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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[Mark One]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2019
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to      

Commission File Number 01-13697
 __________________________________________
MOHAWK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
52-1604305
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
160 S. Industrial Blvd.
Calhoun
Georgia
 
30701
(Address of principal executive offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (706629-7721
Former name, former address and former fiscal year, if changed since last report:
__________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x

Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
MHK
New York Stock Exchange
Floating Rate Notes due 2019
 
New York Stock Exchange
Floating Rate Notes due 2020
 
New York Stock Exchange
2.000% Senior Notes due 2022
 
New York Stock Exchange
The number of shares outstanding of the issuer’s common stock as of July 31, 2019, the latest practicable date, is as follows: 72,152,534 shares of common stock, $.01 par value.


Table of Contents

MOHAWK INDUSTRIES, INC.
INDEX
 
 
 
Page No
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Balance Sheets as of June 29, 2019 and December 31, 2018
 
 
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2019 and June 30, 2018
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 29, 2019 and June 30, 2018
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) (Unaudited) 
 
June 29,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
128,096

 
119,050

Receivables, net
1,819,474

 
1,606,159

Inventories
2,367,631

 
2,287,615

Prepaid expenses
419,775

 
421,553

Other current assets
73,341

 
74,919

Total current assets
4,808,317

 
4,509,296

Property, plant and equipment
8,397,127

 
8,227,074

Less: accumulated depreciation
3,682,821

 
3,527,172

Property, plant and equipment, net
4,714,306

 
4,699,902

Right of use operating lease assets
343,716

 

Goodwill
2,565,702

 
2,520,966

Tradenames
708,779

 
707,380

Other intangible assets subject to amortization, net
241,845

 
254,430

Deferred income taxes and other non-current assets
423,437

 
407,149

 
$
13,806,102

 
13,099,123

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1,891,512

 
1,742,373

Accounts payable and accrued expenses
1,713,934

 
1,523,866

Current operating lease liabilities
100,345

 

Total current liabilities
3,705,791

 
3,266,239

Deferred income taxes
422,544

 
413,740

Long-term debt, less current portion
1,169,489

 
1,515,601

Non-current operating lease liabilities
249,844

 

Other long-term liabilities
436,843

 
463,484

Total liabilities
5,984,511

 
5,659,064

Commitments and contingencies (Note 17)

 

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value; 60 shares authorized; no shares issued

 

Common stock, $.01 par value; 150,000 shares authorized; 79,712 and 79,656 shares issued in 2019 and 2018, respectively
797

 
797

Additional paid-in capital
1,859,248

 
1,852,173

Retained earnings
6,903,261

 
6,588,197

Accumulated other comprehensive loss
(732,521
)
 
(791,608
)
 
8,030,785

 
7,649,559

Less: treasury stock at cost; 7,348 and 7,349 shares in 2019 and 2018, respectively
215,712

 
215,745

Total Mohawk Industries, Inc. stockholders’ equity
7,815,073

 
7,433,814

    Nonredeemable noncontrolling interest
6,518

 
6,245

          Total stockholders’ equity
7,821,591

 
7,440,059

 
$
13,806,102

 
13,099,123

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net sales
$
2,584,485

 
2,577,014

 
5,026,975

 
4,989,216

Cost of sales
1,847,867

 
1,810,459

 
3,665,430

 
3,517,969

Gross profit
736,618

 
766,555

 
1,361,545

 
1,471,247

Selling, general and administrative expenses
469,758

 
440,248

 
929,355

 
876,541

Operating income
266,860

 
326,307

 
432,190

 
594,706

Interest expense
10,521

 
7,863

 
20,994

 
15,391

Other expense (income), net
(3,048
)
 
2,090

 
(6,784
)
 
6,088

Earnings before income taxes
259,387

 
316,354

 
417,980

 
573,227

Income tax expense
56,733

 
118,809

 
93,751

 
166,441

Net earnings including noncontrolling interests
202,654

 
197,545

 
324,229

 
406,786

Net income attributable to noncontrolling interests
213

 
959

 
203

 
1,434

Net earnings attributable to Mohawk Industries, Inc.
$
202,441

 
196,586

 
324,026

 
405,352

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
$
2.80

 
2.64

 
4.50

 
5.44

Weighted-average common shares outstanding—basic
72,402

 
74,597

 
71,970

 
74,525

 
 
 
 
 
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
$
2.79

 
2.62

 
4.48

 
5.41

Weighted-average common shares outstanding—diluted
72,680

 
74,937

 
72,250

 
74,928

See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net earnings including noncontrolling interests
$
202,654

 
197,545

 
324,229

 
406,786

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
45,127

 
(186,350
)
 
59,089

 
(113,957
)
Pension prior service cost and actuarial gain (loss), net of tax
(41
)
 
358

 
67

 
223

Other comprehensive income (loss)
45,086

 
(185,992
)
 
59,156

 
(113,734
)
Comprehensive income
247,740

 
11,553

 
383,385

 
293,052

Comprehensive income (loss) attributable to noncontrolling interests
274

 
(1,068
)
 
273

 
306

Comprehensive income attributable to Mohawk Industries, Inc.
$
247,466

 
12,621

 
383,112

 
292,746

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
Cash flows from operating activities:
 
 
 
Net earnings
$
324,229

 
406,786

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 
 
 
Restructuring
37,758

 
31,311

Depreciation and amortization
277,773

 
249,702

Deferred income taxes
7,036

 
53,031

(Gain) loss on disposal of property, plant and equipment
4,981

 
(806
)
Stock-based compensation expense
11,577

 
21,593

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Receivables, net
(202,657
)
 
(198,131
)
Inventories
(59,250
)
 
(132,508
)
Other assets and prepaid expenses
(27,404
)
 
(39,639
)
Accounts payable and accrued expenses
205,633

 
228,789

Other liabilities
(13,349
)
 
858

Net cash provided by operating activities
566,327

 
620,986

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(281,059
)
 
(498,354
)
Acquisitions, net of cash acquired
(76,847
)
 
(24,410
)
Purchases of short-term investments
(310,000
)
 
(392,096
)
Redemption of short-term investments
314,000

 
429,000

Net cash used in investing activities
(353,906
)
 
(485,860
)
Cash flows from financing activities:
 
 
 
Payments on Senior Credit Facilities
(241,354
)
 
(441,049
)
Proceeds from Senior Credit Facilities
212,223

 
455,015

Payments on Commercial Paper
(8,547,107
)
 
(7,901,645
)
Proceeds from Commercial Paper
8,392,082

 
7,853,591

Proceeds from Floating Rate Notes

 
353,648

Payments of other debt and financing costs
(571
)
 

Debt issuance costs

 
(800
)
Purchase of Mohawk common stock
(8,963
)
 

Change in outstanding checks in excess of cash
(7,036
)
 
(1,545
)
Shares redeemed for taxes
(4,711
)
 
(9,188
)
Proceeds from stock transactions
1

 
2

Net cash (used in) provided by financing activities
(205,436
)
 
308,029

Effect of exchange rate changes on cash and cash equivalents
2,061

 
(9,813
)
Net change in cash and cash equivalents
9,046

 
433,342

Cash and cash equivalents, beginning of period
119,050

 
84,884

Cash and cash equivalents, end of period
$
128,096

 
518,226

 
 
 
 

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

1. General

Interim Reporting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto, and the Company’s description of critical accounting policies, included in the Company’s 2018 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. Results for interim periods are not necessarily indicative of the results for the year.

Hedges of Net Investments in Non-U.S. Operations

The Company has numerous investments outside the United States. The net assets of these subsidiaries are exposed to changes and volatility in currency exchange rates. The Company uses foreign currency denominated debt to hedge its non-U.S. net investments against adverse movements in exchange rates. The gains and losses on the Company’s net investments in its non-U.S. operations are economically offset by losses and gains on its foreign currency borrowings. The Company designated its 500,000 2.00% Senior Notes borrowing as a net investment hedge of a portion of its European operations. For the six months ended June 29, 2019 and June 30, 2018, the change in the U.S. dollar value of the Company’s euro denominated debt was a decrease of $3,578 ($2,718 net of taxes) and a decrease of $15,984 ($11,288 net of taxes), respectively, which is recorded in the foreign currency translation adjustment component of accumulated other comprehensive income (loss). The change in the U.S. dollar value of the Company’s debt partially offsets the euro-to-dollar translation of the Company’s net investment in its European operations.

Recent Accounting Pronouncements - Recently Adopted

In February 2016, the FASB issued a new standard ASU 2016-02, Leases, and subsequently issued additional ASUs amending this ASU (collectively ASC 842, Leases). ASC 842 was issued to increase transparency and comparability among organizations by requiring the recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted the provisions of ASC 842 on January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption in line with the new transition method allowed under ASU 2018-11. ASC 842 provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients” which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight and elected the practical expedient pertaining to land easements. The new standard also provides practical expedients for an entity’s ongoing accounting for leases. The Company elected the short-term lease exemption for all leases that qualify, meaning the Company will not recognize ROU assets or lease liabilities for leases with terms shorter than twelve months. The Company also elected the practical expedient to not separate lease and non-lease components for a majority of its asset classes, including real estate and most equipment.

The adoption of ASC 842 had a material impact on the Company’s condensed consolidated balance sheets, but did not have a material impact on our condensed consolidated statements of operations or cashflow. The most significant impact was the recognition of ROU assets of $328,169 and lease liabilities for operating leases of $332,286 at January 1, 2019, based on the present value of the future minimum rental payments for existing operating leases. The difference in the balances is due to deferred rent, tenant incentive allowances and prepaid amounts taken into account for adoption. Our accounting for finance leases remained substantially unchanged, See Note 10 - Leases.

On January 1, 2019, the Company adopted the new accounting standard, ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard permits entities to reclassify, to retained earnings, the one-time income tax effects stranded in accumulated other comprehensive income arising from the change in the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017. The effect of adopting the new standard was not material.

7

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


On January 1, 2018, the Company adopted the new accounting standard, ASC 606, Revenue from Contracts with Customers and all the related amendments (“ASC 606”) and applied the provisions of the standard to all contracts using the modified retrospective method. The cumulative effect of adopting the new revenue standard was immaterial and no adjustment has been recorded to the opening balance of retained earnings. Prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Substantially all of the Company’s revenue continues to be recognized at a point in time when the product is either shipped or received from the Company’s facilities and control of the product is transferred to the customer. The Company reviewed all of its revenue product categories under ASC 606 and the only changes identified were that an immaterial amount of revenue from intellectual property (“IP”) contracts results in earlier recognition of revenue, new controls and processes designed to meet the requirements of the standard were implemented, and the required new disclosures are presented in Note 3, Revenue from Contracts with Customers. The adoption of ASC 606 did not have a material impact on the amounts reported in the Company’s consolidated financial position, results of operations or cash flows.

On January 1, 2018, the Company adopted the new accounting standard, ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The effect of adopting the new standard was not material.

On January 1, 2018, the Company adopted the new accounting standard, ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The effect of adopting the new standard was not material.

