Company Quick10K Filing
Quick10K
Mohawk Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$139.77 74 $10,370
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-19 Amend Bylaw, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2019-01-15 Officers, Exhibits
8-K 2018-11-27 Officers, Regulation FD, Exhibits
8-K 2018-11-12 Officers, Exhibits
8-K 2018-10-25 Earnings, Other Events, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-05-24 Officers, Shareholder Vote
8-K 2018-05-18 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-14 Enter Agreement, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-08 Earnings, Exhibits
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LZB La-Z-Boy
TILE Interface
CSWI CSW Industrials
ETH Ethan Allen Interiors
PIR Pier 1 Imports
NTZ Natuzzi
NVFY Nova Lifestyle
DXYN Dixie Group
MHK 2018-09-29
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a3q201810qexhibit311-class.htm
EX-31.2 a3q201810qexhibit312-class.htm
EX-32.1 a3q201810qexhibit321-class.htm
EX-32.2 a3q201810qexhibit322-class.htm
EX-95.1 a3q201810qex951-classic.htm

Mohawk Industries Earnings 2018-09-29

MHK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a3q201810qdocument-classic.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
[Mark One]
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018

OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to      
      
Commission File Number 01-13697
 __________________________________________
MOHAWK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
__________________________________________ 
Delaware
 
52-1604305
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
160 S. Industrial Blvd., Calhoun, Georgia
 
30701
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (706) 629-7721
__________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨  
  
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the issuer’s common stock as of October 31, 2018, the latest practicable date, is as follows: 74,198,945 shares of common stock, $.01 par value.



MOHAWK INDUSTRIES, INC.
INDEX
 
 
 
Page No
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2


PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited) 
 
September 29,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
91,351

 
84,884

Receivables, net
1,755,710

 
1,558,159

Inventories
2,214,295

 
1,948,663

Prepaid expenses
416,805

 
376,836

Other current assets
70,309

 
104,425

Total current assets
4,548,470

 
4,072,967

Property, plant and equipment
8,053,767

 
7,486,284

Less: accumulated depreciation
3,467,531

 
3,215,494

Property, plant and equipment, net
4,586,236

 
4,270,790

Goodwill
2,522,139

 
2,471,459

Tradenames
683,348

 
644,208

Other intangible assets subject to amortization, net
261,313

 
247,559

Deferred income taxes and other non-current assets
399,420

 
387,870

 
$
13,000,926

 
12,094,853

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1,333,853

 
1,203,683

Accounts payable and accrued expenses
1,623,418

 
1,451,672

Total current liabilities
2,957,271

 
2,655,355

Deferred income taxes
400,693

 
328,103

Long-term debt, less current portion
1,528,551

 
1,559,895

Other long-term liabilities
511,407

 
455,028

Total liabilities
5,397,922

 
4,998,381

Commitments and contingencies (Note 15)

 

Redeemable noncontrolling interest
31,227

 
29,463

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

 

Common stock, $.01 par value; 150,000 shares authorized; 81,952 and 81,771 shares issued in 2018 and 2017, respectively
820

 
818

Additional paid-in capital
1,847,164

 
1,828,131

Retained earnings
6,635,896

 
6,004,506

Accumulated other comprehensive loss
(704,379
)
 
(558,527
)
 
7,779,501

 
7,274,928

Less: treasury stock at cost; 7,350 shares in 2018 and 2017
215,745

 
215,766

Total Mohawk Industries, Inc. stockholders' equity
7,563,756

 
7,059,162

    Nonredeemable noncontrolling interest
8,021

 
7,847

          Total stockholders' equity
7,571,777

 
7,067,009

 
$
13,000,926

 
12,094,853

See accompanying notes to condensed consolidated financial statements.

3


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net sales
$
2,545,800

 
2,448,510

 
7,535,016

 
7,122,193

Cost of sales
1,825,367

 
1,665,209

 
5,343,336

 
4,879,403

Gross profit
720,433

 
783,301

 
2,191,680

 
2,242,790

Selling, general and administrative expenses
433,189

 
403,203

 
1,309,730

 
1,232,083

Operating income
287,244

 
380,098

 
881,950

 
1,010,707

Interest expense
9,025

 
7,259

 
24,416

 
23,854

Other expense, net
706

 
1,285

 
6,794

 
1,455

Earnings before income taxes
277,513

 
371,554

 
850,740

 
985,398

Income tax expense
49,487

 
100,532

 
215,928

 
251,572

Net earnings including noncontrolling interests
228,026

 
271,022

 
634,812

 
733,826

Net income attributable to noncontrolling interests
1,013

 
997

 
2,447

 
2,566

Net earnings attributable to Mohawk Industries, Inc.
$
227,013

 
270,025

 
632,365

 
731,260

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
$
3.03

 
3.63

 
8.46

 
9.84

Weighted-average common shares outstanding—basic
74,603

 
74,338

 
74,599

 
74,330

 
 
 
 
 
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
$
3.02

 
3.61

 
8.42

 
9.77

Weighted-average common shares outstanding—diluted
74,945

 
74,841

 
74,977

 
74,830

See accompanying notes to condensed consolidated financial statements.


4


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net earnings including noncontrolling interests
$
228,026

 
271,022

 
634,812

 
733,826

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(33,671
)
 
65,262

 
(147,628
)
 
262,350

Pension prior service cost and actuarial gain (loss), net of tax
68

 
156

 
291

 
(692
)
Other comprehensive income (loss)
(33,603
)
 
65,418

 
(147,337
)
 
261,658

Comprehensive income
194,423

 
336,440

 
487,475

 
995,484

Comprehensive income attributable to noncontrolling interests
656

 
997

 
962

 
2,566

Comprehensive income attributable to Mohawk Industries, Inc.
$
193,767

 
335,443

 
486,513

 
992,918

See accompanying notes to condensed consolidated financial statements.

