Company Quick10K Filing
Quick10K
Mohawk Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$131.10 72 $9,490
10-K 2018-12-31 Annual: 2018-12-31
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
10-Q 2015-10-03 Quarter: 2015-10-03
10-Q 2015-07-04 Quarter: 2015-07-04
10-Q 2015-04-04 Quarter: 2015-04-04
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-03-12 Officers, Regulation FD, Exhibits
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
JCI Johnson Controls 33,540
MSI Motorola Solutions 23,810
AWI Armstrong World Industries 4,190
PYX Playtex Products 162
CPTA Capitala Finance 140
DEST Destination Maternity 31
CLCS Cell Source 0
RGIN Regenicin 0
ALPP Alpine 4 Technologies 0
PGLC Pershing Gold 0
MHK 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
EX-10.18 mhk_201810kexhibit1018.htm
EX-10.21 mhk_201810kexhibit1021.htm
EX-10.22 mhk_201810kexhibit1022.htm
EX-21 mhk_201810kexhibit21.htm
EX-23.1 mhk_201810kexhibit231.htm
EX-31.1 mhk_201810kexhibit311.htm
EX-31.2 mhk_201810kexhibit312.htm
EX-32.1 mhk_201810kexhibit321.htm
EX-32.2 mhk_201810kexhibit322.htm
EX-95.1 mhk_201810kexhibit951.htm

Mohawk Industries Earnings 2018-12-31

MHK 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 a4q201810kdocument-classic.htm 10-K Document


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[Mark One]
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
 
New York Stock Exchange
Floating Rate Notes due 2019
 
New York Stock Exchange
Floating Rate Notes due 2020
 
New York Stock Exchange
2.000% Senior Notes due 2022
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act    Yes  ¨    No  ý
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  ý    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 such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
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 Act).    Yes  ¨    No  ý
The aggregate market value of the Common Stock of the Registrant held by non-affiliates (excludes beneficial owners of more than 10% of the Common Stock) of the Registrant (61,962,326 shares) on June 29, 2018 (the last business day of the Registrant’s most recently




completed fiscal second quarter) was $13,276,667,592. The aggregate market value was computed by reference to the closing price of the Common Stock on such date.
Number of shares of Common Stock outstanding as of February 27, 2019: 72,309,897 shares of Common Stock, $.01 par value. 

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2019 Annual Meeting of Stockholders-Part III.



Table of Contents
 
 
 
Page
No.
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.



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PART I
 
Item 1.
Business

General
    
Mohawk Industries, Inc. (“Mohawk” or the “Company”) is a leading global flooring manufacturer that creates products to enhance residential and commercial spaces around the world. The Company’s vertically integrated manufacturing and distribution processes provide competitive advantages in carpet, rugs, ceramic tile, laminate, wood, stone, luxury vinyl tile (“LVT”) and vinyl flooring. The Company’s industry-leading innovation develops products and technologies that differentiate its brands in the marketplace and satisfy all flooring related remodeling and new construction requirements. The Company’s brands are among the most recognized in the industry and include American Olean®, Daltile®, Durkan®, Eliane®, Feltex®, Godfrey Hirst®, IVC®, Karastan®, Marazzi®, Mohawk®, Pergo®, Quick-Step® and Unilin®. The Company has transformed its business from an American carpet manufacturer into the world’s largest flooring company with operations in Australia, Brazil, Canada, Europe, India, Malaysia, Mexico, New Zealand, Russia and the United States. The Company had annual net sales in 2018 of $10.0 billion. Approximately 61% of this amount was generated by sales in the United States and approximately 39% was generated by sales outside the United States. The Company has three reporting segments, Global Ceramic, Flooring North America (“Flooring NA”) and Flooring Rest of the World (“Flooring ROW”) with net sales in 2018 representing 36%, 40% and 24%, respectively, of the total. Selected financial information for the three segments, geographic net sales and the location of long-lived assets are set forth in Note 16-Segment Reporting.

The Global Ceramic Segment designs, manufactures, sources, distributes and markets a broad line of ceramic, porcelain and natural stone tile products used for floor and wall applications in residential and commercial channels for both remodeling and new construction.  In addition, the Global Ceramic Segment manufactures, sources, and distributes other tile related products, including natural stone, quartz and porcelain slab countertops, as well as installation materials. The Global Ceramic Segment markets and distributes its products under various brands, including the following:  American Olean, Daltile, Eliane, EmilGroup®, KAI®, Kerama Marazzi, Marazzi, and Ragno®, which it sells through company-owned and franchised operations, independent distributors, home centers, floor covering retailers, ceramic specialists, commercial contractors and commercial end users. The Global Ceramic Segment operations are vertically integrated from the production of raw material for body and glaze preparation to the manufacturing and distribution of ceramic and porcelain tile.

The Flooring NA Segment designs, manufactures, sources and distributes its floor covering product lines in a broad range of colors, textures and patterns in the residential and commercial markets for both remodeling and new construction. The Segment’s product lines include broadloom carpet, carpet tile, rugs and mats, carpet pad, wood, laminate, medium-density fiberboard (“MDF”), LVT and sheet vinyl. The Flooring NA Segment markets and distributes its flooring products under various brands, including the following: Aladdin Commercial®, Durkan, IVC, Karastan, Mohawk, Mohawk Group®, Mohawk Home®, Pergo, Portico®, and Quick-Step which it sells through floor covering retailers, distributors, home centers, mass merchants, department stores, e-commerce retailers, shop at home, buying groups, builders, commercial contractors and commercial end users.

The Flooring ROW Segment designs, manufactures, sources and distributes laminate, wood flooring, LVT and sheet vinyl, broadloom carpet and carpet tile, as well as roofing panels, insulation boards, mezzanine flooring, MDF, and chipboards, used in the residential and commercial markets for both remodeling and new construction. In addition, the Flooring ROW Segment licenses certain patents related to flooring manufacturers throughout the world. The Flooring ROW Segment markets and distributes its flooring products under various brands, including the following: Balterio®, Feltex, Godfrey Hirst, Hycraft®, Itec®, IVC, Leoline®, Moduleo®, Pergo, Quick-Step, Unilin and Xtratherm®, which it sells through retailers, wholesalers, independent distributors and home centers.

Business Strategy

Mohawk’s Business Strategy provides a consistent vision for the organization and focuses employees around the globe. The strategy is cascaded down through the organization with an emphasis on five key points:

Optimizing the Company’s position as the industry’s preferred provider by delivering exceptional value to customers
Treating employees fairly to retain the best organization
Driving innovation in all aspects of the business
Taking reasonable, well considered risks to grow the business
Enhancing the communities in which the Company operates



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The Mohawk Business Strategy provides continuity for the Company’s operating principles and ensures a focus on exceeding customer expectations.

Strengths

Market Position

Mohawk’s fashionable and innovative products, successful participation in all sales channels, creative marketing programs and extensive sales resources have enabled the Company to build market leadership positions in multiple geographies, primarily North America, Brazil, Europe, Russia and Australasia, as well as export products to more than 170 countries. In North America, Mohawk’s largest marketplace, the Company has leveraged its brands, breadth of offering and award-winning merchandising to build strong positions across all product categories. In Europe and Russia, similar advantages have supported market leadership in ceramic, premium laminate and sheet vinyl. The 2018 acquisition of Godfrey Hirst provided the Company with the largest position in carpet to complement the leading hard surface presence in Australasia that had grown through the earlier acquisition of national distributors in both Australia and New Zealand. In 2018, the Company acquired Eliane, a leading ceramic tile manufacturer in Brazil, the world’s third largest ceramic market. The Eliane brand is highly regarded for innovative design and strength in high-end porcelain floor and wall tile. Eliane is Brazil’s largest ceramic tile exporter. The Company also has established a strong position in the fast-growing LVT market on both sides of the Atlantic following the 2015 acquisition of IVC and subsequent investments to expand production in both North America and Europe.

Product Innovation

Mohawk drives performance through product innovation and improvements across all categories. In ceramic, this includes proprietary Reveal Imaging® printing that replicates the appearance of other surfaces, such as long planks with the visuals and texture of natural wood as well as tiles that mimic natural stone, cement, textiles and other alternatives. In Italy, the Company has recently begun manufacturing porcelain large scale slabs that replicate the look of stone but are harder and more durable. The slabs are being sold in the European and North American markets and are used for floors, walls and countertops. In the U.S., the Company has begun to manufacture quartz countertops that, along with its stone and porcelain slabs, represent a comprehensive array of surface options. In carpet, exclusive fiber technologies include the unique bio-based SmartStrand® and its brand extensions that represented the first super soft stain resistant products on the market and the patented ContinuumTM process that adds bulk and softness to polyester fiber, differentiating the Company’s products in this fast growing component of the carpet market. These fiber advantages have been extended into the Company’s rug production, as well, adding luxurious feel and performance enhancements to the Company’s design leadership. In laminate, the Company’s installation technology revolutionized the category, and the Company continues to deliver new innovations with more realistic visuals and surface embossing in register that precisely recreates the appearance of wood and water resistance that has extended the category into kitchens and baths. In wood flooring, the Company is introducing longer and wider planks in increasingly popular engineered collections, as well as introducing more fashion-forward stains, finishes and surface protection. The Company’s vinyl offerings reflect significant investments in leading-edge technology that yield incredibly realistic reproductions of stone, wood and other materials with embossed finishes that accentuate the beauty of the products.

Operational Excellence

Mohawk’s highly efficient manufacturing and distribution assets serve as the foundation for successful growth. By leveraging continuous process improvement and automation, the Company’s operations drive innovation, quality and value. Through its commitment to sustainability practices, the Company has also optimized natural resources and raw materials. Since 2013, the Company has invested approximately $4 billion to expand capacity, introduce differentiated new products and improve efficiencies. In particular, the Company’s capital investments have improved recently acquired businesses by upgrading their product offerings, expanding their distribution and improving their productivity. For more than a decade, Mohawk’s training and development programs have been ranked among the best by Training magazine, and Forbes designated Mohawk as one of the Best Large U.S. Employers from 2016 through 2018.

Sustainability

The Company believes that it is the industry leader in sustainable products and processes. The Company’s extensive use of recycled content in its products includes the annual use of over 6.2 billion plastic bottles to create polyester carpet fiber and more than 42 million pounds of tires to produce decorative crumb rubber mats. In all, the Company diverts more than 6.5 billion pounds of waste from landfills each year, with 47 of the Company’s manufacturing sites internally certified as Zero Process Waste to Landfill facilities. The Company’s commitment to sustainability extends beyond its products to resource utilization, including a 442-million gallon reduction in water use since 2015, lower greenhouse gas emissions and increased energy efficiency. The


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Company also produces energy through solar panels, windmills and a waste to energy program using scrap material. The Company’s commitment to safety and wellness helps to retain a talented workforce. The Company currently operates 19 on-site, near-site or virtual Healthy Life Centers to assist employees with management of chronic conditions as well as the treatment of acute illness. The Company’s annual sustainability report details these and other initiatives and may be accessed at http://www.mohawksustainability.com.

Sales and Distribution

Global Ceramic Segment

The Global Ceramic Segment designs, markets, manufactures, distributes and sources a broad line of ceramic tile, porcelain tile and natural stone products, including natural stone, quartz and porcelain slab countertops. Products are distributed through various channels, including independent distributors, home centers, Company-operated service centers and stores, ceramic specialists, commercial contractors, and directly to commercial end users. The business is organized to address the specific customer needs of each distribution channel with dedicated sales forces that support the various channels.

The Company provides customers with one of the ceramic tile industry’s broadest product lines—a complete selection of glazed floor tile, glazed wall tile, mosaic tile, porcelain tile, quarry tile, stone products, porcelain slab countertops, quartz countertops and installation products. In addition to products manufactured by the Company’s ceramic tile business, the Company also sources products from other manufacturers to enhance its product offering.

The Global Ceramic Segment markets its products under the American Olean, Daltile, Eliane, EmilGroup, KAI, Kerama Marazzi, Marazzi and Ragno brand names. These brands are supported by a fully integrated marketing program, displays, merchandising boards, literature, catalogs and internet websites. Innovative design, quality and response to changes in customer preference enhances recognition in the marketplace. The Company is focused on sales growth opportunities through innovative products and programs in both the residential and commercial channels for both remodeling and new construction.

The Global Ceramic Segment utilizes various distribution methods including regional distribution centers, service centers, direct shipping and customer pick-up from manufacturing facilities. The Segment’s sales forces are organized by product type and sales channels in order to best serve each type of customer. The Company believes its distribution methods for the Global Ceramic Segment provide high-quality customer service and enhance its ability to plan and manage inventory requirements.

Flooring NA Segment

Through its Flooring NA Segment, the Company designs, markets, manufactures, distributes and sources carpet, laminate, carpet pad, rugs, wood, LVT and sheet vinyl in a broad range of colors, textures and patterns. The Flooring NA Segment positions product lines in all price ranges and emphasizes quality, style, performance and service. The Flooring NA Segment markets and distributes its product lines to independent distributors, floor covering retailers, home centers, mass merchandisers, department stores, e-commerce retailers, shop at home, buying groups, commercial contractors and commercial end users. Some products are also marketed through private labeling programs. Sales to customers focused on residential products represent a significant portion of the total industry and the majority of the Segment’s sales.

