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Table of Contents

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

FORM 10-Q
[Mark One]
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 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: (706) 629-7721
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 May 1, 2019, the latest practicable date, is as follows: 72,421,223 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 March 30, 2019 and December 31, 2018
 
 
 
 
Condensed Consolidated Statements of Operations for the three months ended March 30, 3019 and March 31, 2018
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2019 and March 31, 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) 
 
March 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
105,668

 
119,050

Receivables, net
1,743,581

 
1,606,159

Inventories
2,338,125

 
2,287,615

Prepaid expenses
427,233

 
421,553

Other current assets
74,358

 
74,919

Total current assets
4,688,965

 
4,509,296

Property, plant and equipment
8,282,502

 
8,227,074

Less: accumulated depreciation
3,608,067

 
3,527,172

Property, plant and equipment, net
4,674,435

 
4,699,902

Right of use operating lease assets
320,800

 

Goodwill
2,548,997

 
2,520,966

Tradenames
702,774

 
707,380

Other intangible assets subject to amortization, net
247,790

 
254,430

Deferred income taxes and other non-current assets
421,314

 
407,149

 
$
13,605,075

 
13,099,123

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1,763,332

 
1,742,373

Accounts payable and accrued expenses
1,571,273

 
1,523,866

Current operating lease liabilities
99,642

 

Total current liabilities
3,434,247

 
3,266,239

Deferred income taxes
422,772

 
413,740

Long-term debt, less current portion
1,497,975

 
1,515,601

Non-current operating lease liabilities
227,595

 

Other long-term liabilities
445,441

 
463,484

Total liabilities
6,028,030

 
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; 79,771 and 79,656 shares issued in 2019 and 2018, respectively
798

 
797

Additional paid-in capital
1,853,484

 
1,852,173

Retained earnings
6,709,782

 
6,588,197

Accumulated other comprehensive loss
(777,547
)
 
(791,608
)
 
7,786,517

 
7,649,559

Less: treasury stock at cost; 7,349 and 7,349 shares in 2019 and 2018, respectively
215,716

 
215,745

Total Mohawk Industries, Inc. stockholders’ equity
7,570,801

 
7,433,814

    Nonredeemable noncontrolling interest
6,244

 
6,245

          Total stockholders’ equity
7,577,045

 
7,440,059

 
$
13,605,075

 
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
 
March 30,
2019
 
March 31,
2018
Net sales
$
2,442,490

 
2,412,202

Cost of sales
1,817,563

 
1,707,510

Gross profit
624,927

 
704,692

Selling, general and administrative expenses
459,597

 
436,293

Operating income
165,330

 
268,399

Interest expense
10,473

 
7,528

Other expense (income), net
(3,736
)
 
3,998

Earnings before income taxes
158,593

 
256,873

Income tax expense
37,018

 
47,632

Net earnings including noncontrolling interests
121,575

 
209,241

Net (income) expense attributable to noncontrolling interests
(10
)
 
475

Net earnings attributable to Mohawk Industries, Inc.
$
121,585

 
208,766

 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
$
1.68

 
2.80

Weighted-average common shares outstanding—basic
72,342

 
74,453

 
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
$
1.67

 
2.78

Weighted-average common shares outstanding—diluted
72,646

 
74,929

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
 
March 30,
2019
 
March 31,
2018
Net earnings including noncontrolling interests
$
121,575

 
209,241

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
13,962

 
72,393

Pension prior service cost and actuarial gain (loss), net of tax
108

 
(135
)
Other comprehensive income
14,070

 
72,258

Comprehensive income
135,645

 
281,499

Comprehensive income (loss) attributable to noncontrolling interests
(1
)
 
1,374

Comprehensive income attributable to Mohawk Industries, Inc.
$
135,646

 
280,125

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) 
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Cash flows from operating activities:
 
 
 