Recent Accounting Pronouncements - Effective in Future Years

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and other (Topic 350): Simplifying the test for goodwill impairment. The amendments remove the second step of the current goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for impairment tests in fiscal years beginning after December 15, 2019.
    
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and in November 2018 issued ASU 2018-19, which amended the standard. The standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This standard is effective for the Company on January 1, 2020. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently assessing the impact.

2. Acquisitions

2019 Acquisitions

On January 31, 2019, the Company acquired a hard surface flooring distribution company based in the Netherlands for $72,001, resulting in a preliminary goodwill allocation of $45,931. The results have been included in the Flooring Rest of the World (“Flooring ROW”) segment and are not material to the Company’s consolidated results of operations.

2018 Acquisitions

On November 16, 2018, the Company completed its purchase of Eliane S/A Revestimentos Ceramicos (“Eliane”), one of the largest ceramic tile companies in Brazil. Pursuant to the purchase agreement, the Company (i) acquired the entire issued share capital of Eliane and (ii) acquired $99,037 of net indebtedness of Eliane, with total cash consideration paid of $148,741. The Company’s acquisition of Eliane resulted in preliminary allocations of goodwill of $16,932, indefinite-lived tradename intangible assets of $32,238 and intangible assets subject to amortization of $5,818. The goodwill is expected to be deductible for tax purposes. The purchase price allocation is preliminary until the Company obtains final information regarding these fair values. Eliane’s results of operations have been included in the consolidated financial statements since the date of acquisition in the Global Ceramic reporting segment.


8

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On July 2, 2018, the Company completed its acquisition of Godfrey Hirst Group, the leading flooring company in Australia and New Zealand, further extending Mohawk’s global position. The total value of the acquisition was $400,894. The Company’s acquisition of Godfrey Hirst Group resulted in allocations of goodwill of $88,655, indefinite-lived tradename intangible assets of $58,671 and intangible assets subject to amortization of $43,635. The goodwill is deductible for tax purposes. The factors contributing to the recognition of the amount of goodwill include product, sales and manufacturing synergies. The Godfrey Hirst Group’s results have been included in the condensed consolidated financial statements since the date of acquisition in the Flooring NA and Flooring ROW segments.

During the first quarter of 2018, the Company completed the acquisition of three businesses in the Flooring ROW segment for $24,610, resulting in a goodwill allocation of $12,874 and intangibles subject to amortization of $7.

2017 Acquisitions

On April 4, 2017, the Company completed its purchase of Emilceramica S.r.l (“Emil”), a ceramic company in Italy. The total value of the acquisition was $186,099. The Emil acquisition will enhance the Company’s cost position and strengthen its combined brand and distribution in Europe. The acquisition’s results and purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition. The Company’s acquisition of Emil resulted in a goodwill allocation of $59,491, indefinite-lived tradename intangible asset of $16,196 and an intangible asset subject to amortization of $2,348. The goodwill was not directly deductible for tax purposes. The Emil results are reflected in the Global Ceramic segment and the results of Emil’s operations are not material to the Company’s consolidated results of operations.

During the second quarter of 2017, the Company completed the acquisition of two businesses in the Global Ceramic segment for $37,250, resulting in a goodwill allocation of $1,002. The Company also completed the acquisition of a business in the Flooring NA segment for $26,623.

During the first quarter of 2017, the Company acquired certain assets of a distribution business in the Flooring ROW segment for $1,407, resulting in intangible assets subject to amortization of $827.



9

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Revenue from Contracts with Customers
    
Revenue recognition and accounts receivable

The Company recognizes revenues when it satisfies performance obligations as evidenced by the transfer of control of the promised goods to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. The nature of the promised goods are ceramic, stone, carpet, resilient, laminate, wood and other flooring products. Payment is typically received 90 days or less from the invoice date. The Company adjusts the amounts of revenue for expected cash discounts, sales allowances, returns, and claims, based upon historical experience. The Company adjusts accounts receivable for doubtful account allowances based upon historical bad debt, claims experience, periodic evaluation of specific customer accounts, and the aging of accounts receivable. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Contract liabilities

The Company historically records contract liabilities when it receives payment prior to fulfilling a performance obligation. Contract liabilities related to revenues are recorded in accounts payable and accrued expenses on the accompanying condensed consolidating balance sheets. The Company had contract liabilities of $37,685 and $34,486 as of June 29, 2019 and January 1, 2019, respectively.

Performance obligations

Substantially all of the Company’s revenue is recognized at a point in time when the product is either shipped or received from the Company’s facilities and control of the product is transferred to the customer.  Accordingly, in any period, the Company does not recognize a significant amount of revenue from performance obligations satisfied or partially satisfied in prior periods and the amount of such revenue recognized during the three and six months ended June 29, 2019 was immaterial.

Costs to obtain a contract

The Company historically incurs certain incremental costs to obtain revenue contracts. These costs relate to marketing display structures and are capitalized when the amortization period is greater than one year, with the amount recorded in other assets on the accompanying condensed consolidated balance sheets. Capitalized costs to obtain contracts were $67,900 and $57,840 as of June 29, 2019 and January 1, 2019, respectively. Amortization expense recognized during the six months ended June 29, 2019 related to these capitalized costs was $27,410.

Practical expedients and policy elections

The Company elected the following practical expedients and policy elections:

Incremental costs of obtaining a contract is recorded as an expense when incurred in selling, general and administrative expenses if the amortization period is less than one year.
Shipping and handling activities performed after control has been transferred is accounted for as a fulfillment cost in cost of sales.


10

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue disaggregation

The following table presents the Company’s segment revenues disaggregated by the geographical market location of customer sales and product categories for the three months ended June 29, 2019 and June 30, 2018:

June 29, 2019
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
554,509

 
946,086

 
709

 
1,501,304

Europe
205,205

 
2,164

 
475,761

 
683,130

Russia
67,792

 
22

 
27,087

 
94,901

Other
130,525

 
35,167

 
139,458

 
305,150

 
$
958,031

 
983,439

 
643,015

 
2,584,485

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
958,031

 
13,915

 

 
971,946

Carpet & Resilient

 
808,402

 
201,519

 
1,009,921

Laminate & Wood

 
161,122

 
215,058

 
376,180

Other (1)

 

 
226,438

 
226,438

 
$
958,031

 
983,439

 
643,015

 
2,584,485



June 30, 2018
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
578,535

 
1,013,994

 

 
1,592,529

Europe
208,671

 
1,870

 
490,885

 
701,426

Russia
63,709

 

 
26,553

 
90,262

Other
78,382

 
41,706

 
72,709

 
192,797

 
$
929,297

 
1,057,570

 
590,147

 
2,577,014

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
929,297

 
18,178

 

 
947,475

Carpet & Resilient

 
859,179

 
132,578

 
991,757

Laminate & Wood

 
180,213

 
216,754

 
396,967

Other (1)

 

 
240,815

 
240,815

 
$
929,297

 
1,057,570

 
590,147

 
2,577,014


(1) Other includes roofing elements, insulation boards, chipboards and IP contracts.













11

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)




The following table presents the Company’s segment revenues disaggregated by the geographical market location of customer sales and product categories for the six months ended June 29, 2019 and June 30, 2018:

June 29, 2019
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
1,096,335

 
1,829,328

 
777

 
2,926,440

Europe
384,515

 
4,001

 
945,678

 
1,334,194

Russia
119,707

 
52

 
50,701

 
170,460

Other
255,826

 
72,038

 
268,017

 
595,881

 
$
1,856,383

 
1,905,419

 
1,265,173

 
5,026,975

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
1,856,383

 
28,358

 

 
1,884,741

Carpet & Resilient

 
1,543,826

 
392,448

 
1,936,274

Laminate & Wood

 
333,235

 
425,259

 
758,494

Other (1)

 

 
447,466

 
447,466

 
$
1,856,383

 
1,905,419

 
1,265,173

 
5,026,975


June 30, 2018
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
1,134,722

 
1,922,116

 

 
3,056,838

Europe
398,906

 
3,520

 
985,528

 
1,387,954

Russia
115,131

 

 
45,982

 
161,113

Other
157,086

 
82,292

 
143,933

 
383,311

 
$
1,805,845

 
2,007,928

 
1,175,443

 
4,989,216

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
1,805,845

 
35,721

 

 
1,841,566

Carpet & Resilient

 
1,614,725

 
261,589

 
1,876,314

Laminate & Wood

 
357,482

 
442,897

 
800,379

Other (1)

 

 
470,957

 
470,957

 
$
1,805,845

 
2,007,928

 
1,175,443

 
4,989,216


(1) Other includes roofing elements, insulation boards, chipboards and IP contracts.


12

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Restructuring, acquisition and integration-related costs

The Company incurs costs in connection with acquiring, integrating and restructuring acquisitions and in connection with its global cost-reduction/productivity initiatives. For example:

In connection with acquisition activity, the Company typically incurs costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and

In connection with the Company’s cost-reduction/productivity initiatives, it typically incurs costs and charges associated with site closings and other facility rationalization actions and workforce reductions.

Restructuring, acquisition transaction and integration-related costs consisted of the following during the three and six months ended June 29, 2019 and June 30, 2018:

 
Three Months Ended
 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
Cost of sales
 
 
 
 
 
 
 
Restructuring costs (1)
$
4,379

 
9,331

 
35,913

 
23,421

Acquisition integration-related costs
1,488

 
2,687

 
2,556

 
3,095

  Restructuring and acquisition integration-related costs
$
5,867

 
12,018

 
38,469

 
26,516

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 
 
 
 
 
 
Restructuring costs (1)
$
443

 
3,798

 
1,845

 
7,890

Acquisition transaction-related costs
637

 
63

 
917

 
63

Acquisition integration-related costs
1,988

 
163

 
3,407

 
3,677

  Restructuring, acquisition transaction and integration-related costs
$
3,068

 
4,024

 
6,169

 
11,630



(1) The restructuring costs for 2019 and 2018 primarily relate to the Company’s actions taken to lower its cost structure and improve efficiencies of manufacturing and distribution operations as well as actions related to the Company’s recent acquisitions.

The restructuring activity for the six months ended June 29, 2019 is as follows:
 
Lease
impairments
 
Asset write-downs
 
Severance
 
Other
restructuring
costs
 
Total
Balance as of December 31, 2018
$
397

 

 
7,866

 
250

 
8,513

Provision - Global Ceramic segment

 

 
4,879

 

 
4,879

Provision - Flooring NA segment

 
21,791

 
1,127

 
8,032

 
30,950

Provision - Flooring ROW segment

 
86

 
1,843

 

 
1,929

Cash payments
(173
)
 

 
(8,688
)
 
(7,921
)
 
(16,782
)
Non-cash items

 
(21,877
)
 
(13
)
 
(111
)
 
(22,001
)
Balance as of June 29, 2019
$
224

 

 
7,014

 
250

 
7,488



The Company expects the remaining severance and other restructuring costs to be paid over the next 12 months.    