5


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
Net earnings
$
634,812

 
733,826

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Restructuring
42,791

 
27,099

Depreciation and amortization
382,673

 
328,300

Deferred income taxes
75,694

 
16,549

(Gain) loss on disposal of property, plant and equipment
(1,253
)
 
2,221

Stock-based compensation expense
26,697

 
30,607

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Receivables, net
(180,830
)
 
(166,775
)
Inventories
(209,815
)
 
(121,970
)
Other assets and prepaid expenses
(68,122
)
 
(1,668
)
Accounts payable and accrued expenses
190,090

 
26,343

Other liabilities
1,748

 
(310
)
Net cash provided by operating activities
894,485

 
874,222

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(642,949
)
 
(654,630
)
Acquisitions, net of cash acquired
(425,304
)
 
(250,766
)
Purchases of short-term investments
(526,096
)
 

Redemption of short-term investments
566,000

 

Net cash used in investing activities
(1,028,349
)
 
(905,396
)
Cash flows from financing activities:
 
 
 
Payments on Senior Credit Facilities
(600,926
)
 
(317,162
)
Proceeds from Senior Credit Facilities
554,408

 
267,263

Payments on Commercial Paper
(12,119,516
)
 
(11,385,287
)
Proceeds from Commercial Paper
11,976,223

 
11,587,228

Proceeds from Floating Rate Notes
353,648

 
357,569

Payments of other debt and financing costs

 
(15,493
)
Payments on asset securitization borrowings

 
(500,000
)
Debt issuance costs
(864
)
 
(1,400
)
Change in outstanding checks in excess of cash
(2,242
)
 
(5,004
)
Shares redeemed for taxes
(9,188
)
 
(12,255
)
Proceeds from stock transactions
2

 
1,204

Net cash provide by (used in) financing activities
151,545

 
(23,337
)
Effect of exchange rate changes on cash and cash equivalents
(11,214
)
 
17,348

Net change in cash and cash equivalents
6,467

 
(37,163
)
Cash and cash equivalents, beginning of period
84,884

 
121,665

Cash and cash equivalents, end of period
$
91,351

 
84,502

 
 
 
 

See accompanying notes to condensed consolidated financial statements.

6


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

1. General

Interim Reporting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto, and the Company’s description of critical accounting policies, included in the Company’s 2017 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's net investments in its non-U.S. operations are partially economically offset by gains and losses on its foreign currency borrowings. The Company designated its €500,000 2.00% Senior Notes borrowing as a net investment hedge against a portion of its European operations. For the nine months ended September 29, 2018 and September 30, 2017, the change in the U.S. dollar value of the Company's euro denominated debt was a decrease of $19,848 ($14,223 net of taxes) and an increase of $64,684 ($40,427 net of taxes), respectively, which is recorded in the foreign currency translation adjustment component of other comprehensive income (loss). The increase in the U.S. dollar value of the Company's debt partially offsets the euro-to-dollar translation of the Company's net investment in its European operations.

Recent Accounting Pronouncements - Recently Adopted

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

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

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

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

Recent Accounting Pronouncements - Effective in Future Years

In February 2016, the FASB issued ASU 2016-02, Leases. The amendments in this Update create Topic 842, Leases, and supersede the requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The guidance in this update is effective for annual reporting periods beginning after December 15, 2018 including interim periods within that reporting period and early adoption is permitted.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company plans to adopt the provisions of this update at the beginning of fiscal year 2019. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing its assessment, including identification of new controls and processes designed to meet the requirements of the topic and required new disclosures upon adoption, and may identify additional impacts this guidance will have on its consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and other (Topic 350): Simplifying the test for goodwill impairment. The amendments remove the second step of the current goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for impairment tests in fiscal years beginning after December 15, 2019.
    

2. Acquisitions

2018 Acquisitions

On July 2, 2018, the Company completed its acquisition of Godfrey Hirst Group, the leading flooring company in Australia and New Zealand, further extending Mohawk's global position. The total value of the acquisition was $400,894. The Company's acquisition of Godfrey Hirst Group resulted in preliminary allocations of goodwill of $88,636, indefinite-lived tradename intangible assets of $58,671 and intangible assets subject to amortization of $43,635. The goodwill is not expected to be deductible for tax purposes. The factors contributing to the recognition of the amount of goodwill include product, sales and manufacturing synergies. The Godfrey Hirst Group's results have been included in the condensed consolidated financial statements since the date of acquisition in the Flooring NA and Flooring ROW segments and the results of Godfrey Hirst Group's operations are not material to the Company's condensed consolidated results of operations.

On October 15, 2018, the Company agreed to acquire Eliane S/A Revestimentos Ceramicos, one of the largest ceramic tile companies in Brazil for approximately $250,000. The acquisition is expected to close during the fourth quarter.

During the first quarter of 2018, the Company completed the acquisition of three businesses in the Flooring ROW segment for $24,410, resulting in a preliminary goodwill allocation of $12,548 and intangibles subject to amortization of $7.

2017 Acquisitions

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

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

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



8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

Contract liabilities

The Company historically records contract liabilities when it receives payment prior to fulfilling a performance obligation. Contract liabilities related to revenues are recorded in accounts payable and accrued expenses on the accompanying condensed consolidating balance sheets. The Company had contract liabilities of $34,415 and $29,124 as of September 29, 2018 and January 1, 2018, respectively.

Performance obligations

Substantially all of the Company’s revenue is recognized at a point in time when the product is either shipped or received from the Company's facilities and control of the product is transferred to the customer.  Accordingly, in any period, the Company does not recognize a significant amount of revenue from performance obligations satisfied or partially satisfied in prior periods and the amount of such revenue recognized during the three and nine months ended September 29, 2018 was immaterial.

Costs to obtain a contract

The Company historically incurs certain incremental costs to obtain revenue contracts. These costs relate to marketing display structures and are capitalized when the amortization period is greater than one year, with the amount recorded in other assets on the accompanying condensed consolidated balance sheets. Capitalized costs to obtain contracts were $57,051 and $43,259 as of September 29, 2018 and January 1, 2018, respectively. Amortization expense recognized during the nine months ended September 29, 2018 related to these capitalized costs was $43,498.

Practical expedients and policy elections

The Company elected the following practical expedients and policy elections:

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


9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue disaggregation

The following table presents the Company’s segment revenues disaggregated by the geographical market location of customer sales and product categories for the three months ended September 29, 2018 and September 30, 2017:

September 29, 2018
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
565,616

 
998,488

 
421

 
1,564,525

Europe
175,026

 
1,217

 
438,585

 
614,828

Russia
68,113

 

 
27,435

 
95,548

Other
77,018

 
47,835

 
146,046

 
270,899

 
$
885,773

 
1,047,540

 
612,487

 
2,545,800

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
885,773

 
16,779

 

 
902,552

Carpet & Resilient

 
851,970

 
192,001

 
1,043,971

Laminate & Wood

 
178,791

 
200,499

 
379,290

Other (1)

 

 
219,987

 
219,987

 
$
885,773

 
1,047,540

 
612,487

 
2,545,800



September 30, 2017
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
563,297

 
978,791

 
457

 
1,542,545

Europe
181,938

 
4,740

 
425,868

 
612,546

Russia
67,610

 

 
25,545

 
93,155

Other
80,554

 
48,242

 
71,468

 
200,264

 
$
893,399

 
1,031,773

 
523,338

 
2,448,510

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
893,399

 
17,978

 

 
911,377

Carpet & Resilient

 
830,780

 
109,279

 
940,059

Laminate & Wood

 
183,015

 
209,294

 
392,309

Other (1)

 

