Business context and reporting period
Mohawk Industries, Inc. manufactures and distributes flooring products through Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW). This unaudited Form 10-Q covers the quarter and six months ended July 1, 2017; comparisons are with the periods ended July 2, 2016. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2,453.0 | $2,310.3 | $4,673.7 | $4,482.4 |
| Gross profit | $779.1 | $755.6 | $1,459.5 | $1,395.3 |
| Gross margin | 31.8% | 32.7% | 31.2% | 31.1% |
| Operating income | $355.8 | $350.7 | $630.6 | $596.4 |
| Operating margin | 14.5% | 15.2% | 13.5% | 13.3% |
| Net earnings attributable to Mohawk | $260.7 | $255.2 | $461.2 | $426.7 |
| Diluted EPS | $3.48 | $3.42 | $6.17 | $5.73 |
| Operating cash flow | — | — | $413.9 | $564.7 |
At July 1, 2017, cash was $130.2, current assets $4,010.7, and current liabilities $3,220.7. Total debt carrying value was $2,928.5, including $1,754.1 classified as current and $1,174.4 as long-term. Cash less total debt was approximately negative $2,798.3. The company had $174.1 of availability under its senior credit facility and $350.0 under its receivables securitization facility.
Six-month capital expenditures were $425.4; operating cash flow less capital expenditures was approximately negative $11.5, before acquisitions and other investing activity. Net cash used in investing was $675.9, including $250.5 of acquisitions. Cash increased $8.6 during the six-month period.
Material changes versus comparable periods
- Q2 sales rose 6.2%; six-month sales rose 4.3%. Growth reflected higher volume and favorable price/product mix, partly offset by unfavorable foreign exchange and, in Q2, fewer shipping days.
- Q2 net earnings increased 2.2% and diluted EPS increased from $3.42 to $3.48. For six months, net earnings increased 8.1% and diluted EPS rose from $5.73 to $6.17.
- Q2 gross margin declined 90 basis points and operating margin declined 70 basis points, as higher input and material costs and restructuring/acquisition-related costs outweighed volume, price/mix, and productivity gains. Six-month gross and operating margins improved 10 and 20 basis points, respectively.
- Flooring ROW operating income fell to $86.1 from $101.1 in Q2 and to $162.1 from $180.6 for six months, reflecting higher input costs, foreign exchange effects, and lower patent revenue. Global Ceramic and Flooring NA operating income increased in both comparisons.
- Operating cash flow decreased $150.9 for the six-month period, primarily due to working-capital changes. Receivables and inventories increased, while investing outflows rose with acquisitions and higher capital spending.
Outlook, commentary, risks and unusual items
- Management described sales growth prospects as supported by U.S. housing and remodeling, and cited market-share growth in Europe, Mexico, and Russia. It noted rising material costs and said it was implementing price increases. No specific earnings or revenue guidance was provided.
- Capital spending for the remainder of 2017 was expected to exceed $450, implying full-year spending above $850, for product expansion and cost-reduction projects. Management said available cash, operating cash generation, and credit facilities should meet requirements over the next 12 months.
- In April 2017, Mohawk acquired Italian ceramic producer Emil for approximately $186.2; it also acquired three other businesses in Q2 for approximately $63.4. Emil’s results were included from the acquisition date and were not material to consolidated results.
- Input-cost inflation, the ability to recover cost increases through pricing, foreign-exchange movements, market conditions, and acquisition integration are key risks. Around 60% of debt was floating-rate; a one-percentage-point increase in rates would have increased six-month interest expense by $8.7.
- Two Alabama municipal lawsuits concern past use of perfluorinated compounds in carpet manufacturing. Mohawk denies manufacturing the compounds and intends to defend the cases; it says outcomes could adversely affect results, liquidity, or cash flow in a period. Belgian tax assessments remain contested; the company won an initial ruling for two years, but the tax authority appealed and placed liens on certain properties. Loss exposure beyond accrued amounts was not estimable.
- Mohawk expected ASC 842 lease adoption in fiscal 2019 to materially increase reported assets and liabilities. ASC 606 adoption was planned for fiscal 2018 and was not then expected to materially affect reported financial position, results, or cash flows.
Important facts for investors to verify
- Whether price increases can offset continued material-cost inflation without weakening volume or margins.
- How working capital, capital expenditures above $850 for 2017, and acquisition spending affect cash generation and debt.
- Commercial-paper refinancing and liquidity: $1,544.8 of commercial paper was outstanding, with $174.1 available under the credit facility backstop at quarter-end.
- Flooring ROW’s operating-income decline, including the effects of input costs, foreign exchange, and lower patent revenue.
- Developments and potential financial impacts in the Alabama litigation and Belgian tax dispute, for which the filing does not provide a clear estimate of additional potential losses.