Mohawk Industries, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Global flooring manufacturer reporting the quarter ended October 3, 2015, and the nine months then ended. The company reorganized reporting into Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW); prior segment results were recast. Q3 comparisons are with the quarter ended September 27, 2014.
Financial results
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Net sales | $2,150.7m | $1,990.7m | $6,073.6m | $5,852.0m |
| Gross profit / margin | $661.4m / 30.8% | $556.4m / 28.0% | $1,788.5m / 29.4% | $1,612.6m / 27.6% |
| Operating income / margin | $288.7m / 13.4% | $213.7m / 10.7% | $588.3m / 9.7% | $566.7m / 9.7% |
| Net earnings attributable to Mohawk | $214.9m | $151.3m | $423.7m | $385.1m |
| Diluted EPS | $2.89 | $2.06 | $5.73 | $5.25 |
| Interest expense | $19.3m | $34.8m | $52.6m | $77.6m |
Q3 sales rose 8.0%, operating income 35.1%, and diluted EPS 40.3% year over year. Nine-month sales rose 3.8%, operating income 3.8%, and diluted EPS 9.1%. Q3 gross margin expanded 280 basis points; nine-month operating margin was unchanged.
Cash flow and liquidity: Nine-month operating cash flow was $657.0m, versus $323.4m a year earlier. Capital expenditures were $352.1m; acquisitions used $1,211.7m, contributing to investing cash outflow of $1,563.8m. Cash at October 3 was $110.7m. Current assets were $3,499.2m and current liabilities $3,299.8m. Management said available cash, operating cash generation, and credit and commercial-paper facilities should cover expected requirements for the next 12 months.
Debt: Total debt carrying value was $3,191.0m, including $1,927.8m classified as current; long-term debt was $1,263.2m. The $1.8bn revolving facility had $931.6m available after commercial paper and other utilization. Commercial paper outstanding was $702.3m. The $500m receivables securitization facility was fully drawn. The company issued €500m of 2.00% notes due 2022; $645.6m of 6.125% notes was due January 2016.
Material changes and segment performance
- Q3 sales growth reflected higher volume, partly offset by unfavorable foreign exchange and price/product mix. Acquisitions contributed about $178m of the quarter’s volume increase; currency reduced sales by about $131m.
- Q3 operating improvement reflected volume, productivity, and lower input costs. For the first nine months, these benefits were substantially offset by a $125m polyurethane-foam litigation charge, foreign exchange, price/mix, and higher investment and integration costs.
- Q3 segment sales and operating income: Global Ceramic $791.5m and $120.1m; Flooring NA $955.1m and $125.9m; Flooring ROW $404.0m and $55.5m. Nine-month Flooring NA operating income fell to $145.9m from $207.6m, primarily reflecting the litigation charge and adverse price/mix; Global Ceramic and Flooring ROW operating income increased.
- Acquisitions included IVC, a vinyl flooring business, completed June 12 for approximately $1.15bn, and 90% of KAI, a ceramic tile manufacturer, purchased for $194.6m. Acquisition purchase-price allocations were preliminary; acquired businesses’ reported-period results were not material to consolidated results.
Outlook, commentary, risks, and unusual items
- Management expected continued strong U.S. performance as housing starts and remodeling recovered; European operations improved locally despite a challenging macroeconomic environment. Management cautioned that a strong U.S. dollar would continue to weigh on translated foreign results. No specific revenue or earnings guidance was provided.
- Capital spending for the remainder of 2015 was expected to be approximately $150m–$200m, for growth, product innovation, and upgrades to acquired operations. Raw-material, energy, and fuel costs may fluctuate; the company noted it may not always pass cost increases through to customers.
- U.S. and Canadian polyurethane-foam antitrust settlements were reached, subject to court approval, and additional individual cases remained. The company recorded a $125m charge for settlements and defense. It said adequate provisions had been made, but outcomes remain uncertain.
- Belgian tax assessments covering multiple years were being contested; the consolidated case was scheduled for argument on December 2, 2015. The company said an adverse outcome could materially affect results, liquidity, or cash flows in a period; any loss beyond accrued amounts could not be estimated.
- Foreign-currency translation drove a $269.1m nine-month other comprehensive loss. The company reported no material change in risk factors from its 2014 Form 10-K and no off-balance-sheet arrangements. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the polyurethane-foam settlements received court approval and whether remaining individual claims require additional payments beyond the recorded charge.
- Progress and potential financial exposure in the Belgian tax dispute, including the outcome of the scheduled hearing.
- Debt maturities and refinancing or repayment plans for the 6.125% notes due January 2016, alongside commercial-paper and facility utilization.
- Final IVC and KAI purchase-price allocations, integration progress, and whether acquired-business contributions support ongoing growth and margins.
- Whether sales and profit trends can withstand foreign-exchange pressure, price/mix headwinds, and any reversal in favorable input costs.