 
204,765

 
204,765

 
$
893,399

 
1,031,773

 
523,338

 
2,448,510


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

    

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the Company’s segment revenues disaggregated by the geographical market location of customer sales and product categories for the nine months ended September 29, 2018 and September 30, 2017:

September 29, 2018
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
1,700,338

 
2,920,604

 
421

 
4,621,363

Europe
573,932

 
4,737

 
1,424,113

 
2,002,782

Russia
183,244

 

 
73,417

 
256,661

Other
234,104

 
130,127

 
289,979

 
654,210

 
$
2,691,618

 
3,055,468

 
1,787,930

 
7,535,016

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
2,691,618

 
52,500

 

 
2,744,118

Carpet & Resilient

 
2,466,695

 
453,597

 
2,920,292

Laminate & Wood

 
536,273

 
643,389

 
1,179,662

Other (1)

 

 
690,944

 
690,944

 
$
2,691,618

 
3,055,468

 
1,787,930

 
7,535,016


September 30, 2017
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Geographical Markets
 
 
 
 
 
 
 
United States
$
1,679,508

 
2,861,995

 
1,644

 
4,543,147

Europe
504,956

 
13,023

 
1,252,684

 
1,770,663

Russia
173,874

 

 
66,166

 
240,040

Other
222,700

 
136,550

 
209,093

 
568,343

 
$
2,581,038

 
3,011,568

 
1,529,587

 
7,122,193

 
 
 
 
 
 
 
 
Product Categories
 
 
 
 
 
 
 
Ceramic & Stone
$
2,581,038

 
60,825

 

 
2,641,863

Carpet & Resilient

 
2,393,658

 
320,238

 
2,713,896

Laminate & Wood

 
557,085

 
602,472

 
1,159,557

Other (1)

 

 
606,877

 
606,877

 
$
2,581,038

 
3,011,568

 
1,529,587

 
7,122,193


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

4. Restructuring, acquisition and integration-related costs

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

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

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


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restructuring, acquisition transaction and integration-related costs consisted of the following during the three and nine months ended September 29, 2018 and September 30, 2017:

 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Cost of sales
 
 
 
 
 
 
 
Restructuring costs (a)
$
10,004

 
8,309

 
33,425

 
23,372

Acquisition integration-related costs
198

 
536

 
3,293

 
1,313

  Restructuring and acquisition integration-related costs
$
10,202

 
8,845

 
36,718

 
24,685

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 
 
 
 
 
 
Restructuring costs (a)
$
1,476

 
2,437

 
9,366

 
3,727

Acquisition transaction-related costs
3,032

 
803

 
3,095

 
1,015

Acquisition integration-related costs
5,180

 
1,768

 
8,857

 
4,282

  Restructuring, acquisition transaction and integration-related costs
$
9,688

 
5,008

 
21,318

 
9,024


(a) The restructuring costs for 2018 and 2017 primarily relate to the Company's actions taken to lower its cost structure and improve efficiencies of manufacturing and distribution operations as well as actions related to the Company's recent acquisitions.

The restructuring activity for the nine months ended September 29, 2018 is as follows:
 
Lease
impairments
 
Asset write-downs
 
Severance
 
Other
restructuring
costs
 
Total
Balance as of December 31, 2017
$
359

 

 
584

 
152

 
1,095

Provision - Global Ceramic segment

 
30

 
6,557

 
87

 
6,674

Provision - Flooring NA segment
236

 
700

 
4,985

 
28,889

 
34,810

Provision - Flooring ROW segment

 

 
932

 
(101
)
 
831

Provision - Corporate

 

 
476

 

 
476

Cash payments
(500
)
 

 
(11,197
)
 
(25,518
)
 
(37,215
)
Non-cash items

 
(730
)
 
(155
)
 
(3,445
)
 
(4,330
)
Balance as of September 29, 2018
$
95

 

 
2,182

 
64

 
2,341


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

5. Receivables, net

Receivables, net are as follows:
 
September 29,
2018
 
December 31,
2017
Customers, trade
$
1,726,925

 
1,538,348

Income tax receivable
8,638

 
9,835

Other
101,713

 
96,079

 
1,837,276

 
1,644,262

Less: allowance for discounts, claims and doubtful accounts
81,566

 
86,103

Receivables, net
$
1,755,710

 
1,558,159



12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Inventories

The components of inventories are as follows:
 
September 29,
2018
 
December 31,
2017
Finished goods
$
1,538,122

 
1,326,038

Work in process
166,726

 
159,921

Raw materials
509,447

 
462,704

Total inventories
$
2,214,295

 
1,948,663


7. Goodwill and intangible assets

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

Goodwill:
 
Global Ceramic segment
 
Flooring NA segment
 
Flooring ROW segment
 
Total
Balance as of December 31, 2017
 
 
 
 
 
 
 
Goodwill
$
1,567,872

 
869,764

 
1,361,248

 
3,798,884

Accumulated impairment losses
(531,930
)
 
(343,054
)
 
(452,441
)
 
(1,327,425
)
 
$
1,035,942

 
526,710

 
908,807

 
2,471,459

 
 
 
 
 
 
 
 
Goodwill recognized during the period
$

 
5,184

 
96,000

 
101,184

Currency translation during the period
$
(15,842
)
 

 
(34,662
)
 
(50,504
)
 
 
 
 
 
 
 
 
Balance as of September 29, 2018
 
 
 
 
 
 
 
Goodwill
$
1,552,030

 
874,948

 
1,422,586

 
3,849,564

Accumulated impairment losses
(531,930
)
 
(343,054
)
 
(452,441
)
 
(1,327,425
)
 
$
1,020,100

 
531,894

 
970,145

 
2,522,139


Intangible assets not subject to amortization:

    
 
Tradenames
Balance as of December 31, 2017
$
644,208

Intangible assets acquired during the period
58,671

Currency translation during the period
(19,531
)
Balance as of September 29, 2018
$
683,348

 

13

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, 2017
$
625,263

 
266,969

 
6,825

 
899,057

Intangible assets recognized during the period
43,635

 

 
7

 
43,642

Currency translation during the period
(15,102
)
 
(8,889
)
 
(183
)
 
(24,174
)
Balance as of September 29, 2018
$
653,796

 
258,080

 
6,649

 
918,525

 
 
 
 
 
 
 
 
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
21,429

 
1,713

 
56

 
23,198

Currency translation during the period
(8,798
)
 
(8,673
)
 
(13
)
 
(17,484
)
Balance as of September 29, 2018
$
403,059

 
252,948

 
1,205

 
657,212

 
 
 
 
 
 
 
 
Intangible assets subject to amortization, net
$
250,737

 
5,132

 
5,444

 
261,313

 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Amortization expense
$
8,148