The Company has positioned its brand names across all price ranges. IVC, Karastan, Mohawk, Pergo, Portico and Quick-Step are positioned to sell in the residential flooring markets. Aladdin Commercial and Mohawk Group are positioned to sell in the commercial market, which is made up of corporate office space, educational facilities, institutional facilities, healthcare/assisted living facilities and retail space. The Company also sells into the commercial hospitality space (hotels, restaurants, gaming facilities, etc.) under its Durkan brand.
The Segment’s sales forces are generally organized by sales channels in order to best serve each type of customer. Product delivery to independent dealers is facilitated predominantly on Mohawk trucks operating from strategically positioned warehouses and cross-docks that receive inbound product directly from the Company’s manufacturing operations.

Flooring ROW Segment

The Flooring ROW Segment designs, manufactures, markets, licenses, distributes and sources laminate, wood, broadloom carpet, carpet tile, LVT and sheet vinyl. It also designs and manufactures roofing elements, insulation boards, MDF and chipboards. Products are distributed through separate distribution channels, consisting of retailers, independent distributors, company-operated distributors, wholesalers and home centers. The business is organized to address the specific customer needs of each distribution channel.


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The Flooring ROW Segment markets and sells laminate, wood, broadloom carpet, carpet tile, sheet vinyl and LVT flooring products under the Balterio, Feltex, Godfrey Hirst, IVC, Moduleo, Pergo and Quick-Step brands. The Flooring ROW Segment also sells private label laminate, wood and vinyl flooring products. The Company believes Quick-Step and Pergo are leading brand names in the European flooring industry, and that Godfrey Hirst and Feltex are leading brand names in the Australasian flooring market. In addition, the Flooring ROW Segment markets and sells insulation boards, roof panels, MDF and chipboards in Europe under the Unilin and Xtratherm brands. The Segment also licenses its intellectual property to flooring manufacturers throughout the world.

The Company uses regional distribution centers and direct shipping from manufacturing facilities to provide high-quality customer service and enhance the Company’s ability to plan and manage inventory requirements.

Advertising and Promotion

The Company’s brands are among the best known and most widely distributed in the industry. The Company vigorously supports the value and name recognition of its brands through both traditional advertising channels, including numerous trade publications and unique promotional events that highlight product design and performance and social media initiatives and Internet-based advertising. The Company has invested significantly in websites that educate consumers about the Company’s products, helping them to make informed decisions about purchases and identifying local retailers that offer the Company’s collections. In 2016, the Company introduced Omnify™, a new Internet platform that automatically syncs updated product and sales information between the Company and its U.S. aligned retailer websites, ensuring that consumers have access to the most accurate and timely information.

The Company actively participates in cause marketing partnerships with such well known programs as Susan G. Komen® (breast cancer research), Habitat for Humanity® (housing for low income families), HomeAid® (housing for homeless families) and Operation Finally Home® (housing for disabled veterans), which include both traditional media partnerships as well as promotional events generating national press coverage. The Company also sponsors a European cycling team to promote its Quick-Step brand through logo placements and use of the team in its advertising and point-of-sale displays.

The Company introduces new products, merchandising and marketing campaigns through participation in regional, national and international trade shows as well as exclusive dealer conventions. The Company supports sales with its retail customers through cooperative advertising programs that extend the reach of the Company’s promotion as well as with innovative merchandising displays that highlight the Company’s differentiated products and provide samples to consumers. The cost of providing merchandising displays, product samples, and point of sale promotional marketing, is partially recovered by the purchase of these items by the Company’s customers.

Manufacturing and Operations

Global Ceramic Segment

The Company’s tile manufacturing operations are vertically integrated from the production of raw material for body and glaze preparation to the manufacturing and distribution of ceramic and porcelain tile. The Company believes that its manufacturing organization offers competitive advantages due to its ability to manufacture a differentiated product line consisting of one of the industry’s broadest product offerings of colors, textures and finishes and its ability to utilize the industry’s newest technology, as well as the industry’s largest offering of trim and decorative pieces. In addition, the Global Ceramic Segment also sources a portion of its collections to enhance its product offerings. The Global Ceramic Segment continues to invest in equipment that utilizes the latest technologies, which supports the Company's efforts to increase manufacturing capacity, improve efficiency, meet the growing demand for its innovative products and develop new capabilities.

Flooring NA Segment

The Company’s carpet and rug manufacturing operations are vertically integrated and include the extrusion of triexta, nylon, polyester and polypropylene resins, as well as recycled post-consumer plastics, into fiber. The Flooring NA Segment is also vertically integrated in yarn processing, backing manufacturing, tufting, weaving, dyeing, coating and finishing.

The segment is also vertically integrated with significant manufacturing assets that produce laminate flooring, high density fiber board, engineered and pre-finished solid wood flooring, fiberglass sheet vinyl and luxury vinyl tile. The Flooring NA Segment continues to invest in capital projects, such as the expansion of the Company’s North American LVT, premium laminate and


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engineered wood manufacturing capacity. Other investments in state-of-the-art equipment support market growth, increase manufacturing efficiency and improve overall cost competitiveness.
Flooring ROW Segment

The Company’s laminate and vinyl flooring manufacturing operations in Europe are vertically integrated. The Company believes its Flooring ROW Segment has advanced equipment that results in competitive manufacturing in terms of cost and flexibility. In addition, the Flooring ROW Segment has significant manufacturing capability for engineered wood flooring, LVT and sheet vinyl. The 2018 acquisition of Godfrey Hirst established vertically integrated broadloom carpet and carpet tile operations in Australia and New Zealand, including the production of wool yarn. The Flooring ROW Segment is also vertically integrated in manufacturing, tufting, weaving, dyeing, coating and finishing.

The Flooring ROW Segment continues to invest in capital expenditures, such as LVT and laminate expansions, as well as new carpet tile and sheet vinyl plants in Europe and Russia, respectively, utilizing the latest advances in technologies to increase manufacturing capacity, improve efficiency and develop new capabilities including state-of-the-art, fully integrated production that will leverage the Company’s proven record of bringing innovative and high-quality products to its markets. The manufacturing facilities for roofing elements, insulation boards, MDF and chipboards in the Flooring ROW Segment are all configured for cost-efficient manufacturing and production flexibility and are competitive in the European market.

Inputs and Suppliers

Global Ceramic Segment

The principal raw materials used in the production of ceramic tile are clay, talc, industrial minerals and glazes. The Company has long-term clay mining rights in North America, Russia, Bulgaria and Brazil that satisfy a portion of its clay requirements for producing tile. The Company also purchases a number of different grades of clay for the manufacture of its tile. Glazes are used on a significant percentage of manufactured tiles. Glazes consist of frit (ground glass), zircon, stains and other materials, with frit being the largest ingredient. The Company manufactures a significant amount of its frit requirements. The Company believes that there is an adequate supply of all grades of clay, talc and industrial minerals that are readily available from a number of independent sources. If these suppliers were unable to satisfy the Company’s requirements, the Company believes that alternative supply arrangements would be available.

Flooring NA Segment

The principal raw materials used in the production of carpet and rugs are polypropelene, polyester, triexta, nylon, caprolactam, recycled post-consumer plastics, synthetic backing materials, latex and various dyes and chemicals, the majority of which are petroleum based. The Company uses wood chips, wood veneers, lumber, paper and resins in its production of laminate and wood products. In its vinyl flooring operations, the Company uses glass fiber, plasticizers and polyvinyl chloride (PVC) resins. Major raw materials used in the Company’s manufacturing process are available from independent sources, and the Company obtains most of its raw materials from major suppliers that provide inputs to each major product category. If these suppliers were unable to satisfy the requirements, the Company believes that alternative supply arrangements would be available. Although the market for raw materials is sensitive to temporary disruptions, the North American flooring industry has not experienced a significant shortage of raw materials in recent years.

Flooring ROW Segment

The principal raw materials used in the production of boards, laminate and wood flooring are wood, paper and resins. The wood suppliers provide a variety of wood species, providing the Company with a cost-effective and secure supply of raw material. In its vinyl flooring operations, the Company uses glass fiber, plasticizers and PVC resins. Major raw materials used in the Company’s manufacturing process are available from independent sources, and the Company has long-standing relationships with a number of suppliers. The principal raw materials used in the production of broadloom carpet and carpet tile are polypropelene, polyester, triexta, nylon, caprolactam, recycled post-consumer plastics, synthetic backing materials, latex and various dyes and chemicals, the majority of which are petroleum based. Although the market for raw materials is sensitive to temporary disruptions, the flooring industry has not experienced a significant shortage of raw materials in recent years. If these suppliers were unable to satisfy the requirements, the Company believes that alternative supply arrangements would be available.


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Industry and Competition

The Company is the largest flooring manufacturer in a fragmented industry composed of a wide variety of companies ranging from small, privately-held firms to large multinationals. In 2017, the U.S. floor covering industry reported $25.4 billion in sales, up approximately 4.8% over 2016’s sales of $24.5 billion. In 2017, the primary categories of flooring in the U.S., based on sales, were carpet and rugs (45.4%), resilient (includes sheet vinyl and LVT) and rubber (17.0%), ceramic tile (14.3%), wood (13.7%), stone (5.7%) and laminate (3.9%). In 2017, the primary categories of flooring in the U.S., based on square feet, were carpet and rugs (51.2%), resilient (includes sheet vinyl and LVT) and rubber (21.2%), ceramic tile (14.3%), wood (7.2%), laminate (4.6%) and stone (1.5%).  Each of these categories is influenced by the residential and commercial construction, and residential and commercial remodeling end-use markets. These markets are influenced by many factors including changing consumer preferences, consumer confidence, spending for durable goods, interest rates, inflation, availability of credit, turnover in housing and the overall strength of the economy.

The principal methods of competition within the floor covering industry generally are product innovation, style, quality, price, performance technology and service. In each of the markets, price and market coverage are particularly important when competing among product lines. The Company actively seeks to differentiate its products in the marketplace by introducing innovative products with premium features that provide a superior value proposition. The Company’s investments in manufacturing technology, computer systems and distribution network, as well as the Company’s marketing strategies and resources, contribute to its ability to compete on the basis of performance, quality, style and service, rather than price.

Global Ceramic Segment

Globally, the ceramic tile industry is significantly fragmented. Certain regions around the world have established sufficient capacity to allow them to meet domestic needs in addition to exporting product to other markets where their design and/or technical advantages may drive consumer preferences. Some mature markets have seen industry consolidation driven by mergers and acquisitions, however most markets are comprised of many relatively small manufacturers all working with similar technologies, raw materials and designs. During 2017, the estimated global capacity for ceramic tile was 146 billion square feet, with selling prices varying widely based on a variety of factors, including supply within the market, materials used, size, shape and design. While the Company operates ceramic manufacturing facilities in eight countries, the Company has leveraged advantages in technology, design, brand recognition and marketing to extend exports of its products to approximately 160 countries. As a result of this global sales strategy, the Company faces competition in the ceramic tile market from a large number of foreign and domestic manufacturers, all of which compete for sales of ceramic tile to customers through multiple residential and commercial channels. The Company believes it is the largest manufacturer, distributor and marketer of ceramic tile in the world. The Company also believes it is the largest manufacturer, distributor and marketer of ceramic tile in specific markets, including the U.S., Europe and Russia, as well as maintaining leading positions in the Mexican and Brazilian markets. The Company has leveraged the advantages of its scale, product innovation and unique designs in these markets to solidify its leadership position, however the Company continues to face pressures in these markets from imported ceramic products as well as alternate flooring categories.

Flooring NA Segment

The North American flooring industry is highly competitive, with an increasing variety of product categories, shifting consumer preferences and pressures from imported products, particularly in the rug and hard surface categories. Based on industry publications, in 2017, the U.S. flooring industry had carpet and rug sales in excess of $11.5 billion out of the overall $25.4 billion market. The Company believes it is the largest producer of rugs and the second largest producer of carpet in the world based on its 2017 net sales. The Company differentiates its carpet and rug products in the market place through proprietary fiber systems, state-of-the-art manufacturing technologies and unique styling as well as leveraging the strength of some of the oldest and best known brands in the industry. The Company also believes it is the largest manufacturer and distributor of laminate flooring in the U.S. as well as one of the largest manufacturers and distributors of solid and engineered wood flooring.  The Company’s leading position in laminate flooring is driven by the strength of its premium brands as well as technical innovations such as water resistance, realistic visuals, beveled edges, deeply embossed in register surfaces and patented installation technologies. The U.S. resilient industry is highly competitive, and according to industry publications, grew over 17% in 2017. Based on industry publications, the U.S. flooring industry for LVT and sheet vinyl in 2017 had market sales of $4.5 billion of the overall flooring market. The Company believes that it is one of the largest manufacturers and distributors of LVT and sheet vinyl in the U.S. The Company’s sheet vinyl operations produce fiberglass backed products, which have proven more popular with consumers in the past several years.


