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Mohawk (MHK) Q1 Earnings Miss, Down Y/Y on Lower Demand

Zacks Equity Research

Mohawk Industries, Inc. MHK reported lackluster results in first-quarter 2020. Both the top and bottom lines lagged the Zacks Consensus Estimate and declined on a year-over-year basis. The downside was mainly due to softness in retail demand, reduced production volume and unplanned shutdown costs. In the near term, it expects markets to remain under pressure due to COVID-19 impacts.

Mohawk reported adjusted earnings of $1.66 per share, missing the consensus mark of $1.67 by 0.6%. Also, the metric declined 22.1% year over year.

Net sales of $2.29 billion lagged the consensus estimate of $2.31 billion by 1.1% and fell 6.4% from the year-ago figure of $2.44 billion. On a constant-currency and days basis, net sales were down 3.5% year over year.

Mohawk Industries, Inc. Price, Consensus and EPS Surprise

Mohawk Industries, Inc. Price, Consensus and EPS Surprise

Mohawk Industries, Inc. price-consensus-eps-surprise-chart | Mohawk Industries, Inc. Quote

Operating Highlights

Adjusted gross profit of $627.5 million was down 5.4% year over year. Adjusted selling, general and administrative expenses increased 1.7% from the prior-year level. Adjusted operating income totaled $163.5 million, which declined 20.9% year over year.

Segment Details

Global Ceramic: Sales in the segment totaled $848.5 million, down 6% year over year. Also, the metric declined 2% on a constant currency and days basis. Adjusted operating margin was down 420 basis points (bps) from the prior-year level due to lower volume, unfavorable price and mix, as well as unplanned shutdown costs.

In each region served, the company lowered production to adapt to market demand. Within the U.S. ceramic business, demand declined at a slower pace as new residential and commercial projects are still being completed. Through February, U.S. ceramic imports were down 18% year over year, with average import pricing up 5%.

In Mexico, first-quarter sales were slightly up from the prior-year quarter, while the sales mix declined due to increased competition, higher inflation and investments to expand commercial distribution. In Brazil, sales improved year over year despite coronavirus impacts. In the European ceramic business, the pandemic resulted in production stoppage but shipments continued. In the Russian business, volume was more than expected as customers increased their inventory levels, anticipating higher inflation.

Flooring North America: Net sales in the segment came in at $848.3 million, down 8% year over year (declining 5.5% on a constant days basis due to exit of the unprofitable wood and other products unit). Nonetheless, adjusted operating margin improved 140 bps from the prior-year level. Improvements in productivity and reduction in inflation were partially offset by lower volume, price, mix and the COVID-19 outbreak.

The reportable segment mostly gains from the remodeling business. The company noted that most of the retailers have temporarily stopped operations due to the pandemic. During the quarter, LVT and sheet vinyl were stronger, driven by higher daily output and increased uptime. It introduced new collections featuring enhanced design and performance within premium brands.

Its state-of-the-art laminate provides a DIY alternative with realistic visuals, water-proof technology and enhanced durability. In the wood flooring business, it restructured manufacturing operations, and increased productivity and yields.

Flooring Rest of the World: Net sales in the segment fell 5% year over year to $589 million. On a constant-currency and days basis, sales were flat with the year-ago level. Adjusted operating margin in the segment declined 150 bps on a year-over-year basis due to lower price and mix, volume and shutdown costs, partially offset by reduced inflation and increased productivity.

Its recent investments in rigid LVT, sheet vinyl and carpet tile supported the results in the first quarter. However, laminate volume declined year over year, primarily in countries that are most impacted by the virus outbreak. The company closed the wood flooring plant in the Czech Republic, which will reduce costs in Malaysian operation. The company ceased manufacturing in insulation plants in France and Ireland.

In Australia and New Zealand, sales were slightly up from a year ago owing to growth of hard surfaces and lower pressure on margins by the carpet business. Meanwhile, New Zealand’s operations and retail outlets are closed since late March.

Financial Highlights

As of Mar 31, 2020, it had liquidity of $1.3 billion. Cash and cash equivalents were $263.1 million compared with $105.7 million a year ago.

The company obtained a $500-million term loan to expand liquidity. Long-term debt — less current portion — totaled $1.51 billion, slightly up from $1.5 billion at first quarter 2019-end. Net debt was $2.46 billion.

Trailing 12-month net debt to adjusted EBITDA was 1.7.

COVID-19 Updates

The company’s segmental results were strong, given strategic initiatives implemented in 2019. However, coronavirus-led shutdowns impacted all markets served, with the shutting down of retail and manufacturing operations in some of the markets. Demand dropped significantly, mostly in the residential remodeling business. DIY products performed pretty well, as some people started projects while staying home.

To cope with the current situation, it reduced production to adapt to market demand. It also reduced costs, expenses and investments.

Q2 View

The company continues to witness a tough business environment, given lower demand, reduced production volume and economic uncertainty. At April-end, the company generated 35% lower sales. It anticipates operating loss in the second quarter due to the impact of COVID-19.

Zacks Rank

Mohawk — which shares space with Culp, Inc CULP, Interface, Inc TILE and Select Interior Concepts, Inc. SIC in the Zacks Textile - Home Furnishing industry — currently carries a Zacks Rank #4 (Sell).

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