13

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


5. Receivables, net

Receivables, net are as follows:
 
At June 29, 2019
 
At December 31, 2018
Customers, trade
$
1,793,551

 
1,562,284

Income tax receivable
17,414

 
17,217

Other
81,291

 
101,376

 
1,892,256

 
1,680,877

Less: allowance for discounts, claims and doubtful accounts
72,782

 
74,718

Receivables, net
$
1,819,474

 
1,606,159



6. Inventories

The components of inventories are as follows:
 
At June 29, 2019
 
At December 31, 2018
Finished goods
$
1,656,916

 
1,582,112

Work in process
154,961

 
165,616

Raw materials
555,754

 
539,887

Total inventories
$
2,367,631

 
2,287,615



7. Goodwill and intangible assets

The components of goodwill and other intangible assets are as follows:

Goodwill:
 
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Balance as of December 31, 2018
 
 
 
 
 
 
 
Goodwill
$
1,564,987

 
874,198

 
1,409,206

 
3,848,391

Accumulated impairment losses
(531,930
)
 
(343,054
)
 
(452,441
)
 
(1,327,425
)
 
1,033,057

 
531,144

 
956,765

 
2,520,966

 
 
 
 
 
 
 
 
Goodwill recognized during the period
(2,889
)
 

 
47,543

 
44,654

Currency translation during the period
5,879

 

 
(5,797
)
 
82

 
 
 
 
 
 
 
 
Balance as of June 29, 2019
 
 
 
 
 
 
 
Goodwill
1,567,977

 
874,198

 
1,450,952

 
3,893,127

Accumulated impairment losses
(531,930
)
 
(343,054
)
 
(452,441
)
 
(1,327,425
)
 
$
1,036,047

 
531,144

 
998,511

 
2,565,702



Intangible assets not subject to amortization:
    
 
Tradenames
Balance as of December 31, 2018
$
707,380

Intangible assets acquired during the period
(874
)
Currency translation during the period
2,273

Balance as of June 29, 2019
$
708,779


 

14

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Intangible assets subject to amortization:

Gross carrying amounts:
Customer
relationships
 
Patents
 
Other
 
Total
Balance as of December 31, 2018
$
651,012

 
254,483

 
6,535

 
912,030

Intangible assets recognized during the period
2,092

 

 

 
2,092

Currency translation during the period
(2,464
)
 
(1,624
)
 
(9
)
 
(4,097
)
Balance as of June 29, 2019
$
650,640

 
252,859

 
6,526

 
910,025

 
 
 
 
 
 
 
 
Accumulated amortization:
Customer
relationships
 
Patents
 
Other
 
Total
Balance as of December 31, 2018
$
406,386

 
249,988

 
1,227

 
657,601

Amortization during the period
12,597

 
1,072

 
15

 
13,684

Currency translation during the period
(1,523
)
 
(1,580
)
 
(2
)
 
(3,105
)
Balance as of June 29, 2019
$
417,460

 
249,480

 
1,240

 
668,180

 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
$
233,180

 
3,379

 
5,286

 
241,845


 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Amortization expense
$
6,955

 
7,483

 
13,684

 
15,050




8. Accounts payable and accrued expenses

Accounts payable and accrued expenses are as follows:
 
At June 29, 2019
 
At December 31, 2018
Outstanding checks in excess of cash
$
7,559

 
14,624

Accounts payable, trade
976,231

 
811,879

Accrued expenses
454,930

 
430,431

Product warranties
47,873

 
47,511

Accrued interest
15,745

 
21,908

Accrued compensation and benefits
211,596

 
197,513

Total accounts payable and accrued expenses
$
1,713,934

 
1,523,866



9. Accumulated other comprehensive income (loss)

The changes in accumulated other comprehensive income (loss) by component, for the six months ended June 29, 2019 are as follows:
 
Foreign currency translation adjustments
 
Pensions, net of tax
 
Total
Balance as of December 31, 2018
$
(782,102
)
 
(9,506
)
 
(791,608
)
Current period other comprehensive income
59,020

 
67

 
59,087

Balance as of June 29, 2019
$
(723,082
)
 
(9,439
)
 
(732,521
)



15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Leases

Effective January 1, 2019 the Company adopted ASC 842, which requires recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet, based on the present value of the future minimum rental payments for existing operating leases. The Company adopted the provisions of ASC 842 on January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption in line with the new transition method allowed under ASU 2018-11. ASC 842 provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients” which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight and elected the practical expedient pertaining to land easements. The new standard also provides practical expedients for an entity’s ongoing accounting for leases. The Company elected the short-term lease exemption for all leases that qualify, meaning the Company will not recognize ROU assets or lease liabilities for leases with terms shorter than twelve months. The Company also elected the practical expedient to not separate lease and non-lease components for a majority of its asset classes, including real estate and most equipment.

The Company measures the ROU assets and liabilities based on the present value of the future minimum lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and non-lease components of the agreement, as well as any variable rent payments that depend on an index, initially measured using the index at the lease commencement date. The ROU assets are adjusted for any initial direct costs incurred less any lease incentives received, in addition to payments made on or before the commencement date of the lease. The Company recognizes lease expense for leases on a straight-line basis over the lease term.

As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company’s credit spread adjusted for current market factors and foreign currency rates. The Company also made a policy election to determine its incremental borrowing rate, at the initial application date, using the total lease term and the total minimum rental payments, as the Company believes this rate is more indicative of the implied financing cost.

The Company determines if a contract is or contains a lease at inception. The Company has operating and finance leases for service centers, warehouses, showrooms, and machinery and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company enters into lease contracts ranging from 1 to 60 years with a majority of the Company’s lease terms ranging from 1 to 8 years.

Some leases include one or more options to renew, with renewal terms that can extend the lease term from 3 to 10 years or more. The exercise of these lease renewal options is at the Company’s sole discretion. An insignificant number of our leases include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

Certain of our leases include rental payments that will adjust periodically for inflation or certain adjustments based on step increases. An insignificant number of our leases contain residual value guarantees and none of our agreements contain material restrictive covenants. Variable rent expenses consist primarily of maintenance, property taxes and charges based on usage.

We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases.

















16

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



The components of lease costs are as follows:
 
Three Months Ended June 29, 2019
 
Six Months Ended June 29, 2019
 
Cost of Goods Sold
 
Selling, General and Administrative
 
Total
 
Cost of Goods Sold
 
Selling, General and Administrative
 
Total
Operating lease costs
 
 
 
 
 
 
 
 
 
 
 
Fixed
$
8,169

 
22,807

 
30,976

 
15,857

 
47,262

 
63,119

Short-term
1,552

 
3,577

 
5,129

 
2,991

 
6,486

 
9,477

Variable
2,093

 
9,348

 
11,441

 
4,371

 
14,548

 
18,919

Sub-leases
(41
)
 
(151
)
 
(192
)
 
(125
)
 
(284
)
 
(409
)
 
11,773

 
35,581

 
47,354

 
23,094

 
68,012

 
91,106

Finance lease costs
 
 
 
 
 
 
 
 
 
 
 
Amortization of leased assets

 
392

 
392

 

 
824

 
824

Interest on lease liabilities

 
58

 
58

 

 
89

 
89

 

 
450

 
450

 

 
913

 
913

Net lease costs
$
11,773

 
36,031

 
47,804

 
23,094

 
68,925

 
92,019




Supplemental balance sheet information related to leases is as follows:
 
Classification
 
At June 29, 2019
Assets
 
 
 
Operating Leases
 
 
 
Right of use operating lease assets
Right of use operating lease assets
 
$
343,716

Finance Leases
 
 
 
Property, plant and equipment, gross
Property, plant and equipment
 
7,955

Accumulated depreciation
Accumulated depreciation
 
(2,838
)
Property, plant and equipment, net
Property, plant and equipment, net
 
5,117

Total lease assets
 
 
$
348,833

 
 
 
 
Liabilities
 
 
 
Operating Leases
 
 
 
Other current
Current operating lease liabilities
 
$
100,345

Non-current
Non-current operating lease liabilities
 
249,844

Total operating liabilities
 
 
350,189

Finance Leases
 
 
 
Short-term debt
Short-term debt and current portion of long-term debt
 
1,012

Long-term debt
Long-term debt, less current portion
 
5,014

Total finance liabilities
 
 
6,026

Total lease liabilities
 
 
$
356,215

 
 
 
 











17

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Maturities of lease liabilities are as follows:
Year ending December 31,
Finance
Leases
 
Operating
Leases
 
Total
2019 (excluding the six months ended June 29, 2019)
$
477

 
61,429

 
61,906

2020
1,034

 
110,389

 
111,423

2021
738

 
82,494

 
83,232

2022
488

 
55,932

 
56,420

2023
418

 
29,997

 
30,415

Thereafter
2,930

 
43,162

 
46,092

Total lease payments
6,085

 
383,403

 
389,488

Less imputed interest
59

 
33,214

 
 
Present value, Total
$
6,026

 
350,189

 
 


The Company had approximately $5,151 of leases that commenced after June 29, 2019 that created rights and obligations to the Company. These leases are not included in the above maturity schedule.

For additional information regarding the Company’s Commitments and Contingencies as of December 31, 2018 as disclosed for capital and operating leases, see Note 14 in its 2018 Annual Report filed on Form 10-K.


Lease term and discount rate are as follows:
 
At June 29, 2019
Weighted Average Remaining Lease Term
 
Operating Leases
4.71 years

Finance Leases
9.08 years

 
 
Weighted Average Discount Rate
 
Operating Leases
3.3
%
Finance Leases
0.9
%



Supplemental cash flow information related to leases was as follows:
 
Six Months Ended
 
June 29,
2019
Cash paid for amounts included in measurement of lease liabilities:
 
Operating cash flows from operating leases
$
63,910

Operating cash flows from finance leases
26

Financing cash flows from finance leases
732

Right-of-use assets obtained in exchange for lease obligations:
 
Operating Leases
90,091

Finance Leases
195

Amortization:
 
Amortization of Right of use operating lease assets (1)
56,950


(1) Amortization of Right of use operating lease assets during the period is reflected in Other assets and prepaid expenses on the Condensed Consolidated Statements of Cash Flows.


18

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


11. Stock-based compensation

The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10. Compensation expense is recognized on a straight-line basis over the options’ or other awards’ estimated lives for fixed awards with ratable vesting provisions.

The Company granted 18 restricted stock units (“RSUs”) at a weighted average grant-date fair value of $133.45 per unit for the three months ended June 29, 2019. The Company granted 187 RSUs at a weighted average grant-date fair value of $137.30 per unit for the six months ended June 29, 2019. The Company granted 4 RSUs at a weighted average grant-date fair value of $204.35 per unit for the three months ended June 30, 2018. The Company granted 127 at a weighted average grant-date fair value of $237.94 per unit for the six months ended June 30, 2018. The Company recognized stock-based compensation costs related to the issuance of RSUs of $5,788 ($4,283 net of taxes) and $13,645 ($10,097 net of taxes) for the three months ended June 29, 2019 and June 30, 2018, respectively, which has been allocated to cost of sales and selling, general and administrative expenses. The Company recognized stock-based compensation costs related to the issuance of RSUs of $11,577 ($8,567 net of taxes) and $21,593 ($15,979 net of taxes) for the six months ended June 29, 2019 and June 30, 2018, respectively, which has been allocated to cost of sales and selling, general and administrative expenses. Pre-tax unrecognized compensation expense for unvested RSUs granted to employees, net of estimated forfeitures, was $29,629 as of June 29, 2019, and will be recognized as expense over a weighted-average period of approximately 1.70 years. The Company did not recognize any stock-based compensation costs related to stock options for the six months ended June 29, 2019 and June 30, 2018, respectively.



