Washington, D.C. 20549
MOHAWK INDUSTRIES, INC.
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.
MOHAWK INDUSTRIES, INC.
PART I. FINANCIAL INFORMATION
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
1. General
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"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 20162019 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 some of its non-U.S. net investments against adverse movements in exchange rates. The gains and losses on the Company'sCompany’s net investments in its non-U.S. operations are partially economically offset by gainslosses and lossesgains on its foreign currency borrowings. The Company designated its €500,000 2.00% Senior Notes borrowing as a net investment hedge againstof a portion of its European operations. For the ninesix months ended September 30, 2017,June 27, 2020 and June 29, 2019, the change in the U.S. dollar value of the Company'sCompany’s euro denominated debt was an increase of $64,684$942 ($40,427716 net of taxes) and a decrease of $3,578 ($2,718 net of taxes), respectively, which is recorded in the foreign currency translation adjustment component of accumulated other comprehensive income or (loss). The increasechange in the U.S. dollar value of the Company'sCompany’s debt partially offsets the euro-to-dollar translation of the Company'sCompany’s net investment in its European operations.
2. Acquisitions
The Company incurs costs in connection with acquiring, integrating and restructuring acquisitions and in connection with its global cost-reduction/productivity initiatives. For example:
Restructuring, acquisition transaction and integration-related costs consisted of the following during the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016:June 29, 2019:
The Company expects the remaining severance and other restructuring costs to be paid over the next year.12 months.
|
| | | | | | |
| September 30, 2017 | | December 31, 2016 |
Finished goods | $ | 1,310,957 |
| | 1,127,573 |
|
Work in process | 151,906 |
| | 137,310 |
|
Raw materials | 448,166 |
| | 410,868 |
|
Total inventories | $ | 1,911,029 |
| | 1,675,751 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Inventories
The components of inventories are as follows:
| | | | | | | | | | | |
| At June 27, 2020 | | At December 31, 2019 |
Finished goods | $ | 1,377,173 | | | 1,610,742 | |
Work in process | 117,588 | | | 144,639 | |
Raw materials | 427,287 | | | 526,947 | |
Total inventories | $ | 1,922,048 | | | 2,282,328 | |
Inventories are stated at the lower of cost or market (net realizable value). Cost has been determined using the first-in first-out method (“FIFO”). Costs included in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is replacement cost or net realizable value. Inventories on hand are compared against anticipated future usage, which is a function of historical usage, anticipated future selling price, expected sales below cost, excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost.
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, 2019 | | | | | | | |
Goodwill | $ | 1,583,576 | | | 874,198 | | | 1,439,678 | | | 3,897,452 | |
Accumulated impairment losses | (531,930) | | | (343,054) | | | (452,441) | | | (1,327,425) | |
| 1,051,646 | | | 531,144 | | | 987,237 | | | 2,570,027 | |
| | | | | | | |
Goodwill recognized during the period | — | | | — | | | (9,642) | | | (9,642) | |
Currency translation during the period | (16,538) | | | — | | | (1,941) | | | (18,479) | |
| | | | | | | |
Balance as of June 27, 2020 | | | | | | | |
Goodwill | 1,567,038 | | | 874,198 | | | 1,428,095 | | | 3,869,331 | |
Accumulated impairment losses | (531,930) | | | (343,054) | | | (452,441) | | | (1,327,425) | |
| $ | 1,035,108 | | | 531,144 | | | 975,654 | | | 2,541,906 | |
|
| | | | | | | | | | | | |
| Global Ceramic segment | | Flooring NA segment | | Flooring ROW segment | | Total |
Balance as of December 31, 2016 | | | | | | | |
Goodwill | $ | 1,482,226 |
| | 869,764 |
| | 1,249,861 |
| | 3,601,851 |
|
Accumulated impairment losses | (531,930 | ) | | (343,054 | ) | | (452,441 | ) | | (1,327,425 | ) |
| $ | 950,296 |
| | 526,710 |
| | 797,420 |
| | 2,274,426 |
|
| | | | | | | |
Goodwill recognized or adjusted during the period | $ | 60,493 |
| | — |
| | — |
| | 60,493 |
|
Currency translation during the period | $ | 21,952 |
| | — |
| | 97,489 |
| | 119,441 |
|
| | | | | | | |
Balance as of September 30, 2017 | | | | | | | |
Goodwill | $ | 1,564,671 |
| | 869,764 |
| | 1,347,350 |
| | 3,781,785 |
|
Accumulated impairment losses | (531,930 | ) | | (343,054 | ) | | (452,441 | ) | | (1,327,425 | ) |
| $ | 1,032,741 |
| | 526,710 |
| | 894,909 |
| | 2,454,360 |
|
Intangible assets not subject to amortization:
|
| | | |
| Tradenames |
Balance as of December 31, 2016 | $ | 580,147 |
|
Intangible assets acquired during the period | 16,196 |
|
Currency translation during the period | 41,725 |
|
Balance as of September 30, 2017 | $ | 638,068 |
|
Intangible assets subject to amortization:
|
| | | | | | | | | | | | |
Gross carrying amounts: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2016 | $ | 569,980 |
| | 234,022 |
| | 6,330 |
| | 810,332 |
|
Intangible assets recognized or adjusted during the period | 3,175 |
| | — |
| | — |
| | 3,175 |
|
Currency translation during the period | 45,597 |
| | 28,778 |
| | 442 |
| | 74,817 |
|
Balance as of September 30, 2017 | $ | 618,752 |
| | 262,800 |
| | 6,772 |
| | 888,324 |
|
| | | | | | | |
Accumulated amortization: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2016 | $ | 334,276 |
| | 220,598 |
| | 999 |
| | 555,873 |
|
Amortization during the period | 19,710 |
| | 6,970 |
| | 122 |
| | 26,802 |
|
Currency translation during the period | 25,689 |
| | 27,706 |
| | 24 |
| | 53,419 |
|
Balance as of September 30, 2017 | $ | 379,675 |
| | 255,274 |
| | 1,145 |
| | 636,094 |
|
| | | | | | | |
Intangible assets subject to amortization, net | $ | 239,077 |
| | 7,526 |
| | 5,627 |
| | 252,230 |
|
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Amortization expense | $ | 7,421 |
| | 10,381 |
| | 26,802 |
| | 29,439 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangible assets not subject to amortization:
| | | | | |
| Tradenames |
Balance as of December 31, 2019 | $ | 702,732 | |
| |
| |
Currency translation during the period | (13,508) | |
Balance as of June 27, 2020 | $ | 689,224 | |
7.
Intangible assets subject to amortization:
| | | | | | | | | | | | | | | | | | | | | | | |
Gross carrying amounts: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2019 | $ | 645,206 | | | 249,100 | | | 6,631 | | | 900,937 | |
Intangible assets recognized during the period | 12,789 | | | — | | | — | | | 12,789 | |
Currency translation during the period | (3,214) | | | 419 | | | (195) | | | (2,990) | |
Balance as of June 27, 2020 | $ | 654,781 | | | 249,519 | | | 6,436 | | | 910,736 | |
| | | | | | | |
Accumulated amortization: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2019 | $ | 426,765 | | | 246,872 | | | 1,153 | | | 674,790 | |
Amortization during the period | 12,774 | | | 1,037 | | | 45 | | | 13,856 | |
Currency translation during the period | 46 | | | 434 | | | (4) | | | 476 | |
Balance as of June 27, 2020 | $ | 439,585 | | | 248,343 | | | 1,194 | | | 689,122 | |
| | | | | | | |
Intangible assets subject to amortization, net | $ | 215,196 | | | 1,176 | | | 5,242 | | | 221,614 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
Amortization expense | $ | 6,980 | | | 6,955 | | | 13,856 | | | 13,684 | |
Mohawk performs its annual testing of goodwill and indefinite lived intangibles in the fourth quarter of each year and no impairment was indicated for 2019. In 2019 the Company also concluded that in general, a decline in estimated after tax cash flows greater than approximately 19% to 39% or an increase of approximately 15% to 45% in WACC or a significant or prolonged decline in market capitalization could result in an additional indication of impairment.
As a result of the recent economic impact from COVID-19, the Company performed a qualitative assessment of whether the fair value of any of its reporting units or indefinite-lived intangible assets was more likely than not less than its carrying amount at March 28, 2020. The Company concluded neither goodwill nor any of its indefinite-lived intangible assets were impaired at March 28, 2020. There were no factors or changes in circumstances to indicate a change to this assessment was required during the three months ended June 27, 2020. However, while we have concluded that neither goodwill nor any of its indefinite-lived intangible assets were impaired during the quarter ended June 27, 2020, a prolonged pandemic could impact the Company’s assumptions utilized in the determination of the estimated fair values of the Company’s reporting units and indefinite-lived intangible assets significantly enough to trigger an impairment. Hence, the Company continues to monitor the economic impact of COVID-19 and may be required to reassess impairment of goodwill or indefinite-lived intangible assets in future interim periods.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
| | | | | | | | | | | |
| At June 27, 2020 | | At December 31, 2019 |
Outstanding checks in excess of cash | $ | 3,093 | | | 9,924 | |
Accounts payable, trade | 845,257 | | | 824,956 | |
Accrued expenses | 471,247 | | | 461,035 | |
Product warranties | 53,769 | | | 49,184 | |
Accrued interest | 17,745 | | | 21,050 | |
| | | |
| | | |
Accrued compensation and benefits | 227,473 | | | 192,991 | |
Total accounts payable and accrued expenses | $ | 1,618,584 | | | 1,559,140 | |
|
| | | | | | |
| September 30, 2017 | | December 31, 2016 |
Outstanding checks in excess of cash | $ | 7,276 |
| | 12,269 |
|
Accounts payable, trade | 859,913 |
| | 729,415 |
|
Accrued expenses | 378,640 |
| | 333,942 |
|
Product warranties | 44,196 |
| | 46,347 |
|
Accrued interest | 13,346 |
| | 20,396 |
|
Accrued compensation and benefits | 220,866 |
| | 193,213 |
|
Total accounts payable and accrued expenses | $ | 1,524,237 |
| | 1,335,582 |
|
8.9. Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss) by component, for the ninesix months ended September 30, 2017June 27, 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | Pensions, net of tax | | Total |
Balance as of December 31, 2019 | $ | (753,108) | | | (12,716) | | | (765,824) | |
Current period other comprehensive income (loss) | (201,046) | | | 94 | | | (200,952) | |
| | | | | |
Balance as of June 27, 2020 | $ | (954,154) | | | (12,622) | | | (966,776) | |
|
| | | | | | | | | |
| Foreign currency translation adjustments | | Pensions, net of tax | | Total |
Balance as of December 31, 2016 | $ | (825,354 | ) | | (7,673 | ) | | (833,027 | ) |
Current period other comprehensive income (loss) before reclassifications | 262,350 |
| | (692 | ) | | 261,658 |
|
Balance as of September 30, 2017 | $ | (563,004 | ) | | (8,365 | ) | | (571,369 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.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 10 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of lease costs for the three months ended June 27, 2020 and June 29, 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 27, 2020 | | | | | | Three Months Ended June 29, 2019 | | | | |
| Cost of Goods Sold | | Selling, General and Administrative | | Total | | Cost of Goods Sold | | Selling, General and Administrative | | Total |
Operating lease costs | | | | | | | | | | | |
Fixed | $ | 5,888 | | | 25,830 | | | 31,718 | | | 8,169 | | | 22,807 | | | 30,976 | |
Short-term | 2,497 | | | 3,880 | | | 6,377 | | | 1,552 | | | 3,577 | | | 5,129 | |
Variable | 2,121 | | | 7,294 | | | 9,415 | | | 2,093 | | | 9,348 | | | 11,441 | |
Sub-leases | (121) | | | (127) | | | (248) | | | (41) | | | (151) | | | (192) | |
| $ | 10,385 | | | 36,877 | | | 47,262 | | | 11,773 | | | 35,581 | | | 47,354 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 27, 2020 | | | | | | Three Months Ended June 29, 2019 | | | | |
| Depreciation and Amortization | | Interest | | Total | | Depreciation and Amortization | | Interest | | Total |
Finance lease costs | | | | | | | | | | | |
Amortization of leased assets | $ | 1,476 | | | — | | | 1,476 | | | 392 | | | — | | | 392 | |
Interest on lease liabilities | — | | | 154 | | | 154 | | | — | | | 58 | | | 58 | |
| $ | 1,476 | | | 154 | | | 1,630 | | | 392 | | | 58 | | | 450 | |
Net lease costs | | | | | $ | 48,892 | | | | | | | 47,804 | |
The components of lease costs for the six months ended June 27, 2020 and June 29, 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 27, 2020 | | | | | | Six Months Ended June 29, 2019 | | | | |
| Cost of Goods Sold | | Selling, General and Administrative | | Total | | Cost of Goods Sold | | Selling, General and Administrative | | Total |
Operating lease costs | | | | | | | | | | | |
Fixed | $ | 13,289 | | | 50,643 | | | 63,932 | | | 15,857 | | | 47,262 | | | 63,119 | |
Short-term | 5,138 | | | 7,685 | | | 12,823 | | | 2,991 | | | 6,486 | | | 9,477 | |
Variable | 4,390 | | | 15,420 | | | 19,810 | | | 4,371 | | | 14,548 | | | 18,919 | |
Sub-leases | (218) | | | (268) | | | (486) | | | (125) | | | (284) | | | (409) | |
| $ | 22,599 | | | 73,480 | | | 96,079 | | | 23,094 | | | 68,012 | | | 91,106 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Six Months Ended June 27, 2020 | | | | | | Six Months Ended June 29, 2019 | | | | |
| Depreciation and Amortization | | Interest | | Total | | Depreciation and Amortization | | Interest | | Total |
Finance lease costs | | | | | | | | | | | |
Amortization of leased assets | $ | 2,730 | | | — | | | 2,730 | | | 824 | | | — | | | 824 | |
Interest on lease liabilities | — | | | 303 | | | 303 | | | — | | | 89 | | | 89 | |
| $ | 2,730 | | | 303 | | | 3,033 | | | 824 | | | 89 | | | 913 | |
Net lease costs | | | | | $ | 99,112 | | | | | | | 92,019 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplemental balance sheet information related to leases is as follows:
| | | | | | | | | | | | | | | | | |
| Classification | | At June 27, 2020 | | At December 31, 2019 |
Assets | | | | | |
Operating Leases | | | | | |
Right of use operating lease assets
| Right of use operating lease assets | | $ | 318,047 | | | 323,003 | |
Finance Leases | | | | | |
Property, plant and equipment, gross | Property, plant and equipment | | 40,346 | | | 35,271 | |
Accumulated depreciation | Accumulated depreciation | | (8,358) | | | (5,664) | |
Property, plant and equipment, net | Property, plant and equipment, net | | 31,988 | | | 29,607 | |
Total lease assets | | | $ | 350,035 | | | 352,610 | |
| | | | | |
Liabilities | | | | | |
Operating Leases | | | | | |
Other current | Current operating lease liabilities | | $ | 118,296 | | | 101,945 | |
Non-current | Non-current operating lease liabilities | | 226,555 | | | 228,155 | |
Total operating liabilities | | | 344,851 | | | 330,100 | |
Finance Leases | | | | | |
Short-term debt | Short-term debt and current portion of long-term debt | | 5,714 | | | 4,835 | |
Long-term debt | Long-term debt, less current portion | | 27,064 | | | 25,214 | |
Total finance liabilities | | | 32,778 | | | 30,049 | |
Total lease liabilities | | | $ | 377,629 | | | 360,149 | |
| | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Maturities of lease liabilities are as follows:
| | | | | | | | | | | | | | | | | |
Year ending December 31, | Finance Leases | | Operating Leases | | Total |
2020 (excluding the six months ended June 27, 2020) | $ | 3,164 | | | 73,856 | | | 77,020 | |
2021 | 5,984 | | | 103,633 | | | 109,617 | |
2022 | 5,641 | | | 76,115 | | | 81,756 | |
2023 | 4,951 | | | 46,717 | | | 51,668 | |
2024 | 3,548 | | | 28,461 | | | 32,009 | |
Thereafter | 12,184 | | | 44,124 | | | 56,308 | |
Total lease payments | 35,472 | | | 372,906 | | | 408,378 | |
Less imputed interest | 2,694 | | | 28,055 | | | |
Present value, Total | $ | 32,778 | | | 344,851 | | | |
The Company had approximately $5,592 of leases that commenced after June 27, 2020 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, 2019 as disclosed for finance and operating leases, see Note 15 in its 2019 Annual Report filed on Form 10-K.
