Mohawk Industries, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Amounts below are in U.S. dollars.
Business context
Mohawk is a global flooring manufacturer selling ceramic tile, carpet, rugs, resilient flooring, laminate, wood and related products. FY 2019 sales were nearly evenly divided between the United States (about 58%) and markets outside the United States. Its reporting segments are Global Ceramic, Flooring North America (NA) and Flooring Rest of the World (ROW).
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $9,970.7 million | $9,983.6 million |
| Gross profit / margin | $2,676.0 million / 26.8% | $2,838.1 million / 28.4% |
| Operating income / margin | $827.2 million / 8.3% | $1,095.3 million / 11.0% |
| Net earnings attributable to Mohawk | $744.2 million | $861.7 million |
| Diluted EPS | $10.30 | $11.47 |
| Cash from operations | $1,418.8 million | $1,181.3 million |
| Capital expenditures | $545.5 million | $794.1 million |
Operating cash flow less capital expenditures was approximately $873 million. Cash and equivalents were $134.8 million at year-end, including $110.0 million held outside the U.S. Working capital was $1.72 billion. Total debt, including current maturities, was $2.57 billion; the current portion was $1.05 billion. The company reported $1.07 billion of remaining availability under its $1.8 billion senior credit facility, which backs its commercial paper programs.
Fourth-quarter sales were $2,424.5 million, down 1.0% year over year; net earnings were $264.7 million and diluted EPS was $3.68, versus $229.3 million and $3.05 in Q4 2018.
Material changes versus the prior year
- Annual sales were essentially flat. Higher volume (including the full-year effect of prior-year acquisitions) was offset by foreign exchange and unfavorable price and product mix.
- Operating income fell 24.5%, while gross margin declined 159 basis points. Management cited inflation, price and mix, lower volumes and productivity, foreign exchange, temporary production cuts, and restructuring and integration costs.
- Global Ceramic sales increased 2.2%, but operating income decreased 23.2% to $340.1 million.
- Flooring NA sales declined 4.6%; operating income fell 51.9% to $167.4 million, reflecting lower volume, inflation and lower production.
- Flooring ROW sales rose 3.9% and operating income rose 3.9% to $359.4 million; higher volume and lower inflation were partly offset by unfavorable price and mix and foreign exchange.
- Operating cash flow increased by $237.4 million, primarily due to working-capital changes despite lower earnings. Investing cash outflow declined as acquisition spending and capital expenditures fell.
Outlook, unusual items and risks
- Management cited significant inflation, a strong U.S. dollar, slowing housing markets in some countries and consumer preference shifts toward LVT. It said it had implemented price increases across most product categories in response to material, transport and energy costs.
- Planned 2020 capital investment was approximately $560–$580 million. Management said cash on hand, operating cash generation and credit availability should cover capital spending, working capital and debt service over the next 12 months.
- The effective tax rate was 0.7%, versus 17.6% in 2018. European restructuring produced a $136.2 million deferred tax benefit and a $148.2 million current tax liability that was offset with deferred tax assets; the unusually low rate should not be treated as an ordinary operating trend.
- A $59.9 million impairment was recorded on the company’s net investment in a Chinese ceramic tile manufacturer and distributor. The annual goodwill and indefinite-lived intangible impairment test indicated no impairment, although the auditor identified goodwill valuation for Global Ceramic and Flooring NA as a critical audit matter.
- Key risks include economic and housing-market weakness, competition and pricing pressure, raw-material and energy inflation, foreign exchange, acquisition execution, debt refinancing and covenant compliance, and supply-chain disruption. The filing specifically noted uncertainty around coronavirus-related sourcing from China and Brexit-related trade and currency effects.
- Disclosed contingencies include PFC-related water claims, two putative securities class actions filed in 2020, and Belgian tax disputes. The company says it has accrued probable, estimable losses but cannot estimate any additional loss range; outcomes could materially affect results, cash flows or liquidity in a particular period.
Important facts for investors to verify
- Whether margins and operating income recover, particularly in Flooring NA and Global Ceramic, and whether pricing offsets inflation and product-mix pressure.
- The use and renewal of commercial paper and the approximately $1.05 billion of debt classified as current at year-end, including the 2020 note maturity.
- The sustainability of cash generation, planned 2020 capital spending and expected returns from capacity expansions and acquisition-related investments.
- The assumptions supporting the $136.2 million deferred tax asset, the unusually low FY 2019 tax rate, and the status of Belgian tax matters.
- Developments in PFC and securities litigation, the China investment impairment, and the effect of COVID-19 and other supply-chain or currency risks.