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Mohawk Industries Reports Q3 Results

October 24, 2019 at 4:07 PM EDT

CALHOUN, Ga., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Mohawk Industries, Inc. (NYSE: MHK) today announced 2019 third quarter net earnings of $156 million and diluted earnings per share (EPS) of $2.15. Adjusted net earnings were $199 million, and EPS was $2.75, excluding restructuring, acquisition and other charges. Net sales for the third quarter of 2019 were $2.5 billion, down 1.0% as reported but flat on a constant currency and days basis. For the third quarter of 2018, net sales were $2.5 billion, net earnings were $227 million and EPS was $3.02, adjusted net earnings were $246 million, and EPS was $3.29, excluding restructuring, acquisition and other charges.

For the nine months ending September 28, 2019, net earnings and EPS were $480 million and $6.61, respectively. Net earnings excluding restructuring, acquisition and other charges were $564 million and EPS was $7.77. For the 2019 nine-month period, net sales were $7.5 billion, flat versus prior year as reported or an increase of 3% on a constant currency and days basis. For the nine-month period ending September 29, 2018, net sales were $7.5 billion, net earnings were $632 million and EPS was $8.42; excluding restructuring, acquisition and other charges, net earnings and EPS were $735 million and $9.80.

Commenting on Mohawk Industries’ third quarter performance, Jeffrey S. Lorberbaum, Chairman and CEO, stated, “Our third quarter operating results were in line with our expectations, though we are not satisfied with our performance. As anticipated, our U.S. businesses presented the greatest challenges during the period given soft retail demand, the impact of LVT, a stronger dollar and excess ceramic industry inventories. Trends in our other major markets weakened, creating a more competitive environment. We expect the present conditions to persist and will further adjust our strategies as needed.

“We are progressing on many initiatives to improve our business, with the most significant of these being aligning ceramic production with demand in the U.S., realigning our North American carpet operations, optimizing our LVT manufacturing and ramping up our new plants. In addition, we are entering new product categories, introducing innovative product extensions and optimizing our recent acquisitions in Australia, New Zealand and Brazil. We are investing more in sales personnel and marketing to increase our penetration in new and existing products. We continue to streamline our operations to enhance efficiencies, and we are leveraging automation and process enhancements to lower costs. 

“Our free cash flow for the quarter is up year over year, and our balance sheet remains strong. Since the beginning of the third quarter, we purchased over 740,000 shares for approximately $91 million under our stock purchase program.

“For the quarter, our Global Ceramic Segment sales increased 3.5% as reported and 4% on a constant currency and days basis. The segment’s operating margin was 9% as reported, declining year over year primarily due to inflation and lower production rates partially offset by productivity. Our ceramic businesses around the world are facing slowing economies, and excess industry capacities are increasing competition. The U.S. ceramic market has been impacted by a decline in product mix, consumers shifting to LVT and excess inventories in the channel. Recently, the U.S. imposed 104% tariffs on Chinese imports, and further anti-dumping duties are anticipated. We expect the U.S. ceramic market to remain soft, and we are taking actions to improve our sales and costs. We are expanding our offering of stone looks and polished tiles and introducing additional value-oriented collections. We are initiating a limited launch of our new easy installation ceramic tile, and we will expand more broadly in the beginning of the year. We are developing new markets for our porcelain roofing and thick landscape tiles. Our new countertop plant in Tennessee is ramping up, processes and formulations are being refined and new products are being created. Although the Mexican economy has slowed, we have outperformed the industry by expanding our product offering and growing our customer base. We have outpaced the Brazilian ceramic market with our premium brand and leading offering, and we are installing a new porcelain line. In Europe, lower demand is impacting pricing and compressing margins as we increased sales of lower value tile. We are strengthening our higher value offerings by expanding our commercial technical tile, porcelain slabs and outdoor products. Our Russian ceramic business is the market leader and is gaining share due to our national distribution system, owned and franchised stores and project specification teams.