Lease term and discount rate are as follows:
| | | | | | | | | | | |
| At June 27, 2020 | | At December 31, 2019 |
Weighted Average Remaining Lease Term | | | |
Operating Leases | 4.35 years | | 4.27 years |
Finance Leases | 7.75 years | | 8.44 years |
| | | |
Weighted Average Discount Rate | | | |
Operating Leases | 3.1 | % | | 3.3 | % |
Finance Leases | 1.5 | % | | 1.4 | % |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
| June 27, 2020 | | | | | | June 29, 2019 |
Cash paid for amounts included in measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | $ | 61,535 | | | | | | | 63,910 | |
Operating cash flows from finance leases | 230 | | | | | | | 26 | |
Financing cash flows from finance leases | 2,819 | | | | | | | 732 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases | 50,270 | | | | | | | 90,091 | |
Finance leases | 3,675 | | | | | | | 195 | |
Amortization: | | | | | | | |
Amortization of right of use operating lease assets(1) | 60,324 | | | | | | | 56,950 | |
(1)Amortization of Right of use operating lease assets during the period is reflected in Other assets and prepaid expenses on the Condensed Consolidated Statements of Cash Flows.
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 the FASB 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 1540 restricted stock units ("RSUs") for the three months ended June 27, 2020. The Company granted 188 restricted stock units ("RSUs") at a weighted average grant-date fair value of $226.91$120.94 per unit for the ninesix months ended September 30, 2017.June 27, 2020. The Company granted 18218 RSUs at a weighted average grant-date fair value of $184.88$133.45 per unit for the ninethree months ended October 1, 2016.June 29, 2019. The Company granted 187 RSUs at a weighted average grant-date fair value of $137.30 per unit for the six months ended June 29, 2019. The Company recognized stock-based compensation costs related to the issuance of RSUs of $7,177$4,634 ($4,3553,429 net of taxes) and $5,288$5,788 ($3,2094,283 net of taxes) for the three months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, respectively, which has been allocated to cost of sales and selling, general and administrative expenses. The Company recognized stock-based compensation costs related to the issuance of RSUs of $30,601$9,676 ($18,5697,160 net of taxes) and $28,807$11,577 ($17,4808,567 net of taxes) for the ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, 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 $30,979$17,815 as of September 30, 2017,June 27, 2020, and will be recognized as expense over a weighted-average period of approximately 1.48 years.2.04. The Company also recognizeddid 0t recognize any stock-based compensation costs related to stock options of $6 ($4 net of taxes) and $34 ($21 net of taxes) for the ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016, respectively, whichJune 29, 2019, respectively.
12. Other expense (income), net
Other expense (income), net is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
Foreign currency losses (gains), net | $ | (2,369) | | | 2,088 | | | 5,239 | | | 978 | |
Impairment of joint venture in Brazil | 3,599 | | | — | | | 3,599 | | | — | |
| | | | | | | |
All other, net | (193) | | | (5,136) | | | (2,122) | | | (7,762) | |
Total other expense (income), net | $ | 1,037 | | | (3,048) | | | 6,716 | | | (6,784) | |
13. Income Taxes
For the quarter ended June 27, 2020, the Company is now able to reasonably estimate its annual effective rate because it has been allocatedsix months of actual pre-tax income, therefore the Company has recorded taxes using this approach. For the quarter ended June 27, 2020, the Company recorded an income tax benefit of $26,363 on losses before income taxes of $74,951 for an effective tax rate of 35.2%, as compared to costan income tax expense of sales$56,733 on earnings before income taxes of $259,387, for an effective tax rate of 21.9% for the quarter ended June 29, 2019. For the six months ended June 27, 2020, the Company recorded income tax expense of $304 on earnings before income taxes of $62,181 for an effective tax rate of less than 1%, as compared to income tax expense of $93,751 on earnings before income taxes of $417,980, for an effective tax rate of 22.4% for the six months ended June 29, 2019. The difference in the effective tax rates for the comparative periods was caused by the geographical dispersion of profits and selling, generallosses and administrative expenses.the impact of COVID-19 in Q2 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Stockholders’ Equity
10. Other expense, net
The following tables reflect the changes in stockholders’ equity for the three months ended June 27, 2020 and June 29, 2019 (in thousands).
Other expense, net is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Stockholders’ Equity | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Noncontrolling Interest | Total Stockholders' Equity |
| | Shares | Amount | | | | Shares | Amount | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
March 28, 2020 | | 78,531 | | $ | 785 | | $ | 1,870,003 | | $ | 7,274,085 | | $ | (1,087,852) | | (7,346) | | $ | (215,653) | | $ | 6,275 | | $ | 7,847,643 | |
Shares issued under employee and director stock plans | | 10 | | — | | (15) | | — | | — | | — | | 5 | | — | | (10) | |
Stock-based compensation expense | | — | | — | | 4,635 | | — | | — | | — | | — | | — | | 4,635 | |
| | | | | | | | | | |
Repurchases of common stock | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Noncontrolling earnings (loss) | | — | | — | | — | | — | | — | | — | | — | | (331) | | (331) | |
Currency translation adjustment on non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | 108 | | 108 | |
| | | | | | | | | | |
| | | | | | | | | | |
Currency translation adjustment | | — | | — | | — | | — | | 121,083 | | — | | — | | — | | 121,083 | |
Prior pension and post-retirement benefit service cost and actuarial gain (loss) | | — | | — | | — | | — | | (7) | | — | | — | | — | | (7) | |
CECL adoption | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Net loss | | — | | — | | — | | (48,257) | | — | | — | | — | | — | | (48,257) | |
June 27, 2020 | | 78,541 | | $ | 785 | | $ | 1,874,623 | | $ | 7,225,828 | | $ | (966,776) | | (7,346) | | $ | (215,648) | | $ | 6,052 | | $ | 7,924,864 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Stockholders’ Equity | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Noncontrolling Interest | Total Stockholders' Equity |
| | Shares | Amount | | | | Shares | Amount | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
March 30, 2019 | | 79,771 | | $ | 798 | | $ | 1,853,484 | | $ | 6,709,782 | | $ | (777,547) | | (7,349) | | $ | (215,716) | | $ | 6,244 | | $ | 7,577,045 | |
Shares issued under employee and director stock plans | | 7 | | — | | (24) | | — | | — | | 1 | | 4 | | — | | (20) | |
Stock-based compensation expense | | — | | — | | 5,788 | | — | | — | | — | | — | | — | | 5,788 | |
| | | | | | | | | | |
Repurchases of common stock | | (66) | | (1) | | — | | (8,962) | | — | | — | | — | | — | | (8,963) | |
| | | | | | | | | | |
| | | | | | | | | | |
Noncontrolling earnings | | — | | — | | — | | — | | — | | — | | — | | 214 | | 214 | |
Currency translation adjustment on non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | 60 | | 60 | |
| | | | | | | | | | |
| | | | | | | | | | |
Currency translation adjustment | | — | | — | | — | | — | | 45,067 | | — | | — | | — | | 45,067 | |
Prior pension and post-retirement benefit service cost and actuarial gain (loss) | | — | | — | | — | | — | | (41) | | — | | — | | — | | (41) | |
Net income | | — | | — | | — | | 202,441 | | — | | — | | — | | — | | 202,441 | |
June 29, 2019 | | 79,712 | | $ | 797 | | $ | 1,859,248 | | $ | 6,903,261 | | $ | (732,521) | | (7,348) | | $ | (215,712) | | $ | 6,518 | | $ | 7,821,591 | |
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Foreign currency losses, net | $ | 3,568 |
| | 794 |
| | 6,253 |
| | 4,171 |
|
Release of indemnification asset | — |
| | 2,368 |
| | — |
| | 2,368 |
|
All other, net | (2,283 | ) | | 677 |
| | (4,798 | ) | | (5,078 | ) |
Total other expense, net | $ | 1,285 |
| | 3,839 |
| | 1,455 |
| | 1,461 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11.The following tables reflect the changes in stockholders’ equity for the six months ended June 27, 2020 and June 29, 2019 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Stockholders’ Equity | | | | | | | | |
| | 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, 2020 | | 78,980 | | $ | 790 | | $ | 1,868,250 | | $ | 7,232,337 | | $ | (765,824) | | (7,348) | | $ | (215,712) | | $ | 6,607 | | $ | 8,126,448 | |
Shares issued under employee and director stock plans | | 140 | | 1 | | (3,303) | | — | | — | | 2 | | 64 | | — | | (3,238) | |
Stock-based compensation expense | | — | | — | | 9,676 | | — | | — | | — | | — | | — | | 9,676 | |
| | | | | | | | | | |
Repurchases of common stock | | (579) | | (6) | | — | | (68,635) | | — | | — | | — | | — | | (68,641) | |
| | | | | | | | | | |
| | | | | | | | | | |
Noncontrolling earnings (loss) | | — | | — | | — | | — | | — | | — | | — | | (380) | | (380) | |
Currency translation adjustment on non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | (175) | | (175) | |
| | | | | | | | | | |
| | | | | | | | | | |
Currency translation adjustment | | — | | — | | — | | — | | (201,046) | | — | | — | | — | | (201,046) | |
Prior pension and post-retirement benefit service cost and actuarial gain (loss) | | — | | — | | — | | — | | 94 | | — | | — | | — | | 94 | |
CECL adoption | | — | | — | | — | | (131) | | — | | — | | — | | — | | (131) | |
Net income | | — | | — | | — | | 62,257 | | — | | — | | — | | — | | 62,257 | |
June 27, 2020 | | 78,541 | | $ | 785 | | $ | 1,874,623 | | $ | 7,225,828 | | $ | (966,776) | | (7,346) | | $ | (215,648) | | $ | 6,052 | | $ | 7,924,864 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Stockholders’ Equity | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Noncontrolling Interest | Total Stockholders' Equity |
| | Shares | Amount | | | | Shares | Amount | | |
| | | | | | | | | | |
January 1, 2019 | | 79,656 | | $ | 797 | | $ | 1,852,173 | | $ | 6,588,197 | | $ | (791,608) | | (7,349) | | $ | (215,745) | | $ | 6,245 | | $ | 7,440,059 | |
Shares issued under employee and director stock plans | | 122 | | 1 | | (4,502) | | — | | — | | 1 | | 33 | | — | | (4,468) | |
Stock-based compensation expense | | — | | — | | 11,577 | | — | | — | | — | | — | | — | | 11,577 | |
| | | | | | | | | | |
Repurchases of common stock | | (66) | | (1) | | — | | (8,962) | | — | | — | | — | | — | | (8,963) | |
| | | | | | | | | | |
| | | | | | | | | | |
Noncontrolling earnings | | — | | — | | — | | — | | — | | �� | | — | | 204 | | 204 | |
Currency translation adjustment on non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | 69 | | 69 | |
| | | | | | | | | | |
| | | | | | | | | | |
Currency translation adjustment | | — | | — | | | — | | 59,020 | | — | | — | | — | | 59,020 | |
Prior pension and post-retirement benefit service cost and actuarial gain (loss) | | — | | — | | — | | — | | 67 | | — | | — | | — | | 67 | |
Net income | | — | | — | | — | | 324,026 | | — | | — | | — | | — | | 324,026 | |
June 29, 2019 | | 79,712 | | $ | 797 | | $ | 1,859,248 | | $ | 6,903,261 | | $ | (732,521) | | (7,348) | | $ | (215,712) | | $ | 6,518 | | $ | 7,821,591 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Earnings (loss) per share
Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) 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 (loss) available to common stockholders and weighted averageweighted-average common shares outstanding for purposes of calculating basic and diluted earnings (loss) per share is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
Net earnings (loss) attributable to Mohawk Industries, Inc. | $ | (48,257) | | | 202,441 | | | 62,257 | | | 324,026 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average common shares outstanding-basic and diluted: | | | | | | | |
Weighted-average common shares outstanding—basic | 71,186 | | | 72,402 | | | 71,364 | | | 71,970 | |
Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net(1) | — | | | 278 | | | 183 | | | 280 | |
Weighted-average common shares outstanding-diluted | 71,186 | | | 72,680 | | | 71,547 | | | 72,250 | |
| | | | | | | |
Earnings (loss) per share attributable to Mohawk Industries, Inc. | | | | | | | |
Basic | $ | (0.68) | | | 2.80 | | | 0.87 | | | 4.50 | |
Diluted | $ | (0.68) | | | 2.79 | | | 0.87 | | | 4.48 | |
(1)Due to the anti-dilutive effect resulting from the reported net loss, an incremental 167 of potentially dilutive securities were omitted from the calculation of weighted-average common shares outstanding for the three months ended June 27, 2020. The impact of these potentially dilutive securities was included in the calculation of weighted-average common shares outstanding for diluted earnings per share for the six months ended June 27, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net earnings attributable to Mohawk Industries, Inc. | $ | 270,025 |
| | 269,878 |
| | 731,260 |
| | 696,614 |
|
Accretion of redeemable noncontrolling interest | (46 | ) | | (53 | ) | | (46 | ) | | (53 | ) |
Net earnings available to common stockholders | $ | 269,979 |
| | 269,825 |
| | 731,214 |
| | 696,561 |
|
| | | | | | | |
Weighted-average common shares outstanding-basic and diluted: | | | | | | | |
Weighted-average common shares outstanding—basic | 74,338 |
| | 74,154 |
| | 74,330 |
| | 74,084 |
|
Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net | 503 |
| | 459 |
| | 500 |
| | 467 |
|
Weighted-average common shares outstanding-diluted | 74,841 |
| | 74,613 |
| | 74,830 |
| | 74,551 |
|
| | | | | | | |
Earnings per share attributable to Mohawk Industries, Inc. | | | | | | | |
Basic | $ | 3.63 |
| | 3.64 |
| | 9.84 |
| | 9.40 |
|
Diluted | $ | 3.61 |
| | 3.62 |
| | 9.77 |
| | 9.34 |
|
12.16. Segment reporting
The Company has three3 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, quartz, porcelain slab countertops and other products, which it distributes primarily in North America, Europe, South America and Russia through its network of regional distribution centers and Company-operated service centers.centers using company-operated trucks, common carriers or rail transportation. 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 resilient (includes sheet vinyl products, including LVT,and 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, buying groups, commercial dealerscontractors and commercial end users. The Flooring ROW segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, roofing elements, insulation boards, medium-density fiberboard (“MDF”), chipboards, other wood products, sheet vinyl and LVT, which it distributes primarily in Europe, Australia, New Zealand and Russia through various selling channels, which include retailers, independent distributors and home centers.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Segment information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
Net sales: | | | | | | | |
Global Ceramic segment | $ | 753,335 | | | 958,031 | | | 1,601,785 | | | 1,856,383 | |
Flooring NA segment | 800,088 | | | 983,439 | | | 1,648,418 | | | 1,905,419 | |
Flooring ROW segment | 496,377 | | | 643,015 | | | 1,085,360 | | | 1,265,173 | |
| | | | | | | |
Total | $ | 2,049,800 | | | 2,584,485 | | | 4,335,563 | | | 5,026,975 | |
| | | | | | | |
Operating income (loss)(1): | | | | | | | |
Global Ceramic segment | $ | (33,809) | | | 117,036 | | | 14,168 | | | 200,266 | |
Flooring NA segment | (45,484) | | | 62,047 | | | (9,278) | | | 65,242 | |
Flooring ROW segment | 29,478 | | | 100,093 | | | 105,294 | | | 189,083 | |
Corporate and intersegment eliminations | (11,143) | | | (12,316) | | | (19,660) | | | (22,401) | |
Total | $ | (60,958) | | | 266,860 | | | 90,524 | | | 432,190 | |
(1)During the second quarter of 2020, the Company revised the methodology it uses to estimate and allocate corporate general and administrative expenses to its operating segments to better align usage of corporate resources allocated to the Company segments. The updated allocation methodology had no impact on the Company’s consolidated statements of operations. This change was applied retrospectively, and segment operating income for all comparative periods has been updated to reflect this change.