Net earnings
$
121,575

 
209,241

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 
 
 
Restructuring
32,937

 
18,182

Depreciation and amortization
137,291

 
122,654

Deferred income taxes
9,903

 
19,401

(Gain) loss on disposal of property, plant and equipment
1,164

 
(1,277
)
Stock-based compensation expense
5,789

 
7,948

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Receivables, net
(142,518
)
 
(104,287
)
Inventories
(39,409
)
 
(74,499
)
Other assets and prepaid expenses
(2,474
)
 
(182
)
Accounts payable and accrued expenses
71,199

 
(14,250
)
Other liabilities
(25,320
)
 
297

Net cash provided by operating activities
170,137

 
183,228

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(136,948
)
 
(250,936
)
Acquisitions, net of cash acquired
(76,847
)
 
(24,410
)
Purchases of short-term investments
(154,000
)
 
(246,096
)
Redemption of short-term investments
156,000

 
280,000

Net cash used in investing activities
(211,795
)
 
(241,442
)
Cash flows from financing activities:
 
 
 
Payments on Senior Credit Facilities
(132,030
)
 
(365,889
)
Proceeds from Senior Credit Facilities
94,539

 
355,252

Payments on Commercial Paper
(3,815,406
)
 
(3,976,712
)
Proceeds from Commercial Paper
3,895,455

 
4,089,996

Payments of other debt and financing costs
(125
)
 

Change in outstanding checks in excess of cash
(10,965
)
 
(6,905
)
Shares redeemed for taxes
(4,669
)
 
(9,144
)
Proceeds from stock transactions
1

 
1

Net cash provided by financing activities
26,800

 
86,599

Effect of exchange rate changes on cash and cash equivalents
1,476

 
1,574

Net change in cash and cash equivalents
(13,382
)
 
29,959

Cash and cash equivalents, beginning of period
119,050

 
84,884

Cash and cash equivalents, end of period
$
105,668

 
114,843

 
 
 
 

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 three months ended March 30, 2019 and March 31, 2018, the change in the U.S. dollar value of the Company’s euro denominated debt was a decrease of $11,233 ($8,532 net of taxes) and an increase of $16,047 ($13,043 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, 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

Table of Contents
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

Table of Contents
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 $87,043, indefinite-lived tradename intangible assets of $58,671 and intangible assets subject to amortization of $43,635. The goodwill is not expected to be 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 is not expected to be 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 $34,665 and $34,486 as of March 30, 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 months ended March 30, 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 $59,034 and $57,840 as of March 30, 2019 and January 1, 2019, respectively. Amortization expense recognized during the three months ended March 30, 2019 related to these capitalized costs was $11,048.

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 March 30, 2019 and March 31, 2018:

March 30, 2019
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
541,826

 
883,242

 
68

 
1,425,136

Europe
179,310

 
1,837

 
469,916

 
651,063

Russia
51,915

 
29

 
23,615

 
75,559

Other
125,301

 
36,872

 
128,559

 
290,732

 
$
898,352

 
921,980

 
622,158

 
2,442,490

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
898,352

 
14,443

 

 
912,795

Carpet & Resilient

 
735,424

 
190,929

 
926,353

Laminate & Wood

 
172,113

 
210,201

 
382,314

Other (1)

 

 
221,028

 
221,028

 
$
898,352

 
921,980

 
622,158

 
2,442,490



March 31, 2018
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
556,187

 
908,122

 

 
1,464,309

Europe
190,235

 
1,650

 
494,644

 
686,529

Russia
51,422

 

 
19,428

 
70,850

Other
78,704

 
40,586

 
71,224

 
190,514

 
$
876,548

 
950,358

 
585,296

 
2,412,202

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
876,548

 
17,544

 

 
894,092

Carpet & Resilient

 
755,545

 
129,011

 
884,556

Laminate & Wood

 
177,269

 
226,143

 
403,412

Other (1)

 

 
230,142

 
230,142

 
$
876,548

 
950,358

 
585,296

 
2,412,202


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

        


11

Table of Contents
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 months ended March 30, 2019 and March 31, 2018:

 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Cost of sales
 
 
 