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Flooring ROW Segment

The Company faces competition in the non-U.S. laminate, wood, LVT and sheet vinyl flooring business from a large number of domestic manufacturers as well as pressures from imports. The Company believes it is one of the largest manufacturers and distributors of laminate flooring in the world, with a focus on high-end products, which the Company supplies under some of the best known and most widely marketed brands in its regions. In addition, the Company believes it has a competitive advantage in its laminate flooring markets as a result of the Company’s industry-leading water resistance, realistic visuals and embossed in register surfaces as well as patented installation technologies, all of which allow the Company to distinguish its products in the areas of design, performance, installation and assembly. In wood flooring, the Company has extended the strength of its well-known laminate brands and its installation technologies to add value to its wood collections. The Company faces competition in the non-U.S. vinyl flooring channel from a large number of domestic and foreign manufacturers, but believes it has a competitive advantage in its LVT and sheet vinyl markets due to industry-leading design, patented technologies, brand recognition and vertical integration. The Company has elevated the performance of its sheet vinyl collections and is now aggressively placing the product in commercial applications. After initially extending its geographic footprint by acquiring national hard surface distributors in Australia and New Zealand, the Company acquired Godfrey Hirst in 2018, making the Company the largest manufacturer of carpet in both countries. The Company is integrating its soft and hard surface businesses to provide a comprehensive offering to residential and commercial customers in the region. In Australia and New Zealand, the Company faces competition from a large number of domestic and foreign manufacturers, but believes it has a competitive advantage in its carpet and hard surface offering due to industry-leading design, patented technologies, brand recognition and vertical integration. Through a 2015 acquisition, the Company has extended its insulation panel business to the U.K. and Ireland while expanding sales in its core Benelux Region.



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Patents and Trademarks

Intellectual property is important to the Company’s business and the Company relies on a combination of patent, copyright, trademark and trade secret laws to protect its interests.

The Company uses several trademarks that it considers important in the marketing of its products, including American Olean, Daltile, Durkan, EmilGroup, Feltex, Godfrey Hirst, IVC, Karastan, Marazzi, Moduleo, Mohawk, Mohawk Home, Pergo, Quick-Step and Unilin. These trademarks reflect innovations in design, performance and installation, that represent competitive advantages and provide differentiation from competing brands in the market.

The Flooring ROW Segment owns a number of patent families in Europe and the U.S., some of which the Company licenses to manufacturers throughout the world. The Company continues to explore additional opportunities to generate revenue from its patent portfolio, including in applications for LVT.

Sales Terms and Major Customers

The Company’s sales terms are substantially the same as those generally available throughout the industry. The Company generally permits its customers to return products purchased from it within specified time periods from the date of sale, if the customer is not satisfied with the quality of the product.
    
During 2018, no single customer accounted for more than 10% of total net sales and the top 10 customers accounted for less than 20% of the Company’s net sales. The Company believes the loss of one major customer would not have a material adverse effect on its business.

Employees

As of December 31, 2018, the Company employed approximately 42,100 persons, consisting of approximately 21,000 in the United States, approximately 9,800 in Europe, approximately 3,900 in Mexico, approximately 3,900 in Russia and approximately 3,500 in other countries. The majority of the Company’s European, Russian and Mexican manufacturing employees are members of unions. Less than 1% of the Company’s U.S. employees are party to a collective bargaining agreement. Additionally, the Company has not experienced any major strikes or work stoppages in recent years. The Company believes that its relations with its employees are good.

Available Information

The Company’s Internet address is https://www.mohawkind.com. The Company makes available the following reports it files on its website, free of charge, under the heading “Investors”:

annual reports on Form 10-K;
quarterly reports on Form 10-Q;
current reports on Form 8-K; and
amendments to the foregoing reports.
The foregoing reports are made available on the Company’s website as soon as practicable after they are filed with, or furnished to, the Securities and Exchange Commission (“SEC”).




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Item 1A.
Risk Factors
In addition to the other information provided in this Form 10-K, the following risk factors should be considered when evaluating an investment in shares of the Company’s Common Stock. If any of the events described in these risks were to occur, it could have a material adverse effect on the Company’s business, financial condition and results of operations.


The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence, income and spending, corporate and government spending, interest rate levels, availability of credit and demand for housing. Significant or prolonged declines in the U.S. or global economies could have a material adverse effect on the Company’s business.

Downturns in the U.S. and global economies negatively impact the floor covering industry and the Company’s business. During times of economic uncertainty or decline, end consumers tend to spend less on remodeling their homes, which is how the Company derives a majority of its sales. Likewise, new home construction - and the corresponding need for new flooring materials - tends to slow down during recessionary periods. There may be downturns in the foreseeable future that could cause the industry to deteriorate globally or in the local markets in which the Company operates. A significant or prolonged decline in residential or commercial remodeling or new construction activity could have a material adverse effect on the Company’s business and results of operations.


The Company may be unable to predict customer preferences or demand accurately, or to respond to technological developments.
    
The Company operates in a market sector where demand is strongly influenced by rapidly changing customer preferences as to product design, product category and technical features. Failure to quickly and effectively respond to changing customer demand or technological developments could have a material adverse effect on the business.


The Company faces intense competition in the flooring industry that could decrease demand for the Company’s products or force it to lower prices, which could have a material adverse effect on the Company’s business.

The floor covering industry is highly competitive. The Company faces competition from a number of manufacturers and independent distributors. Maintaining the Company’s competitive position may require substantial investments in the Company’s product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company’s products, force the Company to lower prices or prevent the Company from raising prices to keep up with inflation. Moreover, fluctuations in currency exchange rates and input costs may contribute to more attractive pricing for imports that compete with the Company’s products, which may put pressure on the Company’s pricing.  Any of these factors could have a material adverse effect on the Company’s business.


Changes in the global economy could affect the Company’s overall availability and cost of credit.

A downturn in the U.S. or global economies could impact the Company’s ability to obtain financing in the future, including any financing necessary to refinance existing indebtedness.

Further, negative economic conditions may factor into the Company’s periodic credit ratings assessment by Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Financial Services, LLC (“S&P”) and Fitch, Inc. Any future changes in the credit rating agencies’ methodology in assessing the Company’s credit strength and any downgrades in the Company’s credit ratings could increase the cost of its existing credit and could adversely affect the cost of and ability to obtain additional credit in the future. The Company can provide no assurances that downgrades will not occur. The cost and availability of credit during uncertain economic times could have a material adverse effect on the Company’s financial condition.


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If the Company were unable to meet certain covenants contained in its existing credit facilities, it may be required to repay borrowings under the credit facilities prior to their maturity and may lose access to the credit facilities for additional borrowings that may be necessary to fund its operations and growth strategy.

On March 26, 2015, the Company entered into a $1,800 million, senior revolving credit facility (the “2015 Senior Credit Facility”). As of December 31, 2018, the amount utilized under the 2015 Senior Credit Facility was $1,452.3 million resulting in a total of $347.7 million available. The amount utilized included $1,339.8 million of commercial paper issued, $57.9 million of direct borrowings, and $54.6 million of standby letters of credit related to various insurance contracts and foreign vendor commitments.

If the Company’s cash flow is worse than expected, the Company may need to refinance all or a portion of its indebtedness through a public and/or private debt offering or a new bank facility and may not be able to do so on terms acceptable to it, or at all. If the Company is unable to access debt markets at competitive rates or in sufficient amounts due to credit rating downgrades, market volatility, market disruption, or weakness in the Company’s businesses, the Company’s ability to finance its operations or repay existing debt obligations may be materially and adversely affected.

Additionally, the Company’s credit facilities include certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. In addition, the 2015 Senior Credit Facility requires the Company 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. A failure to comply with the obligations contained in our current or future credit facilities or indentures relating to our outstanding public debt could result in an event of default or an acceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions. We cannot be certain that we would have, or be able to obtain, sufficient funds to make these accelerated payments.


Fluctuations in currency exchange rates may impact the Company’s financial condition and results of operations and may affect the comparability of results between the Company’s financial periods.

The results of the Company’s foreign subsidiaries are translated into U.S. dollars from the local currency for consolidated reporting. The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. The Company may not be able to manage effectively the Company’s currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the Company’s consolidated financial statements and affect comparability of the Company’s results between financial periods.


The Company has significant operations in emerging markets, including Brazil, eastern Europe, Malaysia, Mexico and Russia, and therefore has exposure to doing business in potentially unstable areas of the world.

Operations in emerging markets are subject to greater risk than more developed markets, including in some cases significant legal, economic and political risks. Market conditions and the political structures that support them are subject to rapid change in these economies, and the Company may not be able to react quickly enough to protect its assets and business operations. In particular, developing markets in which the Company operates may be characterized by one or more of the following:
complex and conflicting laws and regulations, which may be inconsistently or arbitrarily enforced;
high incidences of corruption in state regulatory agencies;
volatile inflation;
widespread poverty and resulting political instability;
compliance with laws governing international relations, including U.S. laws that relate to sanctions and corruption;
immature legal and banking systems;
uncertainty with respect to title to real and personal property;
underdeveloped infrastructure;
heavy state control of natural resources and energy supplies;
state ownership of transportation and supply chain assets;


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high protective tariffs and inefficient customs processes; and
high crime rates.

Changes in any one or a combination of these factors could have a material adverse effect on the Company’s business.


In periods of rising costs, the Company may be unable to pass raw materials, labor, energy and fuel-related cost increases on to its customers, which could have a material adverse effect on the Companys business.

The prices of raw materials, labor, energy and fuel-related costs vary significantly with market conditions. Although the Company generally attempts to pass on increases in raw material, labor, 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 recovered. During such periods of time, the Company’s business may be materially adversely affected.


The Company may be unable to obtain raw materials or sourced product on a timely basis, which could have a material adverse effect on the Company’s business.

The principal raw materials used in the Company’s manufacturing operations include triexta, nylon, polypropylene, and polyester resins and fibers, which are used in the Company’s carpet and rug business; clay, talc, nepheline syenite and glazes, including frit (ground glass), zircon and stains, which are used in the Company’s ceramic tile business; wood, paper and resins, which are used in the Company’s wood and laminate flooring business; and glass fiber, plasticizers, and pvc resins, which are used in the Company’s vinyl and luxury vinyl tile business. In addition to raw materials, the Company sources finished goods. For certain raw materials and sourced products, the Company is dependent on one or a small number of suppliers. An adverse change in the Company’s relationship with such a supplier, the financial condition of such a supplier or such supplier’s ability to manufacture or deliver such raw materials or sourced products to the Company could lead to an interruption of supply or require the Company to purchase more expensive alternatives. An extended interruption in the supply of these or other raw materials or sourced products used in the Company’s business or in the supply of suitable substitute materials or products would disrupt the Company’s operations, which could have a material adverse effect on the Company’s business.


The Company makes significant capital investments in its business and such capital investments may not be successful or achieve their intended results.

The Company’s business requires significant capital investment to expand capacity to support its growth, introduce new products and improve operating efficiencies.  Since 2013, the Company has invested approximately $4 billion in capital projects and intends to make similar capital investments in future periods, including between $550-$580 million of capital investments in 2019.  While the Company believes that many of its past capital investments have been successful, there is no guarantee that the return on investment from the Company’s recent or future capital projects will be sufficient to recover the expenses and opportunity costs associated with these projects.  Furthermore, a meaningful portion of the Company’s capital investment is based on forecasted growth in its business, which is subject to uncertainty such as general economic trends, increased competition and consumer preferences.  If the Company does not accurately forecast its future capital investment needs, the Company could have excess capacity or insufficient capacity, either of which would negatively affect its revenues and profitability.


The Company relies on information systems in managing the Company’s operations and any system failure or deficiencies of such systems may have an adverse effect on the Company’s business.

The Company’s businesses rely on sophisticated software applications to obtain, process, analyze and manage data. The Company relies on these systems to, among other things:

facilitate the purchase, management, distribution, and payment for inventory items;
manage and monitor the daily operations of the Company’s distribution network;
receive, process and ship orders on a timely basis;
manage accurate billing to and collections from customers;
control logistics and quality control for the Company’s retail operations;


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manage financial reporting; and
monitor point of sale activity.

The Company also relies on its computer hardware, software and network for the storage, delivery and transmission of data to the Company’s sales and distribution systems, and certain of the Company’s production processes are managed and conducted by computer.

Any event that causes interruptions to the input, retrieval and transmission of data or increase in the service time, whether caused by human error, natural disasters, power loss, computer viruses, system conversion, cyber attacks including and not limited to hacking, intrusions, malware or otherwise, could disrupt our normal operations. There can be no assurance that the Company can effectively carry out our disaster recovery plan to handle the failure of our information systems, or that we will be able to restore our operational capacity within sufficient time to avoid material disruption to our business. The occurrence of any of these events could cause unanticipated disruptions in service, decreased customer service and customer satisfaction, harm to the Company’s reputation and loss or misappropriation of sensitive information, which could result in loss of customers, increased operating expenses and financial losses. Any such events could in turn have a material adverse effect on the Company’s business, financial condition, results of operations, and prospects.


The Company’s inability to maintain its patent licensing revenues could have a material adverse effect on the Company’s business.

The profit margins of certain of the Company’s businesses, particularly the Company’s Flooring Rest of the World Segment, depend in part upon the Company’s ability to obtain, maintain and license proprietary technology used in the Company’s principal product families. The Company has obtained a number of patents relating to the Company’s products and associated methods and has filed applications for additional patents, including the UNICLIC and Pergo family of patents, which protect its interlocking flooring technology. The majority of the UNICLIC patents expired in 2017. The Company continues to develop new sources of revenue that may partially offset the expiration of its revenue-producing patents. The failure to develop alternative revenues could have a material adverse effect on the Company’s business.


The Company may experience certain risks associated with acquisitions, joint ventures and strategic investments.

