Mohawk Industries, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; fourth-quarter figures are also shown below. Mohawk is a global flooring manufacturer with three segments: Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW). Approximately 63% of 2017 sales came from the United States and 37% from other countries.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $9.491 billion | $8.959 billion | +5.9% |
| Gross profit / margin | $2.996 billion / 31.6% | $2.813 billion / 31.4% | Margin +20 bps |
| Operating income / margin | $1.354 billion / 14.3% | $1.280 billion / 14.3% | +5.8% |
| Net earnings attributable to Mohawk | $971.6 million | $930.4 million | +4.4% |
| Diluted EPS | $12.98 | $12.48 | +4.0% |
| Operating cash flow | $1.194 billion | $1.345 billion | -$151.7 million |
| Capital expenditures | $906.0 million | $672.1 million | +$233.9 million |
| Total debt, including current portion | $2.764 billion | $2.511 billion | +$252.1 million |
| Cash and cash equivalents | $84.9 million | $121.7 million | -$36.8 million |
| Working capital | $1.418 billion | $753.2 million | +$664.4 million |
Operating cash flow less capital expenditures was approximately $287.6 million in 2017, a derived measure. The company reported $1.204 billion of current debt, including commercial paper. At year-end, $541.0 million remained available under its $1.8 billion senior revolving facility. Cash included $70.5 million held outside the United States.
Segment results: Global Ceramic sales increased 7.3% to $3.405 billion and operating income rose 9.8% to $525.4 million. Flooring NA sales increased 3.8% to $4.011 billion and operating income rose 7.0% to $540.3 million. Flooring ROW sales increased 8.2% to $2.075 billion, while operating income declined 1.2% to $329.1 million.
Fourth quarter: Sales were $2.369 billion versus $2.183 billion in fourth-quarter 2016; net earnings were $240.4 million versus $233.7 million; diluted EPS was $3.21 versus $3.13.
Material changes and management commentary
- Sales growth reflected approximately $245 million in higher volume (including about $137 million from acquisitions), $218 million from price and product mix, and $69 million from favorable foreign exchange.
- Operating income was supported by approximately $178 million in capital investment and cost-reduction savings and $169 million from price and product mix. Higher input costs reduced results by approximately $195 million, including $137 million of additional material costs.
- Operating cash flow fell primarily because of working-capital movements. Investing outflow rose to $1.241 billion, including $906 million of capital spending and $250.8 million of acquisitions.
- Mohawk completed four acquisitions during 2017, including Emil in Italy, ceramic businesses, a U.S. talc mine, and a nylon polymerization plant. The Emil acquisition contributed $130.5 million of sales for the period included in Mohawk’s results.
- The company issued €300 million of floating-rate notes due 2019. Its receivables securitization facility expired in December 2017. The senior credit facility was extended to March 2022.
Outlook, risks and unusual items
- Management expected continued sales growth and operating-income improvement, including in the United States if housing starts and remodeling continued to improve. It cited inflation and declining patent revenue as headwinds. No specific earnings or sales guidance was provided.
- Mohawk planned approximately $750 million of 2018 capital investment, following more than $900 million in 2017. Major projects include expanding LVT and ceramic capacity, luxury laminate, carpet tile, sheet vinyl, countertops, carpet and rugs.
- The proposed acquisition of Godfrey Hirst Group, for approximately A$556 million (about $434 million at year-end exchange rates), was expected to close in the second quarter of 2018.
- Patent licensing revenue faces pressure following the expiration of most UNICLIC patents in 2017. Flooring ROW operating income was already affected by lower patent revenue and rising input costs.
- 2017 income tax expense was $343.2 million and the effective tax rate was 26.0%, versus 24.8% in 2016. Tax reform accounting included a provisional net U.S. tax expense of $45.2 million and a Belgian tax benefit of $44.4 million. The company said its TCJA accounting remained incomplete, including its analysis of GILTI; subsequent estimates could change.
- Material risks include economic and housing-market weakness, competitive pricing, raw-material and labor inflation, foreign-exchange movements, international and emerging-market exposures, acquisition integration, credit-market access, and cyber or operational disruptions.
- Contingencies include Alabama water-board claims concerning chemicals purchased for carpet production before 2007 and an ongoing Belgian tax dispute. The company stated it had accrued probable, reasonably estimable losses, but could not estimate any additional loss range. It does not expect the matters to materially affect financial condition, though quarterly or annual results, cash flows, or liquidity could be affected.
Important facts for investors to verify
- Whether 2018 pricing and productivity savings can offset the reported material-cost inflation and other operating cost increases.
- How quickly patent licensing revenue declines after UNICLIC patent expirations, and whether replacement licensing sources develop.
- Final tax-reform accounting, particularly the transition-tax estimate, GILTI treatment, and the resulting effective tax rate.
- Execution, funding, and expected returns on the planned capital program and Godfrey Hirst acquisition.
- Commercial-paper refinancing needs and covenant headroom: the facility requires interest coverage of at least 3.0-to-1 and net leverage no greater than 3.75-to-1.
- Developments and potential financial exposure from the Belgian tax appeal and Alabama municipal litigation.