Restructuring costs (1)
$
31,535

 
14,090

Acquisition integration-related costs
1,067

 
408

  Restructuring and acquisition integration-related costs
$
32,602

 
14,498

 
 
 
 
Selling, general and administrative expenses
 
 
 
Restructuring costs (1)
$
1,402

 
4,092

Acquisition transaction-related costs
280

 

Acquisition integration-related costs
1,419

 
3,514

  Restructuring, acquisition transaction and integration-related costs
$
3,101

 
7,606



(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 three months ended March 30, 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

 
23,688

 
598

 
3,313

 
27,599

Provision - Flooring ROW segment

 

 
459

 

 
459

Cash payments
(145
)
 

 
(2,733
)
 
(3,313
)
 
(6,191
)
Non-cash items

 
(23,688
)
 
(17
)
 

 
(23,705
)
Balance as of March 30, 2019
$
252

 

 
11,052

 
250

 
11,554



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

12

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


5. Receivables, net

Receivables, net are as follows:
 
March 30,
2019
 
December 31,
2018
Customers, trade
$
1,716,927

 
1,562,284

Income tax receivable
10,735

 
17,217

Other
88,227

 
101,376

 
1,815,889

 
1,680,877

Less: allowance for discounts, claims and doubtful accounts
72,308

 
74,718

Receivables, net
$
1,743,581

 
1,606,159



6. Inventories

The components of inventories are as follows:
 
March 30,
2019
 
December 31,
2018
Finished goods
$
1,625,685

 
1,582,112

Work in process
166,753

 
165,616

Raw materials
545,687

 
539,887

Total inventories
$
2,338,125

 
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
)
 

 
45,931

 
43,042

Currency translation during the period
1,752

 

 
(16,763
)
 
(15,011
)
 
 
 
 
 
 
 
 
Balance as of March 30, 2019
 
 
 
 
 
 
 
Goodwill
1,563,850

 
874,198

 
1,438,374

 
3,876,422

Accumulated impairment losses
(531,930
)
 
(343,054
)
 
(452,441
)
 
(1,327,425
)
 
$
1,031,920

 
531,144

 
985,933

 
2,548,997



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
(3,732
)
Balance as of March 30, 2019
$
702,774


 

13

Table of Contents
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
(6,758
)
 
(5,015
)
 
74

 
(11,699
)
Balance as of March 30, 2019
$
646,346

 
249,468

 
6,609

 
902,423

 
 
 
 
 
 
 
 
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
6,194

 
533

 
2

 
6,729

Currency translation during the period
(4,772
)
 
(4,920
)
 
(5
)
 
(9,697
)
Balance as of March 30, 2019
$
407,808

 
245,601

 
1,224

 
654,633

 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
$
238,538

 
3,867

 
5,385

 
247,790


 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Amortization expense
$
6,729

 
7,567




8. Accounts payable and accrued expenses

Accounts payable and accrued expenses are as follows:
 
March 30,
2019
 
December 31,
2018
Outstanding checks in excess of cash
$
3,626

 
14,624

Accounts payable, trade
914,205

 
811,879

Accrued expenses
407,386

 
430,431

Product warranties
46,129

 
47,511

Accrued interest
7,197

 
21,908

Accrued compensation and benefits
192,730

 
197,513

Total accounts payable and accrued expenses
$
1,571,273

 
1,523,866



9. Accumulated other comprehensive income (loss)

The changes in accumulated other comprehensive income (loss) by component, for the three months ended March 30, 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
13,953

 
108

 
14,061

Balance as of March 30, 2019
$
(768,149
)
 
(9,398
)
 
(777,547
)



14

Table of Contents
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.

