| | | | | | | | | | | |
| At June 27, 2020 | | At December 31, 2019 |
Assets: | | | |
Global Ceramic segment | $ | 5,112,084 | | | 5,419,896 | |
Flooring NA segment | 3,682,638 | | | 3,823,654 | |
Flooring ROW segment | 3,770,581 | | | 3,925,246 | |
Corporate and intersegment eliminations | 804,101 | | | 217,884 | |
Total | $ | 13,369,404 | | | 13,386,680 | |
|
| | | | | | |
| September 30, 2017 | | December 31, 2016 |
Assets: | | | |
Global Ceramic segment | $ | 4,826,619 |
| | 4,024,859 |
|
Flooring NA segment | 3,699,633 |
| | 3,410,856 |
|
Flooring ROW segment | 3,128,213 |
| | 2,689,592 |
|
Corporate and intersegment eliminations | 168,348 |
| | 105,289 |
|
| $ | 11,822,813 |
| | 10,230,596 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13.17. 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 MunicipalPerfluorinated Compounds (“PFCs”) 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 perfluorinated compounds,specific PFCs, 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 recently granted Gadsden Water Board's motion for remand. On October 24, 2017, the Company appealed the federal court's determination that co-defendant Industrial Chemicals, Inc. ("ICI") was properly joined as a party to the case. ICI's presence in the case deprives the federal court of jurisdiction over the case.
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. County, Alabama. The Gadsden Water Board and the Centre Water Board both seek monetary damages and injunctive relief claiming that their water supplies contain excessive amounts of PFCs. Certain defendants, including the Company, filed dispositive motions in each case arguing that the Alabama state courts lack personal jurisdiction over them. These motions were denied. 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. The Alabama Supreme Court denied the petitions on December 20, 2019. Certain defendants, including the Company, filed an Application for Rehearing with the Alabama Supreme Court asking the Court to reconsider its December 2019 decision. The Alabama Supreme Court denied the application for rehearing.
In December 2019, the City of Rome, Georgia (“Rome”) filed a complaint in the Superior Court of Floyd County, Georgia that is similar to the Gadsden Water Board and Centre Water Board complaints, again seeking monetary damages and injunctive relief related to PFCs. Also in December 2019, Jarrod Johnson filed a putative class action in the Superior Court of Floyd County, Georgia purporting to represent all water subscribers with the Rome (Georgia) Water and Sewer Division and/or the Floyd County (Georgia) Water Department and seeking to recover, among other things, damages in the form of alleged increased rates and surcharges incurred by ratepayers for the costs associated with eliminating certain PFCs from their drinking water. In January 2020, defendant 3M Company removed the class action to federal court. The Company has filed motions to dismiss in both of these cases.
The Company denies all liability in these matters and intends to defend them vigorously.
Putative Securities Class Action
On June 19, 2017,January 3, 2020, the Company and certain of its executive officers were named as defendants removed this case toin a putative shareholder class action lawsuit filed in the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversityGeorgia (the "Securities Class Action"). The complaint alleges that defendants violated the Securities Exchange Act of citizenship1934 and fraudulent joinder.Rule 10b-5 promulgated thereunder by making materially false and misleading statements and that the officers are control persons under Section 20(a) of the Securities Exchange Act of 1934. The Centre Water Boardcomplaint is filed a motion to remandon behalf of shareholders who purchased shares of the case back to state court. The defendants opposedCompany’s common stock between April 28, 2017 and July 25, 2019 (“Class Period”). On June 29, 2020, an amended complaint was filed in the Centre Water Board’s motion,Securities Class Action against Mohawk and its CEO Jeff Lorberbaum, based on the same claims and the parties await a ruling fromsame Class Period. The amended complaint alleges that the federal court on the motionCompany (1) engaged in fabricating revenues by attempting delivery to remand.
The Company has never manufactured perfluorinated compounds, but purchased them for use in the manufacture of its carpets priorcustomers that were closed and recognizing these attempts as sales; (2) overproduced product to 2007. The Gadsdenreport higher operating margins and Centre Water Boards aremaintained significant inventory that was not allegingsalable; and (3) valued certain inventory improperly or improperly delivered inventory with knowledge that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsdenit was defective 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.
would return it. The Company intends to pursue all available defenses relatedvigorously defend against the claims.
Government Subpoenas
On June 25, 2020, the Company received subpoenas issued by the U.S. Attorney’s Office for the Northern District of Georgia and the U.S. Securities and Exchange Commission on topics similar to these matters.those raised by the amended complaint in the Securities Class Action (the “Government Subpoenas”). Following the receipt of the Government Subpoenas and the amended complaint in the Securities Class Action, the Audit Committee of the Board of Directors (the “Audit Committee”), began an internal investigation into the matter. As of August 4, 2020, the Audit Committee, assisted by outside legal counsel and forensic accountants, has substantially completed its investigation. The Company does not believehas been responsive to the ongoing subpoenas and other document requests and will continue to cooperate fully with the governmental inquiries.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Delaware State Court Action
The Company and certain of its present and former executive officers were named as defendants in a putative state securities class action lawsuit filed in the Superior Court of the State of Delaware on January 30, 2020. The complaint alleges that defendants violated Sections 11 and 12 of the ultimate outcomesSecurities Act of these cases will have a material adverse effect1933. The complaint is filed on its financial condition, but there can be no assurances at this stage that the outcomes will not have a material adverse effect onbehalf of shareholders who purchased shares of the Company’s resultscommon stock in Mohawk Industries Retirement Plan 1 and Mohawk Industries Retirement Plan 2 between April 27, 2017 and July 25, 2019. On March 27, 2020, the Court granted a temporary stay of operations, liquiditythe litigation pending the earlier of either the close of fact discovery or cash flowsthe deadline to appeal the dismissal of the related Securities Class Action pending in the United States District Court for the Northern District of Georgia. The stay may be lifted according to the terms set forth in the Court’s Order to Stay Litigation. The Company intends to vigorously defend against the claims.
Derivative Action
The Company and certain of its executive officers and directors were named as defendants in a given period. Furthermore,derivative action filed in the United States District Court for the Northern District of Georgia on May 18, 2020. The complaint alleges that defendants breached their fiduciary duties to the Company cannot predict whether any additional civilby causing the Company to issue materially false and misleading statements. The complaint is filed on behalf of the Company and seeks to remedy fiduciary duty breaches occurring from April 28, 2017 – July 25, 2019. On July 20, 2020, the Court granted a temporary stay of the litigation pending the earlier of either the Securities Class Action defendants filing an answer to the operative complaint or regulatory actionsthe deadline to appeal the dismissal of the Securities Class Action. The stay may be lifted according to the terms set forth in the Court’s Order to Stay Litigation. The Company intends to vigorously defend against it may arise from the allegations in this matter.claims.
Belgian Tax Matter
In JanuaryBetween 2012 and 2014, the Company received a €23,789 assessmentassessments from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position. The Belgian tax authority set aside the assessment in the third quarter of 2012 and refunded all related deposits, including interest income of €1,583 earned on such deposits. However, on October 23, 2012, the Belgian tax authority notified the Company of its intent to increase the Company's taxable income for the year ended December 31, 2008 under a revised theory. On December 28, 2012, the Belgian tax authority issued assessments for thecalendar years ended December 31, 2005 and December 31, 2009,through 2010 in the amounts of €46,135, €38,817, €39,635, €30,131, €35,567 and €35,567,€43,117 respectively, including penalties, but excluding interest. The Company filed a formal protest during the first quarter of 2013 relating to the new assessments. In September 2013, the Belgian tax authority denied the Company'sCompany’s formal protests against these assessments and the Company has brought these twoall six years before the Court of First Appeal in Bruges. In December 2013, the Belgian tax authority issued additional assessments related to the years ended December 31, 2006, 2007, and 2010, in the amounts of €38,817, €39,635, and €43,117, respectively, including penalties, but excluding interest. The Company filed formal protests during the first quarter of 2014, refuting the Belgian tax authority's position for each of the years assessed. In the quarter ended June 28, 2014, the Company received a formal assessment for the year ended December 31, 2008, totaling €30,131, against which the Company also submitted its formal protest. All 4 additional years were brought before the Court of First Appeal in November 2014. In JanuaryBruges ruled in favor of 2015, the Company meton 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 and agreed with the Belgian tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and apply the ruling to all of the open years (to the extent there are no additional facts/procedural arguments in the other years). In May 2017, the statute of limitation was extended to include the calendar year 2011.
On January 27, 2016, the Court of First Appeal in Bruges, Belgium 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. On September 17, 2019, the Company pled its case to the Ghent Court of Special (Tax) Appeals and on October 1, 2019, the Court ruled in favor of the Company, re-confirming the rulings of the Court of First Appeals in Bruges with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016,12, 2020, the Belgian tax authority lodged its Notification of Appealfiled another revised assessment for the calendar year ending December 31, 2009, with the Ghent CourtCourt.
In March 2019, the Company received assessments from the Belgian tax authority for tax years 2011 through 2017 in the amount of Appeal.€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 may appeal.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company disagreescontinues to disagree with the views of the Belgian tax authority on this matterall matters referenced above 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'sCompany’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'sCompany’s operations at these properties.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 we are unable to estimate the amount or range of loss, if any, in excess of amounts accrued. Although there can be no assurances, theThe 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.
The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment, recycling and disposal of solid and hazardous materials and finished product, and the cleanup of contamination associated therewith. Because of the nature of the Company’s business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations. The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided accruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities 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.
14.
18. Debt
Senior Credit Facility
On March 26, 2015,October 18, 2019, the Company amended and restated its 2013 Senior Credit Facility increasing its size from $1,000,000 to $1,800,000 andsenior credit facility, extending the maturity from September 25, 2018 to March 26, 20202022 to October 18, 2024 (as amended and restated, the "2015 Senior“Senior Credit Facility"Facility”). The 2015 Senior Credit Facility eliminated certain provisions inmarginally reduced 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;commitment fee 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 restatement also renewed 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 FacilityCompany’s option to extend the maturity date from March 26, 2021of the Senior Credit Facility up to March 26, 2022.two times for an additional one-year period each.
At the Company'sCompany’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 September 30, 2017)June 27, 2020), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or a monthly LIBORthe Eurocurrency Rate (as defined inthe Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of September 30, 2017)June 27, 2020). 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'lenders exceed utilization of the 2015 Senior Credit Facility ranging from 0.10%0.09% to 0.225%0.20% per annum (0.125%(0.11% as of September 30, 2017)June 27, 2020). The applicable margins and the commitment fee are determined based on whichever of the Company'sCompany’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'sCompany’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'sCompany’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 Senior Credit Facility originally required the Company to maintain a Consolidated Interest Coverage Ratio of at least 3.00 to 1.00 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.00, each as of the last day of any fiscal quarter. However, on May 7, 2020 the Company amended the Senior Credit Facility to temporarily increase the minimum Consolidated Net Leverage Ratio to 4.75 to 1.00 and to increase the amount of certain adjustments to Net Income that are permitted to calculate the ratio. The relief provided by the amendment will be in effect for the fiscal quarters ending on September 26, 2020 through (and including) the fiscal quarter ending December 31, 2021.
The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 2019, the Company paid financing costs of $2,264 in connection with the amendment and restatement of its Senior Credit Facility. These costs were deferred and, along with previously unamortized costs of $3,405 are being amortized over the term of the Senior Credit Facility.
