Mohawk Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparisons are with the three months ended April 2, 2016. Mohawk is a global flooring manufacturer with Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW) segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $2.221 billion | $2.172 billion | +2.2% |
| Gross profit / margin | $680.4 million / 30.6% | $639.7 million / 29.5% | Margin +110 bps |
| Operating income / margin | $274.8 million / 12.4% | $245.7 million / 11.3% | +11.8%; margin +110 bps |
| Net earnings attributable to Mohawk | $200.6 million | $171.5 million | +16.9% |
| Diluted EPS | $2.68 | $2.30 | +16.5% |
| Operating cash flow | $165.9 million | $151.9 million | +$14.0 million |
| Capital expenditures | $201.3 million | $140.8 million | +$60.4 million |
Sales growth reflected approximately $50 million of higher volume and $16 million from price and mix, partly offset by approximately $18 million of unfavorable currency effects. Operating income benefited from capital-investment and cost-reduction savings, volume, and price/mix; higher input costs and spending on product development, sales, and marketing partly offset those gains.
Segment sales and operating income: Global Ceramic $785.0 million and $116.0 million (sales +1.5%); Flooring NA $939.5 million and $92.1 million (sales +3.7%); Flooring ROW $496.2 million and $76.1 million (sales +0.9%). ROW operating income declined from $79.5 million, primarily due to higher material costs and unfavorable exchange rates. Global Ceramic and Flooring NA operating income increased.
Liquidity, debt, and balance sheet
- Cash was $188.4 million at April 1, 2017, versus $121.7 million at December 31, 2016. Operating cash flow was more than offset by $202.1 million of investing outflows, mainly capital expenditures.
- Carrying value of total debt was $2.630 billion, including $1.498 billion classified as current and $1.132 billion long-term. Debt increased from $2.511 billion at year-end; commercial paper borrowings rose, while the $500 million receivables securitization balance was repaid.
- Commercial paper outstanding totaled $1.458 billion. The company reported $302.7 million available under its $1.8 billion senior credit facility and an additional $500 million unused securitization facility, or $802.7 million combined availability.
- Receivables were $1.498 billion and inventories $1.741 billion at quarter-end. The company said cash, operating cash generation, and available facilities should meet capital, working-capital, and debt-service needs for the next 12 months.
Outlook, material events, and risks
- Management expected second-quarter local-currency sales growth to continue and operating income to improve despite inflation, expiring patents, and a weaker British pound. It was implementing product price increases in response to rising material costs.
- Full-year 2017 capital spending was expected to exceed $750 million, with more than $550 million expected during the remainder of the year.
- On April 4, 2017, after quarter-end, Mohawk completed the acquisition of an Italian ceramic company for approximately €189.9 million. Purchase-price allocation was not yet complete.
- Key exposures include raw-material, energy and fuel costs; the ability to recover cost increases through pricing; foreign exchange; competition; acquisition execution; and economic and housing-market conditions. First-quarter results are seasonally weaker in the NA and Global Ceramic segments.
- Legal matters include Gadsden, Alabama litigation concerning the historical use of perfluorinated compounds in carpet manufacturing and a Belgian tax dispute. Mohawk said it had provided for probable estimable losses, but could not estimate any additional loss range; an adverse outcome could affect results, liquidity, or cash flows in a period. Belgian tax authorities appealed a ruling favorable to Mohawk and placed liens on certain properties.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material risk-factor changes from the 2016 annual report were reported.
Important facts for investors to verify
- Whether planned price increases offset continued material-cost inflation without weakening sales volume or margins.
- Actual 2017 capital spending and the effect of the investment program on operating cash flow and returns.
- Integration costs, purchase-price allocation, and expected benefits of the Italian acquisition.
- Commercial-paper refinancing and liquidity availability, including the facility maturity extensions and covenant compliance.
- Developments in the Gadsden litigation and Belgian tax appeal, and whether either results in material cash or earnings exposure.