Mohawk Industries Reports Record Q2 Results
Mohawk Industries, Inc. (NYSE: MHK) announced 2017 second quarter record operating income of $356 million, net earnings of $261 million and diluted earnings per share (EPS) of $3.48. Excluding restructuring, acquisition and other charges, net earnings were $278 million and EPS was $3.72, a 7% increase over last year’s second quarter adjusted EPS. Net sales for the second quarter of 2017 were $2.5 billion, up 6% versus the prior year’s second quarter or an increase of approximately 8% on a constant days and currency basis. For the second quarter of 2016, net sales were $2.3 billion, operating income was $351 million, net earnings were $255 million and EPS was $3.42; excluding restructuring, acquisition and other charges, net earnings were $259 million and EPS was $3.47.
For the six months ending July 1, 2017, net earnings and EPS were $461 million and $6.17, respectively. Net earnings excluding restructuring, acquisition and other charges were $482 million and EPS was $6.44, an increase of 10% over the 2016 six-month period adjusted EPS. For the six-month period, net sales were $4.7 billion, an increase of 4% versus prior year as reported or 6% on a constant days and currency basis. For the six-month period ending July 2, 2016, net sales were $4.5 billion, net earnings were $427 million and EPS was $5.73; excluding restructuring, acquisition and other charges, net earnings and EPS were $436 million and $5.85.
Commenting on Mohawk Industries’ second quarter performance, Jeffrey S. Lorberbaum, Chairman and CEO, stated, “During the period, Mohawk delivered record results, generating the highest sales, adjusted operating income and adjusted EPS in the company’s history. Adjusted operating income increased to $381 million, up 7%, overcoming higher material and start-up costs and a reduction of IP income. Across the business, we are increasing prices to offset inflation, introducing innovative products and improving our productivity.
“During the period, we completed the acquisition of two small ceramic manufacturers to expand our European platform and two U.S. material manufacturing operations to enhance the vertical integration of our businesses. This year, we are increasing our internal investments to over $850 million to capitalize on innovative new products, increased automation and greater efficiencies, as well as to enhance the four acquisitions. As detailed last quarter, we are expanding our sales capacity by approximately $1.4 billion. This production will come online over the next twelve months, and our start-up costs will be higher until we have optimized all our new manufacturing operations later in 2018. These initiatives will increase our sales and profitability, maximizing the long-term value of our business.
“For the quarter, our Global Ceramic Segment sales increased approximately 9% as reported and on a constant days and currency basis. Operating margin was 17% as reported and 18% on an adjusted basis, with adjusted operating income rising approximately 16% for the quarter. We completed two European ceramic acquisitions that increased our segment sales by 6% during the period. Our legacy business improved from the prior quarter but was limited in North America by capacity constraints in red body ceramic and in Europe by a temporary plant shutdown to upgrade our technical production. In Europe, half of our new technical equipment has begun production and is operating at expected levels, and we are importing product to satisfy U.S. demand until our Mexican expansion becomes operational later this year. We are introducing higher value products from our new Tennessee plant, including longer, more-realistic wood visuals; surface textures in registration with our designs; and proprietary slip resistant surfaces. During the quarter, we completed the acquisition of a talc mine in Texas that will ensure our material supply and enhance our competitive position. Even with our capacity restraints, our sales in Mexico outpaced the strong local market. Our European ceramic business grew substantially as a result of our new acquisitions and new products we have introduced. Our Russian ceramic business is significantly outperforming the market, with sales and margins improving as a result of our unique styling, strong brand and robust distribution. Russia’s economy has expanded the last two quarters, and we are increasing our capacity to support future growth.