“During the quarter, our Flooring North America Segment’s sales decreased 4% with an operating margin of 8% as reported. Operating income for the segment declined primarily due to lower volume and inflation. The segment has been reorganized by product category to enhance our sales, product and operational strategies and execution. Polyester carpets continue to gain share in a soft market, which has reduced our overall product mix. We have completed the expansion of recycled polyester fiber to support continued growth in the category. The realignment of our residential carpet manufacturing will be largely complete in the fourth quarter and will improve our cost, quality and service. We are closing higher cost extrusion and dyeing assets and consolidating yarn and tufting operations. We have increased automation and upgraded assets to reduce our backing and yarn costs. Our commercial business continues to outperform residential with carpet tile and LVT growing fastest. We are expanding our sales organization and increasing our carpet tile manufacturing. During the period, LVT sales outperformed the other categories, and our operations improved production volume, speeds and cost. In September, we set a record for rigid LVT production, and our flexible LVT line is running at speeds comparable to our European operations. Our manufactured sheet vinyl sales continue to grow as we broaden our position in the apartment and home center channels. We expanded our waterproof laminate offering, and our RevWood collection is growing with its superior scratch and dent resistance, state-of-the art visuals and greater value.

“For the quarter, our Flooring Rest of the World Segment’s sales decreased 2% as reported and increased 2.5% on a constant basis. The segment’s operating margin was 14% as reported, due to volume growth and lower inflation offset by price and mix. In a slower environment, the segment delivered solid results, driven by product innovation, cost improvements, new businesses and acquisitions. Our new LVT, sheet vinyl, laminate and carpet tile operations are making progress in reaching our expected levels. In laminate, we outperformed the market as our new premium products gained momentum and improved our mix. We have introduced the Signature collection, which sets the standard for the most realistic visuals and textures, and we are adding our water-proof technology to most of our laminate products. Our Russian laminate expansion is operating at expected levels, and our sales are growing. As our LVT production increases, we are expanding our sales organization, and we are introducing new rigid collections that are embossed in registration. We continue to enhance our line speeds, yields and formulations, reducing our costs. Our sheet vinyl business improved as our new Russian plant expanded sales and volume increased. Our insulation business is performing well, with volumes at historically high levels with selling prices and material costs declining. Our panels business has slowed, reducing our pricing and volume partially offset by mix and material cost. In Australia and New Zealand, the integration of our acquisition is largely complete. To increase our position, we are upgrading hard and soft surface offerings, investing in our retail and commercial sales and we have closed high cost assets in Australia.

“We see the present market conditions continuing, and we are taking actions to better position our business for the future. We are investing more in sales and marketing to expand placement of our products and increase the utilization of our new plants. Our new greenfield projects will progress as sales and costs improve. Our LVT production is improving, and increased distribution will follow. Our U.S. and European ceramic businesses are being impacted by lower market demand, and we are reducing inventory levels, expanding product offerings and entering new categories. The restructuring of our U.S. carpet operations will be substantially complete this year and will benefit our costs next year. Taking all of this into account, our EPS guidance for the fourth quarter of 2019 is $2.13 to $2.23, excluding any one-time charges.

“Next year, our business will benefit from our new products, higher utilization of our start-ups and cost reductions we have taken during 2019. Our results and balance sheet should improve with strong cash generation to take advantage of future opportunities. We have a strong global management team, and they are focused on enhancing our results and optimizing our long-term profitability. We will adapt our business strategies to future circumstances as required.”

ABOUT MOHAWK INDUSTRIES
Mohawk Industries is the leading global flooring manufacturer that creates products to enhance residential and commercial spaces around the world. Mohawk’s vertically integrated manufacturing and distribution processes provide competitive advantages in the production of carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring. Our industry leading innovation has yielded products and technologies that differentiate our brands in the marketplace and satisfy all remodeling and new construction requirements. Our brands are among the most recognized in the industry and include American Olean, Daltile, Durkan, Eliane, Feltex, Godfrey Hirst, IVC, Karastan, Marazzi, Mohawk, Mohawk Group, Pergo, Quick-Step and Unilin. During the past decade, Mohawk has transformed its business from an American carpet manufacturer into the world’s largest flooring company with operations in Australia, Brazil, Canada, Europe, India, Malaysia, Mexico, New Zealand, Russia and the United States.

