Mohawk Industries, Inc. — Q1 2019 Form 10-Q
Business and period: Global flooring manufacturer with Global Ceramic, Flooring North America (NA), and Flooring Rest of World (ROW) segments. This unaudited report covers the three months ended March 30, 2019, compared with the three months ended March 31, 2018. Results are seasonal; Q1 is typically among the weaker quarters for Flooring NA and Global Ceramic.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $2,442.5 million | $2,412.2 million |
| Gross profit / margin | $624.9 million / 25.6% | $704.7 million / 29.2% |
| Operating income / margin | $165.3 million / 6.8% | $268.4 million / 11.1% |
| Net earnings attributable to Mohawk | $121.6 million | $208.8 million |
| Diluted EPS | $1.67 | $2.78 |
| Operating cash flow | $170.1 million | $183.2 million |
Sales rose 1.3%; management attributed the increase mainly to volume and acquisitions, partly offset by fewer shipping days and unfavorable foreign exchange. Gross margin declined 363 basis points. Management cited inflation, restructuring and integration costs, weaker production volumes, temporary production reductions, unfavorable mix, and currency effects; savings from investment and cost-reduction initiatives partly offset these pressures.
Segment operating income: Global Ceramic was $84.3 million, down from $113.4 million; Flooring NA was $0.6 million, down from $74.7 million; Flooring ROW was $90.4 million, up from $89.1 million. Flooring NA’s sharp decline reflected inflation, lower production and sales volumes, and restructuring costs.
Cash, debt and liquidity
At March 30, 2019, cash and cash equivalents were $105.7 million, total debt carrying value was $3.261 billion, and total stockholders’ equity was $7.577 billion. Cash declined from $119.1 million at year-end 2018. Operating cash flow was lower year over year, primarily due to working-capital movements. Investing cash outflow was $211.8 million, including $136.9 million of capital spending and $76.8 million for acquisitions; financing cash inflow was $26.8 million.
Commercial paper outstanding totaled $1.405 billion. Mohawk reported $351.6 million of availability under its $1.8 billion senior credit facility after utilization, including commercial paper and letters of credit. The company stated cash, operating cash generation, and credit availability should cover capital expenditure, working-capital, and debt-service needs for at least 12 months. Approximately 64% of debt was floating rate; management estimated a 1 percentage-point rate increase would add $4.2 million to quarterly interest expense.
Outlook, changes and notable items
- Management planned $550–580 million of capital investment in 2019; expected capital spending for the remainder of 2019 was approximately $428 million.
- Management did not provide specific earnings or sales guidance in the supplied filing text. It cited continued investment in capacity, product expansion, and productivity.
- A Netherlands flooring distributor was acquired for approximately $72 million in January 2019; its results were not material to consolidated operations.
- ASC 842 lease accounting was adopted January 1, 2019, adding operating-lease right-of-use assets and liabilities. The adoption materially affected the balance sheet but not operating results or cash flow.
- Restructuring and acquisition-related costs were elevated: $32.6 million in cost of sales and $3.1 million in SG&A in Q1. Remaining severance and other restructuring costs were expected to be paid over the next 12 months.
- Key uncertainties include inflation and input-cost recovery, demand and competition, production levels, foreign exchange, acquisitions and integration, and litigation and tax matters. Belgian tax assessments and appeals, and Alabama municipal litigation involving chemicals formerly used in carpet manufacturing, remain pending. The company said it could not estimate losses beyond amounts accrued; adverse outcomes could affect results, cash flows, or liquidity in a period.
Important facts for investors to verify
- Whether Flooring NA’s near-break-even operating result and the gross-margin decline persist or improve.
- How much planned capital spending converts into productivity, capacity, and margin benefits, and whether the $550–580 million investment plan is maintained.
- Commercial-paper refinancing and credit-facility headroom, especially with $1.405 billion of commercial paper outstanding and floating-rate exposure.
- Developments in the Belgian tax disputes and Alabama litigation, including any changes to accrued contingencies or potential loss estimates.
- Acquisition contribution to sales growth versus legacy growth; Q1 sales included approximately $120 million from acquisitions, while foreign exchange reduced sales by approximately $73 million.