Mohawk Industries, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparisons are to the three months ended March 28, 2020. Mohawk manufactures and sells flooring through Global Ceramic, Flooring North America and Flooring Rest of the World segments. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2,669.0 million | $2,285.8 million | +16.8% |
| Gross profit / margin | $791.8 million / 29.7% | $616.4 million / 27.0% | +270 basis points |
| Operating income / margin | $317.5 million / 11.9% | $151.5 million / 6.6% | +109.6% |
| Net earnings attributable to Mohawk | $236.8 million | $110.5 million | +114.3% |
| Diluted EPS | $3.36 | $1.54 | +$1.82 |
| Operating cash flow | $259.6 million | $195.0 million | +$64.6 million |
- Revenue and segment results: Global Ceramic sales were $929.9 million (+9.6%), Flooring NA $969.3 million (+14.3%), and Flooring ROW $769.9 million (+30.7%). Segment operating income was $87.8 million, $81.3 million and $159.3 million, respectively.
- Performance drivers: Management attributed sales growth principally to higher volumes (approximately $156 million), additional shipping days ($111 million), favorable foreign exchange ($64 million) and price/product mix ($52 million). Operating income benefited from volume and productivity; higher inflation was a partial offset.
- Cash flow and investment: Capital expenditures were $114.7 million. Investing activities used $333.3 million, primarily reflecting purchases of short-term investments net of redemptions. Financing activities used $120.2 million, including $122.9 million of share repurchases. Cash and cash equivalents declined $211.4 million during the quarter.
- Liquidity: At April 3, cash was $557.3 million and short-term investments were $782.3 million. The company reported $1.796 billion available under its senior credit facility. Management said cash, operating cash generation and available credit should be sufficient for capital, working-capital and debt-service needs for at least 12 months.
- Debt: Total debt carrying value was $2.673 billion, including $953.9 million classified as current. Approximately 87% of the debt portfolio was fixed-rate and 13% floating-rate. Interest expense rose to $15.2 million from $8.7 million, mainly due to debt issued in 2020 to bolster liquidity. The 2021 floating-rate notes mature in September 2021.
Material changes versus the prior period
- Sales, gross profit and operating income increased substantially. The comparison is affected by extra shipping days in Q1 2021 and by weaker demand and manufacturing disruptions in Q1 2020 as COVID-19 impacts emerged.
- Gross and operating margins improved, while SG&A increased modestly in dollars but declined to 17.8% of sales from 20.3%.
- Operating cash flow improved, though receivables and inventory used cash during Q1 2021.
- The effective tax rate was 22.2%, compared with 19.4%; the filing attributes the difference partly to the prior-year use of an interim-period rate and the geographic distribution of income and losses.
Outlook, commentary and risks
- Management said residential-market conditions were improving but expected fluctuating demand and COVID-19-related disruption to seasonality and supply chains to continue; duration and extent were uncertain. The filing provides no specific revenue or earnings guidance.
- COVID-related restructuring and productivity actions were expected to generate approximately $100–$110 million in savings; approximately $75 million had been realized through 2020 and Q1 2021. Associated costs were approximately $160 million over that period.
- Inflation in raw materials, energy, fuel, freight and other inputs may pressure results; the company may not be able to pass all increases to customers. Q1 operating income already reflected higher inflation.
- Contingencies include PFC-related water claims, securities and investor class actions, ongoing U.S. Attorney and SEC investigations, derivative actions, Belgian tax disputes and environmental matters. Mohawk disputes the allegations and intends to defend the claims. It says probable, estimable losses have been provided for, but excess losses cannot be estimated; outcomes could materially affect results, cash flows or liquidity in a particular period.
- Management said there were no material changes to previously disclosed risk factors and no off-balance-sheet arrangements at quarter-end.
Important facts for investors to verify
- Whether volume, pricing and productivity gains can continue to offset inflation and any reversal of the benefit from additional shipping days or favorable foreign exchange.
- Working-capital trends, particularly receivables and inventory, and the sustainability of operating cash flow relative to capital spending and shareholder repurchases.
- Debt maturities and refinancing plans, especially the September 2021 floating-rate notes, alongside current debt and available credit capacity.
- Developments and potential financial exposure in the securities-related investigations and litigation, PFC claims and Belgian tax disputes.
- Actual progress toward the stated restructuring savings target and the effect of continuing COVID-19, demand and supply-chain volatility on seasonality and results.