Mohawk Industries, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 27, 2014; compared with periods ended September 28, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Mohawk is a global flooring manufacturer with Carpet, Ceramic, and Laminate and Wood reporting segments. The nine-month comparison includes Marazzi and Spano acquisition contributions; these acquisitions materially affect reported growth.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,990.7 | $1,961.5 | $5,852.0 | $5,424.7 |
| Gross profit | $556.4 | $516.9 | $1,612.6 | $1,408.0 |
| Gross margin | 28.0% | 26.4% | 27.6% | 26.0% |
| Operating income | $213.7 | $175.9 | $566.7 | $395.9 |
| Operating margin | 10.7% | 9.0% | 9.7% | 7.3% |
| Net earnings attributable to Mohawk | $151.3 | $119.1 | $385.1 | $254.1 |
| Diluted EPS | $2.06 | $1.63 | $5.25 | $3.53 |
Cash flow, debt and liquidity
- Nine-month cash from operations was $323.4 million, versus $327.0 million a year earlier. Capital expenditures were $391.6 million, up from $255.5 million; operating cash flow less capital expenditures was negative $68.2 million.
- Cash and equivalents were $105.6 million at September 27, 2014. Current assets were $3,368.8 million and current liabilities $1,831.4 million.
- Total debt carrying value was $2,390.3 million, including $583.5 million current and $1,806.8 million long-term. Cash less total debt implies net debt of approximately $2,284.7 million.
- Commercial paper outstanding was $569.1 million at a 0.63% weighted-average rate and 42-day average maturity. The $1.0 billion revolving facility had $381.4 million of availability after commercial paper and other utilization. The receivables securitization facility was fully drawn at $500 million.
- Management said cash, operating cash generation, and revolving-credit availability should meet capital expenditure, working-capital, and debt-service needs for the next 12 months. Cash held outside the U.S. was $60.1 million; estimated repatriation cost was $21.0 million.
Material changes and management commentary
- Q3 sales increased 1.5%; nine-month sales rose 7.9%. Management attributed approximately $328 million of the nine-month volume increase to Marazzi and Spano acquisitions. Q3 growth reflected higher volume and favorable price/product mix, partly offset by foreign exchange.
- Nine-month operating income increased 43.1%. Management cited productivity, sales volume, lower restructuring and integration costs, and favorable price/product mix; higher input costs partially offset gains. Input costs also weighed on Q3 results.
- All segments reported higher Q3 operating income. Ceramic was the largest contributor to the nine-month increase, with operating income of $268.3 million versus $152.2 million.
- Nine-month investing cash outflow fell year over year because the prior period included acquisitions; current-period capital spending was higher. Management expected $140–$160 million of additional capital expenditures during the remainder of 2014, including capacity, acquired-asset upgrades, product innovation, and a luxury vinyl tile plant.
- Foreign currency translation reduced other comprehensive income by $301.6 million for the nine months, leaving accumulated other comprehensive loss of $122.9 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management identified raw-material, energy, and fuel costs, competitive conditions, and the ability to pass cost increases through to customers as risks.
- Q3 interest expense included approximately $16.5 million of premium and fees for the August redemption of $200 million of 6.125% notes. The redemption was at 107.73% of principal. Approximately $700 million of those notes remained outstanding, due January 2016.
- U.S. polyurethane-foam antitrust class actions were certified; the appeal of certification was denied. Plaintiffs’ direct-purchaser class asserts up to approximately $1.2 billion in damages across all defendants, with potential statutory trebling. Mohawk disputes the allegations; the filing says any excess loss beyond accrued amounts cannot be estimated.
- Belgian tax authorities issued disputed assessments for multiple years. The company is contesting them and says the outcome is not expected to materially affect financial condition, but could materially affect results, liquidity, or cash flows in a quarter or year.
- Management reported no material change in disclosed risk factors and concluded disclosure controls were effective. The company planned to adopt the new revenue-recognition standard in fiscal 2017 and was assessing its impact.
Investor verification priorities
- Separate organic growth and operating performance from the Marazzi and Spano acquisition contribution.
- Track working-capital needs, capital expenditures, and cash conversion, given operating cash flow below capital spending in the first nine months.
- Review near-term debt maturities, commercial-paper refinancing needs, revolver availability, and covenant headroom.
- Monitor the antitrust litigation and Belgian tax disputes, including possible effects on earnings, liquidity, and cash flows.
- Assess sensitivity to input-cost inflation, foreign exchange movements, and the ability to recover cost increases through pricing.