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 20172018 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 sixthree months ended JuneMarch 30, 20182019 and July 1, 2017,March 31, 2018, the change in the U.S. dollar value of the Company'sCompany’s euro denominated debt was a decrease of $15,984$11,233 ($11,2888,532 net of taxes) and an increase of $45,314$16,047 ($28,32113,043 net of taxes), respectively, which is recorded in the foreign currency translation adjustment component of accumulated other comprehensive income (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
During the first quarter of 2018, the Company completed the acquisition of three businesses in the Flooring ROW segment for $24,410,$24,610, resulting in a preliminary goodwill allocation of $12,548$12,874 and intangibles subject to amortization of $7.
On April 4, 2017, the Company completed its purchase of Emilceramica S.r.l (“Emil”), a ceramic company in Italy. The total value of the acquisition was $186,099. The Emil acquisition will enhance the Company'sCompany’s cost position and strengthen its combined brand and distribution in Europe. The acquisition'sacquisition’s results and purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition. The Company'sCompany’s acquisition of Emil resulted in a goodwill allocation of $59,491, indefinite-lived tradename intangible asset of $16,196 and an intangible asset subject to amortization of $2,348. The goodwill is not expected to be deductible for tax purposes. The factors contributing to the recognition of the amount of goodwill include product, sales and manufacturing synergies. The Emil results are reflected in the Global Ceramic segment and the results of Emil'sEmil’s operations are not material to the Company'sCompany’s consolidated results of operations.
During the second quarter of 2017, the Company completed the acquisition of two businesses in the Global Ceramic segment for $37,250, resulting in a goodwill allocation of $1,002. The Company also completed the acquisition of a business in the Flooring NA segment for $26,623.
During the first quarter of 2017, the Company acquired certain assets of a distribution business in the Flooring ROW segment for $1,407, resulting in intangible assets subject to amortization of $827.
3. Revenue from Contracts with Customers
The Company historically records contract liabilities when it receives payment prior to fulfilling a performance obligation. Contract liabilities related to revenues are recorded in accounts payable and accrued expenses on the accompanying condensed consolidating balance sheets. The Company had contract liabilities of $42,938$34,665 and $29,124$34,486 as of JuneMarch 30, 20182019 and January 1, 2018,2019, respectively.
Incremental costs of obtaining a contract is recorded as an expense when incurred in selling, general and administrative expenses if the amortization period is less than one year.
Shipping and handling activities performed after control has been transferred is accounted for as a fulfillment cost in cost of sales.
The following table presents the Company’s segment revenues disaggregated by the geographical market location of customer sales and product categories for the three months ended JuneMarch 30, 20182019 and July 1, 2017:March 31, 2018:
4. Restructuring, acquisition and integration-related costs
The Company incurs costs in connection with acquiring, integrating and restructuring acquisitions and in connection with its global cost-reduction/productivity initiatives. For example:
In connection with acquisition activity, the Company typically incurs costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and
Restructuring, acquisition transaction and integration-related costs consisted of the following during the three and six months ended JuneMarch 30, 20182019 and July 1, 2017:March 31, 2018:
The Company expects the remaining severance and other restructuring costs to be paid over the next 12 months.
6. Inventories
7. Goodwill and intangible assets
|
| | | |
| Tradenames |
Balance as of December 31, 2018 | $ | 707,380 |
|
Intangible assets acquired during the period | (874 | ) |
Currency translation during the period | (3,732 | ) |
Balance as of March 30, 2019 | $ | 702,774 |
|
|
| | | |
| Tradenames |
Balance as of December 31, 2017 | $ | 644,208 |
|
Intangible assets acquired during the period | — |
|
Currency translation during the period | (13,843 | ) |
Balance as of June 30, 2018 | $ | 630,365 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangible assets subject to amortization:
|
| | | | | | | | | | | | |
Gross carrying amounts: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2018 | $ | 651,012 |
| | 254,483 |
| | 6,535 |
| | 912,030 |
|
Intangible assets recognized during the period | 2,092 |
| | — |
| | — |
| | 2,092 |
|
Currency translation during the period | (6,758 | ) | | (5,015 | ) | | 74 |
| | (11,699 | ) |
Balance as of March 30, 2019 | $ | 646,346 |
| | 249,468 |
| | 6,609 |
| | 902,423 |
|
| | | | | | | |
Accumulated amortization: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2018 | $ | 406,386 |
| | 249,988 |
| | 1,227 |
| | 657,601 |
|
Amortization during the period | 6,194 |
| | 533 |
| | 2 |
| | 6,729 |
|
Currency translation during the period | (4,772 | ) | | (4,920 | ) | | (5 | ) | | (9,697 | ) |
Balance as of March 30, 2019 | $ | 407,808 |
| | 245,601 |
| | 1,224 |
| | 654,633 |
|
| | | | | | | |
Intangible assets subject to amortization, net | $ | 238,538 |
| | 3,867 |
| | 5,385 |
| | 247,790 |
|
|
| | | | | | | | | | | | |
Gross carrying amounts: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2017 | $ | 625,263 |
| | 266,969 |
| | 6,825 |
| | 899,057 |
|
Intangible assets recognized during the period | — |
| | — |
| | 7 |
| | 7 |
|
Currency translation during the period | (11,108 | ) | | (7,185 | ) | | (123 | ) | | (18,416 | ) |
Balance as of June 30, 2018 | $ | 614,155 |
| | 259,784 |
| | 6,709 |
| | 880,648 |
|
| | | | | | | |
Accumulated amortization: | Customer relationships | | Patents | | Other | | Total |
Balance as of December 31, 2017 | $ | 390,428 |
| | 259,908 |
| | 1,162 |
| | 651,498 |
|
Amortization during the period | 13,875 |
| | 1,155 |
| | 20 |
| | 15,050 |
|
Currency translation during the period | (7,051 | ) | | (7,006 | ) | | (10 | ) | | (14,067 | ) |
Balance as of June 30, 2018 | $ | 397,252 |
| | 254,057 |
| | 1,172 |
| | 652,481 |
|
| | | | | | | |
Intangible assets subject to amortization, net | $ | 216,903 |
| | 5,727 |
| | 5,537 |
| | 228,167 |
|
|
| | | | | | |
| Three Months Ended |
| March 30, 2019 | | March 31, 2018 |
Amortization expense | $ | 6,729 |
| | 7,567 |
|
|
| | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Amortization expense | $ | 7,483 |
| | 9,322 |
| | 15,050 |
| | 19,381 |
|
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
|
| | | | | | |
| March 30, 2019 | | December 31, 2018 |
Outstanding checks in excess of cash | $ | 3,626 |
| | 14,624 |
|
Accounts payable, trade | 914,205 |
| | 811,879 |
|
Accrued expenses | 407,386 |
| | 430,431 |
|
Product warranties | 46,129 |
| | 47,511 |
|
Accrued interest | 7,197 |
| | 21,908 |
|
Accrued compensation and benefits | 192,730 |
| | 197,513 |
|
Total accounts payable and accrued expenses | $ | 1,571,273 |
| | 1,523,866 |
|
|
| | | | | | |
| June 30, 2018 | | December 31, 2017 |
Outstanding checks in excess of cash | $ | 7,325 |
| | 8,879 |
|
Accounts payable, trade | 951,200 |
| | 810,034 |
|
Accrued expenses | 384,147 |
| | 363,919 |
|
Product warranties | 38,973 |
| | 39,035 |
|
Accrued interest | 16,725 |
| | 22,363 |
|
Accrued compensation and benefits | 191,191 |
| | 207,442 |
|
Total accounts payable and accrued expenses | $ | 1,589,561 |
| | 1,451,672 |
|
9. Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss) by component, for the sixthree months ended JuneMarch 30, 20182019 are as follows:
|
| | | | | | | | | |
| Foreign currency translation adjustments | | Pensions, net of tax | | Total |
Balance as of December 31, 2018 | $ | (782,102 | ) | | (9,506 | ) | | (791,608 | ) |
Current period other comprehensive income | 13,953 |
| | 108 |
| | 14,061 |
|
Balance as of March 30, 2019 | $ | (768,149 | ) | | (9,398 | ) | | (777,547 | ) |
|
| | | | | | | | | |
| Foreign currency translation adjustments | | Pensions, net of tax | | Total |
Balance as of December 31, 2017 | $ | (547,927 | ) | | (10,600 | ) | | (558,527 | ) |
Current period other comprehensive income | (112,829 | ) | | 223 |
| | (112,606 | ) |
Balance as of June 30, 2018 | $ | (660,756 | ) | | (10,377 | ) | | (671,133 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Leases
Effective January 1, 2019 the Company adopted ASC 842, which requires recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet, based on the present value of the future minimum rental payments for existing operating leases. The Company adopted the provisions of ASC 842 on January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption in line with the new transition method allowed under ASU 2018-11. ASC 842 provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients” which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight and elected the practical expedient pertaining to land easements. The new standard also provides practical expedients for an entity’s ongoing accounting for leases. The Company elected the short-term lease exemption for all leases that qualify, meaning the Company will not recognize ROU assets or lease liabilities for leases with terms shorter than twelve months. The Company also elected the practical expedient to not separate lease and non-lease components for a majority of its asset classes, including real estate and most equipment.
The Company measures the ROU assets and liabilities based on the present value of the future minimum lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and non-lease components of the agreement, as well as any variable rent payments that depend on an index, initially measured using the index at the lease commencement date. The ROU assets are adjusted for any initial direct costs incurred less any lease incentives received, in addition to payments made on or before the commencement date of the lease. The Company recognizes lease expense for leases on a straight-line basis over the lease term.
As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company’s credit spread adjusted for current market factors and foreign currency rates. The Company also made a policy election to determine its incremental borrowing rate, at the initial application date, using the total lease term and the total minimum rental payments, as the Company believes this rate is more indicative of the implied financing cost.