The Company intends to grow its business through a combination of organic growth and acquisitions. Growth through acquisitions involves risks, many of which may continue to affect the Company after the acquisition. The Company cannot give assurance that an acquired company will achieve the levels of revenue, profitability and production that the Company expects. Acquisitions may require the issuance of additional securities or the incurrence of additional indebtedness, which may dilute the ownership interests of existing security holders or impose higher interest costs on the Company. Additional challenges related to the Company’s acquisition strategy include:

maintaining executive offices in different locations;
manufacturing and selling different types of products through different distribution channels;
conducting business from various locations;
maintaining different operating systems and software on different computer hardware; and
retaining key employees.

Failure to successfully manage and integrate an acquisition with the Company’s existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could have a material adverse effect on the Company’s business. Even if integration occurs successfully, failure of the acquisition to achieve levels of anticipated sales growth, profitability, or otherwise perform as expected, may result in goodwill or other asset impairments or otherwise have a material adverse effect on the Company’s business. Finally, acquisition targets may be subject to material liabilities that are not properly identified in due diligence and that are not covered by seller indemnification obligation or third party insurance. The unknown liabilities of the Company’s acquisition targets may have a material adverse effect on the Company’s business.

In addition, the Company has made certain investments, including through joint ventures, in which the Company has a minority equity interest and lack management and operational control. The controlling joint venture partner may have business interests, strategies or goals that are inconsistent with those of the Company. Business decisions or other actions or omissions of


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the controlling joint venture partner, or the joint venture company, may result in harm to the Company’s reputation or adversely affect the value of the Company’s investment in the joint venture.


A failure to identify suitable acquisition candidates or partners for strategic investments and to complete acquisitions could have a material adverse effect on the Company’s business.

As part of the Company’s business strategy, the Company intends to pursue a wide array of potential strategic transactions, including acquisitions of complementary businesses, as well as strategic investments and joint ventures. Although the Company regularly evaluates such opportunities, the Company may not be able to successfully identify suitable acquisition candidates or to obtain sufficient financing on acceptable terms to fund such strategic transactions, which may slow the Company’s growth and have a material adverse effect on the Company’s business.


The Company manufactures, sources and sells many products internationally and is exposed to risks associated with doing business globally.

The Company’s international activities are significant to its manufacturing capacity, revenues and profits; and the Company is further expanding internationally. The Company sells products, operates plants and invests in companies around the world. Currently, the Company’s Flooring ROW segment has significant operations in Europe, Russia, Malaysia, Australia and New Zealand, and the Company’s Global Ceramic segment has significant operations in Brazil, Europe, Russia and Mexico. In addition, the Company has invested in joint ventures in Brazil and India related to laminate flooring.

The business, regulatory and political environments in these countries differ from those in the U.S. The Company’s international sales, operations and investments are subject to risks and uncertainties, including:

changes in foreign country regulatory requirements;
differing business practices associated with foreign operations;
various import/export restrictions and the availability of required import/export licenses;
imposition of foreign or domestic tariffs and other trade barriers;
foreign currency exchange rate fluctuations;
differing inflationary or deflationary market pressures;
foreign country tax rules, regulations and other requirements, such as changes in tax rates and statutory and judicial interpretations in tax laws;
differing labor laws and changes in those laws;
work stoppages and disruptions in the shipping of imported and exported products;
government price controls;
extended payment terms and the inability to collect accounts receivable;
potential difficulties repatriating cash from non-U.S. subsidiaries; and
compliance with laws governing international relations, including those U.S. laws that relate to sanctions and corruption.

Specifically, in Europe, the uncertainty surrounding the U.K.’s participation in the European Union and European Single Market following Britain’s notice to the European Union of its decision to exit the EU (“Brexit”) may result in greater restrictions on trade between the UK and EU, which could negatively impact the Company’s results. Additionally, Brexit has caused significant volatility in currency exchange rates. Sales generated by the Company’s U.K. businesses may be negatively impacted when they are translated from the British pound to the U.S. dollar.
    
The Company cannot assure investors that it will succeed in developing and implementing policies and strategies to address the foregoing risks effectively in each location where the Company does business, and, therefore that the foregoing factors will not have a material adverse effect on the Company’s business.







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Negative tax consequences could materially and adversely affect the Companys business.

The Company is subject to the tax laws of the many jurisdictions in which it operates. These tax laws are complex, and the manner in which they apply to our facts is sometimes open to interpretation. In calculating the provision for income taxes, the Company must make judgments about the application of these inherently complex tax laws. Our domestic and international tax liabilities are largely dependent upon the distribution of profit before tax among these many jurisdictions. However, it also includes estimates of additional tax which may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of future earnings of the Company that could impact the valuation of our deferred tax assets. The Company’s future results of operations and tax liability could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently reinvested offshore, the results of audits and examinations of previously filed tax returns, and ongoing assessments of the Company’s tax exposures.


The Company has been, and in the future may be, subject to costs, liabilities and other obligations under existing or new laws and regulations, which could have a material adverse effect on the Company’s business.

The Company is subject to increasingly numerous and complex laws, regulations and licensing requirements in each of the jurisdictions in which the Company conducts business. The Company faces risks and uncertainties related to compliance with such laws and regulations. In addition, new laws and regulations may be enacted in the U.S. or abroad that may require the Company to incur additional personnel-related, environmental, or other costs on an ongoing basis, such as recently enacted healthcare legislation in the United States.

In particular, the Company’s operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment, recycling and disposal of materials and finished product. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties and increased costs of its operations. For example, the Company’s manufacturing facilities may become subject to further limitations on the emission of “greenhouse gases” due to public policy concerns regarding climate change issues or other environmental or health and safety concerns. While the form of any additional regulations cannot be predicted, a “cap-and-trade” system similar to the system that applies to the Company’s businesses in the European Union could be adopted in the United States. The Company’s manufacturing processes use a significant amount of energy, especially natural gas. Any such “cap-and-trade” system or other limitations imposed on the emission of “greenhouse gases” could require the Company to increase our capital expenditures, use its cash to acquire emission credits or restructure our manufacturing operations, which could have a material adverse effect on our business.


The Company’s business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected events.

Many of the Company’s business activities involve substantial investments in manufacturing facilities and many products are produced at a limited number of locations. These facilities could be materially damaged by natural disasters, such as floods, tornados, hurricanes and earthquakes, or by fire or other unexpected events. The Company could incur uninsured losses and liabilities arising from such events, including damage to its reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on its business.


The Company may be exposed to litigation, claims and other legal proceedings relating to its products, which could have a material adverse effect on the Company’s business.

In the ordinary course of business, the Company is subject to a variety of product-related claims, lawsuits and legal proceedings, including those relating to product liability, product warranty, product recall, personal injury, and other matters. A very large claim or several similar claims asserted by a large class of plaintiffs could have a material adverse effect on the Company’s business, if the Company is unable to successfully defend against or resolve these matters or if its insurance coverage is insufficient to satisfy any judgments against the Company or settlements relating to these matters. Although the Company has product liability insurance, the policies may not provide coverage for certain claims against the Company or may not be sufficient to cover all possible liabilities. Further, the Company may not be able to maintain insurance at commercially acceptable premium levels.


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Moreover, adverse publicity arising from claims made against the Company, even if the claims are not successful, could adversely affect the Company’s reputation or the reputation and sales of its products.


The Company’s inability to protect its intellectual property rights could have a material adverse effect on the Company’s business

The Company relies, in part, on the patent, trade secret and trademark laws of the U.S., countries in the European Union and elsewhere, as well as confidentiality agreements with some of the Company’s employees, to protect that technology. The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Company’s pending patent applications will be approved. The Company may be unable to prevent competitors and/or third parties from using the Company’s technology without the Company’s authorization, independently developing technology that is similar to that of the Company or designing around the Company’s patents.

Furthermore, despite the Company’s efforts, the Company may be unable to prevent competitors and/or third parties from using the Company’s technology without the Company’s authorization, independently developing technology that is similar to that of the Company or designing around the Company’s patents. The use of the Company’s technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause the Company to lose sales or otherwise harm the Company’s business.

The Company has obtained and applied for numerous U.S. and foreign service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of the Company’s pending or future applications will be approved by the applicable governmental authorities. A failure to obtain trademark registrations in the U.S. and in other countries could limit the Company’s ability to protect the Company’s trademarks and impede the Company’s marketing efforts in those jurisdictions and could have a material effect on the Company’s business.

The Company generally requires third parties with access to the Company’s trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company’s trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company’s confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties. In any of these circumstances, the Company’s competitiveness could be significantly impaired, which would limit the Company’s growth and future revenue.


Third parties may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Company’s products.

In the past, third parties have claimed that certain technologies incorporated in the Company’s products infringe their patent rights. The Company cannot be certain that the Company’s products do not and will not infringe issued patents or other intellectual property rights of others.

The Company might be required to pay substantial damages (including punitive damages and attorney’s fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses authorizing the use of infringing technology. There can be no assurance that licenses for disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Company’s business would be materially and adversely affected.


The long-term performance of the Company’s business relies on its ability to attract, develop and retain talented management.

To be successful, the Company must attract, develop and retain qualified and talented personnel in management, sales, marketing, product design, and operations, and as it considers entering new international markets, skilled personnel familiar with those markets. The Company competes with multinational firms for these employees and invests resources in recruiting, developing, motivating and retaining them. The failure to attract, develop, motivate and retain key employees could negatively affect the Company’s competitive position and its operating results.




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The Company is subject to changing regulation of corporate governance and public disclosure that have increased both costs and the risk of noncompliance.

The Company’s stock is publicly traded. As a result, the Company is subject to the rules and regulations of federal and state agencies and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the Securities and Exchange Commission and the New York Stock Exchange, frequently issue new requirements and regulations. The Company’s efforts to comply with the regulations and interpretations have resulted in, and are likely to continue to result in, increased general and administrative costs and diversion of management’s time and attention from profit generating activities to compliance activities.

The Companys stock price is subject to volatility.

The Company’s stock price has experienced price volatility in the past and may continue to do so in the future. The Company, the flooring industry and the stock market have experienced stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to the operating performance of these companies. Additionally, price volatility over a given period may cause the average price at which the Company repurchases its own stock to exceed the stock’s price at a given point in time.

Declines in the Company’s business conditions may result in an impairment of the Company’s assets which could result in a material non-cash charge.

A significant or prolonged decrease in the Company’s market capitalization, including a decline in stock price, or a negative long-term performance outlook, could result in an impairment of its assets which results when the carrying value of the Company’s assets exceed their fair value.


Forward-Looking Information

Certain of the statements in this Form 10-K, 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 freight, raw material prices and other input costs; inflation and deflation in consumer markets; currency fluctuations; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company’s products; impairment charges; integration of acquisitions; international operations; introduction of new products; rationalization of operations; tax and tax reform, product and other claims; litigation; regulatory and political changes in the jurisdictions in which the Company does business; and other risks identified in Mohawk’s SEC reports and public announcements.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

The Company owns and leases manufacturing and distribution facilities worldwide. The table below lists the primary owned and leased facilities at December 31, 2018. The Company owns its Corporate Headquarters in Calhoun, GA. The Company also owns and operates service centers and stores in the United States and Russia, none of which are individually material. The Company believes its existing facilities are suitable for its present needs.









18



The following is a list of the principal manufacturing and distribution facilities owned or leased by the Company:

Segment and Property Use
 
North America
 
Europe and Russia
 
Other
 
Total
 
 
 
 
 
 
 
 
 
Global Ceramic
 
 
 
 
 
 
 
 
Manufacturing
 
10

 
11

 
2

 
23

Distribution / Warehouse
 
8

 
8

 
2

 
18

 
 
 
 
 
 
 
 
 
Flooring North America
 
 
 
 
 
 
 
 
Manufacturing
 
17

 

 

 
17

Distribution / Warehouse
 
10

 

 

 
10

 
 
 
 
 
 
 
 
 
Flooring Rest of the World
 
 
 
 
 
 
 
 
Manufacturing
 

 
17

 
5

 
22

Distribution / Warehouse
 

 
3

 

 
3

 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
Manufacturing
 
27

 
28

 
7

 
62

Distribution / Warehouse
 
18

 
11

 
2

 
31

 
 
 
 
 
 
 
 
 


Item 3.
Legal Proceedings

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

Alabama Municipal Litigation

In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing specific perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board’s motion for remand.

In May 2017, the Water Works and Sewer Board of the Town of Centre, Alabama (the “Centre Water Board“) filed a very similar complaint to the Gadsden Water Board complaint in the Circuit Court of Cherokee County. On June 19, 2017, the defendants removed this case to the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversity of citizenship and fraudulent joinder. The Centre Water Board filed a motion to remand the case back to state court, and the defendants opposed the Centre Water Board’s motion. The federal court granted Centre Water Board's motion for remand.

Certain defendants, including the Company, filed dispositive motions in each case arguing that the state court lacks personal jurisdiction over them. Both state courts denied those motions. In June and September 2018, certain defendants, including the Company, petitioned the Alabama Supreme Court for Writs of Mandamus directing each lower court to enter an order granting the defendants’ dispositive motions on personal jurisdiction grounds. Those petitions have been fully briefed and the Company awaits a decision from the Alabama Supreme Court.