As of September 30, 2017,June 27, 2020, amounts utilized under the 2015 Senior Credit Facility included $18,055 of0 borrowings and $55,720$22,787 of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,150,352$129,635 under the Company'sCompany’s U.S. and European commercial paper programs as of September 30, 2017June 27, 2020 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,224,127$152,422 under the 2015 Senior Credit Facility resulting in a total of $575,873$1,647,578 available as of September 30, 2017.June 27, 2020.
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'sCompany’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'sCompany’s commercial paper programs may not exceed $1,800,000 (less any amounts drawn on the 2015Senior Credit Facility) at any time.
The proceeds from the issuance of commercial paper notes will be available for general corporate purposes. As of September 30, 2017,June 27, 2020, there was $122,000$56,700 outstanding under the U.S. commercial paper program, and the euro equivalent of $1,028,352 was outstanding$72,935 under the European program. The weighted-average interest rate and maturity period for the U.S. program were 1.37%0.41% and 5.3630 days, respectively. The weighted averageweighted-average interest rate and maturity period for the European program were (0.19)%0.27% and 25.327.9 days, respectively. The COVID-19 crisis has recently impacted the commercial paper markets, both in the US and Europe, resulting in volatility in relation to supply and pricing. As stated previously, the Company’s commercial paper programs are backstopped by the Senior Credit Facility, which allows the Company to mitigate market disruptions using direct borrowings from the Senior Credit Facility.
Senior Notes
On September 11, 2017,June 12, 2020, Mohawk Capital Finance S.A. (“("Mohawk Finance”Finance"), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of €500,000 aggregate principal amount of 1.750% Senior Notes (“1.750% Senior Notes”) due June 12, 2027. The 1.750% Senior 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 1.750% Senior Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. Interest on the 1.750% Senior Notes is payable annually in cash on June 12 of each year, commencing on June 12, 2021. The Company paid financing costs of $4,855 in connection with the 1.750% Senior Notes. These costs were deferred and are being amortized over the term of the 1.750% Senior Notes.
On May 14, 2020, the Company completed the issuance and sale of $500,000 aggregate principal amount of 3.625% Senior Notes (“3.625% Senior Notes”) due May 15, 2030. The 3.625% 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 3.625% Senior Notes is payable semi-annually in cash on May 15 and November 15 of each year, commencing on November 15, 2020. The Company paid financing costs of $5,550 in connection with the 3.625% Senior Notes. These costs were deferred and are being amortized over the term of the 3.625% Senior Notes.
On September 4, 2019, Mohawk Finance completed the issuance and sale of €300,000 aggregate principal amount of its Floating Rate Notes due September 11, 2019 ("4, 2021 (“2021 Floating Rate Notes"Notes”). The 2021 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 2021 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%0.2% (but in no event shall the interest rate be less than zero). Interest on the 2021 Floating Rate Notes is payable quarterly on December 4, March 4, June 4, and September 4 of each year. Mohawk Finance received an issuance premium of €744 and paid financing cost of $754 in connection with the 2021 Floating Rate Notes. The issuance premium and financing costs have been deferred and are being amortized over the term of the 2021 Floating Rate Notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On May 18, 2018, Mohawk Finance 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 were senior unsecured obligations of Mohawk Finance and ranked pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes were fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bore interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event would the interest rate be less than zero). Interest on the 2020 Floating Rate Notes was payable quarterly on August 18, November 18, February 18, and May 18 of each year. Mohawk Finance paid financing costs of $890 in connection with the 2020 Floating Rate Notes. These costs were deferred and amortized over the term of the 2020 Floating Rate Notes. On May 18, 2020, the Company paid the remaining €300,000 outstanding principal of the 2020 Floating Rate Notes utilizing cash on hand and borrowings under its commercial paper programs.
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 were senior unsecured obligations of Mohawk Finance and ranked pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes were fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bore interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event would the interest rate be less than zero). Interest on the 2019 Floating Rate Notes was payable quarterly on September 11, December 11, March 11, and June 11 of each year. Mohawk Finance paid financing costs of $833$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. As defined inOn September 11, 2019, the related agreements,Company paid the remaining €300,000 outstanding principal of the 2019 Floating Rate Notes contain covenants, representationsutilizing cash on hand 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 Floating Rate Notes to require repayment upon a change of control triggering event.borrowings under its European commercial paper program.
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.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'sCompany’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.
Term Loan
On January 17, 2006,April 7, 2020, the Company issued $900,000 aggregateentered into a credit agreement that provided for a $500,000 delayed draw term loan facility (the “Term Loan Facility”). On April 15, 2020, the Company borrowed the full amount on the Term Loan Facility, the proceeds of which could be used for funding working capital and general corporate purposes of the Company. The principal amount of 6.125% Senior Notes due January 15, 2016. During 2014,the Term Loan Facility was to be repaid in a single installment on April 6, 2021. The Company could prepay all or a portion of the Term Loan Facility from time to time, plus accrued and unpaid interest. The obligations of the Company purchased for cash $254,445 aggregate principal amountand its subsidiaries in respect of its outstanding 6.125%the Term Loan Facility were unsecured. The Term Loan Facility was subject to the same affirmative and negative covenants that are applicable to the Senior Notes due JanuaryCredit Facility. The Company recorded financing costs of $1,088 in connection with the Term Loan. On May 15, 2016. On January 15, 2016,2020, the Company paidprepaid the remaining $645,555entire outstanding principal of its 6.125% Senior Notes (plus accrued but unpaid interest)balance on the Term Loan Facility utilizing cash on hand and borrowings under its U.S. commercial paper program.proceeds from the 3.625% Senior Notes and associated financing costs were written off in the quarter ending June 27, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounts Receivable Securitization
On December 19, 2012, the Company entered into a three-year on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). On September 11, 2014, the Company made certain modifications to its Securitization Facility, which modifications, among other things, increased the aggregate borrowings available under the facility from $300,000 to $500,000 and decreased the interest margins on certain borrowings. On December 10, 2015, the Company amended the terms of the Securitization Facility, reducing the applicable margin and extending the termination date from December 19, 2015 to December 19, 2016. The Company further amended the terms of the Securitization Facility on December 13, 2016, extending the termination date to December 19, 2017. The Company paid financing costs of $250 in connection with this extension. These costs were deferred and are being amortized over the remaining term of the Securitization Facility.
Under the terms of the Securitization Facility, certain subsidiaries of the Company sell at a discount certain of their trade accounts receivable (the “Receivables”) to Mohawk Factoring, LLC (“Factoring”) on a revolving basis. Factoring is a wholly owned, bankruptcy remote subsidiary of the Company, meaning that Factoring is a separate legal entity whose assets are available to satisfy the claims of the creditors of Factoring only, not the creditors of the Company or the Company’s other subsidiaries. To fund such purchases, Factoring may borrow up to $500,000 based on the amount of eligible Receivables owned by Factoring, and Factoring has granted a security interest in all of such Receivables to the third-party lending group as collateral for such borrowings. Amounts loaned to Factoring under the Securitization Facility bear interest at LIBOR plus an applicable margin of 0.70% per annum. Factoring also pays a commitment fee at a per annum rate of 0.30% on the unused amount of each lender’s commitment. As of September 30, 2017, there were no amounts utilized under the Securitization Facility.
The fair values and carrying values of our debt instruments are detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| At June 27, 2020 | | | | At December 31, 2019 | | |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
1.750% Senior Notes, payable June 12, 2027; interest payable annually | $ | 578,529 | | | 561,041 | | | — | | | — | |
3.625% Senior Notes, payable May 15, 2030; interest payable semi-annually | 546,635 | | | 500,000 | | | — | | | — | |
3.85% Senior Notes, payable February 1, 2023; interest payable semi-annually | 640,398 | | | 600,000 | | | 627,144 | | | 600,000 | |
2.00% Senior Notes, payable January 14, 2022; interest payable annually | 572,481 | | | 561,041 | | | 580,235 | | | 560,099 | |
2020 Floating Rate Notes, payable May 18, 2020; interest payable quarterly | — | | | — | | | 336,066 | | | 336,059 | |
| | | | | | | |
2021 Floating Rate Notes, payable September 04, 2021; interest payable quarterly | 334,602 | | | 336,625 | | | 335,965 | | | 336,059 | |
U.S. commercial paper | 56,700 | | | 56,700 | | | 317,000 | | | 317,000 | |
European commercial paper | 72,935 | | | 72,935 | | | 376,946 | | | 376,946 | |
| | | | | | | |
Five-year Senior unsecured Credit Facility, due October 18, 2024 | — | | | — | | | 16,803 | | | 16,803 | |
| | | | | | | |
| | | | | | | |
Finance leases and other | 32,779 | | | 32,779 | | | 30,049 | | | 30,049 | |
Unamortized debt issuance costs | (12,616) | | | (12,616) | | | (3,129) | | | (3,129) | |
Total debt | 2,822,443 | | | 2,708,505 | | | 2,617,079 | | | 2,569,886 | |
Less current portion of long term debt and commercial paper | 135,350 | | | 135,350 | | | 1,051,498 | | | 1,051,498 | |
Long-term debt, less current portion | $ | 2,687,093 | | | 2,573,155 | | | 1,565,581 | | | 1,518,388 | |
|
| | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
3.85% Senior Notes, payable February 1, 2023; interest payable semiannually | $ | 625,116 |
| | 600,000 |
| | 615,006 |
| | 600,000 |
|
2.00% Senior Notes, payable January 14, 2022; interest payable annually | 626,828 |
| | 590,667 |
| | 556,460 |
| | 525,984 |
|
Floating Rate Notes, payable September 11, 2019, interest payable quarterly | 355,262 |
| | 354,400 |
| | — |
| | — |
|
U.S. commercial paper | 122,000 |
| | 122,000 |
| | 283,800 |
| | 283,800 |
|
European commercial paper | 1,028,352 |
| | 1,028,352 |
| | 536,503 |
| | 536,503 |
|
2015 Senior Credit Facility | 18,055 |
| | 18,055 |
| | 60,672 |
| | 60,672 |
|
Securitization facility, due December 19, 2017 | — |
| | — |
| | 500,000 |
| | 500,000 |
|
Capital leases and other | 10,579 |
| | 10,579 |
| | 11,643 |
| | 11,643 |
|
Unamortized debt issuance costs | (6,607 | ) | | (6,607 | ) | | (7,117 | ) | | (7,117 | ) |
Total debt | 2,779,585 |
| | 2,717,446 |
| | 2,556,967 |
| | 2,511,485 |
|
Less current portion of long term debt and commercial paper | 1,172,781 |
| | 1,172,781 |
| | 1,382,738 |
| | 1,382,738 |
|
Long-term debt, less current portion | $ | 1,606,804 |
| | 1,544,665 |
| | 1,174,229 |
| | 1,128,747 |
|
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.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Mohawk Industries, Inc. (“Mohawk” orDuring the “Company”) is a leading global flooring manufacturer that creates products to enhance residential and commercial spaces aroundpast two decades, the world. The Company's vertically integrated manufacturing and distribution processes provide competitive advantages in carpet, rugs, ceramic tile, laminate, wood, stone, luxury vinyl tile ("LVT") and vinyl flooring. The Company's industry-leading innovation develops products and technologies that differentiate its brands in the marketplace and satisfy all flooring related remodeling and new construction requirements. The Company's brands are among the most recognized in the industry and include American Olean®, Daltile®, Durkan®, IVC®, Karastan®, Marazzi®, Mohawk®, Pergo®, Quick-Step® and Unilin®. The Company has transformed its business from an American carpet manufacturer into the world's largest flooring company with operationsgrown significantly. Its current geographic breadth and diverse product offering are reflected in Australia, Brazil,Canada, Europe, India, Malaysia, Mexico, New Zealand, Russia and the United States. The Company had annual net sales in 2016 of $9.0 billion.
The Company has three reporting segments,segments: Global Ceramic,Ceramic; Flooring North America ("(“Flooring NA"NA”); and Flooring Rest of the World ("(“Flooring ROW"ROW”). The Global Ceramic segmentSegment 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 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 segmentSegment designs, manufactures, sources and markets its floor covering product lines,products, including carpets,broadloom carpet, carpet tile, rugs, carpet pad, hardwood,cushion, laminate and vinyl products, including LVT,luxury vinyl tile (LVT) and sheet vinyl, and wood flooring, all of which it distributes through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carriercarriers or rail transportation. The segment’sSegment’s product lines are sold through various selling channels, including independent floor covering retailers, independent distributors, home centers, mass merchandisers, department stores, shop at home, online retailers, buying groups, commercial contractors and commercial end users. The Flooring ROW segmentSegment designs, manufactures, sources, licenses and markets laminate, hardwoodvinyl products, including LVT and sheet vinyl, wood flooring, roofing elements,panels, insulation boards, medium-density fiberboard ("MDF"(“MDF”), chipboards, other wood products and vinyl products, including LVT,chipboards, which it distributes primarily in Europe, Russia, Australia and RussiaNew Zealand through various selling channels, which includeincluding independent floor covering retailers, independent distributors, company-owned distributors, home centers, commercial contractors and home centers.commercial end users.
The CompanyMohawk is a significant participant insupplier of every major productflooring category acrosswith manufacturing operations in 18 nations and sales in more than 170 countries. Based on its annual sales, the global flooring industry. During 2016, industry sales of tile, LVT, sheet vinyl, laminate and wood grew while sales of carpet and rugs were down primarily due to the shift to polyester in residential products which sell at lower average selling prices. However, in 2017 the industry has implemented multiple soft surface price increases to offset inflation leading to higher sales. The Company believes that it is well positioned in all product types to satisfy these changes in customer trends.
the world’s largest flooring manufacturer. A majority of the Company’s sales and long-lived assets are located in the United States and Europe.Europe, which are also the Company’s primary markets. Additionally, the Company maintains significant operations in Russia, Mexico, Australia, New Zealand, Brazil and other parts of the world. The Company expects continued strongis a leading provider of flooring for residential and commercial markets and has earned significant recognition for its innovation in design and performance as well as sustainability.
Due to its global footprint, Mohawk’s business is sensitive to macroeconomic events in the United States market if residential housing starts and remodelingabroad. The current environment has placed unprecedented demands on the Company's operations as the COVID-19 pandemic has caused disruptions to the Company's markets and facilities around the world. During the quarter all of the Company's businesses were dramatically impacted with most of its customers and facilities operating in a limited capacity or completely shut down at times during the period. While the near-term economic and financial impact of the COVID-19 pandemic is improving, based on current visibility, the Company expects that it will continue to see decreased demand across a number of its markets. During the quarter, the Company initiated actions prompted by the evolving health crisis to enhance future performance including site closings, other facility and product rationalization actions and workforce reductions. We anticipate these global actions will deliver annual savings of approximately $110 to $120 million, with an estimated cost of approximately $170 million.