The Company determines if a contract is or contains a lease at inception. The Company has operating and finance leases for service centers, warehouses, showrooms, and machinery and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company enters into lease contracts ranging from 1 to 60 years with a majority of the Company’s lease terms ranging from 1 to 8 years.
Some leases include one or more options to renew, with renewal terms that can extend the lease term from 3 to 10 years or more. The exercise of these lease renewal options is at the Company’s sole discretion. An insignificant number of our leases include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
Certain of our leases include rental payments that will adjust periodically for inflation or certain adjustments based on step increases. An insignificant number of our leases contain residual value guarantees and none of our agreements contain material restrictive covenants. Variable rent expenses consist primarily of maintenance, property taxes and charges based on usage.
We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of lease costs are as follows:
|
| | | | | | | | | |
Three Months Ended March 30, 2019 | Cost of Goods Sold | | Selling, General and Administrative | | Total |
Operating lease costs | | | | | |
Fixed | $ | 7,688 |
| | 24,455 |
| | 32,143 |
|
Short-term | 1,439 |
| | 2,909 |
| | 4,348 |
|
Variable | 2,278 |
| | 5,200 |
| | 7,478 |
|
Sub-leases | (84 | ) | | (133 | ) | | (217 | ) |
| 11,321 |
| | 32,431 |
| | 43,752 |
|
Finance lease costs | | | | | |
Amortization of leased assets | — |
| | 432 |
| | 432 |
|
Interest on lease liabilities | — |
| | 31 |
| | 31 |
|
| — |
| | 463 |
| | 463 |
|
Net lease costs | $ | 11,321 |
| | 32,894 |
| | 44,215 |
|
Supplemental balance sheet information related to leases is as follows:
|
| | | | | |
| Classification | | March 30, 2019 |
Assets | | | |
Operating Leases | | | |
Right of use operating lease assets | Right of use operating lease assets | | $ | 320,800 |
|
Finance Leases | | | |
Property, plant and equipment, gross | Property, plant and equipment | | 9,086 |
|
Accumulated depreciation | Accumulated depreciation | | (2,817 | ) |
Property, plant and equipment, net | Property, plant and equipment, net | | 6,269 |
|
Total lease assets | | | $ | 327,069 |
|
| | | |
Liabilities | | | |
Operating Leases | | | |
Other current | Current operating lease liabilities | | $ | 99,642 |
|
Non-current | Non-current operating lease liabilities | | 227,595 |
|
Total operating liabilities | | | 327,237 |
|
Finance Leases | | | |
Short-term debt | Short-term debt and current portion of long-term debt | | 1,179 |
|
Long-term debt | Long-term debt, less current portion | | 5,130 |
|
Total finance liabilities | | | 6,309 |
|
Total lease liabilities | | | $ | 333,546 |
|
| | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Maturities of lease liabilities are as follows:
|
| | | | | | | | | |
Year ending December 31, | Finance Leases | | Operating Leases | | Total |
2019 (excluding the three months ended March 30, 2019) | $ | 932 |
| | 81,796 |
| | 82,728 |
|
2020 | 1,028 |
| | 100,986 |
| | 102,014 |
|
2021 | 608 |
| | 72,184 |
| | 72,792 |
|
2022 | 412 |
| | 46,168 |
| | 46,580 |
|
2023 | 412 |
| | 23,123 |
| | 23,535 |
|
Thereafter | 3,388 |
| | 30,289 |
| | 33,677 |
|
Total lease payments | 6,780 |
| | 354,546 |
| | 361,326 |
|
Less imputed interest | 471 |
| | 27,309 |
| | |
Present value, Total | $ | 6,309 |
| | 327,237 |
| | |
The Company had approximately $5,000 of leases that commenced after March 30, 2019 that created rights and obligations to the Company. These leases are not included in the above maturity schedule.
For additional information regarding the Company’s Commitments and Contingencies as of December 31, 2018 as disclosed for capital and operating leases, see Note 14 in its 2018 Annual Report filed on Form 10-K.
Lease term and discount rate are as follows:
|
| | |
| March 30, 2019 |
Weighted Average Remaining Lease Term | |
Operating Leases | 4.16 years |
|
Finance Leases | 8.89 years |
|
| |
Weighted Average Discount Rate | |
Operating Leases | 3.3 | % |
Finance Leases | 2.1 | % |
Supplemental cash flow information related to leases was as follows:
|
| | | |
| Three Months Ended |
| March 30, 2019 |
Cash paid for amounts included in measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 31,557 |
|
Operating cash flows from finance leases | 31 |
|
Financing cash flows from finance leases | 371 |
|
Right-of-use assets obtained in exchange for lease obligations: | |
Operating Leases | 22,243 |
|
Finance Leases | — |
|
Amortization: | |
Amortization of Right of use operating lease assets (1) | 28,641 |
|
(1) Amortization of Right of use operating lease assets during the period is reflected in Other assets and prepaid expenses on the Condensed Consolidated Statements of Cash Flows.
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 4169 restricted stock units ("RSUs"(“RSUs”) at a weighted average grant-date fair value of $204.35$137.71 per unit for the three months ended JuneMarch 30, 2018.2019. The Company granted 127 RSUs123 at a weighted average grant-date fair value of $237.94$239.04 per unit for the sixthree months ended June 30,March 31, 2018. The Company granted 153 RSUs at a weighted average grant-date fair value of $226.85 per unit for the six months ended July 1, 2017. The Company recognized stock-based compensation costs related to the issuance of RSUs of $13,645$5,789 ($10,0974,283 net of taxes) and $13,875$7,948 ($8,4195,882 net of taxes) for the three months ended JuneMarch 30, 20182019 and July 1, 2017, 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 $21,593 ($15,979 net of taxes) and $23,424 ($14,214 net of taxes) for the six months ended June 30,March 31, 2018, and July 1, 2017, 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 $32,114$18,759 as of JuneMarch 30, 2018,2019, and will be recognized as expense over a weighted-average period of approximately 1.601.85 years. The Company also recognizeddid not recognize any stock-based compensation costs related to stock options of $6 ($4 net of taxes) for the sixthree months ended July 1, 2017 which was allocated to cost of salesMarch 30, 2019 and selling, general and administrative expenses.March 31, 2018, respectively.
11.12. Other expense (income), net
Other expense (income), net is as follows:
|
| | | | | | |
| Three Months Ended |
| March 30, 2019 | | March 31, 2018 |
Foreign currency losses (gains), net | $ | (1,110 | ) | | 1,405 |
|
Release of indemnification asset | — |
| | 1,749 |
|
All other, net | (2,626 | ) | | 844 |
|
Total other expense, net | $ | (3,736 | ) | | 3,998 |
|
|
| | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Foreign currency losses (gains), net | $ | 3,317 |
| | 5,008 |
| | 4,722 |
| | 2,685 |
|
Release of indemnification asset | — |
| | — |
| | 1,749 |
| | — |
|
All other, net | (1,227 | ) | | (2,006 | ) | | (383 | ) | | (2,515 | ) |
Total other expense, net | $ | 2,090 |
| | 3,002 |
| | 6,088 |
| | 170 |
|
12.13. Income Taxes
For the quarter ended JuneMarch 30, 2018,2019, the Company recorded income tax expense of $118,809$37,018 on earnings before income taxes of $316,354$158,593 for an effective tax rate of 37.6%23.3%, as compared to an income tax expense of $82,682$47,632 on earnings before income taxes of $344,430,$256,873, for an effective tax rate of 24.0%18.5% for the quarter ended July 1, 2017. ForMarch 31, 2018. The difference in the six months ended June 30, 2018, the Company recorded income tax expense of $166,441 on earnings before income taxes of $573,227 for an effective tax rate of 29.0% as compared to an income tax expense of $151,040 on earnings before income taxes of $613,844, for an effective tax rate of 24.6% for the six months ended July 1, 2017.
The effective tax rates for the three and six months ended June 30, 2018 were unfavorably impacted by Notice 2018-26, issuedcomparative periods was caused by the Departmentgeographic dispersion of the Treasury on April 2, 2018, which provided additional guidance on determining the amount of gross income to be recognized by U.S. taxpayers under the deemed repatriation of previously deferred foreign earnings. The effective tax ratesprofits and losses for the threerespective periods; the elimination of an annual tax benefit in Italy; and six months ended June 30, 2018 were favorably impacted by tax reforms in Belgium and the U.S., which reduced the statutory rates from 33.99% to 29.58%, and 35% to 21%, respectively. The effective tax rates for the three and six months ended July 1, 2017 were favorably impacted bya discrete items that occurred in the quarter ended July 1, 2017.stock expense.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the income tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of the TCJA for companies to complete the accounting under ASC 740, Income Taxes ("ASC 740"). In accordance with SAB 118, a company must (1) reflect the income tax effects of those aspects of TCJA for which the accounting under ASC 740 is complete, (2) record a provisional estimate for those aspects of TCJA for which the accounting is incomplete but a reasonable estimate can be made, and/or (3) continue to apply ASC 740 on the basis of the provisions of tax laws in effect immediately before the enactment of the TCJA if no reasonable estimate can be made. The Company has not completed
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
its accounting14. Stockholders’ Equity
The following tables reflect the changes in stockholders’ equity for the income tax effects of the TCJA but this will be completed within the one-year time period permitted by SAB 118.three months ended March 30, 2019 and March 31, 2018 (in thousands).