15

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



The components of lease costs are as follows:
Three Months Ended March 30, 2019
Cost of Goods Sold
 
Selling, General and Administrative
 
Total
Operating lease costs
 
 
 
 
 
Fixed
$
7,688

 
24,455

 
32,143

Short-term
1,439

 
2,909

 
4,348

Variable
2,278

 
5,200

 
7,478

Sub-leases
(84
)
 
(133
)
 
(217
)
 
11,321

 
32,431

 
43,752

Finance lease costs
 
 
 
 
 
Amortization of leased assets

 
432

 
432

Interest on lease liabilities

 
31

 
31

 

 
463

 
463

Net lease costs
$
11,321

 
32,894

 
44,215




Supplemental balance sheet information related to leases is as follows:
 
Classification
 
March 30,
2019
Assets
 
 
 
Operating Leases
 
 
 
Right of use operating lease assets
Right of use operating lease assets
 
$
320,800

Finance Leases
 
 
 
Property, plant and equipment, gross
Property, plant and equipment
 
9,086

Accumulated depreciation
Accumulated depreciation
 
(2,817
)
Property, plant and equipment, net
Property, plant and equipment, net
 
6,269

Total lease assets
 
 
$
327,069

 
 
 
 
Liabilities
 
 
 
Operating Leases
 
 
 
Other current
Current operating lease liabilities
 
$
99,642

Non-current
Non-current operating lease liabilities
 
227,595

Total operating liabilities
 
 
327,237

Finance Leases
 
 
 
Short-term debt
Short-term debt and current portion of long-term debt
 
1,179

Long-term debt
Long-term debt, less current portion
 
5,130

Total finance liabilities
 
 
6,309

Total lease liabilities
 
 
$
333,546

 
 
 
 












16

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 three months ended March 30, 2019)
$
932

 
81,796

 
82,728

2020
1,028

 
100,986

 
102,014

2021
608

 
72,184

 
72,792

2022
412

 
46,168

 
46,580

2023
412

 
23,123

 
23,535

Thereafter
3,388

 
30,289

 
33,677

Total lease payments
6,780

 
354,546

 
361,326

Less imputed interest
471

 
27,309

 
 
Present value, Total
$
6,309

 
327,237

 
 


The Company had approximately $5,000 of leases that commenced after March 30, 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:
 
March 30,
2019
Weighted Average Remaining Lease Term
 
Operating Leases
4.16 years

Finance Leases
8.89 years

 
 
Weighted Average Discount Rate
 
Operating Leases
3.3
%
Finance Leases
2.1
%



Supplemental cash flow information related to leases was as follows:
 
Three Months Ended
 
March 30,
2019
Cash paid for amounts included in measurement of lease liabilities:
 
Operating cash flows from operating leases
$
31,557

Operating cash flows from finance leases
31

Financing cash flows from finance leases
371

Right-of-use assets obtained in exchange for lease obligations:
 
Operating Leases
22,243

Finance Leases

Amortization:
 
Amortization of Right of use operating lease assets (1)
28,641


(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.


17

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 169 restricted stock units (“RSUs”) at a weighted average grant-date fair value of $137.71 per unit for the three months ended March 30, 2019. The Company granted 123 at a weighted average grant-date fair value of $239.04 per unit for the three months ended March 31, 2018. The Company recognized stock-based compensation costs related to the issuance of RSUs of $5,789 ($4,283 net of taxes) and $7,948 ($5,882 net of taxes) for the three months ended March 30, 2019 and March 31, 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 $18,759 as of March 30, 2019, and will be recognized as expense over a weighted-average period of approximately 1.85 years. The Company did not recognize any stock-based compensation costs related to stock options for the three months ended March 30, 2019 and March 31, 2018, respectively.


12. Other expense (income), net

Other expense (income), net is as follows:
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Foreign currency losses (gains), net
$
(1,110
)
 
1,405

Release of indemnification asset

 
1,749

All other, net
(2,626
)
 
844

Total other expense, net
$
(3,736
)
 
3,998




13. Income Taxes

For the quarter ended March 30, 2019, the Company recorded income tax expense of $37,018 on earnings before income taxes of $158,593 for an effective tax rate of 23.3%, as compared to an income tax expense of $47,632 on earnings before income taxes of $256,873, for an effective tax rate of 18.5% for the quarter ended March 31, 2018. The difference in the effective tax rates for the comparative periods was caused by the geographic dispersion of profits and losses for the respective periods; the elimination of an annual tax benefit in Italy; and a discrete stock expense.




