Mohawk Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; compared with the three months ended March 29, 2014. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Mohawk is a global flooring manufacturer operating through Carpet, Ceramic, and Laminate and Wood segments. Reported sales and earnings reflect the impact of foreign exchange, additional shipping days, higher sales volumes, restructuring and acquisition-related activity, and a significant polyurethane-foam antitrust litigation charge.
Financial performance
| Metric | Q1 2015 | Prior-year quarter |
|---|---|---|
| Net sales | $1.881 billion | $1.813 billion |
| Gross profit / margin | $511.9 million / 27.2% | $481.4 million / 26.5% |
| Operating income / margin | $43.8 million / 2.3% | $130.7 million / 7.2% |
| Net earnings attributable to Mohawk | $22.3 million | $81.1 million |
| Diluted EPS | $0.30 | $1.11 |
| Interest expense | $16.4 million | $22.1 million |
| Operating cash flow | $(49.6) million | $(71.0) million |
| Capital expenditures | $105.8 million | $122.1 million |
Revenue increased 3.8%. Management attributed the increase principally to additional shipping days (about $105 million) and higher volume (about $93 million), partly offset by unfavorable foreign exchange (about $137 million). The effective tax rate was 20.8%, versus 21.9%.
Segment sales and operating income were: Carpet, $739.3 million and a $90.0 million operating loss; Ceramic, $719.8 million and $85.3 million operating income; Laminate and Wood, $448.4 million and $58.9 million operating income. The Carpet result included the $125 million litigation charge.
Financial position, liquidity, and debt
At April 4, 2015, cash was $107.0 million and total assets were $8.285 billion. Total debt carrying value was $2.412 billion, including $1.806 billion classified as current; stockholders’ equity totaled $4.224 billion. The current debt classification includes commercial paper and obligations due in the near term.
Cash used in operations was $49.6 million, while investing activities used $109.1 million and financing activities provided $175.3 million. Working-capital movements affected operating cash flow. The company reported $657.1 million of commercial paper outstanding at a 0.60% weighted-average rate and 27-day weighted-average maturity, plus $492.9 million drawn on its receivables securitization facility. It had $1.135 billion of availability under its $1.8 billion revolving credit facility. Management said available cash, operating cash generation, and revolver availability should meet capital expenditure, working-capital, and debt-service needs for the next 12 months.
The revolving facility was amended in March 2015, increased from $1.0 billion to $1.8 billion, and extended to March 2020. It requires minimum interest coverage of 3.0x and maximum net leverage of 3.75x. About 55% of debt was fixed-rate and 45% floating-rate; management said a 1-percentage-point rate change on floating-rate debt would not materially affect results.
Material changes, outlook, and risks
- Earnings decline and litigation charge: SG&A rose to $468.2 million, or 24.9% of sales, from $350.6 million, or 19.3%. The principal factor was a $125 million charge for settlement and defense of U.S. polyurethane-foam cases. Management cited this charge, product launches and geographic expansion, foreign exchange, price/mix, and employee costs among factors weighing on operating income; volume growth and productivity partly offset them.
- Litigation: Mohawk agreed to settle direct-purchaser class claims on March 23 and indirect-purchaser class claims on April 30, 2015; both agreements remained subject to court approval. Other purchaser claims remained, and the company said any additional loss beyond accrued amounts could not be estimated. Canadian class actions had an agreement in principle to settle, not yet finalized. Belgian tax assessments for multiple years were being contested; the company warned that resolution could affect results, liquidity, or cash flows in a period.
- Acquisition plans: The company announced a proposed acquisition of IVC Group for an estimated transaction value of about €1.0 billion, subject to adjustments and regulatory approval, and a proposed 90% stake in an Eastern European ceramic-tile manufacturer for about €175 million, also subject to conditions and approval.
- Capital spending: Remaining 2015 capital expenditures were expected to be approximately $300–$350 million. The company also cited integration, international operations, input-cost volatility, competition, and litigation among forward-looking risks. It reported no material changes to its previously disclosed risk factors.
- Other items: Foreign-currency translation produced a $226.1 million quarterly other comprehensive loss. Management noted that Q1 is typically the weakest season for Carpet and Ceramic, and for Laminate and Wood.
Most important facts for investors to verify
- Whether the U.S. polyurethane-foam settlements received court approval, their final cash cost, and the exposure from remaining claims.
- The cause and durability of the sharp operating-margin and EPS decline, including performance excluding the $125 million litigation charge.
- Near-term debt maturities and refinancing plans, covenant headroom, and continued access to commercial paper and the revolving facility.
- Working-capital and operating-cash-flow trends alongside planned capital spending and the funding and approval status of the proposed acquisitions.
- Developments in Belgian tax litigation and the potential financial effect beyond amounts accrued.