As disclosed in its December 31, 2017 10-K, the Company was able to make reasonable estimates and recorded a provisional amount in 2017 for the reduction of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. This estimate may be affected in future periods by other analysis to the TCJA, including, but not limited to, calculations of deemed repatriation of deferred foreign income and the state tax effect, expenditures that qualify for immediate expensing, and amounts limited for payments to covered employees. The Company analyzed Notice 2018-26, and has recorded $54,674 of additional net tax expense resulting from an increase of $100,865 for estimated Deemed Repatriation Transition Tax ("Transition Tax"), and decreases of $27,485 and $18,706 for reversals of unrecognized tax liabilities and transaction tax liabilities, respectively, during the quarter ended June 30, 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Stockholders’ Equity |
| Redeemable Noncontrolling Interest | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Noncontrolling Interest | Total Stockholders’ Equity |
| Shares | Amount | Shares | Amount |
| | | | | | | | | | |
January 1, 2019 | $ | — |
| 79,656 |
| $ | 797 |
| $ | 1,852,173 |
| $ | 6,588,197 |
| $ | (791,608 | ) | (7,349 | ) | $ | (215,745 | ) | $ | 6,245 |
| $ | 7,440,059 |
|
Shares issued under employee and director stock plans | — |
| 115 |
| 1 |
| (4,478 | ) | — |
| — |
| — |
| 29 |
| — |
| (4,448 | ) |
Stock-based compensation expense | — |
| — |
| — |
| 5,789 |
| — |
| — |
| — |
| — |
| — |
| 5,789 |
|
Accretion of redeemable noncontrolling interest | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Noncontrolling earnings | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (10 | ) | (10 | ) |
Currency translation adjustment on non-controlling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Currency translation adjustment | — |
| — |
| — |
| — |
| — |
| 13,953 |
| — |
| — |
| 9 |
| 13,962 |
|
Prior pension and post-retirement benefit service cost and actuarial gain / loss | — |
| — |
| — |
| — |
| — |
| 108 |
| — |
| — |
| — |
| 108 |
|
Net income | — |
| — |
| — |
| — |
| 121,585 |
| — |
| — |
| — |
| — |
| 121,585 |
|
March 30, 2019 | $ | — |
| 79,771 |
| $ | 798 |
| $ | 1,853,484 |
| $ | 6,709,782 |
| $ | (777,547 | ) | (7,349 | ) | $ | (215,716 | ) | $ | 6,244 |
| $ | 7,577,045 |
|
The Transition Tax is a tax on previously untaxed earnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries, as well as the amount of non-U.S. income tax paid on such earnings. The Company made a provisional estimate of the Transition Tax obligation in 2017 and updated the provisional amount in the second quarter of 2018; however, the Company is continuing to gather additional information to compute a more precise amount. As of June 30, 2018 and December 31, 2017, the Company has a liability of $206,030 and $105,165, respectively, related to Transition Tax and will elect to pay the transition tax liability over the 8-year deferral period, with 8% due in each of the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the eighth year. As of June 30, 2018, $17,522 of the Transition Tax obligation is recorded in accounts payable and accrued expenses, with the remaining $188,508 recorded in other long-term liabilities within the accompanying condensed consolidating balance sheets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Stockholders’ Equity |
| Redeemable Noncontrolling Interest | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Noncontrolling Interest | Total Stockholders’ Equity |
| Shares | Amount | Shares | Amount |
| | | | | | | | | | |
January 1, 2018 | $ | 29,463 |
| 81,771 |
| $ | 818 |
| $ | 1,828,131 |
| $ | 6,004,506 |
| $ | (558,527 | ) | (7,350 | ) | $ | (215,766 | ) | $ | 7,847 |
| $ | 7,067,009 |
|
Shares issued under employee and director stock plans | — |
| 112 |
| 1 |
| (9,004 | ) | — |
| — |
| — |
| 17 |
| — |
| (8,986 | ) |
Stock-based compensation expense | — |
| — |
| — |
| 7,948 |
| — |
| — |
| — |
| — |
| — |
| 7,948 |
|
Accretion of redeemable noncontrolling interest | 305 |
| — |
| — |
| — |
| (305 | ) | — |
| — |
| — |
| — |
| (305 | ) |
Noncontrolling earnings | 444 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 31 |
| 31 |
|
Currency translation adjustment on non-controlling interests | 711 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 188 |
| 188 |
|
Currency translation adjustment | — |
| — |
| — |
| — |
| — |
| 71,494 |
| — |
| — |
| — |
| 71,494 |
|
Prior pension and post-retirement benefit service cost and actuarial gain / loss | — |
| — |
| — |
| — |
| — |
| (135 | ) | — |
| — |
| — |
| (135 | ) |
Net income | — |
| — |
| — |
| — |
| 208,766 |
| — |
| — |
| — |
| — |
| 208,766 |
|
March 31, 2018 | $ | 30,924 |
| 81,883 |
| $ | 819 |
| $ | 1,827,075 |
| $ | 6,212,966 |
| $ | (487,168 | ) | (7,350 | ) | $ | (215,749 | ) | $ | 8,066 |
| $ | 7,346,009 |
|
Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Accordingly, the accounting is incomplete, and the Company is not yet able to make reasonable estimates of the effects; therefore, no provisional estimates were recorded. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend on complex calculations that the Company is unable to reasonably estimate at this time.
19
The Company will continue to evaluate the interpretations of the TCJA, the assumptions made within the calculations, and future guidance that may be issued to determine the impact, if any, on these provisional calculations, which may materially change the Company’s tax determinations.
13.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Earnings per share
Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per common share assumes the exercise of outstanding stock options and the vesting of RSUs using the treasury stock method when the effects of such assumptions are dilutive. A reconciliation of net earnings available to common stockholders and weighted-average common shares outstanding for purposes of calculating basic and diluted earnings per share is as follows:
|
| | | | | | |
| Three Months Ended |
| March 30, 2019 | | March 31, 2018 |
Net earnings attributable to Mohawk Industries, Inc. | $ | 121,585 |
| | 208,766 |
|
Accretion of redeemable noncontrolling interest (1) | — |
| | (305 | ) |
Net earnings available to common stockholders | $ | 121,585 |
| | 208,461 |
|
| | | |
Weighted-average common shares outstanding-basic and diluted: | | | |
Weighted-average common shares outstanding—basic | 72,342 |
| | 74,453 |
|
Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net | 304 |
| | 476 |
|
Weighted-average common shares outstanding-diluted | 72,646 |
| | 74,929 |
|
| | | |
Earnings per share attributable to Mohawk Industries, Inc. | | | |
Basic | $ | 1.68 |
| | 2.80 |
|
Diluted | $ | 1.67 |
| | 2.78 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Net earnings attributable to Mohawk Industries, Inc. | $ | 196,586 |
| | 260,681 |
| | 405,352 |
| | 461,235 |
|
Accretion of redeemable noncontrolling interest (a) | — |
| | — |
| | (305 | ) | | — |
|
Net earnings available to common stockholders | $ | 196,586 |
| | 260,681 |
| | 405,047 |
| | 461,235 |
|
| | | | | | | |
Weighted-average common shares outstanding-basic and diluted: | | | | | | | |
Weighted-average common shares outstanding—basic | 74,597 |
| | 74,327 |
| | 74,525 |
| | 74,269 |
|
Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net | 340 |
| | 474 |
| | 403 |
| | 504 |
|
Weighted-average common shares outstanding-diluted | 74,937 |
| | 74,801 |
| | 74,928 |
| | 74,773 |
|
| | | | | | | |
Earnings per share attributable to Mohawk Industries, Inc. | | | | | | | |
Basic | $ | 2.64 |
| | 3.51 |
| | 5.44 |
| | 6.21 |
|
Diluted | $ | 2.62 |
| | 3.48 |
| | 5.41 |
| | 6.17 |
|
(a)(1) Represents the accretion of the Company'sCompany’s redeemable noncontrolling interest to redemptive value resulting from the May 12, 2015 purchase of approximately 90% of all outstanding shares of the KAI Group.value. The Company has had theholder put this option to call and the holder the option to put this noncontrolling interest since May 12, 2018.Company on December 20, 2018 for $33,884.
14.16. Segment reporting
The Company has three reporting segments: the Global Ceramic segment, the Flooring NA segment and the Flooring ROW segment. The Global Ceramic segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, quartz and porcelain slab countertops, which it distributes primarily in North America, Europe and Russia through its network of regional distribution centers and Company-operated service centers. The segment’s product lines are sold through Company-operated service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Flooring NA segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet pad, hardwood, laminate and vinyl products, including LVT, which it distributes through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment’s product lines are sold through various selling channels, including independent floor covering retailers, home centers, mass merchandisers, department stores, shop at home, buying groups, commercial dealers and commercial end users. The Flooring ROW segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, carpets, rugs, roofing elements, insulation boards, medium-density fiberboard, chipboards, sheet vinyl and LVT, which it distributes primarily in Europe, Russia, Australia and RussiaNew Zealand through various selling channels, which include retailers, independent distributors and home centers.