The Company believes it has the experience and resources necessary to capitalize on opportunities that will arise as employees return to work around the world and macroeconomic conditions improve. The Company also believes it is well positioned with a strong balance sheet and limited debt. The Company recently issued over $1 billion of long term bonds to strengthen its ability to strategically invest and better position Mohawk for the future. Finally, the Company is following the recommendations of local health authorities to minimize exposure risk for its employees, suppliers, customers and other stakeholders. For information on risk factors that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.
On March 27, 2020, in response to the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act, which provides retention related tax credits and certain tax deferrals for employers whose business has operations in Europe, Mexico and Russiabeen financially impacted by the COVID-19 pandemic. The Company utilized this relief as well as programs of other governments where the Company is growing market share, especially in its ceramic tile product lines. The Company expects sales growth to continue on a local basis, and operating income should improve despite inflation, declining patent revenues attributed to expiring patents and a weaker British Pound. The Company is also implementing price increases due to escalating material costs.has significant operations.
For the three months ended September 30, 2017,June 27, 2020, net loss attributable to the Company was $48.3 million, or diluted (loss) earnings per share (“EPS”) of $(0.68), compared to net earnings attributable to the Company of $202.4 million, or diluted EPS of $2.79 for the three months ended June 29, 2019. Our operations and net earnings for the second quarter were unfavorably affected by disruptions caused by the COVID-19 pandemic, although results improved throughout the quarter.
For the six months ended June 27, 2020, net earnings attributable to the Company were $270.0$62.3 million, or diluted earnings per share (“EPS”)EPS of $3.61,$0.87, compared to the net earnings attributable to the Company of $269.9$324.0 million, or diluted EPS of $3.62,$4.48 for the threesix months ended October 1, 2016. For the nine months ended September 30, 2017,June 29, 2019. The Company's operations and net earnings attributable to the Company were $731.3 million, or diluted earnings per share (“EPS”) of $9.77, compared to the net earnings attributable to the Company of $696.6 million, or diluted EPS of $9.34, for the nine months ended October 1, 2016.period were unfavorably affected by disruptions caused by the COVID-19 pandemic. The increasechange in diluted EPS for the nine months ended September 30, 2017 was primarily attributable to savings from capital investments and cost reduction initiatives, the favorableunfavorable net impact of lower volumes, costs due to reducing production, the unfavorable net impact of price and product mix, and lower interest rates, partially offset by higher input costs, increased employee costs, and the unfavorable impact of higher restructuring, acquisition and integration-related costs that were offset by productivity gains, lower inflation, and otherlower startup costs.
Recent Events
On April 4, 2017,For the six months ended June 27, 2020, the Company completedgenerated $763.5 million of cash from operating activities. As of June 27, 2020, the acquisitionCompany had cash and cash equivalents of Emil for approximately $186.1 million. The$737.7 million, of which $413.0 million was in the United States and $324.7 million was in foreign countries. On May 14, 2020, the Company also acquired three additional businesses duringissued $500.0 million of 3.625% senior notes due May 15, 2030, which the second quarterCompany used to pay off its delayed draw term loan facility. On June 12, 2020, a subsidiary of 2017 for approximately $63.9 million.the Company issued €500.0 of 1.750% senior notes due June 12, 2027, which the Company has used to strengthen its balance sheet in light of the COVID-19 crisis.
Results of Operations
Quarter Ended September 30, 2017,June 27, 2020, as compared with Quarter Ended October 1, 2016June 29, 2019
Net sales
Our global sales for the second quarter were unfavorably impacted by disruptions related to the COVID-19 pandemic resulting in decreased demand during the quarter. Net sales for the three months ended September 30, 2017June 27, 2020 were $2,448.5$2,049.8 million, reflecting an increasea decrease of $154.4$534.7 million, or 6.7%20.7%, from the $2,294.1$2,584.5 million reported for the three months ended October 1, 2016.June 29, 2019. The increasedecrease was primarily attributable to higher sales volumelower volumes of approximately $42$456 million, or 2%, which includes sales volume attributable to acquisitionsthe unfavorable net impact from foreign exchange rates of approximately $47$41 million, offset by a decrease in legacy sales volume of approximately $5 million, including the loss of patent revenue and the impact of the hurricanes during the quarter. Also contributing to the increase in sales was the favorableunfavorable net impact of price and product mix of approximately $73$39 million.
Global Ceramic segment—Net sales decreased $204.7 million, or 3%, and the net impact of favorable foreign exchange rates of approximately $40 million, or 2%.
Global Ceramic segment—Net sales increased $71.4 million, or 8.7%21.4%, to $893.4$753.3 million for the three months ended September 30, 2017,June 27, 2020, compared to $822.0$958.0 million for the three months ended October 1, 2016.June 29, 2019. The increasedecrease was primarily attributable to higher sales volumelower volumes of approximately $52$171 million, or 6%, which includes legacy sales volume of approximately $5 million and sales volume attributable to acquisitions of approximately $47 million. Also contributing to the increase in sales was theunfavorable net impact of favorablefrom foreign exchange rates of approximately $17$23 million or 2%, and the favorableunfavorable net impact of price and product mix of approximately $3$11 million. Sales were negatively impacted by the hurricanes in Texas and Florida during the quarter.
Flooring NA segment—Net sales increased $23.2decreased $183.3 million, or 2.3%18.6%, to $1,031.8$800.1 million for the three months ended September 30, 2017,June 27, 2020, compared to $1,008.6$983.4 million for the three months ended October 1, 2016.June 29, 2019. The increasedecrease was primarily attributable to lower volumes of approximately $165 million, and the favorableunfavorable net impact of price and product mix of approximately $41$18 million.
Flooring ROW segment—Net sales decreased $146.6 million, or 4%, partially offset by a decrease in sales volume of approximately $18 million, or 2%. Sales were negatively impacted by the hurricanes in Texas and Florida during the quarter.
Flooring ROW segment—Net sales increased $59.8 million, or 12.9%22.8%, to $523.3$496.4 million for the three months ended September 30, 2017,June 27, 2020, compared to $463.5$643.0 million for the three months ended October 1, 2016.June 29, 2019. The increasedecrease was primarily attributable to higher sales volumelower volumes of approximately $8$120 million, the unfavorable net impact from foreign exchange rates of approximately $17 million and the unfavorable net impact of price and product mix of approximately $10 million.
Gross profit
The Company experienced increased costs associated with short-term reductions in manufacturing output in addition to decreased demand as a result of the disruptions caused by the COVID-19 pandemic. Gross profit for the three months ended June 27, 2020 was $370.0 million (18.0% of net sales), a decrease of $366.6 million or 2%49.8%, despitecompared to gross profit of $736.6 million (28.5% of net sales) for the three months ended June 29, 2019. As a declinepercentage of net sales, gross profit decreased 1045 basis points. The decrease in patent revenue,gross profit dollars was primarily attributable to the favorableunfavorable net impact of lower volumes of approximately $165 million, costs due to reducing production of approximately $96 million, higher restructuring, acquisition and integration-related costs of approximately $62 million, the unfavorable net impact of price and product mix of approximately $29 million, or 6%,productivity loss of approximately $25 million and the unfavorable net impact of favorablefrom foreign exchange rates of approximately $23 million, or 5%.
Gross profit
Gross profit for the three months ended September 30, 2017 was $783.3 million (32.0% of net sales), an increase of $56.7 million or 7.8%, compared to gross profit of $726.6 million (31.7% of net sales) for the three months ended October 1, 2016. As a percentage of net sales, gross profit increased 30 basis points. The increase in gross profit dollars was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $40 million, the favorable net impact of price and product mix of approximately $63 million, the net impact of favorable foreign exchange rates of approximately $10 million, higher sales volumes of approximately $4 million, and the favorable impact of lower restructuring, acquisition and integration-related, and other costs of approximately $5$8 million, partially offset by higher input costslower inflation of approximately $61 million, including increased material costs of approximately $47 million and costs associated with investments in expansion of production capacity of approximately $3$18 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2017June 27, 2020 were $403.2$430.9 million (16.5%(21.0% of net sales), an increasea decrease of $55.0$38.9 million compared to $348.3$469.8 million (15.2%(18.2% of net sales) for the three months ended October 1, 2016.June 29, 2019. As a percentage of net sales, selling, general and administrative expenses increased 130285 basis points. The increasedecrease in selling, general and administrative expenses in dollars was primarily attributable to productivity gains of $53 million, and the unfavorablefavorable net impact from foreign exchange rates of approximately $7 million, partially offset by the higher restructuring, acquisition and integration-related and other costs of approximately $34$24 million.
Operating income (loss)
As previously discussed, our operations for the second quarter were negatively impacted by disruptions from the COVID-19 pandemic resulting in decreased demand and increased costs associated with short-term reductions in manufacturing output. Operating loss for the three months ended June 27, 2020 was $61.0 million (3.0% of net sales) reflecting a decrease of $327.9 million, or 122.9%, compared to operating income of $266.9 million (10.3% of net sales) for the three months ended June 29, 2019. The decrease in operating income was primarily attributable to the unfavorable net impact due to lower volumes of approximately $14$157 million, costs due to reducing production of approximately $96 million, higher restructuring, acquisition and integration-related costs of approximately $87 million, and the unfavorable net impact of price and product mix of approximately $30 million, partially offset by approximately $28 million of productivity gains and lower inflation of approximately $18 million.
Global Ceramic segment—Operating loss was $33.8 million (4.5% of segment net sales) for the three months ended June 27, 2020 reflecting a decrease of $150.8 million compared to operating income of $117.0 million (12.2% of segment net sales) for the three months ended June 29, 2019. The decrease in operating income was primarily attributable to the unfavorable net impact of lower volumes of approximately $60 million, costs due to reducing production of approximately $58 million, higher restructuring, acquisition and integration-related costs of approximately $37 million and the unfavorable net impact of price and product mix of approximately $18 million, partially offset by productivity gains of approximately $21 million.
Flooring NA segment—Operating loss was $45.5 million (5.7% of segment net sales) for the three months ended June 27, 2020 reflecting a decrease of $107.5 million compared to operating income of $62.0 million (6.3% of segment net sales) for the three months ended June 29, 2019. The decrease in operating income was primarily attributable to the unfavorable net impact of lower volumes of approximately $53 million, costs due to reducing production of approximately $26 million, higher restructuring, acquisition and integration-related costs of approximately $25 million and productivity loss of approximately $8 million, partially offset by lower inflation of approximately $10 million.
Flooring ROW segment—Operating income was $29.5 million (5.9% of segment net sales) for the three months ended June 27, 2020 reflecting a decrease of $70.6 million compared to operating income of $100.1 million (15.6% of segment net sales) for the three months ended June 29, 2019. The decrease in operating income was primarily attributable to unfavorable net impact of lower volumes of approximately $44 million, higher restructuring, acquisition and integration-related costs of approximately $24 million, costs due to reducing production of approximately $12 million and the unfavorable net impact of price and product mix of approximately $7 million, partially offset by approximately $13 million of productivity gains and lower inflation of approximately $8 million.
Interest expense
Interest expense was $13.0 million for the three months ended June 27, 2020, reflecting an increase of $2.5 million compared to interest expense of $10.5 million for the three months ended June 29, 2019. The increase in interest expense was primarily due to increased borrowings.
Other expense (income), net
Other expense, net was $1.0 million for the three months ended June 27, 2020, reflecting an unfavorable change of $4.0 million compared to other income, net of $3.0 million for the three months ended June 29, 2019. The change was primarily attributable to an impairment charge of $3.6 million related to the Company's net investment in a joint venture in Brazil, partially offset by foreign exchange rates on transactions in the current quarter.
Income tax expense (benefit)
For the three months ended June 27, 2020, the Company is now able to reasonably estimate its annual effective rate because it has six months of actual pre-tax income, therefore the Company has recorded taxes using this approach. For the three months ended June 27, 2020, the Company recorded an income tax benefit of $26.4 million on losses before income taxes of $75.0 million, for an effective tax rate of 35.2%, as compared to an income tax expense of $56.7 million on earnings before income taxes of $259.4 million, for an effective tax rate of 21.9% for the three months ended June 29, 2019. The difference in the effective tax rates for the comparative periods was caused by the geographical dispersion of profits and losses and the impact of COVID-19 in Q2 2020.
Six Months Ended June 27, 2020, as compared with Six Months Ended June 29, 2019
Net sales
Our global sales were affected by broader economic issues related to the COVID-19 pandemic resulting in decreased demand during the period. Net sales for the six months ended June 27, 2020 were $4,335.6 million, reflecting a decrease of $691.4 million, or 13.8%, from the $5,027.0 million reported for the six months ended June 29, 2019. The decrease was primarily attributable to lower volumes of approximately $540 million, unfavorable net impact of price and product mix of approximately $77 million and the unfavorable net impact from foreign exchange rates of approximately $75 million.
Global Ceramic segment—Net sales decreased $254.6 million, or 13.7%, to $1,601.8 million for the six months ended June 27, 2020, compared to $1,856.4 million for the six months ended June 29, 2019. The decrease was primarily attributable to lower volumes of approximately $201 million, the unfavorable net impact from foreign exchange rates of approximately $37 million, and unfavorable net impact of price and product mix of approximately $17 million.
Flooring NA segment—Net sales decreased $257.0 million, or 13.5%, to $1,648.4 million for the six months ended June 27, 2020, compared to $1,905.4 million for the six months ended June 29, 2019. The decrease was primarily attributable to lower volumes of approximately $222 million and the unfavorable net impact of price and product mix of approximately $35 million.
Flooring ROW segment—Net sales decreased $179.8 million, or 14.2%, to $1,085.4 million for the six months ended June 27, 2020, compared to $1,265.2 million for the six months ended June 29, 2019. The decrease was primarily attributable to lower volumes of approximately $116 million, the unfavorable net impact from foreign exchange rates of approximately $38 million, and unfavorable net impact of price and product mix of approximately $26 million.
Gross profit
The Company experienced increased costs associated with short-term reductions in manufacturing output in addition to decreased demand as result of the disruptions caused by the COVID-19 pandemic. Gross profit for the six months ended June 27, 2020 was $986.4 million (22.8% of net sales), a decrease of $375.1 million or 27.5%, compared to gross profit of $1,361.5 million (27.1% of net sales) for the six months ended June 29, 2019. As a percentage of net sales, gross profit decreased 433 basis points. The decrease in gross profit dollars was primarily attributable to the unfavorable net impact of lower volumes of approximately $196 million, costs due to reducing production of approximately $121 million, the unfavorable net impact of price and product mix of approximately $58 million, and higher restructuring, acquisition and integration-related costs of approximately $35 million, partially offset by lower inflation of approximately $30 million and productivity gains of approximately $13 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the six months ended June 27, 2020 were $895.9 million (20.7% of net sales), a decrease of $33.5 million compared to $929.4 million (18.5% of net sales) for the six months ended June 29, 2019. As a percentage of net sales, selling, general and administrative expenses increased 218 basis points. The decrease in selling, general and administrative expenses in dollars was primarily attributable to productivity gains of $51 million, the favorable net impact from foreign exchange rates of approximately $13 million, and approximately $6 million of lower startup costs, partially offset by the higher restructuring, acquisition and integration-related costs of approximately $22 million and approximately $13 million of costs associated with investments in new product development, sales personnel and marketing.