12. Other expense (income), net

Other expense (income), net is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Foreign currency losses (gains), net
$
2,088

 
3,317

 
978

 
4,722

Release of indemnification asset

 

 

 
1,749

All other, net
(5,136
)
 
(1,227
)
 
(7,762
)
 
(383
)
Total other expense, net
$
(3,048
)
 
2,090

 
(6,784
)
 
6,088




13. Income Taxes

For the quarter ended June 29, 2019, the Company recorded income tax expense of $56,733 on earnings before income taxes of $259,387 for an effective tax rate of 21.9%, as compared to an income tax expense of $118,809 on earnings before income taxes of $316,354, for an effective tax rate of 37.6% for the quarter ended June 30, 2018. For the six months ended June 29, 2019, the Company recorded income tax expense of $93,751 on earnings before income taxes of $417,980 for an effective tax rate of 22.4%, as compared to an income tax expense of $166,441 on earnings before income taxes of $573,227, for an effective tax rate of 29.0% for the six months ended June 30, 2018. The difference in the effective tax rates for the comparative periods was caused by geographical dispersion of profits and losses and the issuance of IRS Notice 2018-26 which caused the Company to record $54,674 of additional net tax expense.




19

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. Stockholders’ Equity

The following tables reflect the changes in stockholders’ equity for the three months ended June 29, 2019 and June 30, 2018 (in thousands).
 
 
Total Stockholders’ Equity
 
Redeemable
Noncontrolling
Interest
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Noncontrolling Interest
Total
Stockholders’
Equity
 
Shares
Amount
Shares
Amount
 
 
 
 
 
 
 
 
 
 
 
March 30, 2019
$

79,771

$
798

$
1,853,484

$
6,709,782

$
(777,547
)
(7,349
)
$
(215,716
)
$
6,244

$
7,577,045

Shares issued under employee and director stock plans

7


(24
)


1

4


(20
)
Stock-based compensation expense



5,788






5,788

Repurchases of common stock

(66
)
(1
)

(8,962
)




(8,963
)
Accretion of redeemable noncontrolling interest










Noncontrolling earnings








214

214

Currency translation adjustment on non-controlling interests










Currency translation adjustment





45,067



60

45,127

Prior pension and post-retirement benefit service cost and actuarial gain / loss





(41
)



(41
)
Net income




202,441





202,441

June 29, 2019
$

79,712

$
797

$
1,859,248

$
6,903,261

$
(732,521
)
(7,348
)
$
(215,712
)
$
6,518

$
7,821,591


 
 
Total Stockholders’ Equity
 
Redeemable
Noncontrolling
Interest
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Noncontrolling Interest
Total
Stockholders’
Equity
 
Shares
Amount
Shares
Amount
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
$
30,924

81,883

$
819

$
1,827,075

$
6,212,966

$
(487,168
)
(7,350
)
$
(215,749
)
$
8,066

$
7,346,009

Shares issued under employee and director stock plans

69

1

1,340




4


1,345

Stock-based compensation expense



13,645






13,645

Repurchases of common stock










Accretion of redeemable noncontrolling interest










Noncontrolling earnings
781








178

178

Currency translation adjustment on non-controlling interests
(1,662
)







(364
)
(364
)
Currency translation adjustment





(184,323
)



(184,323
)
Prior pension and post-retirement benefit service cost and actuarial gain / loss





358




358

Net income




196,586





196,586

June 30, 2018
$
30,043

81,952

$
820

$
1,842,060

$
6,409,552

$
(671,133
)
(7,350
)
$
(215,745
)
$
7,880

$
7,373,434




20

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following tables reflect the changes in stockholders’ equity for the six months ended June 29, 2019 and June 30, 2018 (in thousands).
 
 
Total Stockholders’ Equity
 
Redeemable
Noncontrolling
Interest
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Noncontrolling Interest
Total
Stockholders’
Equity
 
Shares
Amount
Shares
Amount
 
 
 
 
 
 
 
 
 
 
 
January 1, 2019
$

79,656

$
797

$
1,852,173

$
6,588,197

$
(791,608
)
(7,349
)
$
(215,745
)
$
6,245

$
7,440,059

Shares issued under employee and director stock plans

122

1

(4,502
)


1

33


(4,468
)
Stock-based compensation expense



11,577






11,577

Repurchases of common stock

(66
)
(1
)

(8,962
)




(8,963
)
Accretion of redeemable noncontrolling interest










Noncontrolling earnings








204

204

Currency translation adjustment on non-controlling interests










Currency translation adjustment





59,020



69

59,089

Prior pension and post-retirement benefit service cost and actuarial gain / loss





67




67

Net income




324,026





324,026

June 29, 2019
$

79,712

$
797

$
1,859,248

$
6,903,261

$
(732,521
)
(7,348
)
$
(215,712
)
$
6,518

$
7,821,591


 
 
Total Stockholders’ Equity
 
Redeemable
Noncontrolling
Interest
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Noncontrolling Interest
Total
Stockholders’
Equity
 
Shares
Amount
Shares
Amount
 
 
 
 
 
 
 
 
 
 
 
January 1, 2018
$
29,463

81,771

$
818

$
1,828,131

$
6,004,506

$
(558,527
)
(7,350
)
$
(215,766
)
$
7,847

$
7,067,009

Shares issued under employee and director stock plans

181

2

(7,664
)



21


(7,641
)
Stock-based compensation expense



21,593






21,593

Repurchases of common stock










Accretion of redeemable noncontrolling interest
305




(305
)




(305
)
Noncontrolling earnings
1,226








209

209

Currency translation adjustment on non-controlling interests
(951
)







(176
)
(176
)
Currency translation adjustment





(112,829
)



(112,829
)
Prior pension and post-retirement benefit service cost and actuarial gain / loss





223




223

Net income




405,352





405,352

June 30, 2018
$
30,043

81,952

$
820

$
1,842,060

$
6,409,552

$
(671,133
)
(7,350
)
$
(215,745
)
$
7,880

$
7,373,434




15. Earnings per share

Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per common share assumes the exercise of outstanding stock options and the vesting of RSUs using the treasury stock method when the effects of such assumptions are dilutive. A reconciliation of net earnings available to common stockholders and weighted-average common shares outstanding for purposes of calculating basic and diluted earnings per share is as follows:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

    
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net earnings attributable to Mohawk Industries, Inc.
$
202,441

 
196,586

 
324,026

 
405,352

Accretion of redeemable noncontrolling interest (1)

 

 

 
(305
)
Net earnings available to common stockholders
$
202,441

 
196,586

 
324,026

 
405,047

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding-basic and diluted:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
72,402

 
74,597

 
71,970

 
74,525

Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net
278

 
340

 
280

 
403

Weighted-average common shares outstanding-diluted
72,680

 
74,937

 
72,250

 
74,928

 
 
 
 
 
 
 
 
Earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
 
 
Basic
$
2.80

 
2.64

 
4.50

 
5.44

Diluted
$
2.79

 
2.62

 
4.48

 
5.41



(1) Represents the accretion of the Company’s redeemable noncontrolling interest to redemptive value. The holder put this option to the Company on December 20, 2018 for $33,884.


16. Segment reporting

The Company has three reporting segments: the Global Ceramic segment, the Flooring NA segment and the Flooring ROW segment. The Global Ceramic Segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, quartz and porcelain slab countertops, which it distributes primarily in North America, Europe, Brazil and Russia through various selling channels, which include Company-owned stores, independent distributors, independent retailers, home centers, commercial contractors and commercial end users. The Flooring NA Segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet cushion, wood flooring, laminate and vinyl products, including luxury vinyl tile (LVT), which it distributes to its residential and commercial sales channels through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The Segment’s product lines are sold through independent floor covering retailers, independent distributors, home centers, mass merchandisers, department stores, shop at home, online retailers, buying groups, commercial contractors and commercial end users. The Flooring ROW Segment designs, manufactures, sources, licenses and markets laminate, wood flooring, carpets, roofing elements, insulation boards, medium-density fiberboard (“MDF”), chipboards, other wood products and vinyl products, including LVT, which it distributes primarily in Europe, Russia, Australia and New Zealand through various selling channels, which include independent floor covering retailers, independent distributors, company-owned distributors, home centers, commercial contractors and commercial end users.

The accounting policies for each operating segment are consistent with the Company’s policies for the consolidated financial statements. Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses attributable to each segment are estimated and allocated accordingly. Segment performance is evaluated based on operating income.


22

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Segment information is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net sales:
 
 
 
 
 
 
 
Global Ceramic segment
$
958,031

 
929,297

 
1,856,383

 
1,805,845

Flooring NA segment
983,439

 
1,057,570

 
1,905,419

 
2,007,928

Flooring ROW segment
643,015

 
590,147

 
1,265,173

 
1,175,443

Intersegment sales

 

 

 

Total
$
2,584,485

 
2,577,014

 
5,026,975

 
4,989,216

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Global Ceramic segment
$
118,141

 
134,760

 
202,476

 
248,177

Flooring NA segment
59,502

 
100,662

 
60,151

 
175,410

Flooring ROW segment
101,533

 
100,166

 
191,964

 
189,226

Corporate and intersegment eliminations
(12,316
)
 
(9,281
)
 
(22,401
)
 
(18,107
)
Total
$
266,860

 
326,307

 
432,190

 
594,706

 
 
At June 29, 2019
 
At December 31, 2018
Assets:
 
 
 
Global Ceramic segment
$
5,661,364

 
5,194,030

Flooring NA segment
4,024,428

 
3,938,639

Flooring ROW segment
3,858,264

 
3,666,617

Corporate and intersegment eliminations
262,046

 
299,837

Total
$
13,806,102

 
13,099,123




17. Commitments and contingencies

The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

Alabama Municipal Litigation

In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing specific perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board’s motion for remand.

In May 2017, the Water Works and Sewer Board of the Town of Centre, Alabama (the “Centre Water Board”) filed a very similar complaint to the Gadsden Water Board complaint in the Circuit Court of Cherokee County. On June 19, 2017, the defendants removed this case to the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversity of citizenship and fraudulent joinder. The Centre Water Board filed a motion to remand the case back to state court, and the defendants opposed the Centre Water Board’s motion. The federal court granted Centre Water Board's motion for remand.

