Mohawk Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; comparisons are to the periods ended June 29, 2019. Figures are in millions of dollars except per-share amounts. Financial statements are unaudited.
Business context and performance
Mohawk manufactures and sells flooring through Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW). COVID-19 disruptions sharply reduced demand and constrained customer and facility operations during the quarter. Management said results improved as the quarter progressed.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2,049.8 | $2,584.5 | $4,335.6 | $5,027.0 |
| Gross profit / margin | $370.0 / 18.0% | $736.6 / 28.5% | $986.4 / 22.8% | $1,361.5 / 27.1% |
| Operating income (loss) / margin | $(61.0) / (3.0)% | $266.9 / 10.3% | $90.5 / 2.1% | $432.2 / 8.6% |
| Net earnings attributable to Mohawk | $(48.3) | $202.4 | $62.3 | $324.0 |
| Diluted EPS | $(0.68) | $2.79 | $0.87 | $4.48 |
| Operating cash flow | Not separately presented | Not separately presented | $763.5 | $566.3 |
Q2 sales fell 20.7%; management attributed the decline mainly to lower volumes, with additional unfavorable foreign exchange and price/product mix. For the first half, sales declined 13.8%. Lower volume and costs from reduced production were major pressures on gross profit and operating income; restructuring and integration costs also increased. Productivity gains and lower inflation partly offset these headwinds.
Q2 segment sales and operating results: Global Ceramic sales were $753.3 and operating loss was $33.8; Flooring NA sales were $800.1 and operating loss was $45.5; Flooring ROW sales were $496.4 and operating income was $29.5. All three segments reported lower sales year over year.
Liquidity, debt and capital allocation
- Cash and equivalents were $737.7 at June 27, 2020, versus $134.8 at December 31, 2019. Current assets were $4,746.0 and current liabilities $1,872.2.
- Net cash from operations was $763.5 for the first half, up from $566.3. The increase reflected working-capital movements, including a $306.1 inventory-related cash source, despite lower earnings.
- Capital expenditures were $196.3, compared with $281.1 in the prior-year half. Management said it was reducing near-term capital spending and expected lower spending for the remainder of 2020.
- Debt carrying value was $2,708.5, compared with $2,569.9 at year-end; cash less carrying-value debt was approximately $(1,970.8), versus $(2,435.1) at year-end. The filing reports $129.6 of commercial paper outstanding and $1,647.6 available under the $1.8 billion senior credit facility, including the commercial-paper backstop.
- Mohawk issued $500 million of 3.625% notes due 2030 and €500 million of 1.750% notes due 2027. It used the dollar-note proceeds, together with cash, to repay a $500 million term loan drawn in April. The company also repaid €300 million of notes due in May.
- The company amended its credit facility covenants in May, temporarily increasing the maximum net leverage ratio to 4.75:1 for specified quarters from September 2020 through December 2021. Share repurchases were paused; $442.9 million had been repurchased under the authorization before the pause.
Outlook, management commentary and risks
- Management expected decreased demand to continue across some markets, while noting near-term conditions were improving. The filing provides no quantified sales or earnings guidance.
- Global cost actions, including facility closures, rationalization and workforce reductions, were expected to generate annual savings of approximately $110–$120 million at an estimated cost of approximately $170 million. Management expected about $70 million of additional restructuring costs, primarily asset write-downs, largely completed in 2020.
- Management said cash, operating cash generation and credit availability should be sufficient for capital expenditures, working capital and debt service for at least 12 months, while noting it could pursue further debt financing.
- COVID-19 could disrupt supply, manufacturing and delivery, reduce revenue, increase costs, and lead to goodwill or other asset impairments. No goodwill or indefinite-lived intangible impairment was identified in the quarter; management said a prolonged pandemic could require reassessment.
- Mohawk disclosed a securities class action alleging, among other things, improper revenue recognition and inventory practices; related securities and derivative actions; and subpoenas from the U.S. Attorney’s Office and SEC on similar topics. The company said it intended to defend the claims and cooperate with government inquiries. Its Audit Committee’s internal investigation was substantially complete as of August 4, 2020.
- Other disclosed matters include PFC-related litigation and Belgian tax disputes. The company said it could not estimate any loss beyond amounts accrued; contingencies could materially affect results, cash flows or liquidity in a period, even if not its financial condition overall.
Most important facts for investors to verify
- Whether demand, production levels and margins recovered after quarter-end, and how much of the Q2 loss was temporary versus ongoing.
- Delivery and timing of the $110–$120 million annual savings target, alongside the expected restructuring charges and reduced capital spending.
- Cash-flow durability: first-half operating cash flow benefited from working-capital changes, including inventory reduction.
- Debt maturity, covenant headroom and access to commercial-paper markets; confirm covenant compliance under the amended leverage terms.
- Developments and potential financial exposure from the SEC and U.S. Attorney subpoenas, shareholder litigation, PFC claims and Belgian tax matters.
- Whether prolonged COVID-19 effects or changing assumptions trigger impairment testing or other material charges.