The Company has never manufactured the perfluorinated compounds at issue but purchased them for use in the manufacture of its carpets prior to 2007. The Gadsden and Centre Water Boards are not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsden and Centre Water Boards are seeking lost profits based on allegations that their customers decreased water purchases, as well as reimbursement for the cost of a filter and punitive damages.


19


    
Belgian Tax Matter (amounts in thousands)

Between 2012 and 2014, the Company received assessments from the Belgian tax authority for the calendar years 2005 through 2010 in the amount of €46,135, €38,817, €39,635, €30,131, €35,567 and €43,117 respectively, including penalties, but excluding interest. The Belgian tax authority denied the Company’s formal protests against these assessments and the Company brought all six years before the Court of First Appeal in Bruges. The Court of First Appeal in Bruges ruled in favor of the Company on January 27, 2016, with respect to the calendar years ending December 31, 2005 and December 31, 2009; and on June 13, 2018, the Court of First Appeal in Bruges, ruled in favor of the Company with respect to the calendar years ending December 31, 2006, December 31, 2007, December 31, 2008 and December 31, 2010. The Belgian tax authority has lodged its Notification of Appeal for all six years with the Ghent Court of Appeal. In December 2018, the Belgian tax authority issued an assessment for the year ended December 31, 2011, in the amount of €37,991 including penalties, but excluding interest. In January of 2019, the Company received a “Notice of Change” from the Belgian tax authority for tax years 2012 through 2017 in the amount of €38,858, €11,108, €23,522, €30,610, €92,109 and €78,174 respectively, including penalties, but excluding interest. The Company intends to respond to these notices in a timely manner and will file formal protests should the tax authority issue assessments for these years. The Notices of Change are based on largely the same facts underlying the positive rulings, which the Belgian tax authority is appealing.

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

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

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 annual report on Form 10-K.




20




PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for the Common Stock
The Company’s common stock, $0.01 par value per share (the “Common Stock”), is quoted on the New York Stock Exchange (“NYSE”) under the symbol “MHK.”
As of February 27, 2019, there were 224 holders of record of Common Stock. The Company has not paid or declared any cash dividends on shares of its Common Stock since completing its initial public offering. The payment of future cash dividends will be at the discretion of the Board of Directors and will depend upon the Company’s profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.
Issuer Purchases of Equity Securities
On October 25, 2018, the Company announced that its Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $500 million in shares of its common stock. Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to trading plans in accordance with Rules 10b5-1 or 10b-18 under the Exchange Act or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company's stock and the availability of alternative investment opportunities. No time limit was set for completion of repurchases under the new authorization and the program may be suspended or discontinued at any time. The new program replaces any previously authorized share repurchase programs.
Period
Total Number of Shares Purchased in Millions
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan in Millions
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan in Millions
October 1 through November 2, 2018
0.5

$
117.99

0.5

$
441.1

November 5 through November 30, 2018
0.4

$
122.28

0.4

$
392.7

December 3 through December 31, 2018
1.4

$
118.27

1.4

$
225.9

Total
2.3

$
118.90

2.3

 





21


Item 6.
Selected Financial Data
The following table sets forth the selected financial data of the Company for the periods indicated which information is derived from the consolidated financial statements of the Company. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes thereto included elsewhere herein.
 
As of or for the Years Ended December 31,
 
2018(a)
 
2017(b)
 
2016
 
2015
 
2014
 
(In thousands, except per share data)
Statement of operations data:
 
 
 
 
 
 
 
 
 
Net sales
$
9,983,634

 
9,491,290

 
8,959,087

 
8,071,563

 
7,803,446

Cost of sales
7,145,564

 
6,494,876

 
6,146,262

 
5,660,877

 
5,649,254

Gross profit
2,838,070

 
2,996,414

 
2,812,825

 
2,410,686

 
2,154,192

Selling, general and administrative expenses
1,742,744

 
1,642,241

 
1,532,882

 
1,573,120

 
1,381,396

Operating income
1,095,326

 
1,354,173

 
1,279,943

 
837,566

 
772,796

Interest expense
38,827

 
31,111

 
40,547

 
71,086

 
98,207

Other expense (income), net
7,298

 
5,205

 
(1,729
)
 
17,619

 
10,698

Earnings from continuing operations before income taxes
1,049,201

 
1,317,857

 
1,241,125

 
748,861

 
663,891

Income tax expense
184,346

 
343,165

 
307,559

 
131,875

 
131,637

Earnings from continuing operations
864,855

 
974,692

 
933,566

 
616,986

 
532,254

Net earnings including noncontrolling interest
864,855

 
974,692

 
933,566

 
616,986

 
532,254

Less: Net earnings attributable to the noncontrolling interest
3,151

 
3,054

 
3,204

 
1,684

 
289

Net earnings attributable to Mohawk Industries, Inc.
$
861,704

 
971,638

 
930,362

 
615,302

 
531,965

 
 
 
 
 
 
 
 
 
 
Basic earnings from continuing operations per share
$
11.53

 
13.07

 
12.55

 
8.37

 
7.30

Basic earnings per share attributable to Mohawk Industries, Inc.
$
11.53

 
13.07

 
12.55

 
8.37

 
7.30

Diluted earnings from continuing operations per share
$
11.47

 
12.98

 
12.48

 
8.31

 
7.25

Diluted earnings per share attributable to Mohawk Industries, Inc.
$
11.47

 
12.98

 
12.48

 
8.31

 
7.25

 
 
 
 
 
 
 
 
 
 
Balance sheet data:
 
 
 
 
 
 
 
 
 
Working capital
$
1,243,057

 
1,417,612

 
753,192

 
(9,056
)
 
1,033,762

Total assets
13,099,123

 
12,094,853

 
10,230,596

 
9,934,400

 
8,285,544

Long-term debt (including current portion)
3,257,974

 
2,763,578

 
2,511,485

 
3,191,967

 
2,253,440

Total stockholders’ equity
7,440,059

 
7,067,009

 
5,783,487

 
4,860,863

 
4,422,813


(a)
During 2018, the Company acquired Godfrey Hirst Group, Eliane S/A Revestimentos Ceramicos (“Eliane”) and 3 businesses in Flooring ROW segment as discussed in Note 2 of the Notes to Consolidated Financial Statements.
(b)
During 2017, the Company acquired Emil as discussed in Note 2 of the Notes to Consolidated Financial Statements.







22


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview

Mohawk is a significant supplier of every major flooring category with manufacturing operations in 19 nations and sales in more than 170 countries. Based on its annual sales, the Company believes it is the world’s largest flooring manufacturer. A majority of the Company’s long-lived assets are located in the United States and Europe, which are also the Company’s primary markets. The Company expects continued growth in the United States market consistent with residential housing starts and remodeling investments and has invested significantly in state-of-the-art manufacturing to create aspirational products to delight consumers with beauty and performance. The Company also is a leading provider of flooring for the U.S. commercial market and has earned significant recognition for its innovation in design and performance and sustainable practices. Additionally, the Company maintains significant operations in Europe, Russia, Mexico, Australia, New Zealand, Brazil and other parts of the world. The Company is growing share in many markets through its differentiated products, especially its ceramic tile collections.
    
During the past two decades, the Company has grown significantly. Its current geographic breadth and diverse product offering are reflected in three reporting segments: Global Ceramic; Flooring North America (“Flooring NA”); and Flooring Rest of the World (“Flooring ROW”). The Global Ceramic Segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, quartz and porcelain slab countertops, which it distributes primarily in North America, Europe, Brazil and Russia through various selling channels, which include company-owned stores, independent distributors and home centers. The Flooring NA Segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet cushion, wood, laminate and vinyl products, including luxury vinyl tile (LVT), which it distributes through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The Segment’s product lines are sold through various selling channels, including independent floor covering retailers, distributors, home centers, mass merchandisers, department stores, shop at home, online retailers, buying groups, commercial contractors and commercial end users. The Flooring ROW Segment designs, manufactures, sources, licenses and markets laminate, wood flooring, carpets, roofing elements, insulation boards, medium-density fiberboard (“MDF”), chipboards, other wood products and vinyl products, including LVT, which it distributes primarily in Europe, Russia, Australia and New Zealand through various selling channels, which include independent floor covering retailers, independent distributors, company-owned distributors, home centers, commercial contractors and commercial end users.

The Company expects sales growth to continue on a local basis in 2019, even with some softening in the European and Australian markets, offset by projected growth in Russia, Brazil and Mexico. The Company has also implemented multiple product price increases in most product categories due to escalating material, transportation and energy costs in most markets. The Company is managing through current macroeconomic headwinds including significant inflation, a strong U.S. dollar that is impacting currency translation as well as strengthening the competiveness of imports in the U.S. and slowing housing markets in a number of countries. While focused on addressing current conditions, the Company also established a long-term growth strategy, which includes strategic acquisitions in key growth markets and targeted internal investments that are expanding the Company’s geographic reach and product portfolio.

In 2018, the Company completed five acquisitions: two that expanded the Company’s global footprint with leadership positions in major markets and three that expanded the Company’s product offering and distribution in Europe. The Godfrey Hirst acquisition established the Company as the largest flooring manufacturer in Australia and New Zealand, with leading carpet and hard surface positions in both countries when combined with the Company’s existing regional flooring distribution business. Godfrey Hirst’s prestigious wool carpet collections are exported to numerous international markets and have been integrated into the U.S. soft surface product portfolio to expand sales. The acquisition of Brazil-based Eliane provided the Company with a leading ceramic tile position and the most appealing brand in one of the world’s largest ceramic markets and created a gateway into the overall South American market as Eliane is Brazil’s largest ceramic exporter. The acquisition of Berghoef, a leading European mezzanine flooring company, created a leading position in a category that is rapidly expanding due to increased construction of e-commerce warehousing across the continent. The acquisition of Swiss and Italian hard surface distributors expanded the Company’s direct distribution of flooring sales in Europe.

In 2018, the Company invested over $794.1 million in capital projects to, introduce new product categories, enter new markets, expand capacity of constrained premium products and improve productivity.  In 2019, the Company plans to invest an additional $550-$580 million in its existing businesses to complete projects that were begun in 2018 and to commence new initiatives. The largest investments during this two-year period are the expansion of LVT in the U.S. and Europe, including the launch of manufactured rigid LVT collections; ceramic capacity increases in the U.S., Mexico, Italy, Poland, Bulgaria and Russia as well as in the Company’s newly acquired ceramic business in Brazil, where the Company is investing in new assets to dramatically improve profitability as it did with the Marazzi acquisition; new porcelain slab production in Europe and Russia; premium water-resistant laminate in the U.S., Europe and Russia; carpet tile in Europe; sheet vinyl and premium sanitary ware in Russia; quartz


23


countertops in the U.S., where the Company now produces and distributes materials for all kitchen and bath surfaces; and residential and commercial carpet in the U.S. and Australia, where the Company is investing in assets to expand its commercial carpet presence in the recent Godfrey Hirst acquisition. 
Net earnings attributable to the Company were $861.7 million, or diluted EPS of $11.47 for 2018 compared to net earnings attributable to the Company of $971.6 million, or diluted EPS of $12.98 for 2017. The decrease in EPS was primarily attributable
to higher inflation, higher start-up costs, and costs due to temporarily reducing production to align with softer market conditions,
partially offset by the favorable net impact of price and product mix, increased sales volume, productivity gained from capital investments, cost reduction initiatives and decreased income tax expense. The Company benefited from a lower effective tax rate as a result of the recent reforms in the U.S. and Belgium.
For the year ended December 31, 2018, the Company generated $1,181.3 million of cash from operating activities. As of December 31, 2018, the Company had cash and cash equivalents of $119.1 million, of which $31.0 million was in the United States and $88.1 million was in foreign countries.


Recent Events

On November 16, 2018, the Company completed its acquisition of Eliane S/A Revestimentos Ceramicos, one of the largest ceramic tile companies in Brazil, further extending Mohawk’s global position in new markets. Pursuant to the purchase agreement, the Company (i) acquired the entire issued share capital of Eliane and (ii) acquired $99.0 million of indebtedness of Eliane, with total cash consideration paid of $148.7 million including cash held in escrow of $5.3 million.
On January 31, 2019, the Company completed an acquisition of a hard surface flooring distribution company based in the Netherlands for approximately €60.6 million.