The accounting policies for each operating segment are consistent with the Company’s policies for the consolidated financial statements. Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses attributable to each segment are estimated and allocated accordingly. Segment performance is evaluated based on operating income.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information is as follows:
| | | Three Months Ended | | Six Months Ended | Three Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 | March 30, 2019 | | March 31, 2018 |
Net sales: | | | | | | | | | | |
Global Ceramic segment | $ | 929,297 |
| | 902,670 |
| | 1,805,845 |
| | 1,687,639 |
| $ | 898,352 |
| | 876,548 |
|
Flooring NA segment | 1,057,570 |
| | 1,040,299 |
| | 2,007,928 |
| | 1,979,795 |
| 921,980 |
| | 950,358 |
|
Flooring ROW segment | 590,147 |
| | 510,069 |
| | 1,175,443 |
| | 1,006,249 |
| 622,158 |
| | 585,296 |
|
Intersegment sales | — |
| | — |
| | — |
| | — |
| — |
| | — |
|
Total | | $ | 2,442,490 |
| | 2,412,202 |
|
| $ | 2,577,014 |
| | 2,453,038 |
| | 4,989,216 |
| | 4,673,683 |
| | | |
Operating income (loss): | | | | | | | | | | |
Global Ceramic segment | $ | 134,760 |
| | 152,557 |
| | 248,177 |
| | 268,593 |
| $ | 84,335 |
| | 113,417 |
|
Flooring NA segment | 100,662 |
| | 127,482 |
| | 175,410 |
| | 219,624 |
| 649 |
| | 74,748 |
|
Flooring ROW segment | 100,166 |
| | 86,052 |
| | 189,226 |
| | 162,147 |
| 90,431 |
| | 89,060 |
|
Corporate and intersegment eliminations | (9,281 | ) | | (10,266 | ) | | (18,107 | ) | | (19,755 | ) | (10,085 | ) | | (8,826 | ) |
| $ | 326,307 |
| | 355,825 |
| | 594,706 |
| | 630,609 |
| |
Total | | $ | 165,330 |
| | 268,399 |
|
|
| | | | | | |
| March 30, 2019 | | December 31, 2018 |
Assets: | | | |
Global Ceramic segment | $ | 5,503,807 |
| | 5,194,030 |
|
Flooring NA segment | 4,020,336 |
| | 3,938,639 |
|
Flooring ROW segment | 3,799,591 |
| | 3,666,617 |
|
Corporate and intersegment eliminations | 281,341 |
| | 299,837 |
|
Total | $ | 13,605,075 |
| | 13,099,123 |
|
|
| | | | | | |
| June 30, 2018 | | December 31, 2017 |
Assets: | | | |
Global Ceramic segment | $ | 4,974,791 |
| | 4,838,310 |
|
Flooring NA segment | 3,927,190 |
| | 3,702,137 |
|
Flooring ROW segment | 3,701,419 |
| | 3,245,424 |
|
Corporate and intersegment eliminations | 290,639 |
| | 308,982 |
|
| $ | 12,894,039 |
| | 12,094,853 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
15.17. Commitments and contingencies
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
Alabama Municipal Litigation
In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing specific perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board'sBoard’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. On February 22, 2018, the Court of Appeals dismissed the appeal for lack of jurisdiction. 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. On June 19, 2017, the defendants removed this case to the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversity of citizenship and fraudulent joinder. The Centre Water Board filed a motion to remand the case back to state court, and the defendants opposed the Centre Water Board’s motion. The federal court granted Centre Water Board's motion for remand. On December 6, 2017,
Certain defendants, including the Company, appealed the federal court's determination that co-defendant ICI was properly joined as a party to thatfiled dispositive motions in each case as well. On January 31, 2018, the Court of Appeals dismissed the appeal for lack of jurisdiction. ICI's presence in the case deprives the federal court of jurisdiction over the case.
The Company filed a motion to dismiss in the Centre Water Board case on November 30, 2017 and a motion for judgment on the pleadings in the Gadsden Water Board case on October 25, 2017. Both motions arguedarguing that the courts did not havestate court lacks personal jurisdiction over them. Both state courts denied those motions. In June and September 2018, certain defendants, including the Company, and that the complaints failed to state a claim on which relief could be granted. The Centre Water Board court denied the motion on May 15, 2018. On June 19, 2018, the Company filed a petition topetitioned the Alabama Supreme Court seeking a ruling thatfor Writs of Mandamus directing each lower court to enter an order granting the trial court erred in denying the motion to dismissdefendants’ dispositive motions on the personal jurisdiction argument. That petition remains pending. The motion for judgment ongrounds. Those petitions have been fully briefed and the pleadings inCompany awaits a decision from the Gadsden Water Board case also remains pending.Alabama Supreme Court.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has never manufactured the perfluorinated compounds at issue but purchased them for use in the manufacture of its carpets prior to 2007. The Gadsden and Centre Water Boards are not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsden and Centre Water Boards are seeking lost profits based on allegations that their customers decreased water purchases, as well as reimbursement for the cost of a filter and punitive damages.
Belgian Tax Matter
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 have been brought before the Court of First Appeal in November 2014. In January of 2015, the Company met with the Court of First Appeal in Bruges Belgium and agreed with the Belgium tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2011.
On January 27, 2016, the Court of First Appeal in Bruges, Belgium ruled in favor of the Company on January 27, 2016, with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal. On2009; and on June 13, 2018, the Court of First Appeal in Bruges Belgium again ruled in favor of the Company with respect to the calendar years ending December 31, 2006, December 31, 2007, December 31, 2008 and December 31, 2010. The Belgian tax authority has lodged its Notification of Appeal for all six years with the Ghent Court of Appeal. As of March 2019, the Company has now received assessments from the Belgian tax authority for tax years 2011 through 2017 in the amount of €40,617, €39,732, €11,358, €23,919, €30,610, €93,145 and €79,933 respectively, including penalties, but excluding interest. The Company intends to file formal protests based on these assessments in a timely manner. The assessments are largely based on the same facts underlying the positive rulings, fromwhich the Court of First Appeal in Bruges on all calendar years 2005 through 2010, inclusive.Belgian tax authority is appealing.
The Company continues to disagree with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company'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 the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
16.18. Debt
Senior Credit Facility
On March 26, 2015, the Company amended and restated its 2013 senior credit facility increasing its size from $1,000,000 to $1,800,000 and extending the maturity from September 25, 2018 to March 26, 2020 (as amended and restated, the "2015“2015 Senior Credit Facility"Facility”). The 2015 Senior Credit Facility eliminated certain provisions in the 2013 Senior Credit Facility, including those that: (a) accelerated the maturity date to 90 days prior to the maturity of senior notes due in January 2016 if certain specified liquidity levels were not met; and (b) required that certain subsidiaries guarantee the Company'sCompany’s obligations if the Company’s credit ratings fell below investment grade. The 2015 Senior Credit Facility also modified certain negative covenants to provide the Company with additional flexibility, including flexibility to make acquisitions and incur additional indebtedness.On March 1, 2016, the Company amended the 2015 Senior Credit Facility to, among other things, carve out from the general limitation on subsidiary indebtedness the issuance of Euro-denominated commercial paper notes by subsidiaries. Additionally, at several points in 2016, the Company extended the maturity date of the 2015 Senior Credit Facility from March 26, 2020 to March 26, 2021. In the first half of 2017, the Company amended the 2015 Senior Credit Facility to extend the maturity date from March 26, 2021 to March 26, 2022.
At the Company'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 JuneMarch 30, 2018)2019), 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 2015 Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of JuneMarch 30, 2018)2019). The Company also pays a commitment fee to the lenders under the 2015 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders'lenders exceed
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
utilization of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of JuneMarch 30, 2018)2019). 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter. The limitations contain customary exceptions or, in certain cases, do not apply as long as the Company is in compliance with the financial ratio requirements and is not otherwise in default.
The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
TheIn 2017, the Company paid financing costs of $567 in connection with the extension of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022. These costs were deferred and, along with unamortized costs of $6,873 are being amortized over the term of the 2015 Senior Credit Facility.
As of JuneMarch 30, 2018,2019, amounts utilized under the 2015 Senior Credit Facility included $59,233$20,193 of borrowings and $55,220$22,787 of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,069,208$1,405,411 under the Company'sCompany’s U.S. and European commercial paper programs as of JuneMarch 30, 20182019 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,183,661$1,448,391 under the 2015 Senior Credit Facility resulting in a total of $616,339$351,609 available as of JuneMarch 30, 2018.2019.
Commercial Paper
On February 28, 2014 and July 31, 2015, the Company established programs for the issuance of unsecured commercial paper in the United States and Eurozone capital markets, respectively. Commercial paper issued under the U.S. and European programs will have maturities ranging up to 397 days and 183 days, respectively. None of the commercial paper notes may be voluntarily prepaid or redeemed by the Company and all rank pari passu with all of the Company'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 2015 Senior Credit Facility) at any time.
The proceeds from the issuance of commercial paper notes arewill be available for general corporate purposes. As of JuneMarch 30, 2018,2019, there was $508,460$688,000 outstanding under the U.S. commercial paper program, and the euro equivalent of $560,748 was outstanding$717,411 under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.36%2.78% and 26.1825.44 days, respectively. The weighted average interest rate and maturity period for the European program were (0.20)(0.21)% and 26.5338.24 days, respectively.
Senior Notes
On May 18, 2018, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of €300,000 aggregate principal amount of its Floating Rate Notes due May 18, 2020 ("(“2020 Floating Rate Notes"Notes”). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2020 Floating Rate Notes is payable quarterly on August 18, November 18, February 18, and May 18 of each
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
year. Mohawk Finance paid financing costs of $800$890 in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.
On September 11, 2017, Mohawk Finance completed the issuance and sale of €300,000 aggregate principal amount of its Floating Rate Notes due September 11, 2019 ("(“2019 Floating Rate Notes"Notes”). The 2019 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2019 Floating Rate Notes is payable quarterly on September 11, December 11, March 11, and June 11 of each year. Mohawk Finance paid financing costs of $911 in connection with the 2019 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2019 Floating Rate Notes.
On June 9, 2015, the Company issued €500,000 aggregate principal amount of 2.00% Senior Notes (“2.00% Senior Notes”) due January 14, 2022. The 2.00% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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'sCompany’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.
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. Amounts borrowed under the Securitization Facility bore interest at LIBOR plus an applicable margin of 0.70% per annum and the borrower paid a commitment fee at a per annum rate of 0.30% on the unused amount of each lender’s commitment. On December 10, 2015, the Company extended the termination date to December 19, 2016, and on December 13, 2016, the Company extended the termination date to December 19, 2017. The Company paid financing costs of $250 in connection with the second extension. These costs were deferred and are being amortized over the remaining term of the Securitization Facility. The Securitization Facility expired in accordance with its terms on December 19, 2017.