Certain defendants, including the Company, filed dispositive motions in each case arguing that the state court lacks personal jurisdiction over them. Both state courts denied those motions. In June and September 2018, certain defendants, including the Company, petitioned the Alabama Supreme Court for Writs of Mandamus directing each lower court to enter an order granting the defendants’ dispositive motions on personal jurisdiction grounds. Those petitions have been fully briefed and the Company awaits a decision from the Alabama Supreme Court.


23

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company has never manufactured the perfluorinated compounds at issue but purchased them for use in the manufacture of its carpets prior to 2007. The Gadsden and Centre Water Boards are not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsden and Centre Water Boards are seeking lost profits based on allegations that their customers decreased water purchases, as well as reimbursement for the cost of a filter and punitive damages.
    
Belgian Tax Matter

Between 2012 and 2014, the Company received assessments from the Belgian tax authority for the calendar years 2005 through 2010 in the amounts of €46,135, 38,817, 39,635, €30,131, €35,567 and 43,117 respectively, including penalties, but excluding interest. The Belgian tax authority denied the Company’s formal protests against these assessments and the Company brought all six years before the Court of First Appeal in Bruges. The Court of First Appeal in Bruges ruled in favor of the Company on January 27, 2016, with respect to the calendar years ending December 31, 2005 and December 31, 2009; and on June 13, 2018, the Court of First Appeal in Bruges ruled in favor of the Company with respect to the calendar years ending December 31, 2006, December 31, 2007, December 31, 2008 and December 31, 2010. The Belgian tax authority has lodged its Notification of Appeal for all six years with the Ghent Court of Appeal. In March 2019, the Company received assessments from the Belgian tax authority for tax years 2011 through 2017 in the amount of €40,617, €39,732, €11,358, €23,919, €30,610, €93,145 and €79,933 respectively, including penalties, but excluding interest. The Company intends to file formal protests based on these assessments in a timely manner. The assessments are largely based on the same facts underlying the positive rulings, which the Belgian tax authority is appealing.

The Company continues to disagree with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company’s properties in Wielsbeke (Ooigemstraat and Breestraat), Oostrozebeke (Ingelmunstersteenweg) and Desselgem (Waregemstraat) included in the Flooring ROW segment. The purpose of the lien is to provide security for payment should the Belgian tax authority prevail on its appeal. The lien does not interfere with the Company’s operations at these properties.

General

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses that are reasonably estimable. These contingencies are subject to significant uncertainties and the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.

18. Debt

Senior Credit Facility

On March 26, 2015, the Company amended and restated its 2013 senior credit facility increasing its size from $1,000,000 to $1,800,000 and extending the maturity from September 25, 2018 to March 26, 2020 (as amended and restated, the “2015 Senior Credit Facility”). The 2015 Senior Credit Facility eliminated certain provisions in the 2013 Senior Credit Facility, including those that: (a) accelerated the maturity date to 90 days prior to the maturity of senior notes due in January 2016 if certain specified liquidity levels were not met; and (b) required that certain subsidiaries guarantee the Company’s obligations if the Company’s credit ratings fell below investment grade. The 2015 Senior Credit Facility also modified certain negative covenants to provide the Company with additional flexibility, including flexibility to make acquisitions and incur additional indebtedness. On March 1, 2016, the Company amended the 2015 Senior Credit Facility to, among other things, carve out from the general limitation on subsidiary indebtedness the issuance of Euro-denominated commercial paper notes by subsidiaries. Additionally, at several points in 2016, the Company extended the maturity date of the 2015 Senior Credit Facility from March 26, 2020 to March 26, 2021. In the first half of 2017, the Company amended the 2015 Senior Credit Facility to extend the maturity date from March 26, 2021 to March 26, 2022.

At the Company’s election, revolving loans under the 2015 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 1.00% and 1.75% (1.125% as of June 29, 2019), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or the Eurocurrency Rate (as defined in the 2015 Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of June 29, 2019). The Company also pays a commitment fee to the lenders under the 2015 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders exceed utilization

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of June 29, 2019). The applicable margins and the commitment fee are determined based on whichever of the Company’s Consolidated Net Leverage Ratio or its senior unsecured debt rating (or if not available, corporate family rating) results in the lower applicable margins and commitment fee (with applicable margins and the commitment fee increasing as that ratio increases or those ratings decline, as applicable).

The obligations of the Company and its subsidiaries in respect of the 2015 Senior Credit Facility are unsecured.

The 2015 Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, subsidiary indebtedness, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, future negative pledges, and changes in the nature of the Company’s business. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter. The limitations contain customary exceptions or, in certain cases, do not apply as long as the Company is in compliance with the financial ratio requirements and is not otherwise in default.

The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.

In 2017, the Company paid financing costs of $567 in connection with the extension of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022. These costs were deferred and, along with unamortized costs of $6,873 are being amortized over the term of the 2015 Senior Credit Facility.

As of June 29, 2019, amounts utilized under the 2015 Senior Credit Facility included $21,057 of borrowings and $22,787 of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,179,286 under the Company’s U.S. and European commercial paper programs as of June 29, 2019 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,223,130 under the 2015 Senior Credit Facility resulting in a total of $576,870 available as of June 29, 2019.
    
Commercial Paper

On February 28, 2014 and July 31, 2015, the Company established programs for the issuance of unsecured commercial paper in the United States and Eurozone capital markets, respectively. Commercial paper issued under the U.S. and European programs will have maturities ranging up to 397 and 183 days, respectively. None of the commercial paper notes may be voluntarily prepaid or redeemed by the Company and all rank pari passu with all of the Company’s other unsecured and unsubordinated indebtedness. To the extent that the Company issues European commercial paper notes through a subsidiary of the Company, the notes will be fully and unconditionally guaranteed by the Company.

The Company uses its 2015 Senior Credit Facility as a liquidity backstop for its commercial paper programs. Accordingly, the total amount outstanding under all of the Company’s commercial paper programs may not exceed $1,800,000 (less any amounts drawn on the 2015 Senior Credit Facility) at any time.

The proceeds from the issuance of commercial paper notes will be available for general corporate purposes. As of June 29, 2019, there was $526,000 outstanding under the U.S. commercial paper program, and the euro equivalent of $653,286 under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.73% and 31.09 days, respectively. The weighted average interest rate and maturity period for the European program were (0.21)% and 38.35 days, respectively.

Senior Notes
    
On May 18, 2018, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of 300,000 aggregate principal amount of its Floating Rate Notes due May 18, 2020 (“2020 Floating Rate Notes”). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2020 Floating Rate Notes is payable quarterly on August 18, November 18, February 18, and May 18 of each year. Mohawk Finance paid financing costs of $890 in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On September 11, 2017, Mohawk Finance completed the issuance and sale of 300,000 aggregate principal amount of its Floating Rate Notes due September 11, 2019 (“2019 Floating Rate Notes”). The 2019 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2019 Floating Rate Notes is payable quarterly on September 11, December 11, March 11, and June 11 of each year. Mohawk Finance paid financing costs of $911 in connection with the 2019 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2019 Floating Rate Notes.

On June 9, 2015, the Company issued 500,000 aggregate principal amount of 2.00% Senior Notes (“2.00% Senior Notes”) due January 14, 2022. The 2.00% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing and future unsecured indebtedness. Interest on the 2.00% Senior Notes is payable annually in cash on January 14 of each year, commencing on January 14, 2016. The Company paid financing costs of $4,218 in connection with the 2.00% Senior Notes. These costs were deferred and are being amortized over the term of the 2.00% Senior Notes.
    
On January 31, 2013, the Company issued $600,000 aggregate principal amount of 3.85% Senior Notes (“3.85% Senior Notes”) due February 1, 2023. The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing and future unsecured indebtedness. Interest on the 3.85% Senior Notes is payable semi-annually in cash on February 1 and August 1 of each year. The Company paid financing costs of $6,000 in connection with the 3.85% Senior Notes. These costs were deferred and are being amortized over the term of the 3.85% Senior Notes.

As defined in the related agreements, the Company’s senior notes contain covenants, representations and warranties and events of default, subject to exceptions, and restrictions on the Company’s financial and business operations, including limitations on liens, restrictions on entering into sale and leaseback transactions, fundamental changes, and a provision allowing the holder of the notes to require repayment upon a change of control triggering event.

The fair values and carrying values of our debt instruments are detailed as follows:
 
At June 29, 2019
 
At December 31, 2018
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
3.85% senior notes, payable February 1, 2023; interest payable semiannually
$
624,041

 
600,000

 
599,904

 
600,000

2.00% senior notes, payable January 14, 2022; interest payable annually
594,325

 
568,569

 
587,487

 
572,148

Floating Rate Notes, payable May 18, 2020, interest payable quarterly
340,583

 
341,142

 
343,004

 
343,289

Floating Rate Notes, payable September 11, 2019, interest payable quarterly
341,270

 
341,142

 
343,560

 
343,289

U.S. commercial paper
526,000

 
526,000

 
632,668

 
632,668

European commercial paper
653,286

 
653,286

 
707,175

 
707,175

Five-year senior secured credit facility, due March 26, 2022
21,057

 
21,057

 
57,896

 
57,896

Capital leases and other
13,899

 
13,899

 
6,664

 
6,664

Unamortized debt issuance costs
(4,094
)
 
(4,094
)
 
(5,155
)
 
(5,155
)
Total debt
3,110,367

 
3,061,001

 
3,273,203

 
3,257,974

Less current portion of long-term debt and commercial paper
1,891,512

 
1,891,512

 
1,742,373

 
1,742,373

Long-term debt, less current portion
$
1,218,855

 
1,169,489

 
1,530,830

 
1,515,601



The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

During the past two decades, the Company has grown significantly. Its current geographic breadth and diverse product offering are reflected in three reporting segments: Global Ceramic; Flooring North America (“Flooring NA”); and Flooring Rest of the World (“Flooring ROW”). The Global Ceramic Segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, quartz and porcelain slab countertops, which it distributes primarily in North America, Europe, Brazil and Russia through various selling channels, which include Company-owned stores, independent distributors, independent retailers, home centers, commercial contractors and commercial end users. The Flooring NA Segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet cushion, wood flooring, laminate and vinyl products, including luxury vinyl tile (LVT), which it distributes to its residential and commercial sales channels through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The Segment’s product lines are sold through independent floor covering retailers, independent distributors, home centers, mass merchandisers, department stores, shop at home, online retailers, buying groups, commercial contractors and commercial end users. The Flooring ROW Segment designs, manufactures, sources, licenses and markets laminate, wood flooring, carpets, roofing elements, insulation boards, medium-density fiberboard (“MDF”), chipboards, other wood products and vinyl products, including LVT, which it distributes primarily in Europe, Russia, Australia and New Zealand through various selling channels, which include independent floor covering retailers, independent distributors, company-owned distributors, home centers, commercial contractors and commercial end users.

Mohawk is a significant supplier of every major flooring category with manufacturing operations in 19 nations and sales in more than 170 countries. Currently, many of the Company's markets are experiencing uncertainties, with some economies slowing, while other markets are facing import pressures and excess capacity. Moreover, we expect the environment to remain challenging through the remainder of this year.