Certain of the statements in the immediately preceding paragraphs, particularly anticipating future performance, business prospects, growth and operating strategies and similar matters and those that include the words “could,” “should,” “believes,” “anticipates,” “expects,” and “estimates,” or similar expressions constitute “forward-looking statements.” For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in economic or industry conditions; competition; inflation and deflation in raw material prices and other input costs; inflation and deflation in consumer markets; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company’s products; impairment charges; integration of acquisitions; international operations; introduction of new products; rationalization of operations; taxes and tax reform, product and other claims; litigation; and other risks identified in Mohawk’s SEC reports and public announcements.

Conference call Friday, October 25, 2019, at 11:00 AM Eastern Time
The telephone number is 1-800-603-9255 for US/Canada and 1-706-634-2294 for International/Local. Conference ID # 9847415. A replay will be available until November 24, 2019, by dialing 1-855-859-2056 for US/local calls and 1-404-537-3406 for International/Local calls and entering Conference ID # 9847415.

               
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES              
(Unaudited)              
Condensed Consolidated Statement of Operations Data Three Months Ended   Nine Months Ended
(Amounts in thousands, except per share data) September 28, 2019   September 29, 2018   September 28, 2019   September 29, 2018
               
Net sales $ 2,519,185     2,545,800       7,546,160     7,535,016  
Cost of sales   1,827,494     1,825,367       5,492,924     5,343,336  
Gross profit   691,691     720,433       2,053,236     2,191,680  
Selling, general and administrative expenses   451,471     433,189       1,380,826     1,309,730  
Operating income   240,220     287,244       672,410     881,950  
Interest expense   9,316     9,025       30,310     24,416  
Other (income) expense, net   52,713     706       45,929     6,794  
Earnings before income taxes   178,191     277,513       596,171     850,740  
Income tax expense   22,522     49,487       116,273     215,928  
Net earnings including noncontrolling interest   155,669     228,026       479,898     634,812  
Net income attributable to noncontrolling interest   151     1,013       354     2,447  
Net earnings attributable to Mohawk Industries, Inc. $ 155,518     227,013       479,544     632,365  
               
Basic earnings per share attributable to Mohawk Industries, Inc.              
Basic earnings per share attributable to Mohawk Industries, Inc. $ 2.16     3.03       6.63     8.46  
Weighted-average common shares outstanding - basic   72,106     74,603       72,302     74,599  
               
Diluted earnings per share attributable to Mohawk Industries, Inc.              
Diluted earnings per share attributable to Mohawk Industries, Inc. $ 2.15     3.02       6.61     8.42  
Weighted-average common shares outstanding - diluted   72,392     74,945       72,578     74,977  
               
               
Other Financial Information              
(Amounts in thousands)              
Net cash provided by operating activities $ 411,761     273,498       978,086     894,485  
Depreciation and amortization $ 144,920     132,972       422,693     382,673  
Capital expenditures $ 124,555     144,594       405,614     642,949  
               
Condensed Consolidated Balance Sheet Data              
(Amounts in thousands)              
          September 28, 2019   September 29, 2018
ASSETS              
Current assets:              
Cash and cash equivalents         $ 111,303     91,351  
Receivables, net           1,787,158     1,755,710  
Inventories           2,337,952     2,214,295  
Prepaid expenses and other current assets           491,367     487,114  
Total current assets           4,727,780     4,548,470  
Property, plant and equipment, net           4,600,630     4,586,236  
Right of use operating lease assets           334,083     -  
Goodwill           2,519,214     2,522,139  
Intangible assets, net           916,953     944,661  
Deferred income taxes and other non-current assets           294,102     399,420  
Total assets         $ 13,392,762     13,000,926  
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
Current portion of long-term debt and commercial paper         $ 1,273,158     1,333,853  
Accounts payable and accrued expenses           1,738,859     1,623,418  
Current operating lease liabilities           102,682     -  
Total current liabilities           3,114,699     2,957,271  
Long-term debt, less current portion           1,483,581     1,528,551  
Non-current operating lease liabilities           238,560     -  
Deferred income taxes and other long-term liabilities           790,643     912,100  
Total liabilities           5,627,483     5,397,922  
Redeemable noncontrolling interest           -     31,227  
Total stockholders' equity           7,765,279     7,571,777  
Total liabilities and stockholders' equity         $ 13,392,762     13,000,926  
               