“During the quarter, our Flooring North America Segment’s sales increased 6% as reported. Operating margin for the quarter was 12% as reported and 13% on an adjusted basis, with adjusted operating income rising 12%. For the period, our hard surface sales outpaced carpet, and residential sales were stronger than commercial. We have implemented price increases and improved our product mix, which together have offset material and other inflation. We are executing productivity initiatives across our operations, resulting in improved efficiencies and yields. Our premium residential carpet collections are growing faster than the market due to increasing consumer preference for the superior softness and performance of our exclusive SmartStrand franchise. We have begun shipping SmartStrand Silk Reserve, the fourth generation of our proprietary fiber, with an even greater level of softness. During the period, we completed the purchase of a nylon polymerization plant, which we are enhancing to improve our competitive position. Our Main Street commercial sales expanded faster than our specified channels, with carpet tile continuing to gain share. Our LVT and laminate sales outpaced our other hard surfaces, with our distribution expanding as a result of our leading design and performance attributes. Our LVT operations are improving, and construction is progressing on our new rigid LVT line, which will start up by the end of this year. Our propriety water resistant laminate with enhanced visuals is growing as an alternative to wood, and we are increasing our capacity later this year to support additional growth.
“For the quarter, our Flooring Rest of the World Segment’s sales increased 2% as reported and 8.5% on a constant days and currency basis. Operating margin was 17% as reported and on an adjusted basis, with adjusted operating income decreasing approximately 12% for the quarter. The segment was impacted by increasing material costs and currency changes, which we are implementing price increases to recover, and the reduction in patent income. We anticipate that the majority of the price increases will be fully implemented by the fourth quarter, allowing us to recover our higher costs. Our LVT sales are growing significantly, although we are reaching the limits of our present capacity. Our new LVT production line in Belgium will produce both rigid and flexible products and should start-up in the fourth quarter. In Russia, we are finalizing the purchase of a building near our ceramic facilities to house our new sheet vinyl manufacturing operation. In Europe, our premium laminate collections grew substantially, and we have begun installation of a new laminate press line to further expand our business and improve our product mix with value-added introductions. Construction of our new carpet tile plant is underway, and we will begin limited operations in the fourth quarter.
“Mohawk’s operating performance in the third quarter should continue to significantly improve, with sales and income strengthening further, even with higher material inflation and changes in patents. We are implementing price increases across most product categories and regions to recover material and currency changes in the third quarter. We will continue optimizing the acquisitions we completed in the second quarter by improving their strategies and enhancing their profitability. Taking all of this into account, our adjusted EPS guidance for the third quarter is $3.70 to $3.79.
“To enhance our long-term performance, we are investing at record levels this year to expand our product offering and capacity, improve our efficiencies and extend our geographic reach. In the fourth quarter, we will incur higher start-up costs as our production expansions ramp up and we elevate our marketing activities to increase our sales. The expansion of our LVT, ceramic, laminate, sheet vinyl and carpet tile capacity will increase our future growth and profitability, strengthening our position as the global leader in flooring.”
The full text of Mohawk’s 2Q17 earnings release, including all tables, and a replay of the company’s Jul. 28 conference call may be accessed at http://www.mohawkind.com/CorporateIROverview.aspx. A telephone replay will be available until Friday, Aug. 25, 2017, by dialing 1-855-859-2056 for US/local calls and 1-404-537-3406 for International/Local calls and entering Conference ID # 51858547.
ABOUT MOHAWK INDUSTRIES
Mohawk Industries is the leading global flooring manufacturer that creates products to enhance residential and commercial spaces around the world. Mohawk’s vertically integrated manufacturing and distribution processes provide competitive advantages in the production of carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring. Our industry-leading innovation has yielded products and technologies that differentiate our brands in the marketplace and satisfy all remodeling and new construction requirements. Our brands are among the most recognized in the industry and include American Olean, Daltile, Durkan, IVC, Karastan, Marazzi, Mohawk, Mohawk Group, Pergo, Quick-Step and Unilin. During the past decade, Mohawk has transformed its business from an American carpet manufacturer into the world’s largest flooring company with operations in Australia, Brazil, Canada, Europe, India, Malaysia, Mexico, New Zealand, Russia and the United States.