Based on its annual sales, the Company believes it is the world’s largest flooring manufacturer. A majority of the Company’s long-lived assets are located in the United States and Europe, which remain the Company’s primary markets. The Company's continued growth in the United States market is expected to be consistent with residential housing starts, existing home sales, residential remodeling investments and commercial construction and remodeling. To maintain its market position, the Company has invested significantly in state-of-the-art manufacturing to create aspirational products to delight consumers with beauty and performance. The Company also is a leading provider of flooring for the U.S. commercial market and has earned significant recognition for its innovation in design and performance and sustainable practices. Additionally, the Company maintains significant operations in Europe, Russia, Mexico, Australia, New Zealand, Brazil and other parts of the world where it has established leading market positions through its differentiated products, broad distribution and marketing initiatives.

In 2018, the Company invested over $790 million in capital projects to expand capacities, differentiate products, and improve productivity.  In 2019, the Company plans to invest an additional $550-580 million in its existing businesses to complete projects that were begun in 2018 and to commence new initiatives. The largest investments during this two-year period are the expansion of LVT in the U.S. and Europe; ceramic capacity increases in Mexico, Italy, Poland and Russia; premium laminate in the U.S., Europe and Russia; carpet tile in Europe; sheet vinyl in Russia; and countertops in the U.S. and Europe. 

For the three months ended June 29, 2019, net earnings attributable to the Company were $202.4 million, or diluted earnings per share (“EPS”) of $2.79, compared to net earnings attributable to the Company of $196.6 million, or diluted EPS of $2.62 for the three months ended June 30, 2018.

Net earnings attributable to the Company were $324.0 million, or diluted EPS of $4.48 for the six months ended June 29, 2019 compared to net earnings attributable to the Company of $405.4 million, or diluted EPS of $5.41 for the six months ended June 30, 2018. The decrease in EPS was primarily attributable to higher inflation, the net impact of price and product mix, the net impact from foreign exchange rates, an increase in costs due to lower production volumes, the impact of restructuring, acquisition and integration activities, temporary reductions in production, investments in new product development, sales personnel and marketing, partially offset by lower startup costs.
For the six months ended June 29, 2019, the Company generated $566.3 million of cash from operating activities. As of June 29, 2019, the Company had cash and cash equivalents of $128.1 million, of which $24.6 million was in the United States and $103.5 million was in foreign countries.



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Results of Operations

Quarter Ended June 29, 2019, as compared with Quarter Ended June 30, 2018

Net sales

Net sales for the three months ended June 29, 2019 were $2,584.5 million, reflecting an increase of $7.5 million, or 0.3%, from the $2,577.0 million reported for the three months ended June 30, 2018. The increase was primarily attributable to higher sales volume of approximately $92 million, or 3.6% which includes sales from acquisitions of approximately $135 million partially offset by lower legacy sales of $43 million and the unfavorable net impact of price and product mix of $32 million, or 1.2%. Net Sales were also affected by the unfavorable net impact from foreign exchange rates of approximately $51 million, or 2%.

Global Ceramic segment—Net sales increased $28.7 million, or 3.1%, to $958.0 million for the three months ended June 29, 2019, compared to $929.3 million for the three months ended June 30, 2018. The increase was primarily attributable to higher sales volume of approximately $46 million which includes sales from acquisitions of approximately $54 million, partially offset by the unfavorable net impact from foreign exchange rates of approximately $17 million.

Flooring NA segment—Net sales decreased $74.2 million, or 7.0%, to $983.4 million for the three months ended June 29, 2019, compared to $1,057.6 million for the three months ended June 30, 2018. The decrease was primarily attributable to lower volumes of $67 million and by the unfavorable net impact of price and product mix of approximately $8 million.

Flooring ROW segment—Net sales increased $52.9 million, or 9.0%, to $643.0 million for the three months ended June 29, 2019, compared to $590.1 million for the three months ended June 30, 2018. The increase was primarily attributable to higher sales volume of approximately $113 million which includes sales from acquisitions of approximately $81 million, partially offset by the unfavorable net impact of price and product mix of $25 million and the unfavorable net impact from foreign exchange rates of approximately $34 million.

Gross profit

Gross profit for the three months ended June 29, 2019 was $736.6 million (28.5% of net sales), a decrease of $30.0 million or 3.9%, compared to gross profit of $766.6 million (29.7% of net sales) for the three months ended June 30, 2018. As a percentage of net sales, gross profit decreased 124 basis points. The decrease in gross profit dollars was attributable to the unfavorable net impact of price and product mix of $30 million, the unfavorable net impact from foreign exchange rates of approximately $17 million, the unfavorable impact of inflation and costs due to temporarily reducing production of $5 million, partially offset by higher sales volume of approximately $16 million and lower start up costs of approximately $7 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 29, 2019 were $469.8 million (18.2% of net sales), an increase of $29.6 million compared to $440.2 million (17.1% of net sales) for the three months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses increased 109 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $25 million of costs due to higher sales volume and inflation of approximately $8 million.

Operating income

Operating income for the three months ended June 29, 2019 was $266.9 million (10.3% of net sales) reflecting a decrease of $59.4 million, or 18.2%, compared to operating income of $326.3 million (12.7% of net sales) for the three months ended June 30, 2018. The decrease in operating income was primarily attributable to the unfavorable net impact of price and product mix of $30 million, the unfavorable net impact of sales volume of $8 million, an increase in costs of approximately $11 million primarily due to lower production volumes, higher inflation costs of approximately $10 million, the unfavorable net impact from foreign exchange rates of approximately $9 million, partially offset by lower startup costs of approximately $9 million and lower restructuring, acquisition and integration-related and other costs of approximately $6 million.

Global Ceramic segment—Operating income was $118.1 million (12.3% of segment net sales) for the three months ended June 29, 2019 reflecting a decrease of $16.7 million compared to operating income of $134.8 million (14.5% of segment net sales) for the three months ended June 30, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $20 million, approximately $6 million of costs due to temporarily reducing production, the unfavorable net impact from foreign exchange rates of approximately $4 million, the unfavorable net impact of price and product mix of

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approximately $3 million,  partially offset by savings from capital investments and cost reduction initiatives of approximately $16 million.

Flooring NA segment—Operating income was $59.5 million (6.1% of segment net sales) for the three months ended June 29, 2019 reflecting a decrease of $41.2 million compared to operating income of $100.7 million (9.5% of segment net sales) for the three months ended June 30, 2018. The decrease in operating income was primarily attributable to an increase in costs of approximately $29 million due to lower production volumes and approximately $23 million due to lower sales volumes partially offset by savings from capital investments and cost reduction initiatives of approximately $8 million and lower start up costs of approximately $4 million.

Flooring ROW segment—Operating income was $101.5 million (15.8% of segment net sales) for the three months ended June 29, 2019 reflecting an increase of $1.3 million compared to operating income of $100.2 million (17.0% of segment net sales) for the three months ended June 30, 2018. The increase in operating income was primarily attributable to increased sales volume of approximately $16 million and lower material inflation costs of approximately $16 million, offset by unfavorable net impact of price and product mix of approximately $21 million and the unfavorable net impact from foreign exchange rates of approximately $6 million and higher restructuring, acquisition and integration-related and other costs of approximately $4 million.


Interest expense

Interest expense was $10.5 million for the three months ended June 29, 2019, reflecting an increase of $2.6 million compared to interest expense of $7.9 million for the three months ended June 30, 2018. The increase in interest expense was primarily due to increased borrowings.

Other expense (income), net

Other income, net was $3.0 million for the three months ended June 29, 2019, reflecting a favorable change of $5.1 million compared to other expense, net of $2.1 million for the three months ended June 30, 2018. The change was primarily attributable to the favorable impact from foreign exchange rates on transactions in the current year and a miscellaneous insurance settlement.

Income tax expense

For the three months ended June 29, 2019, the Company recorded income tax expense of $56.7 million on earnings before income taxes of $259.4 million for an effective tax rate of 21.9%, as compared to income tax expense of $118.8 million on earnings before income taxes of $316.4 million, for an effective tax rate of 37.6% for the three months ended June 30, 2018. The difference in the effective tax rates was caused by geographical dispersion of profits and losses in the comparative periods and the unfavorable impact of the issuance of IRS Notice 2018-26 to the effective tax rate in 2018.
 


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Six Months Ended June 29, 2019, as compared with Six Months Ended June 30, 2018

Net sales

Net sales for the six months ended June 29, 2019 were $5,027.0 million, reflecting an increase of $37.8 million, or 0.8%, from the $4,989.2 million reported for the six months ended June 30, 2018. The increase was primarily attributable to higher sales volume of approximately $192 million, or 3.8%, which includes sales from acquisitions of approximately $255 million partially offset by and the unfavorable net impact of price and product mix of $29 million. Net sales were also affected by the unfavorable net impact from foreign exchange rates of approximately $124 million, or 2.5%.

Global Ceramic segment—Net sales increased $50.6 million, or 2.8%, to $1,856.4 million for the six months ended June 29, 2019, compared to $1,805.8 million for the six months ended June 30, 2018. The increase was primarily attributable to higher sales volume of approximately $85 million, or 4.7%, which includes sales volume attributable to acquisitions of approximately $105 million, the favorable net impact of price and product mix of $9 million partially offset by the unfavorable net impact from foreign exchange rates of approximately $44 million, or 2.4%.

Flooring NA segment—Net sales decreased $102.5 million, or 5.1%, to $1,905.4 million for the six months ended June 29, 2019, compared to $2,007.9 million for the six months ended June 30, 2018. The decrease was primarily attributable to lower volumes of $105 million.

Flooring ROW segment—Net sales increased $89.8 million, or 7.6%, to $1,265.2 million for the six months ended June 29, 2019, compared to $1,175.4 million for the six months ended June 30, 2018. The increase was primarily attributable to higher sales volume of approximately $211 million, or 18%, which includes sales volume attributable to acquisitions of approximately $150 million partially offset by and the unfavorable net impact of price and product mix of $41 million, or 3.5%. Net Sales were also affected by the unfavorable net impact from foreign exchange rates of approximately $80 million, or 6.8%.

Gross profit

Gross profit for the six months ended June 29, 2019 was $1,361.5 million (27.1% of net sales), a decrease of $109.7 million or 7.5%, compared to gross profit of $1,471.2 million (29.5% of net sales) for the six months ended June 30, 2018. As a percentage of net sales, gross profit decreased 240 basis points. The decrease in gross profit dollars was primarily attributable to the higher inflation costs of approximately $48 million, the unfavorable net impact of price and product mix of $42 million, the unfavorable net impact from foreign exchange rates of approximately $38 million, the impact of restructuring, acquisition and integration-related costs of approximately $17 million, and approximately $10 million of costs due to temporarily reducing production, partially offset by higher sales volume of approximately $37 million and lower start up costs of approximately $16 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 29, 2019 were $929.4 million (18.5% of net sales), an increase of $52.9 million compared to $876.5 million (17.6% of net sales) for the six months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses increased 92 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $47 million of costs due to higher sales volume and higher inflation costs of approximately $13 million and approximately $8 million of costs associated with investments in new product development, sales personnel and marketing, partially offset by the net impact of favorable foreign exchange rates of approximately $18 million.