The fair values and carrying values of our debt instruments are detailed as follows:
|
| | | | | | | | | | | | |
| March 30, 2019 | | December 31, 2018 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
3.85% senior notes, payable February 1, 2023; interest payable semiannually | $ | 618,582 |
| | 600,000 |
| | 599,904 |
| | 600,000 |
|
2.00% senior notes, payable January 14, 2022; interest payable annually | 583,744 |
| | 560,915 |
| | 587,487 |
| | 572,148 |
|
Floating Rate Notes, payable May 18, 2020, interest payable quarterly | 336,286 |
| | 336,549 |
| | 343,004 |
| | 343,289 |
|
Floating Rate Notes, payable September 11, 2019, interest payable quarterly | 336,751 |
| | 336,549 |
| | 343,560 |
| | 343,289 |
|
U.S. commercial paper | 688,000 |
| | 688,000 |
| | 632,668 |
| | 632,668 |
|
European commercial paper | 717,411 |
| | 717,411 |
| | 707,175 |
| | 707,175 |
|
Five-year senior secured credit facility, due March 26, 2022 | 20,193 |
| | 20,193 |
| | 57,896 |
| | 57,896 |
|
Capital leases and other | 6,310 |
| | 6,310 |
| | 6,664 |
| | 6,664 |
|
Unamortized debt issuance costs | (4,620 | ) | | (4,620 | ) | | (5,155 | ) | | (5,155 | ) |
Total debt | 3,302,657 |
| | 3,261,307 |
| | 3,273,203 |
| | 3,257,974 |
|
Less current portion of long-term debt and commercial paper | 1,763,332 |
| | 1,763,332 |
| | 1,742,373 |
| | 1,742,373 |
|
Long-term debt, less current portion | $ | 1,539,325 |
| | 1,497,975 |
| | 1,530,830 |
| | 1,515,601 |
|
|
| | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
3.85% senior notes, payable February 1, 2023; interest payable semiannually | $ | 606,348 |
| | 600,000 |
| | 622,752 |
| | 600,000 |
|
2.00% senior notes, payable January 14, 2022; interest payable annually | 614,936 |
| | 584,112 |
| | 634,193 |
| | 600,096 |
|
Floating Rate Notes, payable September 11, 2019, interest payable quarterly | 351,115 |
| | 350,467 |
| | 360,807 |
| | 360,058 |
|
Floating Rate Notes, payable May 18, 2020, interest payable quarterly | 349,437 |
| | 350,467 |
| | — |
| | — |
|
U.S. commercial paper | 508,460 |
| | 508,460 |
| | 228,500 |
| | 228,500 |
|
European commercial paper | 560,748 |
| | 560,748 |
| | 912,146 |
| | 912,146 |
|
2015 Senior Credit Facility | 59,233 |
| | 59,233 |
| | 62,104 |
| | 62,104 |
|
Capital leases and other | 23,189 |
| | 23,189 |
| | 6,934 |
| | 6,934 |
|
Unamortized debt issuance costs | (6,142 | ) | | (6,142 | ) | | (6,260 | ) | | (6,260 | ) |
Total debt | 3,067,324 |
| | 3,030,534 |
| | 2,821,176 |
| | 2,763,578 |
|
Less current portion of long-term debt and commercial paper | 1,145,481 |
| | 1,146,511 |
| | 1,203,683 |
| | 1,203,683 |
|
Long-term debt, less current portion | $ | 1,921,843 |
| | 1,884,023 |
| | 1,617,493 |
| | 1,559,895 |
|
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 |
Overview
TheDuring the past two decades, the Company has grown significantly. Its current geographic breadth and diverse product offering are reflected in 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 Flooring NA segmentSegment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet pad, hardwood,cushion, wood, laminate and vinyl products, including LVT,luxury vinyl tile (LVT), which it distributes through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The segment’sSegment’s product lines are sold through various selling channels, including independent floor covering retailers, distributors, home centers, mass merchandisers, department stores, shop at home, online retailers, buying groups, commercial contractors and commercial end users. The Flooring ROW segmentSegment designs, manufactures, sources, licenses and markets laminate, hardwoodwood flooring, carpets, roofing elements, insulation boards, medium-density fiberboard ("MDF"(“MDF”), chipboards, other wood products and vinyl products, including LVT, which it distributes primarily in Europe, Russia, Australia and RussiaNew Zealand through various selling channels, which include 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 19 nations and sales in more than 170 countries. Based on its annual sales, the globalCompany believes it is the world’s largest flooring industry.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. The Company expects continued growth in the United States market ifconsistent with residential housing starts and remodeling continueinvestments and has invested significantly in state-of-the-art manufacturing to grow.create aspirational products to delight consumers with beauty and performance. The Company also is a leading provider of flooring for the U.S. commercial market and has earned significant recognition for its innovation in design and performance and sustainable practices. Additionally, the Company maintains significant operations in Europe, Russia, Mexico, Australia, New Zealand, Brazil and other parts of the world where theworld. The Company is growing market share in many markets through its differentiated products, especially in its ceramic tile product lines. The Company expects sales growth to continue on a local basis in 2018 despite decreased revenues from IP contracts that expired during 2017. This decrease in IP contract revenue is projected to result in a reduction of operating income of $35-$40 million. The Company is also implementing product price increases due to escalating material costs.collections.
In 2017,2018, the Company invested over $900$790 million in capital projects to expand capacities, differentiate products, and improve productivity. In 2018,2019, the Company plans to invest an additional $780.0$550-580 million in its existing businesses to complete projects that were begun in 20172018 and to commence new initiatives resulting in $30-$35 million of increased start-up costs.initiatives. The largest investments during this two-year period are the expansion of LVT in the U.S. and Europe; ceramic capacity increases in Mexico, Italy, Poland Bulgaria and Russia; luxury laminate in the U.S., Europe and Russia; carpet tile in Europe; sheet vinyl in Russia; and countertops in the U.S. and Europe.
For the three months ended JuneMarch 30, 2018,2019, net earnings attributable to the Company were $196.6$121.6 million, or diluted earnings per share ("EPS"(“EPS”) of $2.62,$1.67, compared to net earnings attributable to the Company of $260.7$208.8 million, or diluted EPS of $3.48$2.78 for the three months ended July 1, 2017. Net earnings attributable to the Company were $405.4 million, or diluted EPS of $5.41 for the six months ended June 30, 2018 compared to net earnings attributable to the Company of $461.2 million, or diluted EPS of $6.17 for the six months ended July 1, 2017.March 31, 2018. The decrease in EPS was primarily attributable to higher inflation, costs due to temporarily reducing production, the impact of restructuring, acquisition and startupintegration-related costs, increased income tax expense, and decreased sales volume,the net unfavorable impact from foreign exchange rates partially offset by the favorable net impact of price and product mix and savings from capital investments and cost reduction initiatives.
For the sixthree months ended JuneMarch 30, 2018,2019, the Company generated $621.0$170.1 million of cash from operating activities. As of JuneMarch 30, 2018,2019, the Company had cash and cash equivalents of $518.2$105.7 million, of which $22.6$25.7 million was in the United States and $495.7$80.0 million was in foreign countries. The increase in cash in foreign countries was due to the pending Godfrey Hirst acquisition discussed below.
Recent Events
On November 20, 2017,January 31, 2019, the Company announced that it agreed to acquire Godfrey Hirst Group,completed an acquisition of a hard surface flooring distribution company based in the leading flooring company in Australia and New Zealand, further extending Mohawk's global position. The acquisition closed on July 2, 2018Netherlands for approximately A$556.0 million ($411.9 million equivalent at June 30, 2018).$72.0 million.
Results of Operations
Quarter Ended JuneMarch 30, 2018,2019, as compared with Quarter Ended July 1, 2017March 31, 2018
Net sales
Net sales for the three months ended JuneMarch 30, 20182019 were $2,577.0$2,442.5 million, reflecting an increase of $124.0$30.3 million, or 5.1%1.3%, from the $2,453.0$2,412.2 million reported for the three months ended July 1, 2017. The increase was primarily attributable to the net impact of favorable foreign exchange rates of approximately $48 million, or 2%, the favorable net impact of price and product mix of approximately $40 million, or 2%, and higher sales volume of approximately $36 million, or 1%.
Global Ceramic segment—Net sales increased $26.6 million, or 2.9%, to $929.3 million for the three months ended June 30, 2018, compared to $902.7 million for the three months ended July 1, 2017.March 31, 2018. The increase was primarily attributable to higher sales volume of approximately $15$100 million, or 2%, and4.1% which includes sales from acquisitions of approximately $120 million, higher legacy sales volume of approximately $16 million partially offset by the unfavorable impact from fewer shipping days in the first quarter of 2019 of approximately $36 million. Net Sales were also affected by the unfavorable net impact of favorablefrom foreign exchange rates of approximately $11$73 million, or 1%3%.
Flooring NAGlobal Ceramic segment—Net sales increased $17.3$21.8 million, or 1.7%2.5%, to $1,057.6$898.4 million for the three months ended JuneMarch 30, 2018,2019, compared to $1,040.3$876.5 million for the three months ended July 1, 2017.March 31, 2018. The increase was primarily attributable to higher sales volume of approximately $40 million which includes sales from acquisitions of approximately $51 million and the favorableimpact of positive sales mix of approximately $9 million partially offset by the unfavorable impact of fewer shipping days in the first quarter of 2019 of approximately $12 million and the unfavorable net impact from foreign exchange rates of price and product mix and higher sales volume.approximately $27 million.
Flooring ROWNA segment—Net sales increased $80.1decreased $28.4 million, or 15.7%3.0%, to $590.1$922.0 million for the three months ended JuneMarch 30, 2018,2019, compared to $510.1$950.4 million for the three months ended July 1, 2017.March 31, 2018. The increasedecrease was primarily attributable to lower volumes of $24 million, the netunfavorable impact of favorable foreign exchange ratesfewer shipping days in the first quarter of 2019 of approximately $37 million, or 7%, the favorable impact of price and product mix of approximately $25 million, or 5%, and higher sales volume of approximately $18 million, or 3%.
Gross profit
Gross profit for the three months ended June 30, 2018 was $766.6 million (29.7% of net sales), a decrease of $12.6 million or 1.6%, compared to gross profit of $779.1 million (31.8% of net sales) for the three months ended July 1, 2017. As a percentage of net sales, gross profit decreased 202 basis points. The decrease in gross profit dollars was primarily attributable to higher inflation costs of approximately $58 million, including increased material costs of approximately $34 million, and approximately $7 million of startup costs associated with large investments to expand sales, add product categories and enter new markets, partially offset by the favorable net impact of price and product mix of approximately $23 million, savings from capital investments and cost reduction initiatives of approximately $12 million, the net impact of favorable foreign exchange rates of approximately $11 million, and the favorable impact of lower restructuring, acquisition and integration-related, and other costs of approximately $10 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended June 30, 2018 were $440.2 million (17.1% of net sales), an increase of $16.9 million compared to $423.3 million (17.3% of net sales) for the three months ended July 1, 2017. As a percentage of net sales, selling, general and administrative expenses decreased 17 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to the net impact of unfavorable foreign exchange rates of approximately $7 million, higher inflation costs of approximately $4 million, and approximately $3 million of costs associated with investments in new product development, sales personnel and marketing.