24


Results of Operations
Following are the results of operations for the last three years:
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
9,983.6

 
100.0
 %
 
$
9,491.3

 
100.0
 %
 
$
8,959.1

 
100.0
 %
Cost of sales (1)
7,145.6

 
71.6
 %
 
6,494.9

 
68.4
 %
 
6,146.3

 
68.6
 %
Gross profit
2,838.1

 
28.4
 %
 
2,996.4

 
31.6
 %
 
2,812.8

 
31.4
 %
Selling, general and administrative expenses (2)
1,742.7

 
17.5
 %
 
1,642.2

 
17.3
 %
 
1,532.9

 
17.1
 %
Operating income
1,095.3

 
11.0
 %
 
1,354.2

 
14.3
 %
 
1,279.9

 
14.3
 %
Interest expense (3)
38.8

 
0.4
 %
 
31.1

 
0.3
 %
 
40.5

 
0.5
 %
Other expense (income) (4)
7.3

 
0.1
 %
 
5.2

 
0.1
 %
 
(1.7
)
 
 %
Earnings before income taxes
1,049.2

 
10.5
 %
 
1,317.9

 
13.9
 %
 
1,241.1

 
13.9
 %
Income tax expense (5)
184.3

 
1.8
 %
 
343.2

 
3.6
 %
 
307.6

 
3.4
 %
Earnings from continuing operations
864.9

 
8.7
 %
 
974.7

 
10.3
 %
 
933.5

 
10.4
 %
Net earnings including noncontrolling interest
864.9

 
8.7
 %
 
974.7

 
10.3
 %
 
933.5

 
10.4
 %
Less: Net earnings attributable to the noncontrolling interest
3.2

 
 %
 
3.1

 
 %
 
3.2

 
 %
Net earnings attributable to Mohawk Industries, Inc.
$
861.7

 
8.6
 %
 
$
971.6

 
10.2
 %
 
$
930.3

 
10.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Cost of sales includes:
 
 
 
 
 
 
 
 
 
 
 
Restructuring, acquisition and integration-related charges
$
47.1

 
0.5
 %
 
$
36.0

 
0.4
 %
 
$
38.3

 
0.4
 %
Acquisition inventory step-up
15.4

 
 %
 
13.3

 
0.1
 %
 

 
 %
(2)  Selling, general and administrative expenses include:
 
 
 
 
 
 
 
 
 
 
 
Restructuring, acquisition and integration-related charges
31.6

 
0.3
 %
 
12.9

 
0.1
 %
 
12.3

 
0.1
 %
Legal settlement and reserve

 
 %
 

 
 %
 
(90.0
)
 
(1.0
)%
Tradename impairment

 
 %
 

 
 %
 
47.9

 
0.5
 %
Other charges

 
 %
 

 
 %
 
9.9

 
0.1
 %
(3)  Interest expense includes:
 
 
 
 
 
 
 
 
 
 
 
Debt extinguishment costs

 
 %
 
0.2

 
 %
 

 
 %
Acquisition interest expense
4.3

 
 %
 

 
 %
 

 
 %
(4)  Other expense (income) includes:
 
 
 
 
 
 
 
 
 
 
 
Restructuring, acquisition and integration charges
(0.2
)
 
 %
 

 
 %
 

 
 %
Reversal of uncertain tax position indemnification asset
4.6

 
 %
 
4.5

 
 %
 
5.4

 
0.1
 %
(5) Income tax expense includes:
 
 
 
 
 
 
 
 
 
 
 
Tax reform and related, net

 
 %
 
0.8

 
 %
 

 
 %
Reversal of uncertain tax position
(4.6
)
 
 %
 
(4.5
)
 
 %
 
(5.4
)
 
(0.1
)%





25



Year Ended December 31, 2018, as Compared with Year Ended December 31, 2017

Net sales

Net sales for 2018 were $9,983.6 million, reflecting an increase of $492.3 million, or 5.2%, from the $9,491.3 million reported for 2017. The increase was primarily attributable to higher sales volume of approximately $297 million, or 3%, which includes sales volumes attributable to acquisitions of approximately $229 million and legacy sales volumes of approximately $68 million, the favorable net impact of price and product mix of approximately $111 million, or 1%, and the favorable net impact of foreign exchange rates of approximately $85 million, or 1%.

Global Ceramic Segment—Net sales increased $147.8 million, or 4.3%, to $3,552.9 million for 2018, compared to $3,405.1 million for 2017. The increase was primarily attributable to higher sales volume of approximately $150 million, or 4%, which includes sales volume attributable to acquisitions of approximately $82 million, or 2%, and legacy sales volume of approximately $68 million, or 2%, the favorable net impact of foreign exchange rates of approximately $9 million partially offset by the unfavorable net impact of lower price and product mix of $11 million.

Flooring NA Segment—Net sales increased $18.3 million, or 0.5%, to $4,029.1 million for 2018, compared to $4,010.9 million for 2017. The increase was primarily attributable to the favorable net impact of price and product mix of $51 million, or 1%, partially offset by the unfavorable net impact of lower volumes of $33 million.

Flooring ROW Segment—Net sales increased $326.2 million, or 15.7%, to $2,401.6 million for 2018, compared to $2,075.5 million for 2017. The increase was primarily attributable to higher sales volume of approximately $179 million, or 9%, which includes sales volume attributable to acquisitions of approximately $147 million and legacy sales volume of approximately $32 million, the favorable net impact of price and product mix of approximately $71 million, or 3%, and the favorable net impact of foreign exchange rates of approximately $76 million, or 4%.

Quarterly net sales and the percentage changes in net sales by quarter for 2018 versus 2017 were as follows (dollars in millions):
 
2018
 
2017
 
Change
First quarter
$
2,412.2

 
2,220.6

 
8.6
%
Second quarter
2,577.0

 
2,453.0

 
5.1
%
Third quarter
2,545.8

 
2,448.5

 
4.0
%
Fourth quarter
2,448.6

 
2,369.1

 
3.4
%
Total year
$
9,983.6

 
9,491.3

 
5.2
%

Gross profit

Gross profit for 2018 was $2,838.1 million (28.4% of net sales), a decrease of $158.3 million or 5.3%, compared to gross profit of $2,996.4 million (31.6% of net sales) for 2017. As a percentage of net sales, gross profit decreased 314 basis points. The decrease in gross profit dollars was primarily attributable to higher inflation costs of approximately $230 million, including increased material costs of approximately $140 million, approximately $40 million of start-up costs associated with large investments to expand sales, add product categories and enter new markets, approximately $37 million of costs due to temporarily reducing production, and the unfavorable impact of higher restructuring, acquisition and integration-related and other costs of approximately $13 million, partially offset by the favorable net impact of price and product mix of approximately $68 million, higher sales volume of approximately $54 million and savings from capital investments and cost reduction initiatives of approximately $28 million and the net impact of favorable foreign exchange rates of approximately $12 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for 2018 were $1,742.7 million (17.5% of net sales), an increase of $100.5 million or 6.1% compared to $1,642.2 million (17.3% of net sales) for 2017. As a percentage of net sales, selling, general and administrative expenses increased 15 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $45 million of costs due to higher sales volume, approximately $19 million of costs associated with investments in new product development, sales personnel, and marketing, higher inflation costs of approximately


26


$15 million, and the unfavorable impact of higher restructuring, acquisition and integration-related and other costs of approximately $19 million.

Operating income

Operating income for 2018 was $1,095.3 million (11.0% of net sales) reflecting a decrease of $258.8 million, or 19.1%, compared to operating income of $1,354.2 million (14.3% of net sales) for 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $246 million, including increased material costs of approximately $140 million, approximately $48 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, approximately $32 million due to the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs, approximately $37 million of costs due to temporarily reducing production, and approximately $13 million of costs associated with investments in new product development, sales personnel, marketing, and the net impact of unfavorable foreign exchange rates partially offset by the favorable net impact of price and product mix of approximately $68 million, increased sales volume of approximately $9 million, and savings from capital investments and cost reduction initiatives of approximately $35 million.

Global Ceramic Segment—Operating income was $442.9 million (12.5% of segment net sales) for 2018 reflecting a decrease of $82.5 million, or 15.7%, compared to operating income of $525.4 million (15.4% of segment net sales) for 2017. The decrease in operating income was primarily attributable to higher inflation costs of approximately $97 million, the unfavorable net impact of price and product mix of approximately $28 million, approximately $25 million of costs due to temporarily reducing production, and approximately $11 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 $63 million, and increased sales volume of approximately $24 million.

Flooring NA Segment—Operating income was $347.9 million (8.6% of segment net sales) for 2018 reflecting a decrease of $192.4 million, or 35.6%, compared to operating income of $540.3 million (13.5% of segment net sales) for 2017. The decrease
in operating income was primarily attributable to higher inflation costs of approximately $126 million, including increased material costs of approximately $108 million, an increase in costs of approximately $64 million due to lower than expected production volumes, the ramp up of new products and higher logistics costs, lower sales volume of approximately $23 million, approximately $16 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, and approximately $13 million of costs due to temporarily reducing production, partially offset by the favorable net impact of price and product mix of approximately $43 million, and savings from capital investments and cost reduction initiatives of approximately $17 million.

Flooring ROW Segment—Operating income was $345.8 million (14.4% of segment net sales) for 2018 reflecting an increase of $16.7 million, or 5.1%, compared to operating income of $329.1 million (15.9% of segment net sales) for 2017. The increase in operating income was primarily attributable to the favorable net impact of price and product mix of approximately $54 million, savings from capital investments and cost reduction initiatives of approximately $20 million, increased sales volume of approximately $4 million, partially offset by approximately $27 million of start-up costs associated with large investments to expand sales, add product categories, and enter new markets, higher inflation costs of approximately $23 million, and $16 million due to the unfavorable impact of higher restructuring, acquisition and integration-related costs.

Interest expense

Interest expense was $38.8 million for 2018, reflecting an increase of $7.7 million compared to interest expense of $31.1 million for 2017. The increase was primarily attributable to the increase in interest rates during 2018 and the early extinguishment of acquisition debt.

Other expense (income)

Other expense was $7.3 million for 2018, reflecting an unfavorable change of $2.1 million compared to other income of $5.2 million for 2017. The change was primarily due to the increased unfavorable impact of foreign exchange rates on transactions in the current year.



27


Income tax expense

For 2018, the Company recorded income tax expense of $184.3 million on earnings before income taxes of $1,049.2 million for an effective tax rate of 17.6%, as compared to an income tax expense of $343.2 million on earnings before income taxes of $1,317.9 million, resulting in an effective tax rate of 26.0% for 2017. The decrease in the year-over-year tax expense of $158.9 million was primarily driven by the geographic dispersion of the Company’s earnings for 2018, subject to tax at the reduced rates in effect in the U.S. and Belgium, of $181.6 million, and the reduction to the transition tax and related tax planning initiatives of $163.4 million, partially offset by the one-time 2017 restatement of the Company’s deferred tax liabilities of $139.9 million, the one-time Italian tax planning election of $10.3 million, the restatement of certain state deferred tax assets of $20.4 million, and various other items of $15.5 million.

In December of 2017, the U.S. and Belgium enacted tax reform legislation. The U.S. legislation, the Tax Cuts and Jobs Act (“TCJA”), is the most significant and complex change to the U.S. tax law in more than 30 years and requires the combined effort of the Company’s finance, tax, and treasury departments to ensure the proper accounting of its comprehensive changes. The most significant provisions of the TCJA, were the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018, implementation of a territorial income tax regime, and imposition of a transition tax on the deemed repatriation of the accumulated earnings of the Company’s foreign subsidiaries. The most significant provisions of the Belgium legislation were the reduction of the corporate income tax rate from 33.99% to 29.58% for 2018 and 2019, with a further reduction to 25% effective January 1, 2020, an annual limitation on the utilization of net operating losses, and creation of a consolidated corporate income tax regime.

As a result of the tax reform legislation, for the year ended December 31, 2017, the Company recorded a net tax expense of $0.8 million related primarily to the non-cash tax benefit of the revaluation of its Belgian deferred tax liabilities, the non-cash tax benefit of the provisional revaluation of its U.S. deferred tax liabilities, and the tax expense of the provisional accrual associated with the Deemed Repatriation Transition Tax.  This represented a reasonable estimate of the impact of all tax law changes on the Company’s financial statements in accordance with SAB 118. In accordance with the SAB 118 measurement period, the Company has completed its accounting for the income tax effects of all elements of the TCJA. See Note 13-Income Taxes.


Year Ended December 31, 2017, as Compared with Year Ended December 31, 2016

Net sales

Net sales for 2017 were $9,491.3 million, reflecting an increase of $532.2 million, or 5.9%, from the $8,959.1 million reported for 2016. The increase was primarily attributable to higher sales volume of approximately $245 million, or 3%, which includes sales volumes attributable to acquisitions of approximately $137 million and legacy sales volumes of approximately $107 million, the favorable net impact of price and product mix of approximately $218 million, or 2%, and the favorable impact of foreign exchange rates of approximately $69 million, or 1%.

Global Ceramic Segment—Net sales increased $230.4 million, or 7.3%, to $3,405.1 million for 2017, compared to $3,174.7 million for 2016. The increase was primarily attributable to higher sales volume of approximately $162 million, or 5%, which includes sales volume attributable to acquisitions of approximately $137 million and legacy sales volume of approximately $24 million, the favorable net impact of foreign exchange rates of approximately $39 million, or 1%, and the favorable net impact of price and product mix of approximately $29 million, or 1%.

Flooring NA Segment—Net sales increased $145.1 million, or 3.8%, to $4,010.9 million for 2017, compared to $3,865.7 million for 2016. The increase was primarily attributable to higher sales volumes of approximately $39 million, or 1%, and the favorable net impact of price and product mix of $105 million, or 3%.

Flooring ROW Segment—Net sales increased $156.8 million, or 8.2%, to $2,075.5 million for 2017, compared to $1,918.6 million for 2016. The increase was primarily attributable to higher sales volume of approximately $44 million, or 2%, the favorable net impact of price and product mix of approximately $83 million, or 4%, and the favorable net impact of foreign exchange rates of approximately $30 million, or 2%.



