Mohawk Industries, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; quarterly data are also provided. Mohawk is a global flooring manufacturer, with 2015 net sales of $8.07 billion. The company reorganized reporting into Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW); prior-year segment results were reclassified.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $8.072 billion | $7.803 billion |
| Gross profit / margin | $2.411 billion / 29.9% | $2.154 billion / 27.6% |
| Operating income / margin | $837.6 million / 10.4% | $772.8 million / 9.9% |
| Net earnings attributable to Mohawk | $615.3 million | $532.0 million |
| Diluted EPS | $8.31 | $7.25 |
| Operating cash flow | $911.9 million | $662.2 million |
| Capital expenditures | $503.7 million | $561.8 million |
| Long-term debt, including current portion | $3.200 billion | $2.253 billion |
| Cash and cash equivalents | $81.7 million | $97.9 million |
| Working capital | $1.994 billion | $1.885 billion |
Revenue rose 3.4%. Management attributed the increase primarily to higher volume, including acquired businesses, partly offset by approximately $490 million of unfavorable foreign-exchange effects and $28 million of unfavorable price and mix. Gross margin expanded 230 basis points. Operating income increased 8.4%, despite a significant litigation charge. The effective tax rate was 17.6%, compared with 19.8% in 2014; interest expense fell to $71.1 million from $98.2 million.
Cash used in investing activities was $1.874 billion, chiefly reflecting $1.371 billion of acquisitions; financing activities provided $964.1 million. Cash flow from operations less capital expenditures was approximately $408 million. At year-end, the $1.8 billion revolving credit facility had $907.7 million available after commercial paper and other utilization; the separate $500 million receivables securitization facility was fully utilized.
Segments
- Global Ceramic: Sales of $3.013 billion, down 0.1%; operating income of $414.2 million, up 18.0%, with a 13.7% segment margin. Foreign exchange offset volume and pricing gains.
- Flooring NA: Sales of $3.602 billion, up 4.7%; operating income of $264.3 million, down 11.9%, with a 7.3% margin. Litigation expense and unfavorable price/mix weighed on results.
- Flooring ROW: Sales of $1.457 billion, up 7.6%; operating income of $203.4 million, up 34.2%, with a 14.0% margin. Volume growth was partly offset by currency translation.
Fourth-quarter sales were $1.998 billion, up 2.4% year over year; net earnings were $191.6 million and diluted EPS was $2.57, versus $146.9 million and $2.00 in fourth-quarter 2014.
Material changes and notable items
- Mohawk acquired approximately 90% of KAI Group for $194.6 million, IVC Group for approximately $1.146 billion, and Xtratherm for approximately $158.9 million. Acquired businesses contributed about $396 million of 2015 sales; their earnings contribution was not material. Purchase-price allocations remained preliminary.
- The company recorded a $122.5 million charge in selling, general and administrative expenses for settlement and defense of polyurethane-foam antitrust cases. Most claims were settled; one individual U.S. case remained pending.
- Foreign-currency translation reduced 2015 comprehensive income and left accumulated other comprehensive loss of $793.6 million at year-end. The strong U.S. dollar also reduced reported sales and operating results.
- Debt increased substantially, in part to fund acquisitions. The remaining $645.6 million of 6.125% senior notes was repaid on January 15, 2016, using cash and revolver borrowings.
Outlook, risks and contingencies
Management provided no numeric earnings or sales guidance. It expected continued strong U.S. performance as housing starts and remodeling recovered, and described local European operations as improved despite challenging macroeconomic conditions. Management also expected the strong U.S. dollar to continue weighing on translated foreign results.
Key risks include exposure to housing and remodeling cycles, intense competition and pricing pressure, inability to pass through higher input costs, currency fluctuations, acquisition integration and valuation, financing needs and covenant compliance, and operating risks in emerging markets. The company also highlighted cybersecurity and systems disruption, environmental and product-liability exposures, and dependence on intellectual property. Licensing earnings from Flooring ROW patents were approximately €118 million in 2015; the UNICLIC patent family expires in 2017, and only part of that licensing income is expected to be retained thereafter.
Belgian tax assessments for multiple years remained disputed. In January 2016, a court ruled for Mohawk for tax years 2005 and 2009; the company anticipated an appeal, and the ruling may apply to other open years subject to differences in facts or procedure. Management stated that the ultimate outcome was not expected to materially affect financial condition, but could materially affect results, liquidity or cash flows in a period. The filing says provisions were recorded for probable, estimable contingencies, while excess losses, if any, could not be estimated.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor assessed internal controls as effective; the assessment excluded the three 2015 acquisitions.
Important facts for investors to verify
- How much reported growth and future profitability comes from organic volume versus acquisitions, foreign exchange, and pricing/mix.
- Whether acquired businesses meet expected integration, growth and margin objectives, and how final purchase-price allocations affect goodwill and intangible assets.
- The earnings and cash-flow implications of the remaining polyurethane-foam litigation and the adequacy of recorded legal provisions.
- Progress in replacing licensing revenue ahead of the 2017 patent expiry and the portion of royalties at risk.
- Debt refinancing, liquidity and covenant headroom after the January 2016 note repayment, including reliance on commercial paper and receivables securitization.
- Developments in the Belgian tax dispute, including any appeal and effects on cash flows or tax expense.