drivers
- Sales growth reflected approximately $229 million of acquired sales, $68 million of legacy volume growth, $111 million from price and mix, and $85 million from foreign exchange.
- Profitability weakened despite higher sales. Management cited approximately $230 million of inflation costs, including $140 million of higher material costs; $48 million of start-up costs; $37 million from temporarily reduced production; and higher restructuring, acquisition and integration costs. Pricing, product mix, volume, productivity and cost initiatives partly offset these pressures.
- Flooring NA operating income fell 35.6% to $347.9 million, with margin declining to 8.6%. Global Ceramic operating income fell 15.7% to $442.9 million. Flooring ROW operating income increased 5.1% to $345.8 million, although its margin declined to 14.4%.
- The effective tax rate declined to 17.6% from 26.0%, contributing to lower tax expense despite reduced pretax earnings. The filing attributes the change to geographic earnings mix, U.S. and Belgian tax reforms, and tax-planning and transition-tax items.
- 2018 acquisitions included Godfrey Hirst, Eliane, and three Flooring ROW businesses. A Netherlands flooring distributor was acquired on January 31, 2019, for approximately €60.6 million.
Outlook, risks and contingencies
- Management expected local sales growth in 2019, while anticipating some softening in Europe and Australia and projected growth in Russia, Brazil and Mexico. It planned $550–$580 million of 2019 capital investment.
- Management cited inflation, rising material, transportation and energy costs, a strong U.S. dollar, import competition and slower housing markets. Price increases had been implemented across most product categories, but recovery of cost increases depends on market and competitive conditions.
- Debt and liquidity warrant attention: $1.742 billion of debt was classified as current at year-end, and contractual debt maturities were concentrated in 2019. The credit facility requires interest coverage of at least 3.0-to-1 and net leverage no greater than 3.75-to-1.
- Approximately 64% of debt was floating-rate. Management estimated that a one-percentage-point rate change would affect annual interest expense by about $21 million. Currency movements also affect reported results; a hypothetical 10% U.S. dollar move against the euro was estimated to produce a $43 million translation adjustment.
- Significant contingencies include Belgian tax disputes and assessments, including notices covering 2012–2017, and two Alabama municipal lawsuits concerning perfluorinated compounds previously purchased for carpet manufacturing. The company disputes the claims; it says the municipalities do not allege wastewater discharge above legal limits. Management says accrued provisions cover probable, reasonably estimable losses, but cannot estimate any excess loss range.
- The filing reports no goodwill or indefinite-lived intangible impairment in 2018. It identifies acquisition integration, raw-material supply and pricing, economic and housing conditions, competition, foreign exchange, regulatory changes, litigation and patent-licensing revenue as risks.
Important facts for investors to verify
- Whether price increases and productivity gains can offset continued inflation and restore segment margins, particularly in Flooring NA and Global Ceramic.
- How 2019 debt maturities, commercial paper refinancing and covenant headroom are managed; confirm actual year-end leverage and coverage ratios in the full filing.
- Whether the 2018 acquisitions and planned capital projects deliver expected growth, returns and integration benefits.
- Developments, potential cash exposure and accounting treatment for the Belgian tax matter and Alabama litigation.
- The quarterly supplemental table reports unusually high third-quarter gross profit relative to annual results; verify that figure against the filed financial statements before relying on it.