18

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 March 30, 2019 and March 31, 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

115

1

(4,478
)



29


(4,448
)
Stock-based compensation expense



5,789






5,789

Accretion of redeemable noncontrolling interest










Noncontrolling earnings








(10
)
(10
)
Currency translation adjustment on non-controlling interests










Currency translation adjustment





13,953



9

13,962

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





108




108

Net income




121,585





121,585

March 30, 2019
$

79,771

$
798

$
1,853,484

$
6,709,782

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

$
7,577,045


 
 
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

112

1

(9,004
)



17


(8,986
)
Stock-based compensation expense



7,948






7,948

Accretion of redeemable noncontrolling interest
305




(305
)




(305
)
Noncontrolling earnings
444








31

31

Currency translation adjustment on non-controlling interests
711








188

188

Currency translation adjustment





71,494




71,494

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





(135
)



(135
)
Net income




208,766





208,766

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




19

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

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:
    
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Net earnings attributable to Mohawk Industries, Inc.
$
121,585

 
208,766

Accretion of redeemable noncontrolling interest (1)

 
(305
)
Net earnings available to common stockholders
$
121,585

 
208,461

 
 
 
 
Weighted-average common shares outstanding-basic and diluted:
 
 
 
Weighted-average common shares outstanding—basic
72,342

 
74,453

Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net
304

 
476

Weighted-average common shares outstanding-diluted
72,646

 
74,929

 
 
 
 
Earnings per share attributable to Mohawk Industries, Inc.
 
 
 
Basic
$
1.68

 
2.80

Diluted
$
1.67

 
2.78



(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 and Russia through its network of regional distribution centers and Company-operated service centers. The segment’s product lines are sold through Company-operated service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Flooring NA segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet pad, hardwood, laminate and vinyl products, including LVT, which it distributes 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 various selling channels, including independent floor covering retailers, home centers, mass merchandisers, department stores, shop at home, buying groups, commercial dealers and commercial end users. The Flooring ROW segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, carpets, rugs, roofing elements, insulation boards, medium-density fiberboard, chipboards, sheet vinyl and LVT, which it distributes primarily in Europe, Russia, Australia and New Zealand through various selling channels, which include retailers, independent distributors and home centers.

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.


20

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

Segment information is as follows:
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Net sales:
 
 
 
Global Ceramic segment
$
898,352

 
876,548

Flooring NA segment
921,980

 
950,358

Flooring ROW segment
622,158

 
585,296

Intersegment sales

 

Total
$
2,442,490

 
2,412,202

 
 
 
 
Operating income (loss):
 
 
 
Global Ceramic segment
$
84,335

 
113,417

Flooring NA segment
649

 
74,748

Flooring ROW segment
90,431

 
89,060

Corporate and intersegment eliminations
(10,085
)
 
(8,826
)
Total
$
165,330

 
268,399

 
 
March 30,
2019
 
December 31,
2018
Assets:
 
 
 
Global Ceramic segment
$
5,503,807

 
5,194,030

Flooring NA segment
4,020,336

 
3,938,639

Flooring ROW segment
3,799,591

 
3,666,617

Corporate and intersegment eliminations
281,341

 
299,837

Total
$
13,605,075

 
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.


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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. As of 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 March 30, 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 March 30, 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

utilization of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of March 30, 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 March 30, 2019, amounts utilized under the 2015 Senior Credit Facility included $20,193 of borrowings and $22,787 of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,405,411 under the Company’s U.S. and European commercial paper programs as of March 30, 2019 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,448,391 under the 2015 Senior Credit Facility resulting in a total of $351,609 available as of March 30, 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 March 30, 2019, there was $688,000 outstanding under the U.S. commercial paper program, and the euro equivalent of $717,411 under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.78% and 25.44 days, respectively. The weighted average interest rate and maturity period for the European program were (0.21)% and 38.24 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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:
 