Operating income

Operating income for the six months ended June 29, 2019 was $432.2 million (8.6% of net sales) reflecting a decrease of $162.5 million, or 27.3%, compared to operating income of $594.7 million (11.9% of net sales) for the six months ended June 30, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $61 million, the unfavorable net impact of price and product mix of $42 million, the unfavorable net impact from foreign exchange rates of approximately $20 million, an increase in costs of approximately $15 million due to lower production volumes, the impact of restructuring, acquisition and integration-related and other costs of approximately $12 million, approximately $10 million of costs due to temporarily reducing production, and approximately $8 million of costs associated with investments in new product development, sales personnel and marketing, partially offset by lower startup costs of approximately $19 million.


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Global Ceramic segment—Operating income was $202.5 million (10.9% of segment net sales) for the six months ended June 29, 2019 reflecting a decrease of $45.7 million compared to operating income of $248.2 million (13.7% of segment net sales) for the six months ended June 30, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $41 million, approximately $12 million of costs due to temporarily reducing production, approximately $8 million of costs associated with investments in new product development, sales personnel and marketing, and the unfavorable net impact from foreign exchange rates of approximately $7 million, partially offset by savings from capital investments and cost reduction initiatives of approximately $24 million.

Flooring NA segment—Operating income was $60.2 million (3.2% of segment net sales) for the six months ended June 29, 2019 reflecting a decrease of $115.2 million compared to operating income of $175.4 million (8.7% of segment net sales) for the six months ended June 30, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $41 million, approximately $38 million in decreased sales volume, an increase in costs of approximately $34 million due to lower than expected production volumes, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $9 million, partially offset by lower startup costs of approximately $8 million.

Flooring ROW segment—Operating income was $192.0 million (15.2% of segment net sales) for the six months ended June 29, 2019 reflecting an increase of $2.8 million compared to operating income of $189.2 million (16.1% of segment net sales) for the six months ended June 30, 2018. The increase in operating income was  primarily attributable to increased sales volume of approximately $30 million, lower inflation costs of approximately $25 million and lower start-up costs of approximately $9 million partially offset by unfavorable net impact of price and product mix of approximately $37 million, the unfavorable net impact from foreign exchange rates of approximately $14 million, the impact of restructuring, acquisition and integration-related and other costs of approximately $6 million, and an increase in costs of approximately $5 million due to lower production volumes.

Interest expense

Interest expense was $21.0 million for the six months ended June 29, 2019, reflecting an increase of $5.6 million compared to interest expense of $15.4 million for the six months ended June 30, 2018. The increase in interest expense was primarily due to increased borrowings.

Other expense (income), net

Other income, net was $6.8 million for the six months ended June 29, 2019, reflecting a favorable change of $12.9 million compared to other expense, net of $6.1 million for the six months ended June 30, 2018. The change was primarily attributable to the increased favorable impact of foreign exchange rates.

Income tax expense

For the six months ended June 29, 2019, the Company recorded income tax expense of $93.8 million on earnings before income taxes of $418.0 million for an effective tax rate of 22.4%, as compared to an income tax expense of $166.4 million on earnings before income taxes of $573.2 million, for an effective tax rate of 29.0% for the six months ended June 30, 2018. The effective tax rate for 2019 was impacted by geographical dispersion of profits and losses in the comparative periods and the unfavorable impact of the issuance of IRS Notice 2018-26 to the effective tax rate in 2018.

Liquidity and Capital Resources

The Company’s primary capital requirements are for working capital, capital expenditures and acquisitions. The Company’s capital needs are met primarily through a combination of internally generated funds, commercial paper, bank credit lines, term and senior notes and credit terms from suppliers.

Net cash provided by operating activities in the first six months of 2019 was $566.3 million, compared to net cash provided by operating activities of $621.0 million in the first six months of 2018. The decrease of $54.7 million in 2019 was primarily attributable to net earnings partially offset by changes in working capital.

Net cash used in investing activities in the first six months of 2019 was $353.9 million compared to net cash used in investing activities of $485.9 million in the first six months of 2018. The decrease was primarily due to reduced capital expenditures of $217.3 million partially offset by an increase in acquisition costs of $52.4 million and by the net redemption activity in short-term investments of $32.9 million associated with the Company’s wholly-owned captive insurance company. The Company continues to invest to optimize sales and profit growth this year and beyond with product expansion and cost reduction projects in the business. Capital spending during the remainder of 2019 is expected to be approximately $284 million.

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Net cash used in financing activities in the first six months of 2019 was $205.4 million compared to net cash provided by financing activities of $308.0 million in the six months of 2018. The change in cash used in financing activities is primarily attributable to net pay down on borrowings of $150.1 million in 2019 compared to 2018, and proceeds from debt issuance of $353.6 million in 2018.

As of June 29, 2019, the Company had cash of $128.1 million, of which $103.5 million was held outside the United States. The Company plans to permanently reinvest the cash held outside the United States. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its existing credit facilities will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over at least the next twelve months.

On October 25, 2018, the Company announced that its Board of Directors approved a new share repurchase program, authorizing the Company to repurchase up to $500 million of its common stock. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion. The timing and amount of any purchases of common stock will be based on the Company’s liquidity, general business and market conditions and other factors, including alternative investment opportunities.

The Company may continue, from time to time, to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amount involved may be material.

Senior Credit Facility

On March 26, 2015, the Company amended and restated its 2013 senior credit facility increasing its size from $1,000.0 million to $1,800.0 million and extending the maturity from September 25, 2018 to March 26, 2020 (as amended and restated, the “2015 Senior Credit Facility”). The 2015 Senior Credit Facility eliminated certain provisions in the 2013 Senior Credit Facility, including those that: (a) accelerated the maturity date to 90 days prior to the maturity of senior notes due in January 2016 if certain specified liquidity levels were not met; and (b) required that certain subsidiaries guarantee the Company’s obligations if the Company’s credit ratings fell below investment grade. The 2015 Senior Credit Facility also modified certain negative covenants to provide the Company with additional flexibility, including flexibility to make acquisitions and incur additional indebtedness. On March 1, 2016, the Company amended the 2015 Senior Credit Facility to, among other things, carve out from the general limitation on subsidiary indebtedness the issuance of Euro-denominated commercial paper notes by subsidiaries. Additionally, at several points in 2016, the Company extended the maturity date of the 2015 Senior Credit Facility from March 26, 2020 to March 26, 2021. In the first half of 2017, the Company amended the 2015 Senior Credit Facility to extend the maturity date from March 26, 2021 to March 26, 2022.

At the Company’s election, revolving loans under the 2015 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 1.00% and 1.75% (1.125% as of June 29, 2019), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or the Eurocurrency Rate (as defined in the 2015 Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of June 29, 2019). The Company also pays a commitment fee to the lenders under the 2015 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders exceed utilization of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of June 29, 2019). The applicable margins and the commitment fee are determined based on whichever of the Company’s Consolidated Net Leverage Ratio or its senior unsecured debt rating (or if not available, corporate family rating) results in the lower applicable margins and commitment fee (with applicable margins and the commitment fee increasing as that ratio increases or those ratings decline, as applicable).

The obligations of the Company and its subsidiaries in respect of the 2015 Senior Credit Facility are unsecured.

The 2015 Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, subsidiary indebtedness, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, future negative pledges, and changes in the nature of the Company’s business. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter. The limitations contain customary exceptions or, in certain cases, do not apply as long as the Company is in compliance with the financial ratio requirements and is not otherwise in default.

The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.

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In 2017, the Company paid financing costs of $0.6 million in connection with the extension of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022. These costs were deferred and, along with unamortized costs of $6.9 million are being amortized over the term of the 2015 Senior Credit Facility.

As of June 29, 2019, amounts utilized under the 2015 Senior Credit Facility included $21.1 million of borrowings and $22.8 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,179.3 million under the Company’s U.S. and European commercial paper programs as of June 29, 2019 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,223.1 million under the 2015 Senior Credit Facility resulting in a total of $576.9 million available as of June 29, 2019.
    
Commercial Paper

On February 28, 2014 and July 31, 2015, the Company established programs for the issuance of unsecured commercial paper in the United States and Eurozone capital markets, respectively. Commercial paper issued under the U.S. and European programs will have maturities ranging up to 397 days and 183 days, respectively. None of the commercial paper notes may be voluntarily prepaid or redeemed by the Company and all rank pari passu with all of the Company’s other unsecured and unsubordinated indebtedness. To the extent that the Company issues European commercial paper notes through a subsidiary of the Company, the notes will be fully and unconditionally guaranteed by the Company.

The Company uses its 2015 Senior Credit Facility as a liquidity backstop for its commercial paper programs. Accordingly, the total amount outstanding under all of the Company’s commercial paper programs may not exceed $1,800.0 million (less any amounts drawn on the 2015 Senior Credit Facility) at any time.

The proceeds from the issuance of commercial paper notes will be available for general corporate purposes. As of June 29, 2019, there was $526.0 million outstanding under the U.S. commercial paper program, and the euro equivalent of $653.3 million under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.73% and 31.09 days, respectively. The weighted average interest rate and maturity period for the European program were (0.21)% and 38.35 days, respectively.

Senior Notes
    
On May 18, 2018, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of €300.0 million aggregate principal amount of its Floating Rate Notes due May 18, 2020 (“2020 Floating Rate Notes”). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2020 Floating Rate Notes is payable quarterly on August 18, November 18, February 18, and May 18 of each year. Mohawk Finance paid financing costs of $0.9 million in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.

On September 11, 2017, Mohawk Finance completed the issuance and sale of €300.0 million aggregate principal amount of its Floating Rate Notes due September 11, 2019 (“2019 Floating Rate Notes”). The 2019 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2019 Floating Rate Notes is payable quarterly on September 11, December 11, March 11, and June 11 of each year. Mohawk Finance paid financing costs of $0.9 million in connection with the 2019 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2019 Floating Rate Notes.

On June 9, 2015, the Company issued €500.0 million aggregate principal amount of 2.00% Senior Notes (“2.00% Senior Notes”) due January 14, 2022. The 2.00% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing and future unsecured indebtedness. Interest on the 2.00% Senior Notes is payable annually in cash on January 14 of each year, commencing on January 14, 2016. The Company paid financing costs of $4.2 million in connection with the 2.00% Senior Notes. These costs were deferred and are being amortized over the term of the 2.00% Senior Notes.
    
On January 31, 2013, the Company issued $600.0 million aggregate principal amount of 3.85% Senior Notes (“3.85% Senior Notes”) due February 1, 2023. The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari

33

Table of Contents

passu with all the Company’s existing and future unsecured indebtedness. Interest on the 3.85% Senior Notes is payable semi-annually in cash on February 1 and August 1 of each year. The Company paid financing costs of $6.0 million in connection with the 3.85% Senior Notes. These costs were deferred and are being amortized over the term of the 3.85% Senior Notes.