 
7,421

 
23,198

 
26,802



8. Accounts payable and accrued expenses

Accounts payable and accrued expenses are as follows:
 
September 29,
2018
 
December 31,
2017
Outstanding checks in excess of cash
$
6,629

 
8,879

Accounts payable, trade
925,238

 
810,034

Accrued expenses
426,680

 
363,919

Product warranties
44,618

 
39,035

Accrued interest
13,838

 
22,363

Accrued compensation and benefits
206,415

 
207,442

Total accounts payable and accrued expenses
$
1,623,418

 
1,451,672


9. Accumulated other comprehensive income (loss)

The changes in accumulated other comprehensive income (loss) by component, for the nine months ended September 29, 2018 are as follows:
 
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
(146,143
)
 
291

 
(145,852
)
Balance as of September 29, 2018
$
(694,070
)
 
(10,309
)
 
(704,379
)


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


10. 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 3 restricted stock units ("RSUs") at a weighted average grant-date fair value of $189.39 per unit for the three months ended September 29, 2018. The Company granted 130 RSUs at a weighted average grant-date fair value of $236.82 per unit for the nine months ended September 29, 2018. The Company granted 154 RSUs at a weighted average grant-date fair value of $226.91 per unit for the nine months ended September 30, 2017. The Company recognized stock-based compensation costs related to the issuance of RSUs of $5,104 ($3,777 net of taxes) and $7,117 ($4,355 net of taxes) for the three months ended September 29, 2018 and September 30, 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 $26,697 ($19,756 net of taxes) and $30,601 ($18,569 net of taxes) for the nine months ended September 29, 2018 and September 30, 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 $27,540 as of September 29, 2018, and will be recognized as expense over a weighted-average period of approximately 1.38 years. The Company also recognized stock-based compensation costs related to stock options of $6 ($4 net of taxes) for the nine months ended September 30, 2017 which was allocated to cost of sales and selling, general and administrative expenses.


11. Other expense (income), net

Other expense (income), net is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Foreign currency losses (gains), net
$
2,456

 
3,568

 
7,178

 
6,253

Release of indemnification asset

 

 
1,749

 

All other, net
(1,750
)
 
(2,283
)
 
(2,133
)
 
(4,798
)
Total other expense, net
$
706

 
1,285

 
6,794

 
1,455



12. Income Taxes

For the quarter ended September 29, 2018, the Company recorded income tax expense of $49,487 on earnings before income taxes of $277,513 for an effective tax rate of 17.8%, as compared to an income tax expense of $100,532 on earnings before income taxes of $371,554, for an effective tax rate of 27.1% for the quarter ended September 30, 2017. For the nine months ended September 29, 2018, the Company recorded income tax expense of $215,928 on earnings before income taxes of $850,740 for an effective tax rate of 25.4% as compared to an income tax expense of $251,572 on earnings before income taxes of $985,398, for an effective tax rate of 25.5% for the nine months ended September 30, 2017.

The effective tax rates for the three and nine months ended September 29, 2018 were 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 effective tax rates for the three and nine months ended September 29, 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 nine months ended September 30, 2017 were both favorably impacted by discrete items.

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 Tax Cuts and Jobs Act ("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

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Company has not completed its accounting for the income tax effects of the TCJA but this will be completed within the one-year time period permitted by SAB 118.

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 nine months ended September 29, 2018.
 
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 September 29, 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 September 29, 2018, $17,522 of the Transition Tax obligation is current, with the remaining $188,508 recorded in other long-term liabilities within the accompanying condensed consolidated balance sheets.

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.

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. 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:


16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

    
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net earnings attributable to Mohawk Industries, Inc.
$
227,013

 
270,025

 
632,365

 
731,260

Accretion of redeemable noncontrolling interest (a)
(670
)
 
(46
)
 
(975
)
 
(46
)
Net earnings available to common stockholders
$
226,343

 
269,979

 
631,390

 
731,214

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding-basic and diluted:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
74,603

 
74,338

 
74,599

 
74,330

Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net
342

 
503

 
378

 
500

Weighted-average common shares outstanding-diluted
74,945

 
74,841

 
74,977

 
74,830

 
 
 
 
 
 
 
 
Earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
 
 
Basic
$
3.03

 
3.63

 
8.46

 
9.84

Diluted
$
3.02

 
3.61

 
8.42

 
9.77


(a) Represents the accretion of the Company'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. The Company has had the option to call and the holder the option to put this noncontrolling interest since May 12, 2018.


14. Segment reporting

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

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


17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Segment information is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net sales:
 
 
 
 
 
 
 
Global Ceramic segment
$
885,773

 
893,399

 
2,691,618

 
2,581,038

Flooring NA segment
1,047,540

 
1,031,773

 
3,055,468

 
3,011,568

Flooring ROW segment
612,487

 
523,338

 
1,787,930

 
1,529,587

Intersegment sales

 

 

 

 
$
2,545,800

 
2,448,510

 
7,535,016

 
7,122,193

Operating income (loss):
 
 
 
 
 
 
 
Global Ceramic segment
$
118,716

 
143,368

 
366,893

 
411,961

Flooring NA segment
93,369

 
163,494

 
268,779

 
383,118

Flooring ROW segment
84,108

 
83,042

 
273,334

 
245,189

Corporate and intersegment eliminations
(8,949
)
 
(9,806
)
 
(27,056
)
 
(29,561
)
 
$
287,244

 
380,098

 
881,950

 
1,010,707

 
 
September 29,
2018
 
December 31,
2017
Assets:
 
 
 
Global Ceramic segment
$
4,999,334

 
4,838,310

Flooring NA segment
3,989,784

 
3,702,137

Flooring ROW segment
3,709,623

 
3,245,424

Corporate and intersegment eliminations
302,185

 
308,982

 
$
13,000,926

 
12,094,853




18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. 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 perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board's motion for remand. 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, the Company appealed the federal court's determination that co-defendant ICI was properly joined as a party to that 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 argued that the courts did not have personal jurisdiction over the Company and that the complaints failed to state a claim on which relief could be granted.  The Centre Water Board court denied one motion on May 15, 2018, and the Gadsden Water Board court denied the other motion on August 13, 2018.  On June 19, 2018, the Company filed a petition to the Alabama Supreme Court in the Centre Water Board case, and on September 21, 2018, the Company filed a petition to the Alabama Supreme Court in the Gadsden Water Board case, seeking rulings that the trial courts erred in denying the motions on the personal jurisdiction arguments. Both petitions remain pending.

The Company has never manufactured perfluorinated compounds 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 January 2012, the Company received a €23,789 assessment 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 the years ended December 31, 2005 and December 31, 2009, in the amounts of €46,135 and €35,567, 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 €38,817, €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,

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 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. 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. On August 31, 2018, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal. The Company has now received favorable rulings from the Court of First Appeal in Bruges on all calendar years 2005 through 2010, inclusive.

