Mohawk Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 29, 2019. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless noted.
Business context
Mohawk manufactures and sells flooring through Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW). The company cited slowing economies, import pressure and excess capacity in some markets, and expected a challenging environment through the rest of 2019.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $2,584.5 | $2,577.0 | $5,027.0 | $4,989.2 |
| Gross profit | $736.6 | $766.6 | $1,361.5 | $1,471.2 |
| Gross margin | 28.5% | 29.7% | 27.1% | 29.5% |
| Operating income | $266.9 | $326.3 | $432.2 | $594.7 |
| Operating margin | 10.3% | 12.7% | 8.6% | 11.9% |
| Net earnings attributable to Mohawk | $202.4 | $196.6 | $324.0 | $405.4 |
| Diluted EPS | $2.79 | $2.62 | $4.48 | $5.41 |
| Operating cash flow | Not separately stated | Not separately stated | $566.3 | $621.0 |
- Q2 sales were nearly flat year over year. Higher volume, including acquired sales, was substantially offset by unfavorable price/product mix and foreign exchange.
- Q2 operating income fell 18.2%; the company attributed the decline mainly to price/mix, lower production volumes, inflation and foreign exchange. Net earnings and diluted EPS increased despite lower operating income, with a lower effective tax rate contributing: 21.9% versus 37.6%.
- First-half operating income declined 27.3% and diluted EPS declined 17.2%. Management cited inflation, unfavorable price/mix and foreign exchange, lower production, restructuring/integration costs, and spending on product development, sales personnel and marketing.
- Segment performance diverged: Q2 sales rose 3.1% in Global Ceramic and 9.0% in Flooring ROW, but fell 7.0% in Flooring NA. Q2 operating income fell in Global Ceramic and Flooring NA, while Flooring ROW was approximately flat. In the first half, Flooring NA operating income fell to $60.2 million from $175.4 million.
Cash, debt and liquidity
- At June 29, 2019, cash and cash equivalents were $128.1 million; $103.5 million was held outside the U.S. Current assets were $4,808.3 million and current liabilities were $3,705.8 million.
- Total debt carrying value was $3,061.0 million, including $1,891.5 million classified as current and $1,169.5 million long-term. Total debt was $3,258.0 million at December 31, 2018. Debt includes commercial paper and senior notes.
- Commercial paper outstanding was $1,179.3 million. The $1.8 billion senior credit facility had $576.9 million of availability, including the effects of commercial paper and other utilization. The company reported compliance with financial covenants and said cash, operating cash flow and available credit should cover requirements for at least the next 12 months.
- Operating cash flow was $566.3 million in the first half, down $54.7 million year over year. Investing cash use was $353.9 million, including $281.1 million of capital spending and $76.8 million for acquisitions. Financing cash use was $205.4 million.
- Interest expense increased to $21.0 million in the first half from $15.4 million. At quarter-end, 62% of debt was floating-rate; management estimated a one-percentage-point increase in floating rates would raise first-half interest expense by $9.5 million.
Outlook, notable items and risks
- Management planned $550–580 million of 2019 capital investment; approximately $284 million of capital spending was expected during the remainder of the year. Projects included capacity and product expansions, including U.S. and European LVT, ceramic, premium laminate, carpet tile, sheet vinyl and countertops.
- The filing gives no specific revenue or earnings guidance. Management noted that markets were uncertain and expected challenging conditions to continue through the remainder of 2019.
- Restructuring, acquisition and integration activity continued. The first-half restructuring balance was $7.5 million, and remaining severance and other costs were expected to be paid over the following 12 months. The 2019 Netherlands distribution acquisition cost $72.0 million and was not material to consolidated results.
- ASC 842 lease adoption on January 1, 2019 added operating-lease right-of-use assets and liabilities; management said adoption materially affected the balance sheet but did not materially affect earnings or cash flow.
- Contingencies include Alabama municipal litigation involving chemicals purchased for carpet manufacturing before 2007, and Belgian tax disputes. Belgian assessments for 2005–2010 were under appeal after favorable lower-court rulings for Mohawk; additional assessments for 2011–2017 totaled amounts stated in euros and excluded interest. The company said it could not estimate potential losses beyond amounts accrued and that outcomes could affect results, cash flows or liquidity in a particular period.
- The company had a $500 million share repurchase authorization; approximately $216.9 million remained at quarter-end. It repurchased about 0.1 million shares during the quarter for $9.0 million.
Most important facts for investors to verify
- Whether Flooring NA stabilizes and whether cost, volume and margin pressures persist across segments.
- How the company manages the $1.18 billion commercial-paper balance, near-term debt maturities—including floating-rate notes due September 2019—and the credit-facility backstop.
- Whether planned capital investment generates expected capacity, productivity and product-mix benefits without further margin deterioration.
- Developments in the Belgian tax appeals and Alabama litigation, including any change in accrued exposure or potential cash impact.
- Whether cash generation, liquidity and covenant headroom remain adequate amid the stated challenging market conditions.