March 30, 2019
 
December 31, 2018
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
3.85% senior notes, payable February 1, 2023; interest payable semiannually
$
618,582

 
600,000

 
599,904

 
600,000

2.00% senior notes, payable January 14, 2022; interest payable annually
583,744

 
560,915

 
587,487

 
572,148

Floating Rate Notes, payable May 18, 2020, interest payable quarterly
336,286

 
336,549

 
343,004

 
343,289

Floating Rate Notes, payable September 11, 2019, interest payable quarterly
336,751

 
336,549

 
343,560

 
343,289

U.S. commercial paper
688,000

 
688,000

 
632,668

 
632,668

European commercial paper
717,411

 
717,411

 
707,175

 
707,175

Five-year senior secured credit facility, due March 26, 2022
20,193

 
20,193

 
57,896

 
57,896

Capital leases and other
6,310

 
6,310

 
6,664

 
6,664

Unamortized debt issuance costs
(4,620
)
 
(4,620
)
 
(5,155
)
 
(5,155
)
Total debt
3,302,657

 
3,261,307

 
3,273,203

 
3,257,974

Less current portion of long-term debt and commercial paper
1,763,332

 
1,763,332

 
1,742,373

 
1,742,373

Long-term debt, less current portion
$
1,539,325

 
1,497,975

 
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 and home centers. The Flooring NA Segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet cushion, wood, laminate and vinyl products, including luxury vinyl tile (LVT), which it distributes 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 various selling channels, including independent floor covering retailers, 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. 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 are also the Company’s primary markets. The Company expects continued growth in the United States market consistent with residential housing starts and remodeling investments and 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. The Company is growing share in many markets through its differentiated products, especially its ceramic tile collections.

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; luxury 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 March 30, 2019, net earnings attributable to the Company were $121.6 million, or diluted earnings per share (“EPS”) of $1.67, compared to net earnings attributable to the Company of $208.8 million, or diluted EPS of $2.78 for the three months ended March 31, 2018. The decrease in EPS was primarily attributable to higher inflation, costs due to temporarily reducing production, the impact of restructuring, acquisition and integration-related costs, the net unfavorable impact from foreign exchange rates partially offset by savings from capital investments and cost reduction initiatives.
For the three months ended March 30, 2019, the Company generated $170.1 million of cash from operating activities. As of March 30, 2019, the Company had cash and cash equivalents of $105.7 million, of which $25.7 million was in the United States and $80.0 million was in foreign countries.

Recent Events

On January 31, 2019, the Company completed an acquisition of a hard surface flooring distribution company based in the Netherlands for approximately $72.0 million.


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Results of Operations

Quarter Ended March 30, 2019, as compared with Quarter Ended March 31, 2018

Net sales

Net sales for the three months ended March 30, 2019 were $2,442.5 million, reflecting an increase of $30.3 million, or 1.3%, from the $2,412.2 million reported for the three months ended March 31, 2018. The increase was primarily attributable to higher sales volume of approximately $100 million, or 4.1% which includes sales from acquisitions of approximately $120 million, higher legacy sales volume of approximately $16 million partially offset by the unfavorable impact from fewer shipping days in the first quarter of 2019 of approximately $36 million. Net Sales were also affected by the unfavorable net impact from foreign exchange rates of approximately $73 million, or 3%.

Global Ceramic segment—Net sales increased $21.8 million, or 2.5%, to $898.4 million for the three months ended March 30, 2019, compared to $876.5 million for the three months ended March 31, 2018. The increase was primarily attributable to higher sales volume of approximately $40 million which includes sales from acquisitions of approximately $51 million and the impact of positive sales mix of approximately $9 million partially offset by the unfavorable impact of fewer shipping days in the first quarter of 2019 of approximately $12 million and the unfavorable net impact from foreign exchange rates of approximately $27 million.

Flooring NA segment—Net sales decreased $28.4 million, or 3.0%, to $922.0 million for the three months ended March 30, 2019, compared to $950.4 million for the three months ended March 31, 2018. The decrease was primarily attributable to lower volumes of $24 million, the unfavorable impact of fewer shipping days in the first quarter of 2019 of approximately $15 million partially offset by the favorable net impact of price and product mix of approximately $10 million.