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

General

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

16. Debt

Senior Credit Facility

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

At the Company's election, revolving loans under the 2015 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 1.00% and 1.75% (1.125% as of September 29, 2018), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of September 29, 2018). The Company also pays a commitment fee to the lenders under the 2015 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders' exceed utilization of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of September 29, 2018). The applicable margins and the commitment fee are determined based on whichever of the Company's Consolidated Net Leverage Ratio or its senior unsecured debt rating (or if not available, corporate family rating) results in the lower applicable margins and commitment fee (with applicable margins and the commitment fee increasing as that ratio increases or those ratings decline, as applicable).

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

The 2015 Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial and business operations, including limitations on liens, subsidiary indebtedness, fundamental changes, asset

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

dispositions, dividends and other similar restricted payments, transactions with affiliates, future negative pledges, and changes in the nature of the Company's business. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter. The limitations contain customary exceptions or, in certain cases, do not apply as long as the Company is in compliance with the financial ratio requirements and is not otherwise in default.

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

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 September 29, 2018, amounts utilized under the 2015 Senior Credit Facility included $12,000 of borrowings and $55,636 of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $969,520 under the Company's U.S. and European commercial paper programs as of September 29, 2018 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,037,156 under the 2015 Senior Credit Facility resulting in a total of $762,844 available as of September 29, 2018.
    
Commercial Paper

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

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

The proceeds from the issuance of commercial paper notes are available for general corporate purposes. As of September 29, 2018, there was $503,000 outstanding under the U.S. program, and the euro equivalent of $466,520 was outstanding under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.40% and 25.08 days, respectively. The weighted average interest rate and maturity period for the European program were (0.20)% and 45.91 days, respectively.

Senior Notes
    
On May 18, 2018, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of €300,000 aggregate principal amount of its Floating Rate Notes due May 18, 2020 ("2020 Floating Rate Notes"). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 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 $864 in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.

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


21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On June 9, 2015, the Company issued €500,000 aggregate principal amount of 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. 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 due February 1, 2023. The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all the Company's existing and future unsecured indebtedness. Interest on the 3.85% Senior Notes is payable semi-annually in cash on February 1 and August 1 of each year. The Company paid financing costs of $6,000 in connection with the 3.85% Senior Notes. These costs were deferred and are being amortized over the term of the 3.85% Senior Notes.

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

        
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:
 
September 29, 2018
 
December 31, 2017
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
3.85% senior notes, payable February 1, 2023; interest payable semiannually
$
600,816

 
600,000

 
622,752

 
600,000

2.00% senior notes, payable January 14, 2022; interest payable annually
606,580

 
580,248

 
634,193

 
600,096

Floating Rate Notes, payable September 11, 2019, interest payable quarterly
348,595

 
348,149

 
360,807

 
360,058

Floating Rate Notes, payable May 18, 2020, interest payable quarterly
348,090

 
348,149

 

 

U.S. commercial paper
503,000

 
503,000

 
228,500

 
228,500

European commercial paper
466,520

 
466,520

 
912,146

 
912,146

2015 Senior Credit Facility
12,000

 
12,000

 
62,104

 
62,104

Capital leases and other
10,008

 
10,008

 
6,934

 
6,934

Unamortized debt issuance costs
(5,670
)
 
(5,670
)
 
(6,260
)
 
(6,260
)
Total debt
2,889,939

 
2,862,404

 
2,821,176

 
2,763,578

Less current portion of long-term debt and commercial paper
1,333,853

 
1,333,853

 
1,203,683

 
1,203,683

Long-term debt, less current portion
$
1,556,086

 
1,528,551

 
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.

22


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

Overview

The Company has three reporting segments, Global Ceramic, Flooring North America ("Flooring NA") and Flooring Rest of the World ("Flooring ROW"). The Global Ceramic segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, quartz and porcelain slab countertops, which it distributes primarily in North America, Europe and Russia through various selling channels, which include company-owned stores, independent distributors and home centers. The Flooring NA segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet 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, distributors, home centers, mass merchandisers, department stores, shop at home, buying groups, commercial contractors 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 ("MDF"), chipboards, other wood products and vinyl products, including LVT, which it distributes primarily in Europe, Russia, Australia and New Zealand through various selling channels, which include retailers, independent distributors and home centers.

The Company is a significant participant in every major product category across the global flooring industry. A majority of the Company’s sales and long-lived assets are located in the United States and Europe. The Company expects continued growth in the United States market if residential housing starts and remodeling continue to grow. The Company also has operations in Europe, Russia and other parts of the world where the Company is growing market share, especially in its ceramic tile product lines. The Company expects sales growth to continue on a local basis in 2018. The Company is also implementing product price increases due to escalating material costs.

In 2017, the Company invested over $900 million in capital projects to expand capacities, differentiate products, and improve productivity.  In 2018, the Company plans to invest an additional $800 million in its existing businesses to complete projects that were begun in 2017 and to commence new initiatives, resulting in approximately $35 million of increased start-up costs. The largest investments during this two-year period are the expansion of LVT in the U.S. and Europe; ceramic capacity increases in Mexico, Italy, Poland and Russia; luxury laminate in the U.S., Europe and Russia; carpet tile in Europe; sheet vinyl in Russia; and countertops in the U.S. and Europe. 

For the three months ended September 29, 2018, net earnings attributable to the Company were $227.0 million, or diluted earnings per share ("EPS") of $3.02, compared to net earnings attributable to the Company of $270.0 million, or diluted EPS of $3.61 for the three months ended September 30, 2017. Net earnings attributable to the Company were $632.4 million, or diluted EPS of $8.42 for the nine months ended September 29, 2018 compared to net earnings attributable to the Company of $731.3 million, or diluted EPS of $9.77 for the nine months ended September 30, 2017. The decrease in EPS was primarily attributable to higher inflation, higher start-up costs, and costs due to temporarily reducing production, partially offset by decreased income tax expense, the favorable net impact of price and product mix, increased sales volume and savings from capital investments and cost reduction initiatives. The increase in sales volume is primarily due to the acquisitions.
For the nine months ended September 29, 2018, the Company generated $894.5 million of cash from operating activities. As of September 29, 2018, the Company had cash and cash equivalents of $91.4 million, of which $27.7 million was in the United States and $63.6 million was in foreign countries.

Recent Events

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.
On October 15, 2018, the Company agreed to acquire Eliane S/A Revestimentos Ceramicos, one of the largest ceramic tile companies in Brazil for approximately $250 million. The acquisition is expected to close during the fourth quarter.
On July 2, 2018, the Company completed its acquisition of Godfrey Hirst Group, the leading flooring company in Australia and New Zealand, further extending Mohawk's global position. The total value of the acquisition was approximately $400.9 million.