Operating income
Operating income for the three months ended June 30, 2018 was $326.3 million (12.7% of net sales) reflecting a decrease of $29.5 million, or 8.3%, compared to operating income of $355.8 million (14.5% of net sales) for the three months ended July 1, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $62 million, including increased material costs of approximately $34 million, and approximately $8 million of startup costs associated with large investments to expand sales, add product categories, and enter new markets, partially offset by the favorable net impact of price and product mix of approximately $23 million, savings from capital investments and cost reduction initiatives of approximately $12 million, and approximately $9 million due to the favorable impact of lower restructuring, acquisition and integration-related, and other costs.
Global Ceramic segment—Operating income was $134.8 million (14.5% of segment net sales) for the three months ended June 30, 2018 reflecting a decrease of $17.8 million compared to operating income of $152.6 million (16.9% of segment net sales)
for the three months ended July 1, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $25 million, and the unfavorable net impact of price and product mix of approximately $6 million, partially offset by savings from capital investments and cost reduction initiatives of approximately $9 million, and approximately $5 million due to the favorable impact of lower restructuring, acquisition and integration-related, and other costs.
Flooring NA segment—Operating income was $100.7 million (9.5% of segment net sales) for the three months ended June 30, 2018 reflecting a decrease of $26.8 million compared to operating income of $127.5 million (12.3% of segment net sales) for the three months ended July 1, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $30 million, including increased material costs of approximately $23 million, and a decline in the savings from capital investments and costs reduction initiatives of approximately $3$15 million partially offset by the favorable net impact of price and product mix of approximately $7$10 million.
Flooring ROW segment—Operating income was $100.2Net sales increased $36.9 million, (17.0% of segment net sales) for the three months ended June 30, 2018 reflecting an increase of $14.1 million comparedor 6.3%, to operating income of $86.1 million (16.9% of segment net sales) for the three months ended July 1, 2017. The increase in operating income was primarily attributable to the favorable net impact of price and product mix of approximately $22 million, and savings from capital investments and cost reduction initiatives of approximately $6 million, partially offset by higher inflation costs of approximately $8 million, and approximately $5 million of startup costs associated with large investments to expand sales, add product categories, and enter new markets.
Interest expense
Interest expense was $7.9$622.2 million for the three months ended JuneMarch 30, 2018, reflecting a decrease of $0.5 million2019, compared to interest expense of $8.4$585.3 million for the three months ended July 1, 2017.
Other expense, net
Other expense, net was $2.1 million for the three months ended June 30, 2018, reflecting an favorable change of $0.9 million compared to other expense, net of $3.0 million for the three months ended July 1, 2017. The change was primarily attributable to the increased favorable impact of foreign exchange rates on transactions in the current year.
Income tax expense
For the three months ended June 30, 2018, the Company recorded income tax expense of $118.8 million on earnings before income taxes of $316.4 million for an effective tax rate of 37.6%, as compared to income tax expense of $82.7 million on earnings before income taxes of $344.4 million, for an effective tax rate of 24.0% for the three months ended July 1, 2017. The effective tax rate for 2018 was unfavorably impacted by Notice 2018-26, issued by the Department of the Treasury on April 2, 2018, which provided additional guidance on determining the amount of gross income to be recognized by U.S. taxpayers under the deemed repatriation of previously deferred foreign earnings. The 2018 effective tax rate was favorably impacted by tax reforms in Belgium and the U.S., which reduced the statutory rates from 33.99% to 29.58%, and 35% to 21%, respectively. The 2017 effective tax rate was favorably impacted by discrete items that occurred in the quarter ended July 1, 2017.
Six Months Ended June 30, 2018, as compared with Six Months Ended July 1, 2017
Net sales
Net sales for the six months ended June 30, 2018 were $4,989.2 million, reflecting an increase of $315.5 million, or 6.8%, from the $4,673.7 million reported for the six months ended July 1, 2017.March 31, 2018. The increase was primarily attributable to higher sales volume of approximately $93$99 million or 2%, which includes sales volume attributable tofrom acquisitions of approximately $47 million. Also contributing to the increase in$69 million, higher legacy sales was the net impact of favorable foreign exchange rates of approximately $147$39 million or 3%, and the favorable net impact of price and product mix of approximately $76 million, or 2%.
Global Ceramic segment—Net sales increased $118.2 million, or 7.0%, to $1,805.8 million for the six months ended June 30, 2018, compared to $1,687.6 million for the six months ended July 1, 2017. The increase was primarily attributable to higher sales volume of approximately $84 million, or 5%, which includes sales volume attributable to acquisitions of approximately $47 million. Also contributing to the increase in sales was the net impact of favorable foreign exchange rates of approximately $40 million, or 2%, partially offset by the unfavorable net impact of price and product mix of $16 million, the impact of fewer shipping days in the first quarter of 2019 of approximately $5 million.
Flooring NA segment—Net sales increased $28.1$10 million or 1.4%, to $2,007.9 million forand the six months ended June 30, 2018, compared to $1,979.8 million for the six months ended July 1, 2017. The increase was primarily attributable to the favorableunfavorable net impact of price and product mix of approximately $22 million, or 1% and higher sales volume of approximately $6 million.
Flooring ROW segment—Net sales increased $169.2 million, or 16.8%, to $1,175.4 million for the six months ended June 30, 2018, compared to $1,006.2 million for the six months ended July 1, 2017. The increase was primarily attributable to the net impact of favorablefrom foreign exchange rates of approximately $108 million, or 11%, the favorable net impact of price and product mix of approximately $59 million, or 6%, and higher sales volume of approximately $3$46 million.
Gross profit
Gross profit for the sixthree months ended JuneMarch 30, 20182019 was $1,471.2$624.9 million (29.5%(25.6% of net sales), an increasea decrease of $11.8$79.8 million or 0.8%11.3%, compared to gross profit of $1,459.5$704.7 million (31.2%(29.2% of net sales) for the sixthree months ended July 1, 2017.March 31, 2018. As a percentage of net sales, gross profit decreased 174363 basis points. The increasedecrease in gross profit dollars was primarily attributable to higher inflation costs of approximately $45 million, the favorableimpact of restructuring, acquisition and integration-related costs of approximately $22 million, the unfavorable net impact from foreign exchange rates of approximately $22 million, an increase in costs of approximately $12 million due to lower than expected production volumes, the unfavorable net impact of price and product mix of $12 million, approximately $60$7 million of costs due to temporarily reducing production, partially offset by higher sales volume of approximately $21 million, savings from capital investments and cost reduction initiatives of approximately $34$11 million, and the net impact of favorable foreign exchange rates of approximately $33 million, partially offset by higher inflationlower start up costs of approximately $106 million, including increased material costs of approximately $68 million, and approximately $12 million of startup costs associated with large investments to expand sales, add product categories, and enter new markets.$9 million.
Selling, general and administrative expenses
Selling, general and administrative expenses for the sixthree months ended JuneMarch 30, 20182019 were $876.5$459.6 million (17.6%(18.8% of net sales), an increase of $47.7$23.3 million compared to $828.9$436.3 million (17.7%(18.1% of net sales) for the sixthree months ended July 1, 2017.March 31, 2018. As a percentage of net sales, selling, general and administrative expenses decreased 17increased 73 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to acquisitions of approximately $20 million, inflation of approximately $6 million, approximately $5 million of costs associated with investments in new product development, sales personnel, and marketing, approximately $2 million of expenses driven by higher sales volume partially offset by the favorable net impact of unfavorablefrom foreign exchange rates of approximately $22$11 million.
Operating income
Operating income for the three months ended March 30, 2019 was $165.3 million approximately $12(6.8% of net sales) reflecting a decrease of $103.1 million, or 38.4%, compared to operating income of costs due$268.4 million (11.1% of net sales) for the three months ended March 31, 2018. The decrease in operating income was primarily attributable to higher sales volume, andinflation costs of approximately $51
million, the unfavorable impact of higher restructuring, acquisition and integration-related and other costs of approximately $8$18 million, an increase in costs of approximately $16 million due to lower than expected production volumes, the unfavorable net impact of price and product mix of $12 million, the unfavorable net impact from foreign exchange rates of approximately $11 million, $7 million of costs due to temporarily reducing production, approximately $5 million of costs associated with investments in new product development, sales personnel, and marketing partially offset by savings from capital investments and cost reduction initiatives of approximately $11 million and lower startup costs of approximately $10 million.
Global Ceramic segment—Operating income was $84.3 million (9.4% of segment net sales) for the three months ended March 30, 2019 reflecting a decrease of $29.1 million compared to operating income of $113.4 million (12.9% of segment net sales) for the three months ended March 31, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $8$21 million, approximately $6 million of costs due to temporarily reducing production, approximately $5 million of costs associated with investments in new product development, sales personnel, and marketing, and the unfavorable net impact from foreign exchange rates of approximately $3 million partially offset by savings from capital investments and cost reduction initiatives of approximately $10$8 million.
Operating income
Flooring NA segment—Operating income was $0.6 million (0.1% of segment net sales) for the sixthree months ended JuneMarch 30, 2018 was $594.7 million (11.9% of net sales)2019 reflecting a decrease of $35.9$74.1 million or 5.7%, compared to operating income of $630.6$74.7 million (13.5%(7.9% of segment net sales) for the sixthree months ended July 1, 2017.March 31, 2018. The decrease in operating income was primarily attributable to higher inflation costs of approximately $115$39 million, including increased materialan increase in costs of approximately $68$20 million approximately $17 million of startup costs associated with large investmentsdue to expand sales, add product categories, and enter new markets, andlower than expected production volumes, the unfavorable impact of higher restructuring acquisition and integration-related, and other costs of approximately $10 million, partially offset by the favorable net impact of price and product mix of approximately $60 million, savings from capital investments and cost reduction initiatives of approximately $44$14 million and the net impact of favorable foreign exchange rates of approximately $12 million.
