Mohawk Industries, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the quarter and nine months ended October 1, 2016. Amounts below are in U.S. dollars.
Business context
Mohawk is a global flooring manufacturer reporting through Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW). It completed the Emilceramica acquisition in April 2017 and acquired three additional businesses during the second quarter.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2.449 billion | $2.294 billion | $7.122 billion | $6.777 billion |
| Gross profit / margin | $783.3 million / 32.0% | $726.6 million / 31.7% | $2.243 billion / 31.5% | $2.122 billion / 31.3% |
| Operating income / margin | $380.1 million / 15.5% | $378.3 million / 16.5% | $1.011 billion / 14.2% | $974.7 million / 14.4% |
| Net earnings attributable to Mohawk | $270.0 million | $269.9 million | $731.3 million | $696.6 million |
| Diluted EPS | $3.61 | $3.62 | $9.77 | $9.34 |
| Operating cash flow | Not separately presented | Not separately presented | $874.2 million | $1.000 billion |
Quarterly sales rose 6.7%, but operating income was nearly flat and diluted EPS declined slightly. For the nine-month period, sales rose 5.1%, operating income 3.7%, and diluted EPS 4.6%. Gross margin improved modestly year over year, while operating margin declined.
Q3 sales growth reflected favorable price and product mix, foreign exchange, and acquisition volume; legacy sales volume declined modestly, with hurricanes and lower patent revenue among the factors cited. Nine-month operating income benefited from cost savings and pricing/mix, partly offset by higher materials and other input costs, employee costs, and higher restructuring, acquisition and integration-related and other costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $874.2 million, down $126.1 million year over year, primarily due to working-capital changes. Capital expenditures were $654.6 million; acquisitions used $250.8 million. Net cash used in investing was $905.4 million.
- Cash and cash equivalents were $84.5 million at September 30, 2017, including $74.4 million held outside the United States. Total debt carrying value was $2.717 billion, including $1.173 billion classified as current and $1.545 billion long-term.
- Commercial paper outstanding was $1.150 billion. The company reported $575.9 million of remaining availability under its $1.8 billion senior credit facility and no borrowings under its $500 million receivables securitization facility. The credit facility matures in March 2022; the securitization facility was scheduled to terminate December 19, 2017.
- Debt was 44% fixed-rate and 56% floating-rate. Management stated that cash, operating cash generation, and available facilities should meet capital expenditure, working-capital, and debt-service needs over the next 12 months.
Material changes, outlook and risks
- Mohawk issued €300 million of floating-rate notes due September 2019 in September 2017. The company expected full-year 2017 capital spending of approximately $900 million, with more than $200 million planned for the remainder of the year.
- Management cited continued sales growth expectations, anticipated operating-income improvement, and price increases in response to rising material costs. It also identified inflation, patent-revenue declines, currency movements, and input-cost pressures as factors affecting results. No specific earnings or revenue guidance was provided.
- Q3 operating income comparisons were affected by unusual prior-year items: the 2016 period included approximately $90 million received in a contract dispute and a roughly $48 million charge to write off the Lees tradename. These items complicate interpretation of year-over-year expense and margin trends.
- Alabama municipal lawsuits allege damages related to perfluorinated compounds formerly used in carpet manufacturing; Mohawk says it did not manufacture the compounds and intends to defend the cases. The company said outcomes are not expected to materially affect financial condition, but could materially affect results, liquidity, or cash flows in a period.
- A Belgian tax dispute remains under appeal after a lower court ruled for Mohawk for two years; Belgian authorities appealed and placed liens on certain Flooring ROW properties. The filing says the liens do not interfere with operations and that any loss beyond amounts accrued cannot be estimated clearly.
- ASC 606 adoption was planned for fiscal 2018 using the cumulative-effect method; management did not expect a material financial-statement impact. Lease accounting adoption was planned for fiscal 2019 and was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether pricing and cost-reduction initiatives can offset material-cost inflation without further deterioration in operating margins.
- How much future revenue and earnings are affected by declining patent revenue, hurricane-related disruption, and the integration of acquisitions.
- Whether working capital normalizes and operating cash flow supports the planned capital expenditure level.
- Commercial-paper refinancing and liquidity exposure, including the status or renewal of the receivables securitization facility after its stated December 2017 termination date.
- Developments and potential financial exposure in the Alabama litigation and Belgian tax appeal.