23


Results of Operations

Quarter Ended September 29, 2018, as compared with Quarter Ended September 30, 2017

Net sales

Net sales for the three months ended September 29, 2018 were $2,545.8 million, reflecting an increase of $97.3 million, or 4.0%, from the $2,448.5 million reported for the three months ended September 30, 2017. The increase was primarily attributable to higher sales volume of approximately $108 million, or 4%, which includes sales volume attributable to acquisitions of approximately $75 million. Also contributing to the increase in sales was the favorable net impact of price and product mix of approximately $13 million, or 1%, partially offset by the net impact of unfavorable foreign exchange rates of approximately $23 million, or 1%.

Global Ceramic segment—Net sales decreased $7.6 million, or 0.9%, to $885.8 million for the three months ended September 29, 2018, compared to $893.4 million for the three months ended September 30, 2017. The decrease was primarily attributable to the net impact of unfavorable foreign exchange rates of approximately $13 million, or 2%, and the unfavorable net impact of price and product mix of approximately $4 million, partially offset by higher sales volume of approximately $9 million, or 1%.

Flooring NA segment—Net sales increased $15.8 million, or 1.5%, to $1,047.5 million for the three months ended September 29, 2018, compared to $1,031.8 million for the three months ended September 30, 2017. The increase was primarily attributable to the favorable net impact of price and product mix and higher sales volume.

Flooring ROW segment—Net sales increased $89.1 million, or 17.0%, to $612.5 million for the three months ended September 29, 2018, compared to $523.3 million for the three months ended September 30, 2017. The increase was primarily attributable to higher sales volume of approximately $86 million, or 16%, which includes sales volume attributable to acquisitions of approximately $75 million. Also contributing to the increase in sales was the favorable net impact of price and product mix of approximately $14 million, or 3%, partially offset by the net impact of unfavorable foreign exchange rates of approximately $10 million, or 2%.

Gross profit

Gross profit for the three months ended September 29, 2018 was $720.4 million (28.3% of net sales), a decrease of $62.9 million or 8.0%, compared to gross profit of $783.3 million (32.0% of net sales) for the three months ended September 30, 2017. As a percentage of net sales, gross profit decreased 369 basis points. The decrease in gross profit dollars was primarily attributable to higher inflation costs of approximately $63 million, including increased material costs of approximately $37 million, approximately $10 million of start-up costs associated with large investments to expand sales, add product categories and enter new markets, the net impact of unfavorable foreign exchange rates of approximately $9 million, approximately $9 million of costs due to temporarily reducing production, and the unfavorable impact of higher restructuring, acquisition and integration-related and other costs of approximately $5 million, partially offset by higher sales volume of approximately $29 million and savings from capital investments and cost reduction initiatives of approximately $5 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended September 29, 2018 were $433.2 million (17.0% of net sales), an increase of $30.0 million compared to $403.2 million (16.5% of net sales) for the three months ended September 30, 2017. As a percentage of net sales, selling, general and administrative expenses increased 55 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $12 million of costs due to higher sales volume, approximately $8 million of costs associated with investments in new product development, sales personnel, and marketing, higher inflation costs of approximately $6 million, and the unfavorable impact of higher restructuring, acquisition and integration-related and other costs of approximately $5 million.

Operating income

Operating income for the three months ended September 29, 2018 was $287.2 million (11.3% of net sales) reflecting a decrease of $92.9 million, or 24.4%, compared to operating income of $380.1 million (15.5% of net sales) for the three months ended September 30, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $69 million, including increased material costs of approximately $37 million and increased North American freight costs of approximately $12 million, approximately $14 million of start-up costs associated with large investments to expand sales, add

24


product categories, and enter new markets, approximately $10 million due to the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs, approximately $9 million of costs due to temporarily reducing production, the net impact of unfavorable foreign exchange rates of approximately $6 million, and approximately $4 million of costs associated with investments in new product development, sales personnel, and marketing, partially offset by increased sales volume of approximately $17 million.

Global Ceramic segment—Operating income was $118.7 million (13.4% of segment net sales) for the three months ended September 29, 2018 reflecting a decrease of $24.7 million compared to operating income of $143.4 million (16.0% of segment net sales) for the three months ended September 30, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $29 million, including increased North American freight costs of approximately $12 million, the unfavorable net impact of price and product mix of approximately $8 million, approximately $5 million of costs due to temporarily reducing production, and approximately $4 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 $15 million, approximately $6 million due to the favorable impact of lower restructuring, acquisition and integration-related, and other costs, and increased sales volume of approximately $4 million.

Flooring NA segment—Operating income was $93.4 million (8.9% of segment net sales) for the three months ended September 29, 2018 reflecting a decrease of $70.1 million compared to operating income of $163.5 million (15.8% of segment net sales) for the three months ended September 30, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $36 million, including increased material costs of approximately $30 million, an increase in costs of approximately $24 million due to lower than expected production volumes, the ramp up of new products and higher logistics costs, approximately $8 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, and approximately $4 million of costs due to temporarily reducing production.

Flooring ROW segment—Operating income was $84.1 million (13.7% of segment net sales) for the three months ended September 29, 2018 reflecting an increase of $1.1 million compared to operating income of $83.0 million (15.9% of segment net sales) for the three months ended September 30, 2017. The increase in operating income was primarily attributable to increased sales volume of approximately $9 million, savings from capital investments and cost reduction initiatives of approximately $9 million, and the favorable net impact of price and product mix of approximately $6 million, partially offset by approximately $11 million due to the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs, approximately $5 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, higher inflation costs of approximately $4 million, and the net impact of unfavorable foreign exchange rates of approximately $4 million.

Interest expense

Interest expense was $9.0 million for the three months ended September 29, 2018, reflecting an increase of $1.8 million compared to interest expense of $7.3 million for the three months ended September 30, 2017. The increase in interest expense was primarily due to increased borrowings.

Other expense, net

Other expense, net was $0.7 million for the three months ended September 29, 2018, reflecting an favorable change of $0.6 million compared to other expense, net of $1.3 million for the three months ended September 30, 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 September 29, 2018, the Company recorded income tax expense of $49.5 million on earnings before income taxes of $277.5 million for an effective tax rate of 17.8%, as compared to income tax expense of $100.5 million on earnings before income taxes of $371.6 million, for an effective tax rate of 27.1% for the three months ended September 30, 2017. The effective tax rate for 2018 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 effective tax rate for 2017 was favorably impacted by state tax benefits recognized during the quarter.