Global Ceramic segment—Operating income was $248.2$15 million (13.7% of segment net sales) for the six months ended June 30, 2018 reflecting a decrease of $20.4 million compareddue to operating income of $268.6 million (15.9% of segment net sales) for the six months ended July 1, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $37 million, and the unfavorable net impact of price and product mix of approximately $13 million,lower sales volumes partially offset by savings from capital investments and cost reduction initiatives of approximately $23$8 million, and increased sales volume of approximately $11 million.
Flooring NA segment—Operating income was $175.4 million (8.7% of segment net sales) for the six months ended June 30, 2018 reflecting a decrease of $44.2 million compared to operating income of $219.6 million (11.1% of segment net sales) for the six months ended July 1, 2017. The decrease in operating income was primarily attributable higher inflationlower start up costs of approximately $55 million, including increased material costs of approximately $44 million, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $11 million, approximately $6 million in decreased sales volume, and approximately $4 million of startup costs associated with large investments to expand sales, add product categories, and enter new markets, partially offset by the favorable net impact of price and product mix of approximately $21 million and savings from capital investments and cost reduction initiatives of approximately $11$3 million.
Flooring ROW segment—Operating income was $189.2$90.4 million (16.1%(14.5% of segment net sales) for the sixthree months ended JuneMarch 30, 20182019 reflecting an increase of $27.1$1.4 million compared to operating income of $162.1$89.1 million (16.1%(15.2% of segment net sales) for the sixthree months ended July 1, 2017.March 31, 2018. The increase in operating income was primarily attributable to the favorableincreased sales volume of approximately $14 million, lower material inflation costs of approximately $10 million and lower start-up costs of approximately $4 million partially offset by unfavorable net impact of price and product mix of approximately $53 million, savings from capital investments and cost reduction initiatives of approximately $10$16 million and the unfavorable net impact of favorablefrom foreign exchange rates of approximately $8 million, partially offset by higher inflation costs of approximately $22 million, including increased material costs of approximately $17 million, approximately $11 million in decreased sales volume, and approximately $9 million of startup costs associated with large investments to expand sales, add product categories, and enter new markets. The decrease in sales volume is primarily due to the decline of IP contract revenue.million.
Interest expense
Interest expense was $15.4$10.5 million for the sixthree months ended JuneMarch 30, 2018,2019, reflecting a decreasean increase of $1.2$2.9 million compared to interest expense of $16.6$7.5 million for the sixthree months ended July 1, 2017.March 31, 2018. 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 (income), net was $6.1$3.7 million for the sixthree months ended JuneMarch 30, 2018,2019, reflecting an unfavorablea favorable change of $5.9$7.7 million compared to other expense, net of $0.2$4.0 million for the sixthree months ended July 1, 2017.March 31, 2018. The change was primarily attributable to the increased unfavorablefavorable impact offrom foreign exchange rates on transactions in the current year and a charge for the release of an indemnification receivable.year.
Income tax expense
For the sixthree months ended JuneMarch 30, 2018,2019, the Company recorded income tax expense of $166.4$37.0 million on earnings before income taxes of $573.2$158.6 million for an effective tax rate of 29.0%23.3%, as compared to an income tax expense of $151.0$47.6 million on earnings before income taxes of $613.8$256.9 million, for an effective tax rate of 24.6%18.5% for the sixthree months ended July 1, 2017.March 31, 2018. The difference in the effective tax raterates for 2018the comparative periods was unfavorably impacted by Notice 2018-26, issuedcaused by the Departmentgeographic dispersion of profits and losses for the Treasury on April 2, 2018, which provided additional guidance on determiningperiods; the amountelimination of gross income to be recognized by U.S. taxpayers under the deemed repatriation of previously deferred foreign earnings. The 2018 effectivean annual tax rate was favorably impacted by tax reformsbenefit in BelgiumItaly; and the U.S., which reduced the statutory rates from 33.99% to 29.58%, and 35% to 21%, respectively. The 2017 effective tax rate was favorably impacted bya discrete items that occurred in the six months ended July 1, 2017.detrimental stock option accounting expense.
Liquidity and Capital Resources
The Company’s primary capital requirements are for working capital, capital expenditures and acquisitions. The Company’s capital needs are met primarily through a combination of internally generated funds, commercial paper, bank credit lines, term and senior notes and credit terms from suppliers.
Net cash provided by operating activities in the first sixthree months of 20182019 was $621.0$170.1 million, compared to net cash provided by operating activities of $413.9$183.2 million in the first sixthree months of 2017.2018. The increasedecrease of $207.1$13.1 million in 20182019 was primarily attributable to changes in working capital. These changes in working capital reflect normal fluctuations relative to the timing and nature of these transactions.
Net cash used in investing activities in the first sixthree months of 20182019 was $485.9$211.8 million compared to net cash used in investing activities of $675.9$241.4 million in the first sixthree months of 2017.2018. The decrease was primarily due to acquisitions in the prior year of $250.5 million compared to acquisitions in the current year of $24.4 million and increasedreduced capital expenditures of $72.9$114.0 million partially offset by an increase in the current year. These increases were offsetacquisition costs of $52.4 million and by the net redemption activity in short-term investments of $36.9 million.$31.9 million associated with the Company’s wholly-owned captive insurance company. The Company continues to invest to optimize sales and profit growth this year and beyond with product expansion and cost reduction projects in the business. Capital spending during the remainder of 20182019 is expected to approximate $280 million, resulting in the full year spending being approximately $780.0$428 million.
Net cash provided by financing activities in the first sixthree months of 20182019 was $308.0$26.8 million compared to net cash provided by financing activities of $257.3$86.6 million in the sixthree months of 2017.2018. The change in cash provided by financing activities is primarily attributable to increased borrowings in the current year.of $60.1 million.
As of JuneMarch 30, 2018,2019, the Company had cash of $518.2$105.7 million, of which $495.7$80.0 million was held outside the United States. The increase in cash held outside the United States was due to the acquisition of Godfrey Hirst that closed July 2, 2018. The Company plans to permanently reinvest the cash held outside the United States. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its existing credit facilities will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over at least the next twelve months.
On October 25, 2018, the Company announced that its Board of Directors approved a new share repurchase program, authorizing the Company to repurchase up to $500 million of its common stock. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion. The timing and amount of any purchases of common stock will be based on the Company’s liquidity, general business and market conditions and other factors, including alternative investment opportunities.
The Company may continue, from time to time, to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amount involved may be material.
Senior Credit Facility
On March 26, 2015, the Company amended and restated its 2013 Senior Credit Facilitysenior credit facility increasing its size from $1,000.0 million to $1,800.0 million and extending the maturity from September 25, 2018 to March 26, 2020 (as amended and restated, the "2015“2015 Senior Credit Facility"Facility”). The 2015 Senior Credit Facility eliminated certain provisions in the 2013 Senior Credit Facility, including those that: (a) accelerated the maturity date to 90 days prior to the maturity of senior notes due in January 2016 if certain specified liquidity levels were not met; and (b) required that certain subsidiaries guarantee the Company'sCompany’s obligations if the Company’s credit ratings fell below investment grade. The 2015 Senior Credit Facility also modified certain negative covenants to provide the Company with additional flexibility, including flexibility to make acquisitions and incur additional indebtedness.On March 1, 2016, the Company amended the 2015 Senior Credit Facility to, among other things, carve out from the general limitation on subsidiary indebtedness the issuance of Euro-denominated commercial paper notes by subsidiaries. Additionally, at several points in 2016, the Company extended the maturity date of the 2015 Senior Credit Facility from March 26, 2020 to March 26, 2021. In the first half of 2017, the Company amended the 2015 Senior Credit Facility to extend the maturity date from March 26, 2021 to March 26, 2022.
At the Company'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 JuneMarch 30, 2018)2019), 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 2015 Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of JuneMarch 30, 2018)2019). The Company also pays a commitment fee to the lenders under the 2015 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders'lenders exceed utilization of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of JuneMarch 30, 2018)2019). 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 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
TheIn 2017, the Company paid financing costs of $0.6 million in connection with the extension of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022. These costs were deferred and, along with unamortized costs of $6.9 million are being amortized over the term of the 2015 Senior Credit Facility.
As of JuneMarch 30, 2018,2019, amounts utilized under the 2015 Senior Credit Facility included $59.2$20.2 million of borrowings and $55.2$22.8 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,069.2$1,405.4 million under the Company'sCompany’s U.S. and European commercial paper programs as of JuneMarch 30, 20182019 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,183.7$1,448.4 million under the 2015 Senior Credit Facility resulting in a total of $616.3$351.6 million available as of JuneMarch 30, 2018.2019.
Commercial Paper
On February 28, 2014 and July 31, 2015, the Company established programs for the issuance of unsecured commercial paper in the United States and Eurozone capital markets, respectively. Commercial paper issued under the U.S. and European programs will have maturities ranging up to 397 days and 183 days, respectively. None of the commercial paper notes may be voluntarily prepaid or redeemed by the Company and all rank pari passu with all of the Company'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 $1,800.0 million (less any amounts drawn on the 2015 Senior Credit Facility) at any time.
The proceeds from the issuance of commercial paper notes arewill be available for general corporate purposes. As of JuneMarch 30, 2018,2019, there was $508.5$688.0 million outstanding under the U.S. commercial paper program, and the euro equivalent of $560.7$717.4 million was outstanding under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.36%2.78% and 26.1825.44 days, respectively. The weighted average interest rate and maturity period for the European program were (0.20)(0.21)% and 26.5338.24 days, respectively.