Flooring ROW segment—Net sales increased $36.9 million, or 6.3%, to $622.2 million for the three months ended March 30, 2019, compared to $585.3 million for the three months ended March 31, 2018. The increase was primarily attributable higher sales volume of approximately $99 million which includes sales from acquisitions of approximately $69 million, higher legacy sales of $39 million partially offset by the unfavorable net impact of price and product mix of $16 million, the impact of fewer shipping days in the first quarter of 2019 of approximately $10 million and the unfavorable net impact from foreign exchange rates of approximately $46 million.

Gross profit

Gross profit for the three months ended March 30, 2019 was $624.9 million (25.6% of net sales), a decrease of $79.8 million or 11.3%, compared to gross profit of $704.7 million (29.2% of net sales) for the three months ended March 31, 2018. As a percentage of net sales, gross profit decreased 363 basis points. The decrease in gross profit dollars was attributable to higher inflation costs of approximately $45 million, the impact of restructuring, acquisition and integration-related costs of approximately $22 million, the unfavorable net impact from foreign exchange rates of approximately $22 million, an increase in costs of approximately $12 million due to lower than expected production volumes, the unfavorable net impact of price and product mix of $12 million, approximately $7 million of costs due to temporarily reducing production, partially offset by higher sales volume of approximately $21 million, savings from capital investments and cost reduction initiatives of approximately $11 million, and lower start up costs of approximately $9 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 30, 2019 were $459.6 million (18.8% of net sales), an increase of $23.3 million compared to $436.3 million (18.1% of net sales) for the three months ended March 31, 2018. As a percentage of net sales, selling, general and administrative expenses increased 73 basis points. The increase in selling, general and administrative expenses was primarily attributable to acquisitions of approximately $20 million, inflation of approximately $6 million, approximately $5 million of costs associated with investments in new product development, sales personnel, and marketing, approximately $2 million of expenses driven by higher sales volume partially offset by the favorable net impact from foreign exchange rates of approximately $11 million.

Operating income

Operating income for the three months ended March 30, 2019 was $165.3 million (6.8% of net sales) reflecting a decrease of $103.1 million, or 38.4%, compared to operating income of $268.4 million (11.1% of net sales) for the three months ended March 31, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $51

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million, the impact of restructuring, acquisition and integration-related and other costs of approximately $18 million, an increase in costs of approximately $16 million due to lower than expected production volumes, the unfavorable net impact of price and product mix of $12 million, the unfavorable net impact from foreign exchange rates of approximately $11 million, $7 million of costs due to temporarily reducing production, approximately $5 million of costs associated with investments in new product development, sales personnel, and marketing partially offset by savings from capital investments and cost reduction initiatives of approximately $11 million and lower startup costs of approximately $10 million.

Global Ceramic segment—Operating income was $84.3 million (9.4% of segment net sales) for the three months ended March 30, 2019 reflecting a decrease of $29.1 million compared to operating income of $113.4 million (12.9% of segment net sales) for the three months ended March 31, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $21 million, approximately $6 million of costs due to temporarily reducing production, approximately $5 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 $3 million partially offset by savings from capital investments and cost reduction initiatives of approximately $8 million.

Flooring NA segment—Operating income was $0.6 million (0.1% of segment net sales) for the three months ended March 30, 2019 reflecting a decrease of $74.1 million compared to operating income of $74.7 million (7.9% of segment net sales) for the three months ended March 31, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $39 million, an increase in costs of approximately $20 million due to lower than expected production volumes, the impact of restructuring costs of approximately $14 million and approximately $15 million due to lower sales volumes partially offset by savings from capital investments and cost reduction initiatives of approximately $8 million, lower start up costs of approximately $4 million and the favorable net impact of price and product mix of $3 million.