               
Segment Information Three Months Ended   As of or for the Nine Months Ended
(Amounts in thousands) September 28, 2019   September 29, 2018   September 28, 2019   September 29, 2018
               
Net sales:              
Global Ceramic $ 916,422     885,773       2,772,805     2,691,618  
Flooring NA   1,001,908     1,047,540       2,907,327     3,055,468  
Flooring ROW   600,855     612,487       1,866,028     1,787,930  
Intersegment sales   -     -       -     -  
Consolidated net sales $ 2,519,185     2,545,800       7,546,160     7,535,016  
               
Operating income (loss):              
Global Ceramic $ 84,410     118,716       286,886     366,893  
Flooring NA   80,223     93,369       140,374     268,779  
Flooring ROW   84,428     84,108       276,392     273,334  
Corporate and intersegment eliminations   (8,841 )   (8,949 )     (31,242 )   (27,056 )
Consolidated operating income $ 240,220     287,244       672,410     881,950  
               
Assets:              
Global Ceramic         $ 5,385,279     4,999,334  
Flooring NA           4,020,205     3,989,784  
Flooring ROW           3,736,296     3,709,623  
Corporate and intersegment eliminations           250,982     302,185  
Consolidated assets         $ 13,392,762     13,000,926  



Reconciliation of Net Earnings Attributable to Mohawk Industries, Inc. to Adjusted Net Earnings Attributable to Mohawk Industries, Inc. and Adjusted Diluted Earnings Per Share Attributable to Mohawk Industries, Inc.
(Amounts in thousands, except per share data)                
  Three Months Ended   Nine Months Ended  
  September 28, 2019   September 29, 2018   September 28, 2019   September 29, 2018  
Net earnings attributable to Mohawk Industries, Inc. $ 155,518     227,013     479,544     632,365    
Adjusting items:                
Restructuring, acquisition and integration-related and other costs   1,542     19,890     49,877     58,036    
Acquisitions purchase accounting , including inventory step-up   -     7,090     3,716     8,638    
Impairment of investment in a manufacturer and distributor of Ceramic tile in China [1]   65,172     -     65,172     -    
Release of indemnification asset   (659 )   -     (659 )   1,749    
Income taxes - reversal of uncertain tax position   659     -     659     (1,749 )  
Income taxes   (22,807 )   (7,701 )   (34,660 )   35,465    
Adjusted net earnings attributable to Mohawk Industries, Inc. $ 199,425     246,292     563,649     734,504    
                 
Adjusted diluted earnings per share attributable to Mohawk Industries, Inc. $ 2.75     3.29     7.77     9.80    
Weighted-average common shares outstanding - diluted   72,392     74,945     72,578     74,977    
                 
[1] In September, the US commerce department imposed a 104% countervailing duty on top of the 25% general tariffs on all ceramic produced in China. As a consequence, ceramic purchases from China will dramatically decline and Mohawk is taking a $65 million write off to our investment in a Chinese manufaturer and distributor.
                 
                 
Reconciliation of Total Debt to Net Debt
(Amounts in thousands)                
  September 28, 2019              
Current portion of long-term debt and commercial paper $ 1,273,158                
Long-term debt, less current portion   1,483,581                
Less: Cash and cash equivalents   111,303                
Net Debt $ 2,645,436                
                 