28


Quarterly net sales and the percentage changes in net sales by quarter for 2017 versus 2016 were as follows (dollars in millions):
 
2017
 
2016
 
Change
First quarter
$
2,220.6

 
2,172.0

 
2.2
%
Second quarter
2,453.0

 
2,310.3

 
6.2
%
Third quarter
2,448.5

 
2,294.1

 
6.7
%
Fourth quarter
2,369.1

 
2,182.6

 
8.5
%
Total year
$
9,491.3

 
8,959.1

 
5.9
%

Gross profit

Gross profit for 2017 was $2,996.4 million (31.6% of net sales), an increase of $183.6 million or 6.5%, compared to gross profit of $2,812.8 million (31.4% of net sales) for 2016. As a percentage of net sales, gross profit increased 20 basis points. The increase in gross profit dollars was primarily attributable to the favorable net impact of price and product mix of approximately $171 million, savings from capital investments and cost reduction initiatives of approximately $154 million, higher sales volume of approximately $58 million, and the favorable net impact of foreign exchange rates of approximately $17 million, partially offset by higher input costs of approximately $194 million, including increased material costs of approximately $137 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for 2017 were $1,642.2 million (17.3% of net sales), an increase of $109.4 million or 7.1% compared to $1,532.9 million (17.1% of net sales) for 2016. As a percentage of net sales, selling, general and administrative expenses increased 20 basis points. The increase in selling, general and administrative expenses in dollars was primarily attributable to approximately $50 million of costs due to higher sales volume, the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $33 million, approximately $23 million of costs associated with investments in new product development, sales personnel, and marketing, increased employee costs of approximately $13 million and the unfavorable net impact of foreign exchange rates of approximately $12 million, partially offset by savings from capital investments and cost reduction initiatives of approximately $24 million. Restructuring, acquisition and integration-related, and other costs were higher in 2017 primarily due to the absence of approximately $90 million received in 2016 related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that was recorded in 2016.

Operating income

Operating income for 2017 was $1,354.2 million (14.3% of net sales) reflecting an increase of $74.2 million, or 5.8%, compared to operating income of $1,279.9 million (14.3% of net sales) for 2016. The increase in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $178 million and the favorable net impact of price and product mix of approximately $169 million, partially offset by higher input costs of approximately $195 million, including increased material costs of approximately $137 million, approximately $23 million of costs associated with investments in new product development, sales personnel, and marketing, increased employee costs of approximately $13 million, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $45 million. Restructuring, acquisition and integration-related, and other costs were higher in 2017 primarily due to the absence of approximately $90 million received in 2016 related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that was recorded in 2016.

Global Ceramic Segment—Operating income was $525.4 million (15.4% of segment net sales) for 2017 reflecting an increase of $47.0 million, or 9.8%, compared to operating income of $478.4 million (15.1% of segment net sales) for 2016. The increase in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $70 million, increased sales volumes of approximately $29 million, the favorable net impact of price and product mix of approximately $15 million, and the favorable net impact of foreign exchange rates of approximately $10 million, partially offset by higher input costs of approximately $40 million, approximately $12 million of costs associated with investments in new product development, sales personnel, and marketing, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $16 million.

Flooring NA Segment—Operating income was $540.3 million (13.5% of segment net sales) for 2017 reflecting an increase of $35.2 million, or 7.0%, compared to operating income of $505.1 million (13.1% of segment net sales) for 2016. The increase


29


in operating income was primarily attributable to savings from capital investments and cost reduction initiatives of approximately $71 million, and the favorable net impact of price and product mix of approximately $74 million, partially offset by higher input costs of approximately $72 million, including increased material costs of approximately $54 million, and the unfavorable impact of higher restructuring, acquisition and integration-related, and other costs of approximately $33 million. Restructuring, acquisition and integration-related, and other costs were higher primarily due to the absence of approximately $90 million received in 2016 related to a contract dispute, partially offset by the approximately $48 million charge related to the write-off of the Lees tradename that was recorded in 2016.

Flooring ROW Segment—Operating income was $329.1 million (15.9% of segment net sales) for 2017 reflecting a decrease of $4.0 million, or (1.2)%, compared to operating income of $333.1 million (17.4% of segment net sales) for 2016. The decrease in operating income was primarily attributable to higher input costs of approximately $80 million, including increased material costs of approximately $76 million, costs associated with investments in expansion of production capacity of approximately $7 million, approximately $6 million of costs associated with investments in new product development, sales personnel, and marketing, the unfavorable net impact of exchange rates of approximately $5 million, and approximately $22 million in decreased sales volumes, primarily attributable to lower patent revenue. These decreases in operating income were partially offset by savings from capital investments and cost reduction initiatives of approximately $37 million, and the favorable net impact of price and product mix of approximately $80 million.

Interest expense

Interest expense was $31.1 million for 2017, reflecting a decrease of $9.4 million compared to interest expense of $40.5 million for 2016. The decrease was primarily attributable to a shift in the Company’s borrowings to lower interest rate instruments.

Other expense (income)

Other expense was $5.2 million for 2017, reflecting an unfavorable change of $6.9 million compared to other income of $1.7 million for 2016. The change was primarily due to the increased unfavorable impact of foreign exchange rates on transactions in the current year.

Income tax expense

For 2017, the Company recorded income tax expense of $343.2 million on earnings before income taxes of $1,317.9 million for an effective tax rate of 26.0%, as compared to an income tax expense of $307.6 million on earnings before income taxes of $1,241.1 million, resulting in an effective tax rate of 24.8% for 2016. The increase in the year-over-year effective tax rate was the direct result of the geographic dispersion of the Company’s earnings for 2017, decreased by $44.4 million caused by the revaluation of deferred tax liabilities triggered by the Belgium corporate income tax reform, and increased by a one-time provisional net tax expense of $45.2 million resulting from the U.S. corporate income tax reform.

In December of 2017, the U.S. and Belgium enacted tax reform legislation. The U.S. legislation, the Tax Cuts and Jobs Act (“TCJA”), is the most significant and complex change to the U.S. tax law in more than 30 years. The most significant provisions of the TCJA, were the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018, implementation of a territorial income tax regime, and imposition of a transition tax on the deemed repatriation of the accumulated earnings of the Company’s foreign subsidiaries. The most significant provisions of the Belgium legislation were the reduction of the corporate income tax rate from 33.99% to 29.58% for January 1, 2018 and January 1, 2019, respectively, with a further reduction to 25% effective January 1, 2020, an annual limitation on the utilization of net operating losses, and creation of a consolidated corporate income tax regime.

Accordingly, for the year ended December 31, 2017, the Company recorded a net tax expense of $0.8 million related primarily to the non-cash tax benefit of the revaluation of its Belgian deferred tax liabilities, the non-cash tax benefit of the provisional revaluation of its U.S. deferred tax liabilities, and the tax expense of the provisional accrual associated with the Deemed Repatriation Transition Tax. See Note 13-Income Taxes.

Liquidity and Capital Resources
    
The Company’s primary liquidity requirements are for working capital, capital expenditures and acquisitions. The Company’s liquidity 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. As of December 31, 2018, the Company had a total of $347.7 million available under its 2015 Senior Credit Facility. The Company also maintains local currency revolving lines of credit and other credit facilities to provide liquidity to its businesses around the world.  None of such local facilities are material in amount.


30



Net cash provided by operating activities for the year ended 2018 was $1,181.3 million, compared to net cash provided by operating activities of $1,193.6 million for the year ended 2017. This decrease of $12.3 million was primarily attributable to a reduction in operating income and changes in working capital, reflecting normal fluctuations relative to the timing and nature of these transactions. The decrease in cash provided by operating activities for 2017 as compared to 2016 of $151.7 million was primarily attributable to changes in working capital.

Net cash used in investing activities for the year ended 2018 was $1,332.2 million compared to net cash used in investing activities of $1,240.7 million for the year ended 2017. The increase was primarily due to a $318.2 million increase in acquisitions, partially offset by a $111.9 million reduction in capital expenditures. Net cash used in investing activities in 2017 increased over 2016 by $568.6 million due primarily to acquisitions of $250.8 million, $83.9 million purchase of short-term investments, and an increase in capital expenditures of $233.9 million. The Company will continue to invest to optimize sales and profit growth with product expansion and cost reduction projects in the business.

Net cash provided by financing activities for the year ended 2018 was $198.0 million compared to net cash used in financing activities of $7.0 million for the year ended 2017. The change in cash provided by financing is primarily attributable to increased borrowings of commercial paper, offset by purchases of the Company’s shares of $274.1 million. Net cash used in financing activities for the year ended 2017 was $7.0 million compared to net cash used in financing activities for the year ended 2016 of $641.6 million. This reduction of $634.6 million is primarily attributable to the issuance and sale of $357.6 million in Floating Rate Notes in 2017 and the repayment of senior notes of $645.6 million in 2016.



Senior Credit Facility

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

At the Company’s election, revolving loans under the 2015 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 1.00% and 1.75% (1.125% as of December 31, 2018), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus 0.5%, or the Eurocurrency Rate (as defined in the 2015 Senior Credit Facility) rate plus 1.0%, plus an applicable margin ranging between 0.00% and 0.75% (0.125% as of December 31, 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 December 31, 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.


31



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

In 2017, the Company paid financing costs of $0.6 million in connection with the extension of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022. These costs were deferred and, along with unamortized costs of $6.9 million are being amortized over the term of the 2015 Senior Credit Facility.

As of December 31, 2018, amounts utilized under the 2015 Senior Credit Facility included $57.9 million of borrowings and $54.6 million of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of $1,339.8 million under the Company’s U.S. and European commercial paper programs as of December 31, 2018 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized $1,452.3 million under the 2015 Senior Credit Facility resulting in a total of $347.7 million available as of December 31, 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 and 183 days, respectively. None of the commercial paper notes may be voluntarily prepaid or redeemed by the Company and all rank pari passu with all of the Company’s other unsecured and unsubordinated indebtedness. To the extent that the Company issues European commercial paper notes through a subsidiary of the Company, the notes will be fully and unconditionally guaranteed by the Company.

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

The proceeds from the issuance of commercial paper notes will be available for general corporate purposes. As of December 31, 2018 there was $632.7 million outstanding under the U.S. commercial paper program, and the euro equivalent of $707.2 million under the European program. The weighted-average interest rate and maturity period for the U.S. program were 2.98% and 27.64 days, respectively. The weighted-average interest rate and maturity period for the European program were (0.21)% and 28.61 days, respectively. 

Senior Notes

On May 18, 2018, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of €300.0 million aggregate principal amount of its Floating Rate Notes due May 18, 2020 (“2020 Floating Rate Notes”). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus 0.3% (but in no event shall the interest rate be less than zero). Interest on the 2020 Floating Rate Notes is payable quarterly on August 18, November 18, February 18, and May 18 of each year. Mohawk Finance paid financing costs of $0.9 million in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.

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 (“2.00% Senior Notes”). The 2.00% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing and future unsecured indebtedness. Interest on the 2.00% Senior Notes is payable annually in cash on January 14 of each year, commencing on January 14, 2016. The Company paid financing costs of $4.2 million in connection


32


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 (“3.85% Senior Notes”). The 3.85% Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’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 amortized over the term of the Securitization Facility. The Securitization Facility expired in accordance with its terms on December 19, 2017.

Other

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.
    
As of December 31, 2018, the Company had cash of $119.1 million, of which $88.1 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 2015 Senior Credit Facility will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over the next twelve months.

As of December 31, 2018, the Company has repurchased $274.1 million of its shares of common stock pursuant to the $500 million program announced in October. All of these repurchases have been financed through the Company’s operations and existing finance arrangements. See Item 5 - Issuer Purchases of Equity Securities.
    



33




Contractual obligations and commitments
The following is a summary of the Company’s future minimum payments under contractual obligations and commitments as of December 31, 2018 (in millions):
 
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Contractual obligations and commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current maturities and capital leases
$
3,263.1

 
1,742.4

 
344.3

 
0.6

 
572.6

 
600.4

 
2.8

Interest payments on long-term debt and capital leases (1)
150.2

 
54.2

 
34.7

 
34.7

 
24.2

 
2.1

 
0.4

Operating leases
366.5

 
116.1

 
93.7

 
66.1

 
42.2

 
22.2

 
26.1

Purchase commitments (2)
574.9

 
184.5

 
81.1

 
54.3

 
25.5

 
25.5

 
204.0

Expected pension contributions (3)
2.6

 
2.6

 

 

 

 

 

Uncertain tax positions (4)
3.0

 
3.0

 

 

 

 

 

Guarantees (5)
8.8

 
8.8

 

 

 

 

 

Total
$
4,369.1

 
2,111.5

 
553.8

 
155.7

 
664.5

 
650.2

 
233.3

 
(1)
For fixed rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect as of December 31, 2018 to these balances.

(2)
Includes volume commitments for natural gas, electricity and raw material purchases.

(3)
Includes the estimated pension contributions for 2019 only, as the Company is unable to estimate the pension contributions beyond 2019. The Company’s projected benefit obligation and plan assets as of December 31, 2018 were $63.6 million and $54.3 million, respectively. The projected benefit obligation liability has not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.

(4)
Excludes $27.7 million of non-current accrued income tax liabilities and related interest and penalties for uncertain tax positions. These liabilities have not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.

(5)
Includes bank guarantees and letters of credit.


Critical Accounting Policies
In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, the Company must make decisions which impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and analysis of the relevant circumstances and historical experience. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included elsewhere in this report. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting estimates are defined as those that are both most important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company believes the following accounting policies require it to use judgments and estimates in preparing its consolidated financial statements and represent critical accounting policies.


