Mohawk Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended July 4, 2015; comparisons are to periods ended June 28, 2014. Amounts below are in millions of U.S. dollars unless stated otherwise. The company is a global flooring manufacturer. It realigned reporting into Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW); prior segment figures were reclassified.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2,041.7 | $2,048.2 | $3,922.9 | $3,861.3 |
| Gross profit / margin | $615.1 / 30.1% | $574.8 / 28.1% | $1,127.1 / 28.7% | $1,056.2 / 27.4% |
| Operating income / margin | $255.8 / 12.5% | $222.2 / 10.9% | $299.6 / 7.6% | $353.0 / 9.1% |
| Net earnings attributable to Mohawk | $186.5 | $152.8 | $208.8 | $233.8 |
| Diluted EPS | $2.53 | $2.08 | $2.83 | $3.19 |
| Interest expense | $16.8 | $20.7 | $33.3 | $42.8 |
- Q2: Sales were nearly flat year over year, as approximately $141 million of unfavorable foreign exchange offset volume and price/mix gains. Operating income rose 15.1%; management attributed improvement mainly to productivity, lower input costs, and higher volume, partly offset by currency effects and higher restructuring, acquisition, and integration costs.
- Six months: Sales increased 1.6%, but operating income fell 15.1% and diluted EPS fell 11.3%. The principal factor was a $125 million charge for settlement and defense of polyurethane-foam antitrust litigation, alongside unfavorable currency and price/mix effects.
- Six-month net earnings also reflected a lower effective tax rate (20.9% versus 23.8%); management cited a favorable Italian tax ruling and the geographic mix of earnings and losses.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $267.5 million, versus $97.9 million a year earlier. Investing cash outflow was $1,429.6 million, including $1,201.2 million for acquisitions and $228.4 million of capital expenditures. Financing cash inflow was $1,239.0 million.
- Cash at July 4, 2015 was $171.1 million, up from $97.9 million at year-end 2014; $127.1 million was held outside the U.S. The company estimated repatriation cost of that foreign cash at approximately $44.5 million.
- Total debt carrying value was $3,475.9 million, including $1,698.0 million classified as current; long-term debt was $1,777.8 million. Net debt was approximately $3,304.8 million, calculated as debt less cash.
- The amended, unsecured revolving credit facility was increased to $1.8 billion and extended to March 2020. After commercial paper and other utilization, $650.9 million remained available. U.S. commercial paper outstanding was $541.0 million, at a 0.48% weighted-average rate and 19-day weighted-average maturity. The receivables securitization facility was fully utilized at $500 million, secured by $763.8 million of receivables.
- Management said cash, operating cash generation, and credit-facility availability should cover capital expenditures, working capital, and debt service over the next 12 months. Capital spending for the remainder of 2015 was expected to be approximately $300–$400 million.
Business developments and material items
- Mohawk completed the IVC Group vinyl-flooring acquisition on June 12 for approximately $1.16 billion and acquired 90% of KAI Group, an Eastern European ceramic tile maker, on May 12 for approximately $194.6 million. Their results since acquisition were not material to reported earnings in this period. Purchase-price allocations remained preliminary; combined goodwill recorded was approximately $738.1 million.
- The company issued €500 million of 2.00% senior notes due January 2022, partly to fund the IVC acquisition. The notes were designated as a hedge of a portion of its European net investment.
- The $125 million polyurethane-foam litigation charge was recorded in Q1. Settlements of U.S. direct- and indirect-purchaser class actions and Canadian class actions were agreed, subject to court approval. Five individual U.S. cases remained pending; the company said remaining litigation could materially affect results, cash flows, or liquidity in a particular period.
- Belgian tax assessments for multiple years remained under dispute. The company stated it believed the matter would not materially affect financial condition, but could materially affect results, liquidity, or cash flows in a given period.
- After quarter-end, a European commercial paper program of up to €1 billion was established; proceeds were expected to repay euro-denominated credit-facility borrowings. The filing reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether the litigation settlements receive court approval, and the ultimate cost or exposure from the five remaining individual cases and other claims.
- Final purchase-price allocations and the acquired businesses’ contribution to sales, earnings, integration costs, and future cash generation.
- Debt maturities and refinancing needs, including the current debt classification, commercial-paper rollover exposure, and compliance with credit-facility covenants.
- Whether expected productivity, volume growth, and lower input costs can offset foreign-exchange and price/mix pressures; reported segment comparisons reflect the new segment structure.
- Developments in the Belgian tax dispute and any resulting cash, earnings, or liquidity impact.