                 
Reconciliation of Operating Income to Adjusted EBITDA
(Amounts in thousands)               Trailing Twelve
  Three Months Ended Months Ended
  December 31, 2018   March 30, 2019   June 29, 2019   September 28, 2019 September 28, 2019
Operating income $ 213,376     165,330     266,860     240,220   885,786  
Other (Expense)/ Income   (504 )   3,736     3,048     (52,713 ) (46,433 )
Net (income) loss attributable to noncontrolling interest   (704 )   10     (213 )   (151 ) (1,058 )
Depreciation and amortization   139,092     137,291     140,482     144,920   561,785  
EBITDA   351,260     306,367     410,177     332,276   1,400,080  
Restructuring, acquisition and integration-related and other costs   20,412     39,495     8,840     1,542   70,289  
Impairment of investment in a manufacturer and distributor of Ceramic tile in China   -     -     -     65,172   65,172  
Acquisitions purchase accounting, including inventory step-up   6,721     2,552     1,164     -   10,437  
Release of indemnification asset   2,857     -     -     (659 ) 2,198  
Adjusted EBITDA $ 381,250     348,414     420,181     398,331   1,548,176  
                 
Net Debt to Adjusted EBITDA               1.7  
                 
                 
Reconciliation of Net Sales to Net Sales on a Constant Exchange Rate and on Constant Shipping Days Excluding Acquisition Volume
(Amounts in thousands)                
  Three Months Ended   Nine Months Ended  
  September 28, 2019   September 29, 2018   September 28, 2019   September 29, 2018  
Net sales $ 2,519,185     2,545,800     7,546,160     7,535,016    
Adjustment to net sales on constant shipping days   (1,332 )   -     37,182     -    
Adjustment to net sales on a constant exchange rate   35,215     -     159,570     -    
Net sales on a constant exchange rate and constant shipping days   2,553,068     2,545,800     7,742,912     7,535,016    
Less: impact of acquisition volume   (70,357 )   -     (325,352 )   -    
Net sales on a constant exchange rate and constant shipping days excluding acquisition volume $ 2,482,711     2,545,800     7,417,560     7,535,016    
                 
                 
Reconciliation of Segment Net Sales to Segment Net Sales on a Constant Exchange Rate and on Constant Shipping Days Excluding Acquisition Volume
(Amounts in thousands)                
  Three Months Ended          
Global Ceramic September 28, 2019   September 29, 2018          
Net sales $ 916,422     885,773            
Adjustment to net sales on constant shipping days   (1,332 )   -            
Adjustment to segment net sales on a constant exchange rate   8,364     -            
Segment net sales on a constant exchange rate and constant shipping days   923,454     885,773            
Less: impact of acquisition volume   (57,369 )   -            
Segment net sales on a constant exchange rate and constant shipping days excluding acquisition volume $ 866,085     885,773            
                 
                 
Reconciliation of Segment Net Sales to Segment Net Sales on a Constant Exchange Rate Excluding Acquisition Volume
(Amounts in thousands)                
  Three Months Ended          
Flooring ROW September 28, 2019   September 29, 2018          
Net sales $ 600,855     612,487            
Adjustment to segment net sales on a constant exchange rate   26,852     -            
Segment net sales on a constant exchange rate   627,707     612,487            
Less: impact of acquisition volume   (12,988 )   -            
Segment net sales on a constant exchange rate excluding acquisition volume $ 614,719     612,487            
                 
                 
Reconciliation of Selling, General and Administrative Expenses to Adjusted Selling, General and Administrative Expenses
(Amounts in thousands)                
  Three Months Ended          
  September 28, 2019   September 29, 2018          
Selling, general and administrative expenses $ 451,471     433,189            
Adjustments to selling, general and administrative expenses:                
Restructuring, acquisition and integration-related and other costs   (2,051 )   (9,688 )          
Release of indemnification asset   (246 )   -            
Adjusted selling, general and administrative expenses $ 449,174     423,501            
                 
                 
Reconciliation of Operating Income to Adjusted Operating Income
(Amounts in thousands)                
  Three Months Ended          
  September 28, 2019   September 29, 2018          
Operating income $ 240,220     287,244            
Adjustments to operating income:                
Restructuring, acquisition and integration-related and other costs   9,515     19,890            
Release of indemnification asset   246     -            
Acquisitions purchase accounting, including inventory step-up   -     7,090            
Adjusted operating income $ 249,981     314,224            
                 