34


Accounts receivable and revenue recognition. 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. A 10% change in the Company’s allowance for discounts, returns, claims and doubtful accounts would have affected net earnings by approximately $5 million for the year ended December 31, 2018.
Inventories are stated at the lower of cost or market (net realizable value). Cost has been determined using the first-in first-out method (“FIFO”). Costs included in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is replacement cost or net realizable value. Inventories on hand are compared against anticipated future usage, which is a function of historical usage, anticipated future selling price, expected sales below cost, excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost, and a 10% change in the Company’s assumptions for excess or obsolete inventory would have affected net earnings by approximately $8 million for the year ended December 31, 2018.
Acquisition Accounting. The fair value of the consideration the Company pay for each new acquisition is allocated to tangible assets and identifiable intangible assets, liabilities assumed, any non-controlling interest in the acquired entity and goodwill.  The accounting for acquisitions involves a considerable amount of judgment and estimate, including the fair value of certain forms of consideration; fair value of acquired intangible assets involving projections of future revenues and cash flows that are then either discounted at an estimated discount rate or measured at an estimated royalty rate; fair value of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of the acquired assets. The assumptions used are determined at the time of the acquisition in accordance with accepted valuation models.  Projections are developed using internal forecasts, available industry and market data and estimates of long-term rates of growth for the business. The impact of prior or future acquisitions on the Company’s financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.  See Note 2-Acquisitions for further discussion of business combination accounting valuation methodology and assumptions.  
Goodwill and other intangibles. Goodwill is tested annually for impairment on the first day of the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The Company considers the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified Global Ceramic, Flooring NA and Flooring ROW as its reporting units for the purposes of allocating goodwill and intangibles as well as assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital (“WACC”), and comparable company market multiples. When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur, such as declines in spending for new construction, remodeling and replacement activities; the inability to pass increases in the costs of raw materials and fuel on to customers; or a decline in comparable company market multiples, then key judgments and assumptions could be impacted. Generally, a decline in estimated after tax cash flows of more than 35% or a more than 26% increase in WACC or a significant or prolonged decline in market capitalization could result in an additional indication of impairment.
The impairment test for intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. These judgments and assumptions are subject to the variability discussed above.


35


The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted on the first day of the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable to ownership of the trademarks. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the trademarks. Estimated cash flows are sensitive to changes in the economy among other things.
The Company reviews its long-lived asset groups, which include intangible assets subject to amortization, which for the Company are its patents and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset groups may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated by these asset groups. If such asset groups are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets held for sale are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.
The Company conducted its annual assessment of goodwill and indefinite lived intangibles on the first day of the fourth quarter and no impairment was indicated for 2018.
Income taxes. The Company’s effective tax rate is based on its income, statutory tax rates and tax planning opportunities available in the jurisdictions in which it operates. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company’s tax expense and in evaluating the Company’s tax positions. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in a future period. The Company evaluates the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that the Company is not able to realize all or a portion of its deferred tax assets in the future, a valuation allowance is provided. The Company would recognize such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. For further information regarding the Company’s valuation allowances, see Note 13-Income Taxes.
In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information, as required by the provisions of the Financial Accounting Standards Board (“FASB”) FASB Accounting Standards Codification Topic (“ASC”) 740-10. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements. For further information regarding the Company’s uncertain tax positions, see Note 13-Income Taxes.
Environmental and legal accruals. Environmental and legal accruals are estimates based on judgments made by the Company relating to ongoing environmental and legal proceedings, as disclosed in the Company’s consolidated financial statements. In determining whether a liability is probable and reasonably estimable, the Company consults with its internal experts. The Company believes that the amounts recorded in the accompanying financial statements are based on the best estimates and judgments available to it.

Recent Accounting Pronouncements

See Note 1(u), “Summary of Significant Accounting Policies”, of the Company’s accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements including the dates, or expected dates of adoption, and effects, or expected effects, on the Company’s disclosures, results of operations, and financial condition.



36


Impact of Inflation

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

The Company is a calendar year-end company. With respect to its Flooring NA and Global Ceramic segments, the second quarter typically sees the higher net sales and operating income, followed by the first and third quarters. The results of operations for the fourth quarter tends to be the weakest. 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 earnings followed by moderate first and third quarters and a weaker fourth quarter.




37




Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
The Company’s market risk is impacted by changes in foreign currency exchange rates, interest rates and certain commodity prices. Financial exposures to these risks are monitored as an integral part of the Company’s risk management program, which seeks to reduce the potentially adverse effect that the volatility of these markets may have on its operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes. Excluding the hedge of net investment discussed in Note 1(n) “Hedges of Net Investments in Non-U.S. Operations”, of the Company’s accompanying consolidated financial statements in Item 8 of this Annual Report on Form 10-K, the Company did not have any derivative contracts outstanding as of December 31, 2018 and 2017.
Interest Rate Risk
As of December 31, 2018, approximately 36% of the Company’s debt portfolio was comprised of fixed-rate debt and 64% was floating-rate debt. The Company believes that probable near-term changes in interest rates would not materially affect its financial condition, results of operations or cash flows. The annual impact on interest expense of a one-percentage point interest rate change on the outstanding balance of the Company’s variable rate debt as of December 31, 2018 would be approximately $21 million or $0.18 to diluted EPS.
 
Foreign Exchange Risk

As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates, which may adversely affect the operating results and financial condition of the Company. Principal foreign currency exposures relate primarily to the euro and to a lesser extent the Russian ruble, the Mexican peso, the Canadian dollar, the Australian dollar, the British pound and the Brazilian real.
 
The Company’s objective is to balance, where possible, non-functional currency denominated assets to non-functional currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. The Company enters into cross border transactions through importing and exporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than their functional currency. This also applies to services provided and other cross border agreements among subsidiaries.

The Company takes steps to minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities. The Company does not enter into any speculative positions with regard to derivative instruments.
 
Based on financial results for the year ended December 31, 2018, a hypothetical overall 10 percent change in the U.S. dollar against the euro would have resulted in a translational adjustment of approximately $43 million.



38



Item 8.
Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 



39



Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Mohawk Industries, Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Mohawk Industries, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ KPMG LLP
We have served as the Company’s auditor since 1990.
Atlanta, Georgia
February 28, 2019



40


Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Mohawk Industries, Inc.:

Opinion on Internal Control Over Financial Reporting
We have audited Mohawk Industries, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and related notes, and our report dated February 28, 2019 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Godfrey Hirst Group during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, Godfrey Hirst Group’s internal control over financial reporting associated with total assets of $199.6 million and total net sales of $146.9 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018.

The Company acquired Eliane S/A Revestimentos Ceramicos (“Eliane”) during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, Eliane’s internal control over financial reporting associated with total assets of $186.5 million and total net sales of $35.1 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


41


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP
Atlanta, Georgia
February 28, 2019


42


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2018 and 2017
 
 
2018
 
2017
 
(In thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
119,050

 
84,884

Receivables, net
1,606,159

 
1,558,159

Inventories
2,287,615

 
1,948,663

Prepaid expenses
421,553

 
376,836

Other current assets
74,919

 
104,425

Total current assets
4,509,296

 
4,072,967

Property, plant and equipment, net
4,699,902

 
4,270,790

Goodwill
2,520,966

 
2,471,459

Tradenames
707,380

 
644,208

Other intangible assets, net
254,430

 
247,559

Deferred income taxes and other non-current assets
407,149

 
387,870

 
$
13,099,123

 
12,094,853

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
1,742,373

 
1,203,683

Accounts payable and accrued expenses
1,523,866

 
1,451,672

Total current liabilities
3,266,239

 
2,655,355

Deferred income taxes
413,740

 
328,103

Long-term debt, less current portion
1,515,601

 
1,559,895

Other long-term liabilities
463,484

 
455,028

Total liabilities
5,659,064

 
4,998,381

Commitments and contingencies (Note 14)

 

Redeemable noncontrolling interest

 
29,463

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

 

Common stock, $.01 par value; 150,000 shares authorized; 79,656 and 81,771 shares issued in 2018 and 2017, respectively
797

 
818

Additional paid-in capital
1,852,173

 
1,828,131

Retained earnings
6,588,197

 
6,004,506

Accumulated other comprehensive loss
(791,608
)
 
(558,527
)
 
7,649,559

 
7,274,928

Less: treasury stock at cost; 7,349 and 7,350 shares in 2018 and 2017, respectively
215,745

 
215,766

Total Mohawk Industries, Inc. stockholders’ equity
7,433,814

 
7,059,162

Noncontrolling interest
6,245

 
7,847

Total stockholders’ equity
7,440,059

 
7,067,009

 
$
13,099,123

 
12,094,853

See accompanying notes to consolidated financial statements.


43


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2018, 2017 and 2016
 
 
2018
 
2017
 
2016
 
(In thousands, except per share data)
Net sales
$
9,983,634

 
9,491,290

 
8,959,087

Cost of sales
7,145,564

 
6,494,876

 
6,146,262

Gross profit
2,838,070

 
2,996,414

 
2,812,825

Selling, general and administrative expenses
1,742,744

 
1,642,241

 
1,532,882

Operating income
1,095,326

 
1,354,173

 
1,279,943

Interest expense
38,827

 
31,111

 
40,547

Other expense (income)
7,298

 
5,205

 
(1,729
)
Earnings before income taxes
1,049,201

 
1,317,857

 
1,241,125

Income tax expense
184,346

 
343,165

 
307,559

Net earnings including noncontrolling interest
864,855

 
974,692

 
933,566

Net earnings attributable to noncontrolling interest
3,151

 
3,054

 
3,204

Net earnings attributable to Mohawk Industries, Inc.
$
861,704

 
971,638

 
930,362

 
 
 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 
 
Basic earnings per share attributable to Mohawk Industries, Inc.
$
11.53

 
13.07

 
12.55

Weighted-average common shares outstanding—basic
74,413

 
74,357

 
74,104

 
 
 
 
 
 
Diluted earnings per share attributable to Mohawk Industries, Inc.
 
 
 
 


Diluted earnings per share attributable to Mohawk Industries, Inc.
$
11.47

 
12.98

 
12.48

Weighted-average common shares outstanding—diluted
74,773

 
74,839

 
74,568


See accompanying notes to consolidated financial statements.


44


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2018, 2017 and 2016
 
 
 
2018
 
2017
 
2016
 
 
(in thousands)
Net earnings including noncontrolling interest
 
$
864,855

 
974,692

 
933,566

Other comprehensive (loss) income:
 
 
 
 
 
 
Foreign currency translation adjustments
 
(237,339
)
 
281,655

 
(36,702
)
Prior pension and post-retirement benefit service cost and actuarial loss
 
1,094

 
(2,927
)
 
(2,757
)
Other comprehensive income (loss)
 
(236,245
)
 
278,728

 
(39,459
)
Comprehensive income
 
628,610

 
1,253,420

 
894,107

Comprehensive (loss) income attributable to the non-controlling interest
 
(13
)
 
7,282

 
3,204

Comprehensive income attributable to Mohawk Industries, Inc.
 
$
628,623

 
1,246,138

 
890,903

 
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.



45


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2018, 2017 and 2016
 
 
 
Total Stockholders’ Equity
 
Redeemable
Noncontrolling
Interest
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Noncontrolling Interest
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
(In thousands)
Balances at December 31, 2015
$
21,952

 
81,280

 
$
813

 
$
1,760,016

 
$
4,102,707

 
$
(793,568
)
 
(7,351
)
 
$
(215,795
)
 
$
6,690

 
$
4,860,863

Shares issued under employee and director stock plans

 
239

 
2

 
(8,232
)
 

 

 

 
4

 

 
(8,226
)
Stock-based compensation expense

 

 

 
35,059

 

 

 

 

 

 
35,059

Tax benefit from stock-based compensation

 

 

 
4,697

 

 

 

 

 

 
4,697

Accretion of redeemable noncontrolling interest
123

 

 

 

 
(123
)
 

 

 

 

 
(123
)
Noncontrolling earnings
2,864

 

 

 

 

 

 

 

 
340

 
340

Currency translation adjustment on noncontrolling interests
(1,243
)
 

 

 

 

 

 

 

 
(26
)
 
(26
)
Acquisition of noncontrolling interest, net of taxes


 

 

 

 
(32
)
 

 

 

 
32

 

Currency translation adjustment

 

 

 

 

 
(36,702
)
 

 

 

 
(36,702
)
Prior pension and post-retirement benefit service cost and actuarial loss

 

 

 

 

 
(2,757
)
 

 

 

 
(2,757
)
Net income

 

 

 

 
930,362

 

 

 

 

 
930,362

Balances at December 31, 2016
23,696

 
81,519

 
815

 
1,791,540

 
5,032,914

 
(833,027
)
 
(7,351
)
 
(215,791
)
 
7,036

 
5,783,487

Shares issued under employee and director stock plans

 
252

 
3

 
269

 

 

 
1

 
25

 

 
297

Stock-based compensation expense

 

 

 
36,322

 

 

 

 

 

 
36,322

Distribution to noncontrolling interest, net of adjustments

 

 

 

 

 

 

 

 
(750
)
 
(750
)
Accretion of redeemable noncontrolling interest
46

 

 

 

 
(46
)
 

 

 

 

 
(46
)
Noncontrolling earnings