Mohawk Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 29, 2018; year-to-date results cover the nine months ended September 29, 2018. Comparatives are the corresponding 2017 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Mohawk manufactures and markets flooring and related products through Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW). The company completed its acquisition of Australia and New Zealand flooring company Godfrey Hirst on July 2, 2018, for approximately $400.9 million; its results are included from that date.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,545.8 | $2,448.5 | $7,535.0 | $7,122.2 |
| Gross profit | $720.4 | $783.3 | $2,191.7 | $2,242.8 |
| Gross margin | 28.3% | 32.0% | 29.1% | 31.5% |
| Operating income | $287.2 | $380.1 | $882.0 | $1,010.7 |
| Operating margin | 11.3% | 15.5% | 11.7% | 14.2% |
| Net earnings attributable to Mohawk | $227.0 | $270.0 | $632.4 | $731.3 |
| Diluted EPS | $3.02 | $3.61 | $8.42 | $9.77 |
- Q3 sales rose 4.0%, but operating income fell 24.4% and diluted EPS fell 16.3%. For the first nine months, sales rose 5.8%, while operating income declined 12.7% and diluted EPS declined 13.8%.
- Management attributed margin and earnings pressure chiefly to inflation, including materials and freight, start-up costs for expansion projects, production reductions or lower-than-expected output, and higher restructuring and integration costs. Price and product mix, sales volume, productivity savings, and lower tax expense partly offset these pressures.
- Q3 segment sales were $885.8 for Global Ceramic, $1,047.5 for Flooring NA, and $612.5 for Flooring ROW. Flooring ROW sales increased 17.0%, partly reflecting acquisitions; its operating income was nearly flat at $84.1. Flooring NA operating income declined to $93.4 from $163.5, while Global Ceramic operating income declined to $118.7 from $143.4.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $894.5, versus $874.2 a year earlier. Capital expenditures were $642.9; acquisitions, net of cash acquired, used $425.3. Net cash used in investing was $1,028.3. Cash and cash equivalents ended at $91.4.
- At September 29, 2018, current assets were $4,548.5 and current liabilities $2,957.3. Total debt was $2,862.4, including $1,333.9 classified as current; long-term debt was $1,528.6. Cash was $91.4. Debt therefore exceeded cash by approximately $2,771.1.
- Commercial paper outstanding was $969.5. The company reported $762.8 of remaining availability under its $1.8 billion senior credit facility after utilization, including commercial paper and letters of credit. Credit covenants require interest coverage of at least 3.0 to 1.0 and net leverage no greater than 3.75 to 1.0.
- Approximately 59% of debt was floating-rate. Management estimated a 1 percentage-point rate increase would add $4.2 of interest expense for the quarter and $12.6 for the nine-month period.
Outlook, significant items and risks
- Management expected local sales growth to continue in 2018 and was implementing price increases in response to rising material costs. It planned approximately $800 million of full-year 2018 capital spending, including about $130 million for the remainder of the year; the expansion program was expected to add approximately $35 million of start-up costs. Management stated available cash, operating cash flow, and credit facilities should meet requirements for at least the next 12 months.
- After quarter-end, the company agreed to acquire Brazilian ceramic tile producer Eliane for approximately $250 million, with closing expected in Q4 2018. On October 25, the board authorized a share repurchase program of up to $500 million; it does not require purchases.
- The company recorded an additional $54.7 of net tax expense during the first nine months related to updated estimates under U.S. tax reform guidance. Its estimated transition tax liability was $206.0 at quarter-end, payable over eight years. Accounting for certain tax-reform provisions remained incomplete.
- Two Alabama municipal lawsuits concerning perfluorinated compounds remained pending; the company said it had never manufactured the compounds but had purchased them for carpet manufacturing before 2007. It also faced Belgian tax appeals: the company had received favorable lower-court rulings for 2005–2010, but the tax authority appealed; a lien on certain Belgian properties remains in place. The company said it could not estimate potential losses beyond accrued amounts and that an adverse outcome could affect results, cash flow, or liquidity in a given period.
- Adoption of the new lease standard was planned for fiscal 2019 and was expected to materially increase reported assets and liabilities through recognition of right-of-use assets and lease liabilities. Management cited inflation and input costs, foreign exchange, competition, execution and integration of acquisitions, capital spending, and litigation and tax matters among factors that could affect results.
Important facts for investors to verify
- Whether pricing and productivity improvements can offset materials, freight, and other inflation, particularly in Flooring NA, and whether margins recover from Q3 levels.
- How expansion-related start-up costs, production levels, and the planned approximately $800 million of 2018 capital expenditures affect cash generation and returns.
- Integration and performance of Godfrey Hirst, the timing and funding of the proposed Eliane acquisition, and any actual share repurchases.
- Changes in commercial paper usage, debt maturities, floating-rate exposure, credit-facility availability, and compliance with debt covenants.
- Final U.S. tax-reform estimates and outcomes of the Alabama litigation and Belgian tax appeals, including any changes in accrued contingencies.