25



Nine Months Ended September 29, 2018, as compared with Nine Months Ended September 30, 2017

Net sales

Net sales for the nine months ended September 29, 2018 were $7,535.0 million, reflecting an increase of $412.8 million, or 5.8%, from the $7,122.2 million reported for the nine months ended September 30, 2017. The increase was primarily attributable to higher sales volume of approximately $200 million, or 3%, which includes sales volume attributable to acquisitions of approximately $122 million. Also contributing to the increase in sales was the net impact of favorable foreign exchange rates of approximately $124 million, or 2%, and the favorable net impact of price and product mix of approximately $89 million, or 1%.

Global Ceramic segment—Net sales increased $110.6 million, or 4.3%, to $2,691.6 million for the nine months ended September 29, 2018, compared to $2,581.0 million for the nine months ended September 30, 2017. The increase was primarily attributable to higher sales volume of approximately $93 million, or 3%, 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 $27 million, or 1%, partially offset by the unfavorable net impact of price and product mix of approximately $9 million.

Flooring NA segment—Net sales increased $43.9 million, or 1.5%, to $3,055.5 million for the nine months ended September 29, 2018, compared to $3,011.6 million for the nine months ended September 30, 2017. The increase was primarily attributable to the favorable net impact of price and product mix of approximately $25 million, or 1% and higher sales volume of approximately $19 million, or 1%.

Flooring ROW segment—Net sales increased $258.3 million, or 16.9%, to $1,787.9 million for the nine months ended September 29, 2018, compared to $1,529.6 million for the nine months ended September 30, 2017. The increase was primarily attributable to higher sales volume of approximately $89 million, or 6%, which includes sales volume attributable to acquisitions of approximately $75 million. Also contributing to the increase in sales was the net impact of favorable foreign exchange rates of approximately $97 million, or 6%, and the favorable net impact of price and product mix of approximately $73 million, or 5%.

Gross profit

Gross profit for the nine months ended September 29, 2018 was $2,191.7 million (29.1% of net sales), an decrease of $51.1 million or 2.3%, compared to gross profit of $2,242.8 million (31.5% of net sales) for the nine months ended September 30, 2017. As a percentage of net sales, gross profit decreased 240 basis points. The decrease in gross profit dollars was primarily attributable to the higher inflation costs of approximately $170 million, including increased material costs of approximately $105 million, approximately $23 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, approximately $22 million of costs due to temporarily reducing production, and approximately $7 million due to the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs, partially offset by favorable net impact of price and product mix of approximately $59 million, savings from capital investments and cost reduction initiatives of approximately $52 million, higher sales volume of approximately $36 million, and the net impact of favorable foreign exchange rates of approximately $24 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the nine months ended September 29, 2018 were $1,309.7 million (17.4% of net sales), an increase of $77.6 million compared to $1,232.1 million (17.3% of net sales) for the nine months ended September 30, 2017. As a percentage of net sales, selling, general and administrative expenses increased 8 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $24 million of costs due to higher sales volume, the net impact of unfavorable foreign exchange rates of approximately $18 million, higher inflation costs of approximately $14 million, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $12 million, and approximately $7 million of costs associated with investments in new product development, sales personnel, and marketing.

Operating income

Operating income for the nine months ended September 29, 2018 was $882.0 million (11.7% of net sales) reflecting a decrease of $128.8 million, or 12.7%, compared to operating income of $1,010.7 million (14.2% of net sales) for the nine months ended September 30, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $183 million, including increased material costs of approximately $105 million and increased North American freight costs of

26


approximately $24 million, approximately $30 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, approximately $22 million of costs due to temporarily reducing production, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $20 million, and approximately $7 million of costs associated with investments in new product development, sales personnel, and marketing, partially offset by the favorable net impact of price and product mix of approximately $59 million, savings from capital investments and cost reduction initiatives of approximately $58 million, higher sales volume of approximately $12 million, and the net impact of favorable foreign exchange rates of approximately $6 million.

Global Ceramic segment—Operating income was $366.9 million (13.6% of segment net sales) for the nine months ended September 29, 2018 reflecting a decrease of $45.1 million compared to operating income of $412.0 million (16.0% of segment net sales) for the nine months ended September 30, 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $67 million, including increased North American freight costs of approximately $24 million, the unfavorable net impact of price and product mix of approximately $22 million, approximately $17 million of costs due to temporarily reducing production, and approximately $7 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 $50 million, increased sales volume of approximately $15 million, and the favorable impact of lower restructuring, acquisition and integration-related, and other costs of approximately $8 million.

Flooring NA segment—Operating income was $268.8 million (8.8% of segment net sales) for the nine months ended September 29, 2018 reflecting a decrease of $114.3 million compared to operating income of $383.1 million (12.7% of segment net sales) for the nine months ended September 30, 2017. The decrease in operating income was primarily attributable higher inflation costs of approximately $90 million, including increased material costs of approximately $73 million, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $12 million, approximately $12 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, an increase in costs of approximately $11 million due to lower than expected production volumes, the ramp up of new products and higher logistics costs, approximately $6 million of costs due to temporarily reducing production, and approximately $5 million in decreased sales volume, partially offset by the favorable net impact of price and product mix of approximately $22 million.

Flooring ROW segment—Operating income was $273.3 million (15.3% of segment net sales) for the nine months ended September 29, 2018 reflecting an increase of $28.1 million compared to operating income of $245.2 million (16.0% of segment net sales) for the nine months ended September 30, 2017. The increase in operating income was primarily attributable to the favorable net impact of price and product mix of approximately $59 million, savings from capital investments and cost reduction initiatives of approximately $19 million, and the net impact of favorable foreign exchange rates of approximately $4 million, partially offset by higher inflation costs of approximately $26 million, including increased material costs of approximately $18 million, approximately $14 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $12 million.

Interest expense

Interest expense was $24.4 million for the nine months ended September 29, 2018, reflecting an increase of $0.6 million compared to interest expense of $23.9 million for the nine months ended September 30, 2017.

Other expense, net

Other expense was $6.8 million for the nine months ended September 29, 2018, reflecting an unfavorable change of $5.3 million compared to other expense of $1.5 million for the nine months ended September 30, 2017. The change was primarily attributable to the increased unfavorable impact of foreign exchange rates on transactions in the current year and a charge for the release of an indemnification receivable.

Income tax expense

For the nine months ended September 29, 2018, the Company recorded income tax expense of $215.9 million on earnings before income taxes of $850.7 million for an effective tax rate of 25.4%, as compared to an income tax expense of $251.6 million on earnings before income taxes of $985.4 million, for an effective tax rate of 25.5% for the nine months ended September 30, 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

27


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 nine months ended September 30, 2017.


