Mohawk Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparison is the three months ended March 30, 2019. Mohawk manufactures and sells flooring products globally through Global Ceramic, Flooring North America and Flooring Rest of the World.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2,285.8 million | $2,442.5 million | Down 6.4% |
| Gross profit / margin | $616.4 million / 27.0% | $624.9 million / 25.6% | Profit down 1.4%; margin up 138 bps |
| Operating income / margin | $151.5 million / 6.6% | $165.3 million / 6.8% | Down 8.3% |
| Net earnings attributable to Mohawk | $110.5 million | $121.6 million | Down 9.1% |
| Diluted EPS | $1.54 | $1.67 | Down 7.8% |
| Operating cash flow | $195.0 million | $170.1 million | Up $24.8 million |
Interest expense was $8.7 million, down from $10.5 million; other expense was $5.7 million versus other income of $3.7 million, primarily reflecting unfavorable foreign-exchange effects. The effective tax rate was 19.4%, compared with 23.3%.
Sales fell in all three segments: Global Ceramic $848.5 million (down 5.6%), Flooring NA $848.3 million (down 8.0%) and Flooring ROW $589.0 million (down 5.3%). Segment operating income was $49.1 million, $33.7 million and $77.2 million, respectively. Flooring NA improved substantially from $0.6 million in the prior-year quarter; Global Ceramic and Flooring ROW operating income declined.
Cash, debt and liquidity
- At March 28, 2020, cash and cash equivalents were $263.1 million; current assets were $4.61 billion and current liabilities were $2.87 billion.
- Total debt carrying value was $2.72 billion, including $1.21 billion classified as current. Debt includes finance leases; operating lease liabilities were $345.5 million separately. Cash was $263.1 million.
- The $1.8 billion senior credit facility had $906.1 million available at quarter-end after facility usage, letters of credit and commercial paper. Commercial paper outstanding was $305.9 million; the filing notes COVID-related volatility in commercial-paper markets.
- Operating cash flow was $195.0 million; investing cash outflow was $133.4 million, including $115.6 million of capital expenditures; financing cash inflow was $87.2 million. The company repurchased $68.6 million of stock during the quarter.
- After quarter-end, Mohawk borrowed the full $500 million under a new unsecured term loan on April 15, 2020; the single repayment is due April 6, 2021. This is a subsequent event and is not included in March 28 debt balances.
Material changes and management commentary
Management attributed the sales decline to lower volumes (about $46 million), fewer shipping days (about $38 million), unfavorable price and mix (about $39 million), and foreign exchange (about $34 million). COVID-19 reduced demand toward quarter-end and drove costs from temporarily lowering production. Productivity gains, lower inflation and reduced restructuring-related costs partly offset these pressures; gross margin improved despite lower sales.
Management expected near-term demand to remain weak and warned of possible additional plant closures, furloughs or layoffs. It was reducing near-term capital expenditures for the remainder of 2020, extending vendor payment terms and putting further share repurchases on hold. The company stated that cash, operating cash generation and available credit were expected to cover requirements for at least 12 months, while noting it continued to reassess liquidity needs. No quantified earnings or revenue guidance is provided.
Foreign-currency translation losses of $322.4 million contributed to a comprehensive loss attributable to Mohawk of $211.5 million; this translation effect was recorded in other comprehensive income and did not represent the quarter’s net earnings. Mohawk concluded goodwill and indefinite-lived intangibles were not impaired at quarter-end, but cautioned that a prolonged pandemic could prompt future impairment testing and charges.
Risks, contingencies and unusual items
- COVID-19 and the associated downturn could further reduce demand, disrupt supply, manufacturing or delivery, increase costs, and affect asset values; the duration and impact were described as uncertain.
- Pending matters include PFC-related water claims, U.S. securities class actions, and Belgian tax disputes. The company intends to defend the claims; it says probable, estimable losses are accrued, but cannot estimate any loss beyond accrued amounts. Outcomes could materially affect results, cash flows or liquidity in a period.
- Senior credit facility covenants require interest coverage of at least 3.0-to-1 and net leverage no greater than 3.75-to-1, subject to stated terms and exceptions.
- Approximately 57% of debt was floating-rate at quarter-end; a 1 percentage-point increase in floating rates would have increased quarterly interest expense by $3.8 million, according to the filing.
Important facts for investors to verify
- How subsequent-quarter demand, production levels and segment profitability developed as COVID-19 disruptions continued.
- Liquidity after the $500 million term-loan draw, including repayment planning for the April 2021 maturity, commercial-paper access and covenant headroom.
- Whether planned capital-expenditure reductions and cost actions affect capacity, productivity or future demand recovery.
- Updates on PFC, securities and Belgian tax matters, including any changes to accruals or potential exposure.
- Whether sustained economic weakness triggers impairment testing or charges against goodwill and indefinite-lived intangible assets.