Mohawk Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison period ended April 1, 2017. Financial statements are unaudited. Mohawk manufactures and markets flooring through Global Ceramic, Flooring North America, and Flooring Rest of the World (ROW).
Financial performance and position
| Metric | Q1 2018 | Prior period | Change |
|---|---|---|---|
| Net sales | $2,412.2 million | $2,220.6 million | +8.6% |
| Gross profit / margin | $704.7 million / 29.2% | $680.4 million / 30.6% | Margin down 140 bps |
| Operating income / margin | $268.4 million / 11.1% | $274.8 million / 12.4% | Income down 2.3% |
| Net earnings attributable to Mohawk | $208.8 million | $200.6 million | +4.1% |
| Diluted EPS | $2.78 | $2.68 | +3.7% |
| Operating cash flow | $183.2 million | $165.9 million | +$17.3 million |
Interest expense was $7.5 million, versus $8.2 million. The effective tax rate fell to 18.5% from 25.4%, benefiting from U.S. and Belgian tax reforms. Capital expenditures were $250.9 million; net cash used in investing was $241.4 million. Cash and equivalents were $114.8 million at quarter-end, including $93.5 million held outside the U.S.
Total debt at carrying value was $2,917.6 million, including $1,331.9 million classified as current and $1,585.7 million long-term. Commercial paper outstanding was $1,278.3 million. The company reported $411.9 million of remaining availability under its $1.8 billion senior credit facility after utilization. Debt was 58% floating-rate; management estimated a 1 percentage-point rate increase would add $4.3 million to quarterly interest expense.
Material changes and segment results
- Sales increased by approximately $191.6 million, reflecting about $99 million of favorable foreign exchange, $57 million of higher volume (including about $45 million from acquisitions), and $36 million from price and mix.
- Gross margin and operating income declined despite higher sales. Management cited approximately $52 million of higher inflation costs, including $34 million of increased material costs, as well as increased restructuring, acquisition and integration costs and investment start-up costs. Price/mix, productivity savings and foreign exchange partly offset these pressures.
- Global Ceramic sales rose 11.7% to $876.5 million; operating income declined to $113.4 million from $116.0 million. Flooring NA sales rose 1.2% to $950.4 million; operating income fell to $74.7 million from $92.1 million. Flooring ROW sales rose 18.0% to $585.3 million; operating income increased to $89.1 million from $76.1 million. ROW sales benefited from foreign exchange and price/mix, while lower IP-contract revenue reduced volume.
- Operating cash flow increased, but receivables and inventories absorbed cash. Restructuring costs recorded in cost of sales and SG&A totaled approximately $22.1 million, compared with approximately $4.0 million in the prior-year quarter.
Outlook, risks and unusual items
- Management expects continued local sales growth and operating-income improvement, while noting inflation and declining revenue from expired IP contracts. Price increases are being implemented in response to rising material costs.
- Mohawk plans approximately $750 million of 2018 capital spending, including about $500 million for the remainder of the year. Management expects 2018 operating income to be reduced by $70–$75 million from investment start-up costs of $30–$35 million and about $40 million of lower revenue from IP contracts that expired in 2017.
- The planned acquisition of Godfrey Hirst Group, a flooring company in Australia and New Zealand, was expected to close in Q2 2018 for approximately A$556 million (about $427.1 million at March 31). Q1 acquisitions were $24.4 million.
- Accounting for certain Tax Cuts and Jobs Act provisions remained incomplete. Treasury guidance issued April 2, 2018 could materially affect provisional tax estimates; the company was also evaluating GILTI tax accounting.
- Two Alabama municipal lawsuits concern alleged impacts from perfluorinated compounds previously purchased for carpet manufacturing; the company says it never manufactured the compounds and the complaints do not allege wastewater-discharge violations. A Belgian tax dispute remains on appeal, with liens on certain properties. Mohawk says it has accrued probable, estimable losses but cannot estimate any additional loss range; outcomes could affect results, cash flows or liquidity in a period.
- Management believes cash, operating cash flow and credit availability will cover requirements for at least 12 months. The filing notes seasonality: Q1 is typically the weakest period for Global Ceramic and Flooring NA.
Important facts for investors to verify
- Whether price increases and productivity gains can offset continued material and other inflation, given the quarter’s lower gross and operating margins.
- Progress, total funding needs and integration risks for the Godfrey Hirst acquisition, and delivery of the planned 2018 capital projects.
- The pace and financial effect of declining IP-contract revenue and the forecast $70–$75 million operating-income headwind.
- Final tax impacts under the U.S. tax law, including transition-tax and GILTI accounting, and any resulting cash-tax obligations.
- Developments in the Belgian tax appeal and Alabama litigation, as well as commercial-paper refinancing needs and floating-rate exposure.