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 nine months of 2018 was $894.5 million, compared to net cash provided by operating activities of $874.2 million in the first nine months of 2017. The increase of $20.3 million in 2018 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 nine months of 2018 was $1,028.3 million compared to net cash used in investing activities of $905.4 million in the first nine months of 2017. The increase was primarily due to acquisitions in the prior year of $250.8 million compared to acquisitions in the current year of $425.3 million. This increase was offset by the net redemption activity in short-term investments of $39.9 million associated with the Company's wholly-owned captive insurance company, and decreased capital expenditures of $11.7 million in the current year. 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 2018 is expected to approximate $130 million, resulting in the full year spending being approximately $800.0 million.

Net cash provided by financing activities in the first nine months of 2018 was $151.5 million compared to net cash used in financing activities of $23.3 million in the nine months of 2017. The change in cash provided by financing activities is primarily attributable to increased borrowings.

As of September 29, 2018, the Company had cash of $91.4 million, of which $63.6 million was held outside the United States. The Company plans to permanently reinvest the cash held outside the United States. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its existing credit facilities will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over at least the next twelve months.

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

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

Senior Credit Facility

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

At the Company's election, revolving loans under the 2015 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 1.00%

28


and 1.75% (1.125% as of September 29, 2018), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of September 29, 2018). The Company also pays a commitment fee to the lenders under the 2015 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders' exceed utilization of the 2015 Senior Credit Facility ranging from 0.10% to 0.225% per annum (0.125% as of September 29, 2018). The applicable margins and the commitment fee are determined based on whichever of the Company's Consolidated Net Leverage Ratio or its senior unsecured debt rating (or if not available, corporate family rating) results in the lower applicable margins and commitment fee (with applicable margins and the commitment fee increasing as that ratio increases or those ratings decline, as applicable).

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

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

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

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 September 29, 2018, amounts utilized under the 2015 Senior Credit Facility included $12.0 million of borrowings and $55.6 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $969.5 million under the Company's U.S. and European commercial paper programs as of September 29, 2018 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,037.2 million under the 2015 Senior Credit Facility resulting in a total of $762.8 million available as of September 29, 2018.
    
Commercial Paper

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

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

The proceeds from the issuance of commercial paper notes are available for general corporate purposes. As of September 29, 2018, there was $503.0 million outstanding under the U.S. program, and the euro equivalent of $466.5 million was outstanding under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.40% and 25.08 days, respectively. The weighted average interest rate and maturity period for the European program were (0.20)% and 45.91 days, respectively.

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

29


zero). Interest on the Floating Rate Notes is payable quarterly on August 18, November 18, February 18, and May 18 of each year. Mohawk Finance paid financing costs of $0.9 million in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.

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

On June 9, 2015, the Company issued €500.0 million aggregate principal amount of 2.00% Senior Notes 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. The Company paid financing costs of $4.2 million in connection with the 2.00% Senior Notes. These costs were deferred and are being amortized over the term of the 2.00% Senior Notes.
    
On January 31, 2013, the Company issued $600.0 million aggregate principal amount of 3.85% Senior Notes due February 1, 2023. The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all the Company's existing and future unsecured indebtedness. Interest on the 3.85% Senior Notes is payable semi-annually in cash on February 1 and August 1 of each year. The Company paid financing costs of $6.0 million in connection with the 3.85% Senior Notes. These costs were deferred and are being amortized over the term of the 3.85% Senior Notes.

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

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 2017 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 within our Condensed Consolidated Financial Statements of this Form 10-Q for a discussion of the Company's updated accounting policies on revenue recognition. The Company’s critical accounting policies and estimates are described in its 2017 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.

30



Impact of Inflation

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

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements as of September 29, 2018.

Seasonality

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

Forward-Looking Information

Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies, and similar matters, and those that include the words “could,” “should,” “believes,” “anticipates,” “expects” and “estimates” or similar expressions constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in economic or industry conditions; competition; inflation and deflation in raw material prices and other input costs; inflation and deflation in consumer markets; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company’s products; impairment charges; ability to identify attractive acquisition targets; ability to successfully complete and integrate acquisitions; international operations; changes in foreign exchange rates; introduction of new products; rationalization of operations; tax, product and other claims; litigation; and other risks identified in Item 1A "Risk Factors" in the Company's 2017 Annual Report on Form 10-K.



31


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As of September 29, 2018, approximately 41% of the Company's debt portfolio was comprised of fixed-rate debt and 59% was floating-rate debt. A 1.0 percentage point increase in the interest rate of the floating-rate debt would have resulted in an increase in interest expense of $4.2 million and $12.6 million for the three and nine months ended September 29, 2018, respectively. There have been no significant changes to the Company’s exposure to market risk as disclosed in the Company’s 2017 Annual Report filed on Form 10-K.    

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

There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting other than the Company adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018, and implemented new controls and processes to meet the requirements of the standard, and acquired businesses as referenced in Note 2 in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q and implemented new controls and procedures with respect to the acquisitions.

32


PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

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

Alabama Municipal Litigation

In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board's motion for remand. 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, the Company appealed the federal court's determination that co-defendant ICI was properly joined as a party to that 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 argued that the courts did not have personal jurisdiction over the Company and that the complaints failed to state a claim on which relief could be granted.  The Centre Water Board court denied one motion on May 15, 2018, and the Gadsden Water Board court denied the other motion on August 13, 2018.  On June 19, 2018, the Company filed a petition to the Alabama Supreme Court in the Centre Water Board case, and on September 21, 2018, the Company filed a petition to the Alabama Supreme Court in the Gadsden Water Board case, seeking rulings that the trial courts erred in denying the motions on the personal jurisdiction arguments. Both petitions remain pending.

The Company has never manufactured perfluorinated compounds 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 January 2012, the Company received a €23.8 million assessment 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 the years ended December 31, 2005 and December 31, 2009, 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, and €43.1 million, 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

33


December 31, 2008, totaling €30.1 million, 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 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 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. 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. On August 31, 2018, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal. The Company has now received favorable rulings from the Court of First Appeal in Bruges on all calendar years 2005 through 2010, inclusive.

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

General

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

There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2017. The risk factors disclosed in our Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition or results.

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

None.

Item 3.
Defaults Upon Senior Securities

None.


Item 4.
Mine Safety Disclosures

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

Item 5.
Other Information

None.


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Item 6.
Exhibits
No.
 
Description
 
 
 
31.1
 
31.2
 
32.1
 
32.2
 
95.1
 
101.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.




35


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
MOHAWK INDUSTRIES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
Dated:
November 2, 2018
By:
 
/s/ Jeffrey S. Lorberbaum
 
 
 
 
JEFFREY S. LORBERBAUM
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
(principal executive officer)
 
 
 
 
 
Dated:
November 2, 2018
By:
 
/s/ Frank H. Boykin
 
 
 
 
FRANK H. BOYKIN
 
 
 
 
Chief Financial Officer
 
 
 
 
(principal financial officer)

36