Operating income (loss)
As previously discussed, our operations for the period were negatively impacted by disruptions from the COVID-19 pandemic resulting in decreased demand and increased costs associated with short-term reductions in manufacturing output. Operating income for the six months ended June 27, 2020 was $90.5 million (2.1% of net sales) reflecting a decrease of $341.7 million, or 79.1%, compared to operating income of $432.2 million (8.6% of net sales) for the six months ended June 29, 2019. The decrease in operating income was primarily attributable to the unfavorable net impact due to lower volumes of approximately $190 million, costs due to reducing production of approximately $121 million, the unfavorable net impact of price and product mix of approximately $58 million, higher sales volume,restructuring, acquisition and integration-related costs of approximately $6$57 million, and approximately $13 million of costs associated with investments in new product development, sales personnel and marketing, the net impact of unfavorable foreign exchange rates of approximately $6 million, and increased employee costs of approximately $4 million, partially offset by savings from capital investments and cost reduction initiativesproductivity gains of $64 million, lower inflation of approximately $9 million. Restructuring, acquisition$30 million and integration-related, and other costs were higher primarily due to the absenceapproximately $13 million of approximately $90 million received related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that were recorded in the prior year.lower startup costs.
Operating income
Global Ceramic segment—Operating income was $14.2 million (0.9% of segment net sales) for the threesix months ended September 30, 2017 was $380.1June 27, 2020 reflecting a decrease of $186.1 million (15.5% of net sales) reflecting an increase of $1.8 million, or 0.5%, compared to operating income of $378.3$200.3 million (16.5%(10.8% of segment net sales) for the threesix months ended October 1, 2016.June 29, 2019. The increasedecrease in operating income was primarily attributable to savings from capital investments and cost reduction initiativescosts due to reducing production of approximately $49$73 million, the favorableunfavorable net impact of lower volumes of approximately $71 million, higher restructuring, acquisition and integration-related costs of approximately $31 million, and the unfavorable net impact of price and product mix of approximately $62 million, and the net impact of favorable exchange rates of approximately $4$28 million, partially offset by higher input costsproductivity gains of approximately $61$25 million.
Flooring NA segment—Operating loss was $9.3 million including increased material(0.6% of segment net sales) for the six months ended June 27, 2020 reflecting a decrease of $74.5 million compared to operating income of $65.2 million (3.4% of segment net sales) for the six months ended June 29, 2019. The decrease in operating income was primarily attributable to the unfavorable net impact of lower volumes of approximately $72 million, costs due to reducing production of approximately $32 million and the unfavorable net impact of price and product mix of approximately $10 million, partially offset by lower inflation of approximately $18 million, and productivity gains of approximately $21 million.
Flooring ROW segment—Operating income was $105.3 million (9.7% of segment net sales) for the six months ended June 27, 2020 reflecting a decrease of $83.8 million compared to operating income of $189.1 million (14.9% of segment net sales) for the six months ended June 29, 2019. The decrease in operating income was primarily attributable to unfavorable net impact of lower volumes of approximately $47 million, higher restructuring, acquisition and integration-related costs of approximately $6$23 million, the unfavorable net impact of price and product mix of approximately $20 million, costs due to reducing production of approximately $16 million, and approximately $13 million of costs associated with investments in new product development, sales personnel and marketing, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $29 million, decreased sales volumes of approximately $9 million, primarily attributable to lower patent revenue, increased employee costs of approximately $4 million, and costs associated with investments in expansion of production capacity of approximately $3 million. Restructuring, acquisition and integration-related, and other costs were higher primarily due to the absence of approximately $90 million received related to a contract dispute, partially offset by thelower inflation of approximately $48$17 million, charge related to the write-offand productivity gains of the Lees tradename that were recorded in the prior year.approximately $16 million.
Global Ceramic segment—Operating incomeInterest expense
Interest expense was $143.4$21.6 million (16.0% of segment net sales) for the threesix months ended September 30, 2017June 27, 2020, reflecting an increase of $7.4 million compared to operating income of $136.0 million (16.5% of segment net sales) for the three months ended October 1, 2016. The increase in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $16 million and increased sales volume of approximately $8 million, partially offset by higher input costs of approximately $10 million and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $6 million.
Flooring NA segment—Operating income was $163.5 million (15.8% of segment net sales) for the three months ended September 30, 2017 reflecting a decrease of $7.0 million compared to operating income of $170.5 million (16.9% of segment net sales) for the three months ended October 1, 2016. The decrease in operating income was primarily attributable to the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $25 million. Restructuring, acquisition and integration-related, and other costs were higher primarily due to the absence of approximately $90 million received related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that were recorded in the prior year. Also contributing to the change in operating income were the favorable net impact of price and product mix of approximately $32 million and savings from capital investments and cost reduction initiatives of approximately $25 million, partially offset by higher input costs of approximately $29 million, including increased material costs of approximately $24 million, and a decrease in sales volumes of approximately $4 million.
Flooring ROW segment—Operating income was $83.0 million (15.9% of segment net sales) for the three months ended September 30, 2017 reflecting an increase of $1.3 million compared to operating income of $81.8 million (17.6% of segment net sales) for the three months ended October 1, 2016. The increase in operating income was primarily attributable to the favorable net impact of price and product mix of approximately $28 million and savings from capital investments and cost reduction initiatives of approximately $8 million, partially offset by higher input costs of approximately $22 million, including increased material costs of approximately $21 million and approximately $13 million in decreased sales volumes, primarily attributable to lower patent revenue.
Interest expense
Interest expense was $7.3 million for the three months ended September 30, 2017, reflecting a decrease of $2.2$0.6 million compared to interest expense of $9.4$21.0 million for the threesix months ended October 1, 2016.June 29, 2019. The decreaseincrease in interest expense was primarily attributabledue to a shift in the Company's borrowings to lower interest rate instruments.increased borrowings.
Other expense (income), net
Other expense, net
Other expense was $1.3$6.7 million for the threesix months ended September 30, 2017,June 27, 2020, reflecting a favorablean unfavorable change of $2.6$13.5 million compared to other expenseincome, net of $3.8$6.8 million for the threesix months ended October 1, 2016.June 29, 2019. The change was primarily attributable to an impairment charge of $3.6 million related to the Company's net investment in a charge for the release of an indemnification receivablejoint venture in Brazil and foreign exchange rates on transactions in the priorcurrent year.
Income tax expense
For the threesix months ended September 30, 2017,June 27, 2020, the Company recorded income tax expense of $100.5$0.3 million on earnings before income taxes of $371.6$62.2 million for an effective tax rate of 27.1%less than 1%, as compared to an income tax expense of $94.2$93.8 million
on earnings before income taxes of $365.1$418.0 million, for an effective tax rate of 25.8%22.4% for the threesix months ended October 1, 2016.June 29, 2019. The difference in the effective tax raterates for the comparative periods was unfavorably impactedcaused by the geographical dispersion of earningsprofits and losses forand the comparative periods, partially offset by the release of a state valuation allowance.
Nine Months Ended September 30, 2017, as compared with Nine Months Ended October 1, 2016
Net sales
Net sales for the nine months ended September 30, 2017 were $7,122.2 million, reflecting an increase of $345.7 million, or 5.1%, from the $6,776.5 million reported for the nine months ended October 1, 2016. The increase was primarily attributable to higher sales volume of approximately $201 million, or 3%, which includes legacy sales volume of approximately $142 million and sales volume attributable to acquisitions of approximately $95 million, offset by the unfavorable impact of fewer shipping daysCOVID-19 in 2020.
Global Ceramic segment—Net sales increased $155.5 million, or 6.4%, to $2,581.0 million for the nine months ended September 30, 2017, compared to $2,425.6 million for the nine months ended October 1, 2016. The increase was primarily attributable to higher sales volume of approximately $114 million, or 5%, which includes legacy sales volume of approximately $31 million and sales volume attributable to acquisitions of approximately $95 million, offset by the unfavorable impact of fewer shipping days of approximately $12 million. Also contributing to the increase in sales was the favorable net impact of price and product mix of approximately $21 million, or 1% and the net impact of favorable foreign exchange rates of approximately $20 million, or 1%.
Flooring NA segment—Net sales increased $116.0 million, or 4.0%, to $3,011.6 million for the nine months ended September 30, 2017, compared to $2,895.6 million for the nine months ended October 1, 2016. The increase was primarily attributable to higher sales volume of approximately $63 million, or 2%, offset by the unfavorable impact of fewer shipping days of approximately $15 million, and the favorable net impact of price and product mix of $68 million, or 2%.
Flooring ROW segment—Net sales increased $74.2 million, or 5.1%, to $1,529.6 million for the nine months ended September 30, 2017, compared to $1,455.4 million for the nine months ended October 1, 2016. The increase was primarily attributable to higher sales volume of approximately $47 million, or 3%, despite a decline in patent revenue, offset by the unfavorable impact of fewer shipping days of approximately $9 million. Also contributing to the increase in sales was the favorable net impact of price and product mix of approximately $47 million, or 3%, partially offset by the net impact of unfavorable foreign exchange rates of approximately $11 million, or 1%.
Gross profit
Gross profit for the nine months ended September 30, 2017 was $2,242.8 million (31.5% of net sales), an increase of $121.0 million or 5.7%, compared to gross profit of $2,121.8 million (31.3% of net sales) for the nine months ended October 1, 2016. As a percentage of net sales, gross profit increased 20 basis points. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $50 million, savings from capital investments and cost reduction initiatives of approximately $114 million, and the favorable net impact of price and product mix of approximately $112 million, partially offset by higher input costs of approximately $142 million, including increased material costs of approximately $98 million, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $12 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended September 30, 2017 were $1,232.1 million (17.3% of net sales), an increase of $84.9 million compared to $1,147.2 million (16.9% of net sales) for the nine months ended October 1, 2016. As a percentage of net sales, selling, general and administrative expenses increased 40 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $37 million of costs due to higher sales volume, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $34 million, approximately $20 million of costs associated with investments in new product development, sales personnel, and marketing, and increased employee costs of approximately $9 million, partially offset by savings from capital investments and cost reduction initiatives of approximately $20 million. Restructuring, acquisition and integration-related, and other costs were higher primarily due to the absence of approximately $90 million received related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that were recorded in the prior year.
Operating income
Operating income for the nine months ended September 30, 2017 was $1,010.7 million (14.2% of net sales) reflecting an increase of $36.0 million, or 3.7%, compared to operating income of $974.7 million (14.4% of net sales) for the nine months ended October 1, 2016. The increase in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $134 million, the favorable net impact of price and product mix of approximately $110 million, and increased sales volume of approximately $13 million, partially offset by higher input costs of approximately $142 million, including increased material costs of approximately $98 million, increased employee costs of approximately $9 million, approximately $20 million of costs associated with investments in new product development, sales personnel, and marketing, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $45 million. Restructuring, acquisition and integration-related, and other costs were higher primarily due to the absence of approximately $90 million received related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that were recorded in the prior year.
Global Ceramic segment—Operating income was $412.0 million (16.0% of segment net sales) for the nine months ended September 30, 2017 reflecting an increase of $35.6 million compared to operating income of $376.4 million (15.5% of segment net sales) for the nine months ended October 1, 2016. The increase in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $54 million, increased sales volumes of approximately $22 million, the favorable net impact of price and product mix of approximately $12 million, and the net impact of favorable foreign exchange rates of approximately $8 million, partially offset by higher input costs of approximately $30 million, approximately $8 million of costs associated with investments in new product development, sales personnel, and marketing, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $16 million.
Flooring NA segment—Operating income was $383.1 million (12.7% of segment net sales) for the nine months ended September 30, 2017 reflecting an increase of $18.3 million compared to operating income of $364.8 million (12.6% of segment net sales) for the nine months ended October 1, 2016. The increase in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $49 million, the favorable net impact of price and product mix of approximately $53 million and increased sales volumes of approximately $7 million, partially offset by higher input costs of approximately $53 million, including increased material costs of approximately $39 million, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $29 million, and approximately $5 million of costs associated with investments in new product development, sales personnel, and marketing. Restructuring, acquisition and integration-related, and other costs were higher primarily due to the absence of approximately $90 million received related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that were recorded in the prior year.
Flooring ROW segment—Operating income was $245.2 million (16.0% of segment net sales) for the nine months ended September 30, 2017 reflecting a decrease of $17.2 million compared to operating income of $262.4 million (18.0% of segment net sales) for the nine months ended October 1, 2016. The decrease in operating income was primarily attributable to higher input costs of approximately $56 million, including increased material costs of approximately $54 million, the net impact of unfavorable exchange rates of approximately $9 million, approximately $7 million of costs associated with investments in new product development, sales personnel, and marketing,and approximately $17 million in decreased sales volumes, primarily attributable to lower patent revenue. These decreases in operating income were partially offset by savings from capital investments and cost reduction initiatives of approximately $30 million, and the favorable net impact of price and product mix of approximately $45 million.
Interest expense
Interest expense was $23.9 million for the nine months ended September 30, 2017, reflecting a decrease of $8.2 million compared to interest expense of $32.1 million for the nine months ended October 1, 2016. The decrease was primarily attributable to a shift in the Company's borrowings to lower interest rate instruments.
Other expense, net
Other expense was unchanged at $1.5 million for the nine months ended September 30, 2017 and October 1, 2016. The increased unfavorable impact of foreign exchange rates on transactions in the current year was offset by a charge for the release of an indemnification receivable in the prior year.
Income tax expense
For the nine months ended September 30, 2017, the Company recorded income tax expense of $251.6 million on earnings before income taxes of $985.4 million for an effective tax rate of 25.5%, as compared to an income tax expense of $242.1 million on earnings before income taxes of $941.1 million, for an effective tax rate of 25.7% for the nine months ended October 1, 2016. The difference in the effective tax rate for the comparative period is due to the geographic dispersion of earnings and losses for the periods.
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.