Flooring ROW segment—Operating income was $90.4 million (14.5% of segment net sales) for the three months ended March 30, 2019 reflecting an increase of $1.4 million compared to operating income of $89.1 million (15.2% of segment net sales) for the three months ended March 31, 2018. The increase in operating income was primarily attributable to increased sales volume of approximately $14 million, lower material inflation costs of approximately $10 million and lower start-up costs of approximately $4 million partially offset by unfavorable net impact of price and product mix of approximately $16 million and the unfavorable net impact from foreign exchange rates of approximately $8 million.

Interest expense

Interest expense was $10.5 million for the three months ended March 30, 2019, reflecting an increase of $2.9 million compared to interest expense of $7.5 million for the three months ended March 31, 2018. The increase in interest expense was primarily due to increased borrowings.

Other expense (income), net

Other expense (income), net was $3.7 million for the three months ended March 30, 2019, reflecting a favorable change of $7.7 million compared to other expense, net of $4.0 million for the three months ended March 31, 2018. The change was primarily attributable to the increased favorable impact from foreign exchange rates on transactions in the current year.

Income tax expense

For the three months ended March 30, 2019, the Company recorded income tax expense of $37.0 million on earnings before income taxes of $158.6 million for an effective tax rate of 23.3%, as compared to income tax expense of $47.6 million on earnings before income taxes of $256.9 million, for an effective tax rate of 18.5% for the three months ended March 31, 2018. The difference in the effective tax rates for the comparative periods was caused by the geographic dispersion of profits and losses for the periods; the elimination of an annual tax benefit in Italy; and a discrete detrimental stock option accounting expense.


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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 three months of 2019 was $170.1 million, compared to net cash provided by operating activities of $183.2 million in the first three months of 2018. The decrease of $13.1 million in 2019 was primarily attributable to changes in working capital. These changes in working capital reflect normal fluctuations relative to the timing and nature of these transactions.

Net cash used in investing activities in the first three months of 2019 was $211.8 million compared to net cash used in investing activities of $241.4 million in the first three months of 2018. The decrease was primarily due to reduced capital expenditures of $114.0 million partially offset by an increase in acquisition costs of $52.4 million and by the net redemption activity in short-term investments of $31.9 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 approximate $428 million.

Net cash provided by financing activities in the first three months of 2019 was $26.8 million compared to net cash provided by financing activities of $86.6 million in the three months of 2018. The change in cash provided by financing activities is primarily attributable to increased borrowings of $60.1 million.

As of March 30, 2019, the Company had cash of $105.7 million, of which $80.0 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 March 30, 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 March 30, 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 March 30, 2019). The

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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 $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 March 30, 2019, amounts utilized under the 2015 Senior Credit Facility included $20.2 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 $1,405.4 million under the Company’s U.S. and European commercial paper programs as of March 30, 2019 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,448.4 million under the 2015 Senior Credit Facility resulting in a total of $351.6 million available as of March 30, 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 March 30, 2019, there was $688.0 million outstanding under the U.S. commercial paper program, and the euro equivalent of $717.4 million under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.78% and 25.44 days, respectively. The weighted average interest rate and maturity period for the European program were (0.21)% and 38.24 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.


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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 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 March 30, 2019.


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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; 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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Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As of March 30, 2019, approximately 36% of the Company’s debt portfolio was comprised of fixed-rate debt and 64% 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 $4.2 million for the three months ended March 30, 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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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. As of 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.


General


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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.

There was no share repurchase activity during the three months ended March 30, 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
January 1 through February 2, 2019

$


$
225.9

February 3 through March 2, 2019

$


$
225.9

March 3 through March 31, 2019

$


$
225.9

Total

$


 


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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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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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:
May 3, 2019
By:
 
/s/ Jeffrey S. Lorberbaum
 
 
 
 
JEFFREY S. LORBERBAUM
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
(principal executive officer)
 
 
 
 
 
Dated:
May 3, 2019
By:
 
/s/ Glenn Landau
 
 
 
 
GLENN LANDAU
 
 
 
 
Chief Financial Officer
 
 
 
 
(principal financial officer)

36