Mohawk Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 3, 2021; comparisons are with the quarter ended June 27, 2020. Six-month comparisons are with the six months ended June 27, 2020. Amounts below are in millions except per-share data.
Business context and results
Mohawk manufactures and sells flooring globally through Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW). Management cautions that the COVID-19 pandemic continues to affect demand, supply chains, and normal seasonality; the prior-year comparison was significantly affected by pandemic-related demand declines and manufacturing disruption.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,953.8 | $2,049.8 | $5,622.9 | $4,335.6 |
| Gross profit / margin | $902.2 / 30.5% | $370.0 / 18.0% | $1,694.0 / 30.1% | $986.4 / 22.8% |
| Operating income (loss) / margin | $404.4 / 13.7% | ($61.0) / (3.0%) | $721.9 / 12.8% | $90.5 / 2.1% |
| Net earnings (loss) attributable to Mohawk | $336.3 | ($48.3) | $573.1 | $62.3 |
| Diluted EPS | $4.82 | ($0.68) | $8.18 | $0.87 |
| Operating cash flow | Not presented quarterly | $598.0 | $763.5 |
Financial position, cash flow, and material changes
- Q2 sales rose 44.1% year over year; six-month sales rose 29.7%. Growth reflected higher volumes, favorable pricing/product mix, currency effects, and additional shipping days. All three segments increased sales; Flooring ROW grew fastest in Q2, up 67.8%.
- Operating income improved substantially from the prior-year loss in Q2. Management attributed the improvement primarily to higher volumes, productivity, favorable price/mix, fewer manufacturing disruptions, lower restructuring costs, and currency effects. Higher inflation partially offset these benefits.
- For the six months, operating cash flow declined $165.5 million year over year, primarily because of working-capital changes, despite higher earnings. Receivables and inventory increased; cash flow included a $297.2 million increase in receivables and a $184.1 million increase in inventory.
- At July 3, cash and cash equivalents were $753.7 million and short-term investments were $662.4 million. Current assets were $5,950.6 million versus current liabilities of $3,178.9 million.
- Total debt carrying value was $2,682.1 million, including $958.8 million classified as current; long-term debt was $1,723.3 million. The company had $1,799.2 million available under its senior credit facility and no commercial paper outstanding. Approximately 87% of debt was fixed-rate. Management said available cash, operating cash flow, and credit facilities should cover needs for at least the next 12 months.
- Investing cash use was $328.5 million, including $227.4 million of capital expenditures. Financing cash use was $275.8 million, including $264.5 million of share repurchases. A $500 million repurchase authorization had $172.7 million remaining at July 3.
Outlook, commentary, and risks
- Mohawk planned $650–700 million of 2021 capital investment for capacity expansion, product differentiation, and productivity improvements. Management also expects COVID-related demand variability and potential departures from historical seasonality to continue, with duration and effects uncertain.
- Cost-reduction actions were expected to deliver approximately $100–110 million in savings; about $95 million had been realized in 2020 and the first half of 2021. Related costs were approximately $165 million over that same period. Remaining severance and restructuring costs were expected to be paid within 12 months.
- Inflation in raw materials, freight, energy, packaging, and labor may not be fully offset by pricing, depending on timing, competition, and market conditions. Management reported higher inflation as a partial offset to operating improvement.
- Q2 effective tax rate was 16.0%; the six-month rate was 18.7%. Management cited geographic profit mix and a one-time Italian tax-planning election that realigned tax asset values. Other income included a $6.2 million resolution of foreign non-income tax contingencies.
- Contingencies include PFC-related claims, shareholder securities and investor lawsuits, derivative actions, ongoing U.S. Attorney and SEC investigations, and Belgian tax disputes. Mohawk denies liability or wrongdoing where stated and intends to defend the matters. It says probable, estimable losses are provided for, but cannot estimate any loss beyond accrued amounts; outcomes could materially affect results, cash flows, or liquidity in a particular period.
- The filing reports no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether strong sales and margin performance persists after accounting for the unusually weak pandemic-affected prior-year comparison and the company’s seasonality.
- Whether pricing and productivity can continue to offset raw-material, freight, energy, and other inflation, and how working-capital needs affect cash conversion.
- Upcoming debt maturities: €300 million floating-rate notes due September 2021 and €500 million 2.00% senior notes due January 2022; confirm repayment or refinancing and the resulting liquidity impact.
- Progress and returns on planned capital spending, and remaining costs and realized savings from restructuring actions.
- Developments and potential financial exposure from the pending litigation, government investigations, and Belgian tax assessments; the filing does not provide a clear estimate of potential losses beyond amounts accrued.