As defined in the related agreements, the Company’s senior notes contain covenants, representations and warranties and events of default, subject to exceptions, and restrictions on the Company’s financial and business operations, including limitations on liens, restrictions on entering into sale and leaseback transactions, fundamental changes, and a provision allowing the holder of the notes to require repayment upon a change of control triggering event.

Contractual Obligations

There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 2018 Annual Report filed on Form 10-K.
    
Critical Accounting Policies and Estimates

Refer to Note 1 - General, Note 3 - Revenue from Contracts with Customers and Note 10 - Leases within our Condensed Consolidated Financial Statements of this Form 10-Q for a discussion of the Company’s updated accounting policies on revenue recognition and lease accounting. The Company’s critical accounting policies and estimates are described in its 2018 Annual Report filed on Form 10-K.

Recent Accounting Pronouncements

See Note 1 in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q under the heading “Recent Accounting Pronouncements” for a discussion of new accounting pronouncements which is incorporated herein by reference.

Impact of Inflation

Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses. The Company expects raw material prices, many of which are petroleum based, to fluctuate based upon worldwide supply and demand of commodities utilized in the Company’s production processes. Although the Company attempts to pass on increases in raw material, energy and fuel-related costs to its customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. In the past, the Company has often been able to enhance productivity and develop new product innovations to help offset increases in costs resulting from inflation in its operations.

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements as of June 29, 2019.

Seasonality

The Company is a calendar year-end company. With respect to its Flooring NA and Global Ceramic segments, its results of operations for the first quarter tend to be the weakest followed by the fourth quarter. The second and third quarters typically produce higher net sales and operating income in these segments. These results are primarily due to consumer residential spending patterns which have historically decreased during the holiday season and the first two months following. The Flooring ROW segment’s second quarter typically produces the highest net sales and earnings followed by a moderate first and fourth quarter and a weaker third quarter.

Forward-Looking Information

Certain of the statements in this Form 10-Q, particularly those 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” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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;

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Table of Contents

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; ability to identify attractive acquisition targets; ability to successfully complete and integrate acquisitions; international operations; changes in foreign exchange rates; introduction of new products; rationalization of operations; tax, product and other claims; litigation; and other risks identified in Item 1A “Risk Factors” in the Company’s 2018 Annual Report on Form 10-K.



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Table of Contents

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As of June 29, 2019, approximately 38% of the Company’s debt portfolio was comprised of fixed-rate debt and 62% was floating-rate debt. A 1.0 percentage point increase in the interest rate of the floating-rate debt would have resulted in an increase in interest expense of $4.7 million and $9.5 million for the three and six months ended June 29, 2019. There have been no significant changes to the Company’s exposure to market risk as disclosed in the Company’s 2018 Annual Report filed on Form 10-K.    

Item 4.
Controls and Procedures
 
Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), which have been designed to provide reasonable assurance that such controls and procedures will meet their objectives, as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective at a reasonable assurance level for the period covered by this report.

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than the Company adopted ASC 842, Leases, on January 1, 2019, and implemented new controls and processes to meet the requirements of the standard.

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Table of Contents

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

Alabama Municipal Litigation

In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing specific perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board’s motion for remand.

In May 2017, the Water Works and Sewer Board of the Town of Centre, Alabama (the “Centre Water Board”) filed a very similar complaint to the Gadsden Water Board complaint in the Circuit Court of Cherokee County. On June 19, 2017, the defendants removed this case to the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversity of citizenship and fraudulent joinder. The Centre Water Board filed a motion to remand the case back to state court, and the defendants opposed the Centre Water Board’s motion. The federal court granted Centre Water Board's motion for remand.

Certain defendants, including the Company, filed dispositive motions in each case arguing that the state court lacks personal jurisdiction over them. Both state courts denied those motions. In June and September 2018, certain defendants, including the Company, petitioned the Alabama Supreme Court for Writs of Mandamus directing each lower court to enter an order granting the defendants’ dispositive motions on personal jurisdiction grounds. Those petitions have been fully briefed and the Company awaits a decision from the Alabama Supreme Court.

The Company has never manufactured the perfluorinated compounds at issue but purchased them for use in the manufacture of its carpets prior to 2007. The Gadsden and Centre Water Boards are not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsden and Centre Water Boards are seeking lost profits based on allegations that their customers decreased water purchases, as well as reimbursement for the cost of a filter and punitive damages.

Belgian Tax Matter

Between 2012 and 2014, the Company received assessments from the Belgian tax authority for the calendar years 2005 through 2010 in the amounts of €46.1 million, €38.8 million, €39.6 million, €30.1 million, €35.6 million and €43.1 million, respectively, including penalties, but excluding interest. The Belgian tax authority denied the Company’s formal protests against these assessments and the Company brought all six years before the Court of First Appeal in Bruges. The Court of First Appeal in Bruges ruled in favor of the Company on January 27, 2016, with respect to the calendar years ending December 31, 2005 and December 31, 2009; and on June 13, 2018, the Court of First Appeal in Bruges ruled in favor of the Company with respect to the calendar years ending December 31, 2006, December 31, 2007, December 31, 2008 and December 31, 2010. The Belgian tax authority has lodged its Notification of Appeal for all six years with the Ghent Court of Appeal. In March 2019, the Company received assessments from the Belgian tax authority for tax years 2011 through 2017 in the amount of €40.6 million, €39.7 million, €11.4 million, €23.9 million, €30.6 million, €93.1 million and €79.9 million respectively, including penalties, but excluding interest. The Company intends to file formal protests based on these assessments in a timely manner. The assessments are largely based on the same facts underlying the positive rulings, which the Belgian tax authority is appealing.

The Company continues to disagree with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company’s properties in Wielsbeke (Ooigemstraat and Breestraat), Oostrozebeke (Ingelmunstersteenweg) and Desselgem (Waregemstraat) included in the Flooring ROW segment. The purpose of the lien is to provide security for payment should the Belgian tax authority prevail on its appeal. The lien does not interfere with the Company’s operations at these properties.





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Table of Contents

General

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses that are reasonably estimable. These contingencies are subject to significant uncertainties and the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
Item 1A.
Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2018. The risk factors disclosed in our Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition or results.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

On October 25, 2018, the Company announced that its Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $500 million in shares of its common stock. Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to trading plans in accordance with Rules 10b5-1 or 10b-18 under the Exchange Act or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock and the availability of alternative investment opportunities. No time limit was set for completion of repurchases under the new authorization and the program may be suspended or discontinued at any time. The new program replaces any previously authorized share repurchase programs.

The following table provides information regarding share repurchase activity during the three months ended June 29, 2019.

Period
Total Number of Shares Purchased
in Millions
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
in Millions
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan
in Millions
March 31 through May 4, 2019
0.0

$
126.99

0.0

$
225.8

May 5 through June 1, 2019
0.0

$
136.46

0.0

$
219.2

June 2 through June 29, 2019
0.0

$
136.64

0.0

$
216.9

Total
0.1

$
136.42

0.1

 


Item 3.
Defaults Upon Senior Securities

None.


Item 4.
Mine Safety Disclosures

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this quarterly report on Form 10-Q.

Item 5.
Other Information

None.


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Table of Contents

Item 6.
Exhibits
No.
 
Description
 
 
 
31.1
 
31.2
 
32.1
 
32.2
 
95.1
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.




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Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
MOHAWK INDUSTRIES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
Dated:
August 2, 2019
By:
 
/s/ Jeffrey S. Lorberbaum
 
 
 
 
JEFFREY S. LORBERBAUM
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
(principal executive officer)
 
 
 
 
 
Dated:
August 2, 2019
By:
 
/s/ Glenn Landau
 
 
 
 
GLENN LANDAU
 
 
 
 
Chief Financial Officer
 
 
 
 
(principal financial officer)

40
Exhibit


EXHIBIT 31.1
CERTIFICATIONS
I, Jeffrey S. Lorberbaum, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Mohawk Industries, Inc.;
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 2, 2019
/s/ Jeffrey S. Lorberbaum
Jeffrey S. Lorberbaum
Chairman and Chief Executive Officer




Exhibit


EXHIBIT 31.2
CERTIFICATIONS
I, Glenn Landau, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Mohawk Industries, Inc.;
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 2, 2019
/s/ Glenn Landau
Glenn Landau
Chief Financial Officer



Exhibit


EXHIBIT 32.1
Statement of Chief Executive Officer of
MOHAWK INDUSTRIES, INC.
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002
In connection with the quarterly report of Mohawk Industries, Inc. (the “Company”) on Form 10-Q for the period ended June 29, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jeffrey S. Lorberbaum
Jeffrey S. Lorberbaum
Chairman and Chief Executive Officer
August 2, 2019



Exhibit


EXHIBIT 32.2
Statement of Chief Financial Officer of
MOHAWK INDUSTRIES, INC.
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002
In connection with the quarterly report of Mohawk Industries, Inc. (the “Company”) on Form 10-Q for the period ended June 29, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn Landau, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Glenn Landau
Glenn Landau
Chief Financial Officer
August 2, 2019



Exhibit
Exhibit 95.1

Mine Safety Disclosure

The following disclosures are provided pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) and Item 104 of Regulation S-K, which requires certain disclosures by companies required to file periodic reports under the Securities Exchange Act of 1934, as amended, that operate mines regulated under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”).
 
Mine Safety Information

Whenever the Federal Mine Safety and Health Administration (“MSHA”) believes a violation of the Mine Act, any health or safety standard or any regulation has occurred, it may issue a citation which describes the alleged violation and fixes a time within which the U.S. mining operator must abate the alleged violation. In some situations, such as when MSHA believes that conditions pose a hazard to miners, MSHA may issue an order removing miners from the area of the mine affected by the condition until the alleged hazards are corrected. When MSHA issues a citation or order, it generally proposes a civil penalty, or fine, as a result of the alleged violation, that the operator is ordered to pay. Citations and orders can be contested and appealed, and as part of that process, may be reduced in severity and amount, and are sometimes dismissed. The number of citations, orders and proposed assessments vary depending on the size and type (underground or surface) of the mine as well as by the MSHA inspector(s) assigned.

The following table includes information required by the Act for the three months ended June 29, 2019.

Mine
(Federal Mine Safety and Health Administration (MSHA) ID)
Total # of Significant & Substantial violations under §104(a)
Total # of orders under §104(b)
Total # of unwarrantable failure citations and orders under §104(d)
Total # of violations under §110(b)(2)
Total # of orders under §107(a)
Total dollar value of proposed assessments from MSHA ($ in thousands)
Total # of mining related fatalities
Received Notice of Pattern of Violations under §104(e) (yes/no)?
Received Notice of Potential to have Pattern under §104(e) (yes/no)?
Total # of Legal Actions Pending with the Mine Safety and Health Review Commission as of the Last Day of Period
Legal Actions Initiated or Resolved During Period
TP Claims 1&2/Rosa Blanca (4100867)
$—
No
No
Allamore Mill (4100869)
1
196
No
No
Wild Horse Plant (4101527)
No
No