Senior Notes
On May 18, 2018, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of €300.0 million aggregate principal amount of its Floating Rate Notes due May 18, 2020 ("(“2020 Floating Rate Notes"Notes”). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2020 Floating Rate Notes is payable quarterly on August 18, November 18, February 18, and May 18 of each year. Mohawk Finance paid financing costs of $0.8$0.9 million in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.
On September 11, 2017, Mohawk Finance completed the issuance and sale of €300.0 million aggregate principal amount of its Floating Rate Notes due September 11, 2019 ("(“2019 Floating Rate Notes"Notes”). The 2019 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2019 Floating Rate Notes is payable quarterly on September 11, December 11, March 11, and June 11 of each year. Mohawk Finance paid financing costs of $0.9 million in connection with the 2019 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2019 Floating Rate Notes. As defined in the related agreements, the 2019 Floating Rate 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 2019 Floating Rate Notes to require repayment upon a change of control triggering event.
On June 9, 2015, the Company issued €500.0 million aggregate principal amount of 2.00% Senior Notes (“2.00% Senior Notes”) due January 14, 2022. The 2.00% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing and future unsecured indebtedness. Interest on the 2.00% Senior Notes is payable annually in cash on January 14 of each year.year, commencing on January 14, 2016. The Company paid financing costs of $4.2 million in connection with the 2.00% Senior Notes. These costs were deferred and are being amortized over the term of the 2.00% Senior Notes.
On January 31, 2013, the Company issued $600.0 million aggregate principal amount of 3.85% Senior Notes (“3.85% Senior Notes”) due February 1, 2023. The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all the Company'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.
As defined in the related agreements, the Company'sCompany’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.
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 $300.0 million to $500.0 million and decreased the interest margins on certain borrowings. Amounts borrowed under the Securitization Facility bore interest at LIBOR plus an applicable margin of 0.70% per annum and the borrower paid a commitment fee at a per annum rate of 0.30% on the unused amount of each lender’s commitment. On December 10, 2015, the Company extended the termination date to December 19, 2016, and on December 13, 2016, the Company extended the termination date to December 19, 2017. The Company paid financing costs of $0.3 million in connection with the second extension. These costs were deferred and are being amortized over the remaining term of the Securitization Facility. The Securitization Facility expired in accordance with its terms on December 19, 2017.
Contractual Obligations
There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 20172018 Annual Report filed on Form 10-K.
Critical Accounting Policies and Estimates
Refer to Note 1 - General, and Note 3 - Revenue from Contracts with Customers and Note 10 - Leases within our Condensed Consolidated Financial Statements of this Form 10-Q for a discussion of the Company'sCompany’s updated accounting policies on revenue recognition.recognition and lease accounting. The Company’s critical accounting policies and estimates are described in its 20172018 Annual Report filed on Form 10-K.
Recent Accounting Pronouncements
See Note 1 in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q under the heading "“Recent Accounting Pronouncements"” for a discussion of new accounting pronouncements which is incorporated herein by reference.
Impact of Inflation
Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses. The Company expects raw material prices, many of which are petroleum based, to fluctuate based upon worldwide supply and demand of commodities utilized in the Company’s production processes. Although the Company attempts to pass on increases in raw material, energy and fuel-related costs to its customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. In the past, the Company has often been able to enhance productivity and develop new product innovations to help offset increases in costs resulting from inflation in its operations.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of JuneMarch 30, 20182019.
Seasonality
The Company is a calendar year-end company. With respect to its Flooring NA and Global Ceramic segments, its results of operations for the first quarter tend to be the weakest followed by the fourth quarter. The second and third quarters typically produce higher net sales and operating income in these segments. These results are primarily due to consumer residential spending patterns which have historically decreased during the holiday season and the first two months following. The Flooring ROW segment’s second quarter typically produces the highest net sales and earnings followed by a moderate first and fourth quarter and a weaker third quarter.
Forward-Looking Information
Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies, and similar matters, and those that include the words “could,” “should,” “believes,” “anticipates,”
“expects” “expects” and “estimates” or similar expressions constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in economic or industry conditions; competition; inflation and deflation in raw material prices and other input costs; inflation and deflation in consumer markets; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company’s products; impairment charges; ability to identify attractive acquisition targets; ability to successfully complete and integrate acquisitions; international operations; changes in foreign exchange rates; introduction of new products; rationalization of operations; tax, product and other claims; litigation; and other risks identified in Mohawk’s SEC reports and public announcements.Item 1A “Risk Factors” in the Company’s 2018 Annual Report on Form 10-K.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As of JuneMarch 30, 2018,2019, approximately 40%36% of the Company'sCompany’s debt portfolio was comprised of fixed-rate debt and 60%64% was floating-rate debt. A 1.0 percentage point increase in the interest rate of the floating-rate debt would have resulted in an increase in interest expense of $4.6 million and $9.1$4.2 million for the three and six months ended JuneMarch 30, 2018, respectively.2019. There have been no significant changes to the Company’s exposure to market risk as disclosed in the Company’s 20172018 Annual Report filed on Form 10-K.
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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 Company adopted ASC 606, Revenue from Contracts with Customers842, Leases, on January 1, 2018,2019, and the Company implemented new controls and processes to meet the requirements of the standard.
PART II. OTHER INFORMATION
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
Alabama Municipal Litigation
In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing specific perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board'sBoard’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. On February 22, 2018, the Court of Appeals dismissed the appeal for lack of jurisdiction. 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. On June 19, 2017, the defendants removed this case to the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversity of citizenship and fraudulent joinder. The Centre Water Board filed a motion to remand the case back to state court, and the defendants opposed the Centre Water Board’s motion. The federal court granted Centre Water Board's motion for remand. On December 6, 2017,
Certain defendants, including the Company, appealed the federal court's determination that co-defendant ICI was properly joined as a party to thatfiled dispositive motions in each case as well. On January 31, 2018, the Court of Appeals dismissed the appeal for lack of jurisdiction. ICI's presence in the case deprives the federal court of jurisdiction over the case.
The Company filed a motion to dismiss in the Centre Water Board case on November 30, 2017 and a motion for judgment on the pleadings in the Gadsden Water Board case on October 25, 2017. Both motions arguedarguing that the courts did not havestate court lacks personal jurisdiction over them. Both state courts denied those motions. In June and September 2018, certain defendants, including the Company, and that the complaints failed to state a claim on which relief could be granted. The Centre Water Board court denied the motion on May 15, 2018. On June 19, 2018, the Company filed a petition topetitioned the Alabama Supreme Court seeking a ruling thatfor Writs of Mandamus directing each lower court to enter an order granting the trial court erred in denying the motion to dismissdefendants’ dispositive motions on the personal jurisdiction argument. That petition remains pending. The motion for judgment ongrounds. Those petitions have been fully briefed and the pleadings inCompany awaits a decision from the Gadsden Water Board case also remains pending.Alabama Supreme Court.
The Company has never manufactured the perfluorinated compounds at issue but purchased them for use in the manufacture of its carpets prior to 2007. The Gadsden and Centre Water Boards are not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsden and Centre Water Boards are seeking lost profits based on allegations that their customers decreased water purchases, as well as reimbursement for the cost of a filter and punitive damages.
Belgian Tax Matter
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
have been brought before the Court of First Appeal in November 2014. In January of 2015, the Company met with theBruges. The Court of First Appeal in Bruges Belgium and agreed with the Belgium 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 2011.
On January 27, 2016, the Court of First Appeal in Bruges, Belgium ruled in favor of the Company on January 27, 2016, with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal. On2009; and on June 13, 2018, the Court of First Appeal in Bruges Belgium again 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 Company has now received positive rulings from the Court of First Appeal in Bruges on all calendar years 2005 through 2010, inclusive. The Company anticipates that the Belgian tax authority will lodgehas lodged its Notification of Appeal for all six years with the Ghent Court of AppealAppeal. As of March 2019, the Company received assessments from the Belgian tax authority for tax years 2011 through 2017 in the calendar years December 31, 2006, December 31, 2007, December 31, 2008amount of €40.6 million, €39.7 million, €11.4 million, €23.9 million, €30.6 million, €93.1 million and December 31, 2010.€79.9 million respectively, including penalties, but excluding interest. The Company intends to file formal protests based on these assessments in a timely manner. The assessments are largely based on the same facts underlying the positive rulings, which the Belgian tax authority is appealing.
The Company disagreescontinues to disagree with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company'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 the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
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, 2017.2018. The risk factors disclosed in our Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition or results.
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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.
There was no share repurchase activity during the three months ended March 30, 2019.
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Period | Total Number of Shares Purchased in Millions | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan in Millions | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan in Millions |
January 1 through February 2, 2019 | — |
| $ | — |
| — |
| $ | 225.9 |
|
February 3 through March 2, 2019 | — |
| $ | — |
| — |
| $ | 225.9 |
|
March 3 through March 31, 2019 | — |
| $ | — |
| — |
| $ | 225.9 |
|
Total | — |
| $ | — |
| — |
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Item 3. | Defaults Upon Senior Securities |
None.
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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.
None.
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No. | | Description |
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10.1 | | Second Supplemental Indenture, dated as of May 18, 2018, by and among Mohawk Capital Finance S.A., as issuer, Mohawk Industries, Inc., as parent guarantor, U.S. Bank National Association, as trustee, registrar and transfer agent and Elavon Financial Services DAC, UK Branch, as paying agent (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated May 18, 2018). |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
95.1 | | |
101.INS | | 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. |
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: | AugustMay 3, 20182019 | By: | | /s/ Jeffrey S. Lorberbaum |
| | | | JEFFREY S. LORBERBAUM |
| | | | Chairman and Chief Executive Officer |
| | | | (principal executive officer) |
| | | | |
Dated: | AugustMay 3, 20182019 | By: | | /s/ Frank H. BoykinGlenn Landau |
| | | | FRANK H. BOYKINGLENN LANDAU |
| | | | Chief Financial Officer |
| | | | (principal financial officer) |