                 
Reconciliation of Segment Operating Income to Adjusted Segment Operating Income
(Amounts in thousands)                
  Three Months Ended          
Global Ceramic September 28, 2019   September 29, 2018          
Operating income $ 84,410     118,716            
Adjustments to segment operating income:                
Restructuring, acquisition and integration-related and other costs   1,167     181            
Adjusted segment operating income $ 85,577     118,897            
                 
                 
Reconciliation of Segment Operating Income to Adjusted Segment Operating Income
(Amounts in thousands)                
  Three Months Ended          
Flooring NA September 28, 2019   September 29, 2018          
Operating income $ 80,223     93,369            
Adjustments to segment operating income:                
Restructuring, acquisition and integration-related and other costs   4,095     10,603            
Adjusted segment operating income $ 84,318     103,972            
                 
                 
Reconciliation of Segment Operating Income to Adjusted Segment Operating Income
(Amounts in thousands)                
  Three Months Ended          
Flooring ROW September 28, 2019   September 29, 2018          
Operating income $ 84,428     84,108            
Adjustments to segment operating income:                
Restructuring, acquisition and integration-related and other costs   4,435     5,596            
Acquisitions purchase accounting, including inventory step-up   -     7,090            
Adjusted segment operating income $ 88,863     96,794            
                 
                 
Reconciliation of Earnings including Noncontrolling Interests Before Income Taxes to Adjusted Earnings Including Noncontrolling Interests Before Income Taxes
(Amounts in thousands)                
  Three Months Ended          
  September 28, 2019   September 29, 2018          
Earnings before income taxes $ 178,191     277,513            
Noncontrolling interests   (151 )   (1,013 )          
Adjustments to earnings including noncontrolling interests before income taxes:                
Restructuring, acquisition and integration-related and other costs   1,542     19,890            
Acquisitions purchase accounting, including inventory step-up   -     7,090            
Impairment of investment in a manufacturer and distributor of Ceramic tile in China   65,172     -            
Release of indemnification asset   (659 )   -            
Adjusted earnings including noncontrolling interests before income taxes $ 244,095     303,480            
                 
                 
Reconciliation of Income Tax Expense to Adjusted Income Tax Expense
(Amounts in thousands)                
  Three Months Ended          
  September 28, 2019   September 29, 2018          
Income tax expense $ 22,522     49,487            
Income taxes - reversal of uncertain tax position   (659 )   -            
Income tax effect of adjusting items   22,807     7,701            
Adjusted income tax expense $ 44,670     57,188            
                 
Adjusted income tax rate   18.3 %   18.8 %          
                 

The Company supplements its condensed consolidated financial statements, which are prepared and presented in accordance with US GAAP, with certain non-GAAP financial measures. As required by the Securities and Exchange Commission rules, the tables above present a reconciliation of the Company's non-GAAP financial measures to the most directly comparable US GAAP measure. Each of the non-GAAP measures set forth above should be considered in addition to the comparable US GAAP measure, and may not be comparable to similarly titled measures reported by other companies. The Company believes these non-GAAP measures, when reconciled to the corresponding US GAAP measure, help its investors as follows: Non-GAAP revenue measures that assist in identifying growth trends and in comparisons of revenue with prior and future periods and non-GAAP profitability measures that assist in understanding the long-term profitability trends of the Company's business and in comparisons of its profits with prior and future periods.

The Company excludes certain items from its non-GAAP revenue measures because these items can vary dramatically between periods and can obscure underlying business trends. Items excluded from the Company's non-GAAP revenue measures include: foreign currency transactions and translation and the impact of acquisitions.

The Company excludes certain items from its non-GAAP profitability measures because these items may not be indicative of, or are unrelated to, the Company's core operating performance. Items excluded from the Company's non-GAAP profitability measures include: restructuring, acquisition and integration-related and other costs, acquisition purchase accounting, including inventory step-up, release of indemnification assets and the reversal of uncertain tax positions.

Contact:   Glenn Landau, Chief Financial Officer (706) 624-2025

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Source: Mohawk Industries, Inc.