Management has and will continue to evaluate its liquidity needs and strategy regarding capital resources as the economic crisis caused by the COVID-19 pandemic evolves. As of September 30, 2017,discussed below, the Company had a total of $575.9 million available under its 2015 Senior Credit Facility andrecently issued $500.0 million under its Securitization Facility.of 3.625% senior notes, and a subsidiary of the Company issued €500.0 of 1.750% senior notes, with ten and seven-year terms, respectively. Due to reduced short-term demand, the Company has reduced production capacity and reduced headcount through furloughs and layoffs. Management believes these actions along with cash secured from increased borrowing will allow the Company to meet any needs stemming from short-term reductions in cash flows from operations.
Net cash provided by operating activities in the first ninesix months of 20172020 was $874.2$763.5 million, compared to net cash provided by operating activities of $1,000.3$566.3 million in the first ninesix months of 2016.2019. The decreaseincrease of $126.1$197.2 million in 20172020 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.partially offset by lower net earnings.
Net cash used in investing activities in the first ninesix months of 20172020 was $905.4$210.5 million compared to net cash used in investing activities of $460.8$353.9 million in the first ninesix months of 2016.2019. The increasedecrease was primarily due to acquisitions in the current year of $250.8 million. Also,reduced capital expenditures increased by $193.9of $84.8 million and a decrease in acquisition costs of $76.8 million. In an effort to $654.6 million inmanage liquidity during the current year. The Company continuesCOVID-19 crisis, management is reducing near-term capital expenditures and expects to invest to optimize sales and profit growth this year and beyond with product expansion and cost reduction projects in the business. Capital spending duringreduce its spend for the remainder of 2017 is expected to exceed $200 million, resulting in the full year spending being approximately $900 million.2020.
Net cash used inprovided by financing activities in the first ninesix months of 20172020 was $23.3$63.0 million compared to net cash used in financing activities of $516.9$205.4 million in the ninesix months of 2016.2019. The change in cash used inprovided by financing activities is primarily attributable to the issuanceproceeds from the Senior Notes of $735.3 million (net of repayments of $326.9 million), the net pay down on commercial paper of $408.8 million and saleshare repurchases of $357.6$59.7 million. Additionally, on April 15, 2020, the Company borrowed $500.0 million on the Term Loan Facility, which was repaid on May 15, 2020.
As of June 27, 2020, the Company had cash of $737.7 million, of which $324.7 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. The Company is continually evaluating its projected needs in Floating Rate Noteslight of the current crisis and the Company may conduct additional debt financings, subject to market conditions, to increase its liquidity and to take advantage of attractive financing opportunities.
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 has purchased an aggregate of $442.9 million under the program through the first quarter of 2020 before deciding to put future purchases on hold until the economic environment improves.
The Company may continue, from time to time, to retire its outstanding debt through cash purchases in the current yearopen market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and the repayment of senior notes of $645.6 million in the prior year, partially offset by decreased borrowings in the current year.other factors. The amount involved may be material.
Senior Credit Facility
On March 26, 2015,October 18, 2019, the Company amended and restated its 2013 Senior Credit Facility increasing its size from $1,000.0 million to $1,800.0 million andsenior credit facility, extending the maturity from September 25, 2018 to March 26, 20202022 to October 18, 2024 (as amended and restated, the "2015 Senior“Senior Credit Facility"Facility”). The 2015 Senior Credit Facility eliminated certain provisions inmarginally reduced 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;commitment fee 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 restatement also renewed 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 FacilityCompany’s option to extend the maturity date from March 26, 2021of the Senior Credit Facility up to March 26, 2022.two times for an additional one-year period each.
At the Company'sCompany’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 September 30, 2017)June 27, 2020), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or a monthly LIBORthe Eurocurrency Rate (as defined in the Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of September 30, 2017)June 27, 2020). 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'lenders exceed utilization of the 2015 Senior Credit Facility ranging from 0.10%0.09% to 0.225%0.20% per annum (0.125%(0.11% as of September 30, 2017)June 27, 2020). The applicable margins and the commitment fee are determined based on whichever of the Company'sCompany’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'sCompany’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'sCompany’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 Senior Credit Facility originally required the Company to maintain a Consolidated Interest Coverage Ratio of at least 3.00 to 1.00 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.00, each as of the last day of any fiscal quarter. However, on May 7, 2020 the Company amended the Senior Credit Facility to temporarily increase the minimum Consolidated Net Leverage Ratio to 4.75 to 1.00 and to increase the amount of certain adjustments to Net Income that are permitted to calculate the ratio. The relief provided by the amendment will be in effect for the fiscal quarters ending on September 26, 2020 through (and including) the fiscal quarter ending December 31, 2021.
The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
TheIn 2019, the Company paid financing costs of $0.6$2.3 million in connection with the extensionamendment and restatement of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022.Facility. These costs were deferred and, along with previously unamortized costs of $6.9$3.4 million are being amortized over the term of the 2015 Senior Credit Facility.
As of September 30, 2017,June 27, 2020, amounts utilized under the 2015 Senior Credit Facility included $18.1 million ofzero borrowings and $55.7$22.8 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,150.4$129.6 million under the Company'sCompany’s U.S. and European commercial paper programs as of September 30, 2017June 27, 2020 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,224.1$152.4 million under the 2015 Senior Credit Facility resulting in a total of $575.9$1,647.6 million available as of September 30, 2017.June 27, 2020.
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'sCompany’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 2015Senior Credit Facility) at any time.
The proceeds from the issuance of commercial paper notes will be available for general corporate purposes. As of September 30, 2017,June 27, 2020, there was $122.0$56.7 million outstanding under the U.S. commercial paper program, and the euro equivalent of $1,028.4$72.9 million was outstanding under the European program. The weighted-average interest rate and maturity period for the U.S. program were 1.37%0.41% and 5.3630 days, respectively. The weighted averageweighted-average interest rate and maturity period for the European program were (0.19)%0.27% and 25.327.9 days, respectively. The COVID-19 crisis has recently impacted the commercial paper markets, both in the US and Europe, resulting in volatility in relation to supply and pricing. As stated previously, the Company’s commercial paper programs are backstopped by the Senior Credit Facility, which allows the Company to mitigate market disruptions using direct borrowings from the Senior Credit Facility.
Senior Notes
On September 11, 2017,June 12, 2020, Mohawk Capital Finance S.A.completed the issuance and sale of €500.0 aggregate principal amount of 1.750% Senior Notes (“1.750% Senior Notes”) due June 12, 2027. The 1.750% Senior Notes are senior unsecured obligations of Mohawk Finance”), an indirect wholly-owned finance subsidiaryFinance and rank pari passu with all of Mohawk Finance's other existing and future senior unsecured indebtedness. The 1.750% Senior Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. Interest on the 1.750% Senior Notes is payable annually in cash on June 12 of each year, commencing on June 12, 2021. The Company paid financing costs of $4.9 million in connection with the 1.750% Senior Notes. These costs were deferred and are being amortized over the term of the 1.750% Senior Notes.
On May 14, 2020, the Company completed the issuance and sale of $500 aggregate principal amount of 3.625% Senior Notes (“3.625% Senior Notes”) due May 15, 2030. The 3.625% 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 3.625% Senior Notes is payable semi-annually in cash on May 15 and November 15 of each year, commencing on November 15, 2020. The Company paid financing costs of $5.6 million in connection with the 3.625% Senior Notes. These costs were deferred and are being amortized over the term of the 3.625% Senior Notes.
On September 4, 2019, Mohawk Finance completed the issuance and sale of €300.0 million aggregate principal amount of its Floating Rate Notes due September 11, 2019 ("4, 2021 (“2021 Floating Rate Notes"Notes”). The 2021 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 2021 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%0.2% (but in no event shall the interest rate be less than zero). Interest on the 2021 Floating Rate Notes is payable quarterly on December 4, March 4, June 4, and September 4 of each year. Mohawk Finance received an issuance premium of €0.7 million and paid financing cost of $0.8 million in connection with the 2021 Floating Rate Notes. The issuance premium and financing costs have been deferred and are being amortized over the term of the 2021 Floating Rate Notes.
On May 18, 2018, Mohawk Finance 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 were senior unsecured obligations of Mohawk Finance and ranked pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes were fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bore interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event would 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 amortized over the term of the 2020 Floating Rate Notes. On May 18, 2020, the Company paid the remaining €300.0 outstanding principal of the 2020 Floating Rate Notes utilizing cash on hand and borrowings under its commercial paper programs.
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 were senior unsecured obligations of Mohawk Finance and ranked pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes were fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bore interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event would the interest rate be less than zero). Interest on the 2019 Floating Rate Notes was payable quarterly on September 11, December 11, March 11, and June 11 of each year. Mohawk Finance paid financing costs of $0.8$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. As defined inOn September 11, 2019, the related agreements,Company paid the remaining €300.0 million outstanding principal of the 2019 Floating Rate Notes contain covenants, representationsutilizing cash on hand and warranties and eventsborrowings under its European commercial paper program.
On June 9, 2015, the Company issued €500.0 million aggregate principal amount of 2.00% Senior Notes due January 14, 2022.2022 (“2.00% Senior Notes”). 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.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 due February 1, 2023.2023 (“3.85% Senior Notes”). The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company'sCompany’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.
On January 17, 2006,As defined in the Company issued $900.0 million aggregate principal amountrelated agreements, the Company’s senior notes contain covenants, representations and warranties and events of 6.125% Senior Notes due January 15, 2016. During 2014,default, subject to exceptions, and restrictions on the Company purchased for cash $254.4 million aggregate principal amountCompany’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 its outstanding 6.125% Senior Notes due January 15, 2016. On January 15, 2016, the Company paid the remaining $645.6 million outstanding principalnotes to require repayment upon a change of its 6.125% Senior Notes (plus accrued but unpaid interest) utilizing cash on hand and borrowings under its U.S. commercial paper program.control triggering event.
Term Loan
Accounts Receivable Securitization
On December 19, 2012,April 7, 2020, the Company entered into a three-year on-balance sheet trade accounts receivable securitizationcredit agreement that provided for a $500.0 million delayed draw term loan facility (the "Securitization Facility"“Term Loan Facility”). On September 11, 2014,April 15, 2020, the Company made certain modificationsborrowed the full amount on the Term Loan Facility, the proceeds of which could be used for funding working capital and general corporate purposes of the Company. The principal amount of the Term Loan Facility was to its Securitizationbe repaid in a single installment on April 6, 2021. The Company could prepay all or a portion of the Term Loan Facility which modifications, among other things, increased the aggregate borrowings available under the facility from $300.0 milliontime to $500.0 milliontime, plus accrued and decreased the interest margins on certain borrowings. On December 10, 2015,unpaid interest. The obligations of the Company amended the termsand its subsidiaries in respect of the SecuritizationTerm Loan Facility reducingwere unsecured. The Term Loan Facility was subject to the same affirmative and negative covenants that are applicable margin and extendingto the termination date from December 19, 2015 to December 19, 2016. The Company further amended the terms of the Securitization Facility on December 13, 2016, extending the termination date to December 19, 2017.Senior Credit Facility. The Company paid financing costs of $0.3$1.1 million in connection with this extension. Thesethe Term Loan. On May 15, 2020, the Company prepaid the entire outstanding balance on the Term Loan Facility utilizing cash on hand and proceeds from the 3.625% Senior Notes and associated financing costs were deferred and are being amortized over the remaining term of the Securitization Facility.
Under the terms of the Securitization Facility, certain subsidiaries of the Company sell at a discount certain of their trade accounts receivable (the “Receivables”) to Mohawk Factoring, LLC (“Factoring”) on a revolving basis. Factoring is a wholly owned, bankruptcy remote subsidiary of the Company, meaning that Factoring is a separate legal entity whose assets are available to satisfy the claims of the creditors of Factoring only, not the creditors of the Company or the Company’s other subsidiaries. To fund such purchases, Factoring may borrow up to $500.0 million based on the amount of eligible Receivables owned by Factoring, and Factoring has granted a security interest in all of such Receivables to the third-party lending group as collateral for such borrowings. Amounts loaned to Factoring under the Securitization Facility bear interest at LIBOR plus an applicable margin of 0.70% per annum. Factoring also pays a commitment fee at a per annum rate of 0.30% on the unused amount of each lender’s commitment. As of September 30, 2017, there were no amounts utilized under the Securitization Facility.
The Company may continue, from time to time, to retire its outstanding debt through cash purchaseswritten off 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.quarter ending June 27, 2020.
Contractual Obligations
There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 20162019 Annual Report filed on Form 10-K.10-K except as described herein.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
Contractual obligations and commitments: | | | | | | | | | | | | | |
Long-term debt, including current maturities | $ | 1,061.0 | | | — | | | — | | | — | | | — | | | — | | | 1,061.0 | |
Total | $ | 1,061.0 | | | — | | | — | | | — | | | — | | | — | | | 1,061.0 | |
Critical Accounting Policies and Estimates
There have been no significant changesRefer to Note 1 - General, and Note 5 - Receivables, net within our Condensed Consolidated Financial Statements of this Form 10-Q for a discussion of the Company’s criticalupdated accounting policies and estimates during the period.on Measurement of Credit Losses on Financial Instruments. The Company’s critical accounting policies and estimates are described in its 20162019 Annual Report filed on Form 10-K.
Goodwill and intangible assets
Mohawk performs its annual testing of goodwill and indefinite lived intangibles in the fourth quarter of each year and no impairment was indicated for 2019. In 2019 the Company also concluded that in general, a decline in estimated after tax cash flows greater than approximately 19% to 39% or an increase of approximately 15% to 45% in WACC or a significant or prolonged decline in market capitalization could result in an additional indication of impairment.
As a result of the recent economic impact from COVID-19, the Company performed a qualitative assessment of whether the fair value of any of its reporting units or indefinite-lived intangible assets was more likely than not less than its carrying amount at March 28, 2020. The Company concluded neither goodwill nor any of its indefinite-lived intangible assets were impaired at March 28, 2020. There were no factors or changes in circumstances to indicate a change to this assessment was required during the three months ended June 27, 2020. However, while we have concluded that neither goodwill nor any of its indefinite-lived intangible assets were impaired during the quarter ended June 27, 2020, a prolonged pandemic could impact the Company’s assumptions utilized in the determination of the estimated fair values of the Company’s reporting units and indefinite-lived intangible assets significantly enough to trigger an impairment. Hence, the Company continues to monitor the economic impact of COVID-19 and may be required to reassess impairment of goodwill or indefinite-lived intangible assets in future interim periods.
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 September 30, 2017.June 27, 2020.
