Mohawk Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019; comparisons are with the periods ended September 29, 2018. Mohawk manufactures and markets flooring through Global Ceramic, Flooring North America, and Flooring Rest of the World (ROW).
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,519.2 million | $2,545.8 million | $7,546.2 million | $7,535.0 million |
| Gross profit (margin) | $691.7 million (27.5%) | $720.4 million (28.3%) | $2,053.2 million (27.2%) | $2,191.7 million (29.1%) |
| Operating income (margin) | $240.2 million (9.5%) | $287.2 million (11.3%) | $672.4 million (8.9%) | $882.0 million (11.7%) |
| Net earnings attributable to Mohawk | $155.5 million | $227.0 million | $479.5 million | $632.4 million |
| Diluted EPS | $2.15 | $3.02 | $6.61 | $8.42 |
| Cash from operating activities | Not provided by quarter in the filing excerpt | $978.1 million | $894.5 million |
Q3 sales fell 1.0% year over year, while nine-month sales were essentially flat (+0.1%). Nine-month operating income declined 23.8%. Management attributed the pressure primarily to inflation, weaker volumes and productivity, unfavorable price and product mix, foreign exchange, and temporary production reductions. Q3 and nine-month net earnings included a $65.2 million impairment of the company’s investment in a Chinese ceramic-tile manufacturer and distributor.
Balance sheet, debt and liquidity
- At September 28, 2019, cash and cash equivalents were $111.3 million; total current assets were $4,727.8 million and current liabilities were $3,114.7 million.
- Debt carrying value totaled $2,756.7 million: $1,273.2 million current and $1,483.6 million long-term. Commercial paper outstanding was $932.8 million. Credit-facility availability, after commercial paper and other utilization, was $841.9 million.
- Operating lease liabilities of $341.2 million were recognized following adoption of ASC 842 in 2019. Adoption materially increased balance-sheet assets and liabilities but did not materially affect reported earnings or cash flow.
- Nine-month capital expenditures were $405.6 million. Cash used in investing activities was $474.5 million, compared with $1,028.3 million in the prior-year period; financing activities used $510.3 million.
Segment and period comparisons
- Q3: Global Ceramic sales increased 3.5%, but operating income fell to $84.4 million from $118.7 million. Flooring NA sales declined 4.4% and operating income fell to $80.2 million from $93.4 million. Flooring ROW sales declined 1.9%; operating income was approximately flat at $84.4 million.
- Nine months: Global Ceramic sales rose 3.0%, with operating income down to $286.9 million from $366.9 million. Flooring NA sales fell 4.9% and operating income declined to $140.4 million from $268.8 million. Flooring ROW sales rose 4.4% and operating income increased slightly to $276.4 million from $273.3 million.
- Currency reduced nine-month sales by approximately $160 million; acquisitions contributed approximately $325 million of sales volume. For Q3, foreign exchange reduced sales by approximately $35 million, partly offset by higher volume.
Outlook, risks and unusual items
- Management said markets were uncertain, with some economies slowing, import pressure and excess capacity, and expected challenging conditions through the rest of 2019. The filing gives no specific earnings or sales guidance.
- Full-year 2019 capital investment was planned at $575–595 million; expected capital spending for the remainder of 2019 was approximately $159 million. Projects include U.S. and European LVT expansion, ceramic capacity, premium laminate, carpet tile, sheet vinyl and countertops.
- Management said cash, operating cash generation and credit availability should cover capital expenditures, working capital and debt service for at least the next 12 months. On October 18, 2019, the company extended its senior credit facility maturity to October 17, 2024 and modified fees and covenants.
- Floating-rate debt was 58% of the debt portfolio. The filing estimates a one-percentage-point rate increase would add $4 million and $12 million to interest expense for the three- and nine-month periods, respectively.
- Contingencies include Alabama municipal lawsuits involving chemicals formerly purchased for carpet manufacturing and Belgian tax disputes. The company reported favorable rulings on certain Belgian tax years, further assessments for 2011–2017, and a lien on Belgian properties. It stated that potential losses beyond accrued amounts cannot be estimated; an adverse outcome could affect quarterly or annual results, cash flows or liquidity.
- The company repurchased approximately $76.7 million of common stock in the first nine months under a $500 million authorization. At quarter-end, approximately $149.2 million remained available under the program.
Most important facts for investors to verify
- Whether margins and operating income stabilize, especially in Flooring NA and Global Ceramic, given lower volumes, inflation, and production utilization.
- Whether the $65.2 million China investment impairment signals further exposure or impairment risk; the filing does not provide a clear recovery value.
- Debt maturities, commercial-paper refinancing needs, floating-rate exposure, and continuing availability under the credit facility.
- Progress against the 2019 capital-spending plan and the expected returns from major capacity and product investments.
- Developments in the Belgian tax assessments and Alabama litigation, including any change to the company’s stated inability to estimate exposure beyond accrued amounts.