Mohawk Industries, Inc. — Q1 2016 Form 10-Q
Business context and period. Global flooring manufacturer with three reporting segments: Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW). The quarter ended April 2, 2016; comparisons are with the quarter ended April 4, 2015. Segment presentation reflects a 2015 realignment.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $2.172 billion | $1.881 billion |
| Gross profit / margin | $639.7 million / 29.5% | $511.9 million / 27.2% |
| Operating income / margin | $245.7 million / 11.3% | $43.8 million / 2.3% |
| Net earnings attributable to Mohawk | $171.5 million | $22.3 million |
| Diluted EPS | $2.30 | $0.30 |
| Operating cash flow | $137.8 million | $(49.6) million |
| Capital expenditures | $140.8 million | $105.8 million |
Sales increased 15.5%. Higher volume—including contributions from acquisitions and legacy operations—was partly offset by fewer shipping days, unfavorable foreign exchange, and slightly unfavorable price and mix. Gross margin improved 230 basis points. The company cited higher volume, lower material costs, and savings from capital investments and cost-reduction programs as drivers of improved profitability.
Segment sales and operating income were: Global Ceramic, $773.7 million and $99.8 million; Flooring NA, $906.4 million and $75.4 million; Flooring ROW, $492.0 million and $79.5 million. Flooring NA had an operating loss of $75.2 million in the prior-year quarter, while the other two segments increased operating income.
Liquidity, debt, and other metrics
- At April 2, 2016, cash was $98.3 million and total debt carrying value was approximately $3.250 billion, including $2.076 billion classified as current. Cash and total stockholders’ equity were $5.157 billion.
- Commercial paper outstanding totaled $1.545 billion. The revolving facility had $227.3 million available after commercial paper and other usage; a separate delayed-draw term loan facility had $200 million available and no borrowings outstanding.
- Operating cash flow improved by $187.4 million year over year, principally reflecting higher earnings; working-capital movements partly offset the increase. Investing cash outflow was $140.8 million, primarily capital spending.
- Management expected 2016 capital spending, excluding acquisitions, of approximately $450–$500 million. It stated available cash, operating cash generation, and credit facilities should meet capital, working-capital, and debt-service needs over the next 12 months.
- Interest expense declined to $12.3 million from $16.4 million, mainly following repayment of the remaining 6.125% senior notes in January 2016. Approximately 64% of debt was fixed-rate and 36% floating-rate; management said a 1 percentage-point rate change on floating-rate debt would not materially affect results.
Material changes, outlook, and risks
- The large year-over-year earnings improvement is not solely an operating trend: Q1 2015 included a $125 million charge related to polyurethane-foam litigation settlements and defense. Q1 2016 also benefited from higher volume, cost savings, lower material costs, and reduced interest expense, while spending on product development, sales, marketing, and capacity expansion was a partial offset.
- Recent acquisitions contributed materially to reported growth, particularly in Flooring ROW. IVC and KAI were acquired in 2015; Xtratherm was acquired in December 2015. Acquisition purchase-price allocations remained preliminary for certain items.
- Management expected continued strength in the U.S. market as housing starts and remodeling recovered, while noting a challenging European macroeconomic environment and a continued adverse translation effect from a strong U.S. dollar. The filing provides no specific earnings or sales guidance.
- Risks include foreign-exchange movements, economic and industry conditions, competition, input-cost volatility and the ability to pass costs through, acquisition integration, capital-spending execution, and litigation and tax matters. Results are seasonal; first-quarter results tend to be weaker in Flooring NA and Global Ceramic.
- Belgian tax authorities appealed a court ruling favorable to Mohawk for tax years 2005 and 2009; related assessments for multiple years remain contested. The company said an adverse outcome could materially affect results, liquidity, or cash flows in a given period, though it did not expect a material adverse effect on financial condition.
- One polyurethane-foam individual lawsuit remained pending, with trial scheduled for November 2016; the company stated it had provided for the matter and did not expect a material adverse effect on financial condition. Most related class and individual cases had been settled.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable in legacy operations versus acquisition contributions and the prior-year litigation charge.
- Whether operating cash generation continues to cover elevated capital spending and working-capital requirements.
- Commercial-paper refinancing exposure, facility availability, and compliance with credit-facility leverage and interest-coverage covenants.
- Developments in the Belgian tax appeal and the remaining polyurethane-foam lawsuit, including any changes to accrued amounts or potential exposure.
- Foreign-exchange effects, input-cost trends, and progress integrating acquired businesses and completing planned investments.