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 highersegment, net sales and operating income are typically higher in these segments. These results are primarily due to consumer residential spending patterns which have historically decreased during the holiday seasonsecond quarter, followed by the third and the first two months following.quarters and a weaker fourth quarter. The Flooring ROWNA segment’s second quarter typically produces the highest net sales followed by moderate third and fourth quarters, and a weaker first quarter. However, for the operating income, the third quarter typically shows stronger earnings, followed by a moderate firstsecond and fourth quarters, and the first quarter shows weaker earnings. The Flooring ROW segment’s fourth quarter historically produces the highest net sales followed by moderate second and third quarters, and a weaker first quarter. However, for the operating income, generally, the second quarter shows the stronger earnings, followed by third quarter.and first quarters, and the fourth quarter shows weaker earnings.
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; the risks and uncertainty related to the COVID-19 pandemic; and other risks identified in Mohawk’s SEC reportsItem 1A “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K and public announcements.Part II, Item 1A “Risk Factors” in the Company's quarterly report on Form 10-Q for the period ended March 28, 2020.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2017,June 27, 2020, approximately 44%83% of the Company'sCompany’s debt portfolio was comprised of fixed-rate debt and 56%17% 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 $3.8$1.2 million and $11.4$2.3 million for the three and ninesix months ended September 30, 2017, respectively. June 27, 2020.
There have been no other significant changes to the Company’s exposure to market risk as disclosed in the Company’s 20162019 Annual Report filed on Form 10-K.
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Item 4. | Controls and Procedures |
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'sCompany’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'sCompany’s internal control over financial reporting other than the integrationreporting.
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 MunicipalPerfluorinated Compounds (“PFCs”) 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 perfluorinated compounds,specific PFCs, 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 recently granted Gadsden Water Board's motion for remand. On October 24, 2017, the Company appealed the federal court's determination that co-defendant Industrial Chemicals, Inc. ("ICI") was properly joined as a party to the case. ICI's presence in the case deprives the federal court of jurisdiction over the case.
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. County, Alabama. The Gadsden Water Board and the Centre Water Board both seek monetary damages and injunctive relief claiming that their water supplies contain excessive amounts of PFCs. Certain defendants, including the Company, filed dispositive motions in each case arguing that the Alabama state courts lack personal jurisdiction over them. These motions were denied. 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. The Alabama Supreme Court denied the petitions on December 20, 2019. Certain defendants, including the Company, filed an Application for Rehearing with the Alabama Supreme Court asking the Court to reconsider its December 2019 decision. The Alabama Supreme Court denied the application for rehearing.
In December 2019, the City of Rome, Georgia (“Rome”) filed a complaint in the Superior Court of Floyd County, Georgia that is similar to the Gadsden Water Board and Centre Water Board complaints, again seeking monetary damages and injunctive relief related to PFCs. Also in December 2019, Jarrod Johnson filed a putative class action in the Superior Court of Floyd County, Georgia purporting to represent all water subscribers with the Rome (Georgia) Water and Sewer Division and/or the Floyd County (Georgia) Water Department and seeking to recover, among other things, damages in the form of alleged increased rates and surcharges incurred by ratepayers for the costs associated with eliminating certain PFCs from their drinking water. In January 2020, defendant 3M Company removed the class action to federal court. The Company has filed motions to dismiss in both of these cases.
The Company denies all liability in these matters and intends to defend them vigorously.
Putative Securities Class Action
On June 19, 2017,January 3, 2020, the Company and certain of its executive officers were named as defendants removed this case toin a putative shareholder class action lawsuit filed in the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversityGeorgia (the "Securities Class Action"). The complaint alleges that defendants violated the Securities Exchange Act of citizenship1934 and fraudulent joinder.Rule 10b-5 promulgated thereunder by making materially false and misleading statements and that the officers are control persons under Section 20(a) of the Securities Exchange Act of 1934. The Centre Water Boardcomplaint is filed a motion to remandon behalf of shareholders who purchased shares of the case back to state court. The defendants opposedCompany’s common stock between April 28, 2017 and July 25, 2019 (“Class Period”). On June 29, 2020, an amended complaint was filed in the Centre Water Board’s motion,Securities Class Action against Mohawk and its CEO Jeff Lorberbaum, based on the same claims and the parties await a ruling fromsame Class Period. The amended complaint alleges that the federal court on the motionCompany (1) engaged in fabricating revenues by attempting delivery to remand.
The Company has never manufactured perfluorinated compounds, but purchased them for use in the manufacture of its carpets priorcustomers that were closed and recognizing these attempts as sales; (2) overproduced product to 2007. The Gadsdenreport higher operating margins and Centre Water Boards aremaintained significant inventory that was not allegingsalable; and (3) valued certain inventory improperly or improperly delivered inventory with knowledge that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsdenit was defective 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.
would return it. The Company intends to pursue all available defenses relatedvigorously defend against the claims.
Government Subpoenas
On June 25, 2020, the Company received subpoenas issued by the U.S. Attorney’s Office for the Northern District of Georgia and the U.S. Securities and Exchange Commission on topics similar to these matters.those raised by the amended complaint in the Securities Class Action (the “Government Subpoenas”). Following the receipt of the Government Subpoenas and the amended complaint in the Securities Class Action, the Audit Committee of the Board of Directors (the “Audit Committee”), began an internal investigation into the matter. As of August 4, 2020, the Audit Committee, assisted by outside legal counsel and forensic accountants, has substantially completed its investigation. The Company does not believehas been responsive to the ongoing subpoenas and other document requests and will continue to cooperate fully with the governmental inquiries.
Delaware State Court Action
The Company and certain of its present and former executive officers were named as defendants in a putative state securities class action lawsuit filed in the Superior Court of the State of Delaware on January 30, 2020. The complaint alleges that defendants violated Sections 11 and 12 of the ultimate outcomesSecurities Act of these cases will have a material adverse effect1933. The complaint is filed on its financial condition, but there can be no assurances at this stage that the outcomes will not have a material adverse effect onbehalf of shareholders who purchased shares of the Company’s resultscommon stock in Mohawk Industries Retirement Plan 1 and Mohawk Industries Retirement Plan 2 between April 27, 2017 and July 25, 2019. On March 27, 2020, the Court granted a temporary stay of operations, liquiditythe litigation pending the earlier of either the close of fact discovery or cash flowsthe deadline to appeal the dismissal of the related Securities Class Action pending in the United States District Court for the Northern District of Georgia. The stay may be lifted according to the terms set forth in the Court’s Order to Stay Litigation. The Company intends to vigorously defend against the claims.
Derivative Action
The Company and certain of its executive officers and directors were named as defendants in a given period. Furthermore,derivative action filed in the United States District Court for the Northern District of Georgia on May 18, 2020. The complaint alleges that defendants breached their fiduciary duties to the Company cannot predict whether any additional civilby causing the Company to issue materially false and misleading statements. The complaint is filed on behalf of the Company and seeks to remedy fiduciary duty breaches occurring from April 28, 2017 – July 25, 2019. On July 20, 2020, the Court granted a temporary stay of the litigation pending the earlier of either the Securities Class Action defendants filing an answer to the operative complaint or regulatory actionsthe deadline to appeal the dismissal of the Securities Class Action. The stay may be lifted according to the terms set forth in the Court’s Order to Stay Litigation.The Company intends to vigorously defend against it may arise from the allegations in this matter.claims.
Belgian Tax Matter
In JanuaryBetween 2012 and 2014, the Company received a €23.8 million assessmentassessments from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position. The Belgian tax authority set aside the assessment in the third quarter of 2012 and refunded all related deposits, including interest income of €1.6 million earned on such deposits. However, on October 23, 2012, the Belgian tax authority notified the Company of its intent to increase the Company's taxable income for the year ended December 31, 2008 under a revised theory. On December 28, 2012, the Belgian tax authority issued assessments for thecalendar years ended December 31, 2005 and December 31, 2009,through 2010 in the amounts of €46.1 million, and €35.6 million, respectively, including penalties, but excluding interest. The Company filed a formal protest during the first quarter of 2013 relating to the new assessments. In September 2013, the Belgian tax authority denied the Company's protests, and the Company has brought these two years before the Court of First Appeal in Bruges. In December 2013, the Belgian tax authority issued additional assessments related to the years ended December 31, 2006, 2007, and 2010, in the amounts of €38.8 million, €39.6 million, €30.1 million, €35.6 million and €43.1 million, respectively, including penalties, but excluding interest. The Company filedBelgian tax authority denied the Company’s formal protests during the first quarter of 2014, refuting the Belgian tax authority's position for each of the years assessed. In the quarter ended June 28, 2014,against these assessments and the Company received a formal assessment for the year ended December 31, 2008, totaling €30.1 million, against which the Company also submitted its formal protest. All 4 additionalbrought all six years were brought before the Court of First Appeal in November 2014. In JanuaryBruges. The Court of 2015,First Appeal in Bruges ruled in favor of the Company meton 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 and agreed with the Belgian tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and apply the ruling to all of the open years (to the extent there are no additional facts/procedural arguments in the other years). In May 2017, the statute of limitation was extended to include the calendar year 2011.
On January 27, 2016, the Court of First Appeal in Bruges, Belgium 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. On September 17, 2019, the company pled its case to the Ghent Court of Special (Tax) Appeals and on October 1, 2019, the Court ruled in favor of the Company, re-confirming the rulings of the Court of First Appeals in Bruges with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016,12, 2020, the Belgian tax authority lodged its Notification of Appealfiled another revised assessment for the calendar year ending December 31, 2009, with the Ghent CourtCourt.
In March 2019, the Company received assessments from the Belgian tax authority for tax years 2011 through 2017 in the amount of Appeal.€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 may appeal.
In January 2020, the Belgian tax authority canceled the tax assessments for the years ending December 31, 2011 through 2017, inclusively. On March 10, 2020, a new notice of change was received for the year ending December 31, 2016 against which the Company has filed a protest on April 10, 2020. The new notice applies a new theory retroactively but does not yet quantify the amount of any proposed assessment.
The Company disagreescontinues to disagree with the views of the Belgian tax authority on this matterall matters referenced above 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'sCompany’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'sCompany’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 we are unable to estimate the amount or range of loss, if any, in excess of amounts accrued. Although there can be no assurances, theThe 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.
The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment, recycling and disposal of solid and hazardous materials and finished product, and the cleanup of contamination associated therewith. Because of the nature of the Company’s business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations. The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided accruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities 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'sCompany’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, 2016.2019, and Part II, Item 1A to our quarterly report on Form 10-Q for the period ended March 28, 2020. The risk factors disclosed in our Annual Report on Form 10-K,these reports, in addition to the other information set forth in this report, could materially affect our business, financial condition or results.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
On October 25, 2018, the Company announced that its Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $500 million in shares of its common stock. Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to trading plans in accordance with Rules 10b5-1 or 10b-18 under the Exchange Act or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock and the availability of alternative investment opportunities. No time limit was set for completion of repurchases under the new authorization and the program may be suspended or discontinued at any time. The new program replaces any previously authorized share repurchase programs. The Company purchased an aggregate of $442.9 million under the program through the first quarter of 2020 before deciding to put future purchases on hold until the economic environment improves.
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Item 3. | Defaults Upon Senior Securities |
Item 3.Defaults Upon Senior Securities
None.
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Item 4. | Mine Safety Disclosures |
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
The deadlines for stockholders to submit proposals and nominations
None.
Any proposal that a stockholder desires to include in the Company’s proxy statement for presentation at the 2018 annual meeting must be received by the Company at Mohawk Industries, Inc., P.O. Box 12069, 160 South Industrial Boulevard, Calhoun, Georgia 30701, Attention: Secretary, on or before December 7, 2017 and must comply with the requirements of SEC Rule 14a-8. In addition, any stockholder who intends to present a director nomination or other proposal at the 2018 annual meeting, other than through inclusion in the Company’s proxy statement pursuant to SEC Rule 14a-8, must provide the Company with advance notice of such nomination or other stockholder proposal no earlier than December 7, 2017, and no later than February 20, 2018, and provide all of the information specified under the Company’s bylaws. A copy of the Company’s bylaws may be obtained by written request at Mohawk Industries, Inc., P.O. Box 12069, 160 South Industrial Boulevard, Calhoun, Georgia 30701, Attention: Secretary.
Item 6.Exhibits
Description |
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No.4.1 | | Description |
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10.1* | | Third Supplemental Indenture, dated as of September 11, 2017,May 14, 2020, by and among Mohawk Capital Finance S.A., as issuer,between Mohawk Industries, Inc., as parent guarantor and U.S. Bank National Association, as trustee (incorporated hereintrustee. (Incorporated by reference to Exhibit 4.1 to4.2 of the Company’s Current Report on Form 8-K filed on September 11, 2017). May 18, 2020.) |
10.2*4.2 | | |
4.3 | | Fourth Supplemental Indenture, dated as September 11, 2017,of June 12, 2020, by and among Mohawk Capital Finance S.A., as issuer, Mohawk Industries, Inc., as parent guarantor, U.S. Bank National Association, as trustee, initial registrar and transfer agent and Elavon Financial Services DAC, UK Branch, as initial paying agent and calculation agent (incorporated hereinagent. (Incorporated by reference to Exhibit 4.2 toof the Company’s Current Report on Form 8-K filed on September 11, 2017).June 12, 2020.) |
4.4 | | Note for Senior Notes due 2027. (Incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on June 12, 2020.) |
10.1 | | Credit Agreement, dated as of April 7, 2020, by and among the Company, as borrower, certain of its domestic subsidiaries, as guarantors, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 13, 2020.) |
10.2 | | First Amendment to Credit Agreement, dated as of May 7, 2020, by and among the Company, the guarantors party thereto, Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 7, 2020.) |
10.3 | | First Amendment to Second Amended and Restated Credit Agreement, dated as of April 7, 2020, by and among the Company and certain of its subsidiaries, as borrowers, Wells Fargo Bank, National Association, as administrative agent, swing line lender, and an L/C issuer, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on April 13, 2020.) |
10.4 | | Second Amendment to Second Amended and Restated Credit Agreement, dated as of May 7, 2020, by and among the Company and certain of its subsidiaries, as borrowers, Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on May 7, 2020.) |
10.5 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
95.1 | | |
101.INS101.SCH | | XBRL Instance Document. |
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. |
*Indicates exhibit incorporated by reference.
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.
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| | | | MOHAWK INDUSTRIES, INC. |
| | | | (Registrant) |
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Dated: | August 6, 2020 | By: | | MOHAWK INDUSTRIES, INC. |
| | | | (Registrant) |
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Dated: | November 3, 2017 | By: | | /s/ Jeffrey S. Lorberbaum |
| | | | JEFFREY S. LORBERBAUM |
| | | | Chairman and Chief Executive Officer |
| | | | (principal executive officer) |
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Dated: | November 3, 2017August 6, 2020 | By: | | /s/ Frank H. Boykin |
| | | | FRANK H. BOYKIN |
| | | | Chief Financial Officer |
| | | | (principal financial officer) |