Business context and reporting period
Mohawk Industries, Inc. is a global flooring manufacturer, reporting three segments: Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW). This unaudited Form 10-Q covers the quarter and six months ended July 2, 2016; comparisons are to periods ended July 4, 2015.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $2,310.3 million | $2,041.7 million | $4,482.4 million | $3,922.9 million |
| Gross profit | $755.6 million; 32.7% | $615.1 million; 30.1% | $1,395.3 million; 31.1% | $1,127.1 million; 28.7% |
| Operating income | $350.7 million; 15.2% | $255.8 million; 12.5% | $596.4 million; 13.3% | $299.6 million; 7.6% |
| Net earnings attributable to Mohawk | $255.2 million | $186.5 million | $426.7 million | $208.8 million |
| Diluted EPS | $3.42 | $2.53 | $5.73 | $2.83 |
| Operating cash flow | Not presented quarterly | $549.4 million | $267.5 million |
Q2 sales increased 13.2%; first-half sales rose 14.3%. First-half gross margin improved 240 basis points. First-half operating income increased 99.1%, partly because the prior-year period included a $125 million polyurethane-foam litigation charge. The first-half effective tax rate was 25.7%, versus 20.9%, reflecting the geographic mix of earnings and a favorable, nonrecurring Italian tax ruling in 2015.
First-half investing cash outflow was $276.9 million, all reported as property, plant and equipment additions; capital expenditures were $276.9 million versus $228.4 million in the prior-year period. Cash increased by $30.4 million to $112.0 million. Working-capital movements included a $201.2 million use of cash from receivables and a $41.3 million use from inventories.
At July 2, 2016, total debt carrying value was $2,956.3 million, including $1,795.6 million classified as current. Cash was $112.0 million; current assets were $3,519.2 million and current liabilities $3,129.7 million. The company had $1,169.2 million of commercial paper outstanding, $504.7 million available under its senior credit facility after utilization, and a separate undrawn $200 million term loan facility. The $500 million accounts-receivable securitization facility was fully utilized.
Material changes versus the prior comparable period
- Q2 segment sales were $829.8 million for Global Ceramic, $980.7 million for Flooring NA, and $499.8 million for Flooring ROW. Flooring ROW sales grew 50.7%, primarily due to acquisitions.
- First-half sales growth included approximately $430 million from acquisitions and $146 million from legacy volume; unfavorable foreign exchange reduced sales by approximately $42 million.
- Q2 volume, capital-investment and cost-reduction savings, lower input costs, and lower restructuring and integration costs supported profit growth. Higher spending on product development, sales personnel and marketing partly offset gains.
- Interest expense fell to $22.7 million in the first half from $33.3 million, primarily following repayment of the remaining 6.125% notes in January 2016 and lower-rate commercial paper borrowings.
- First-half operating cash flow rose by $281.9 million year over year, while investing outflow was substantially lower because there were no 2016 acquisitions; first-half 2015 acquisition spending was $1,191.3 million.
Outlook, commentary, risks and unusual items
Management expects full-year 2016 capital spending of $600 million to $650 million, including $325 million to $375 million in the remainder of the year. It said cash, operating cash generation and available credit should be sufficient for capital expenditures, working capital and debt service over the next 12 months. No specific earnings or sales guidance was provided.
Management described U.S. housing starts and remodeling as continuing to rebound and expected continued strong U.S. performance; European operations improved locally despite a challenging macroeconomic environment. The company cautioned that a strong U.S. dollar would continue to affect translation of foreign results. It also cited industry growth in hard-surface flooring and increasing polyester-carpet sales, which can pressure average soft-surface selling prices.
Belgian tax assessments remain under appeal. A Belgian court ruled for Mohawk on the 2005 and 2009 tax years, but the tax authority appealed, and a lien was placed on certain Flooring ROW properties as security. The lien does not interfere with operations. The company believes the matter will not materially harm financial condition but acknowledges a possible material effect on results, liquidity or cash flows in a particular period; any loss beyond accrued amounts is not clearly estimable from the filing. Most U.S. and Canadian polyurethane-foam antitrust claims were settled; one reconsideration request remained pending in an indirect-purchaser appeal, which management did not expect to materially affect financial condition.
Other considerations include foreign-exchange exposure, volatile raw-material and energy costs, competitive and market conditions, acquisition integration, and litigation and tax claims. The company reported no off-balance-sheet arrangements and no material change in the risk factors disclosed in its 2015 Form 10-K. It had no borrowings under the delayed-draw term loan at quarter-end; the securitization facility was scheduled to terminate in December 2016.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable legacy growth versus acquisition contribution, particularly in Flooring ROW?
- Whether margin gains from cost savings and lower input costs persist as pricing, product mix and foreign-exchange effects change.
- Capital-spending execution against the $600–$650 million full-year plan and its impact on future cash generation.
- Commercial-paper refinancing and liquidity exposure, including the short weighted-average maturities and renewal of the receivables securitization facility.
- Developments in the Belgian tax appeal and any change in potential exposure or property liens.
- The effect of the higher effective tax rate relative to 2015’s nonrecurring Italian tax benefit.