NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
1. General
Interim Reporting
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto, and the Company’s description of critical accounting policies, included in the Company’s
2017
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. Results for interim periods are not necessarily indicative of the results for the year.
Hedges of Net Investments in Non-U.S. Operations
The Company has numerous investments outside the United States. The net assets of these subsidiaries are exposed to changes and volatility in currency exchange rates. The Company uses foreign currency denominated debt to hedge some of its non-U.S. net investments against adverse movements in exchange rates. The gains and losses on the Company's net investments in its non-U.S. operations are partially economically offset by gains and losses on its foreign currency borrowings. The Company designated its
€500,000
2.00%
Senior Notes borrowing as a net investment hedge against a portion of its European operations. For the
six months ended
June 30, 2018
and
July 1, 2017
, the change in the U.S. dollar value of the Company's euro denominated debt was a decrease of
$15,984
(
$11,288
net of taxes) and an increase of
$45,314
(
$28,321
net of taxes), respectively, which is recorded in the foreign currency translation adjustment component of other comprehensive income (loss). The increase in the U.S. dollar value of the Company's debt partially offsets the euro-to-dollar translation of the Company's net investment in its European operations.
Recent Accounting Pronouncements - Recently Adopted
On January 1, 2018, the Company adopted the new accounting standard, ASC 606,
Revenue from Contracts with Customers
and all the related amendments (“ASC 606”) and applied the provisions of the standard to all contracts using the modified retrospective method. The cumulative effect of adopting the new revenue standard was immaterial and no adjustment has been recorded to the opening balance of retained earnings. Prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Substantially all of the Company’s revenue continues to be recognized at a point in time when the product is either shipped or received from the Company's facilities and control of the product is transferred to the customer. The Company reviewed all of its revenue product categories under ASC 606 and the only changes identified were that an immaterial amount of revenue from intellectual property ("IP") contracts results in earlier recognition of revenue, new controls and processes designed to meet the requirements of the standard were implemented, and the required new disclosures are presented in
Note 3, Revenue from Contracts with Customers. The adoption of ASC 606 did not have a material impact on the amounts reported in the Company's consolidated financial position, results of operations or cash flows.
On January 1, 2018, the Company adopted the new accounting standard, ASU 2016-15,
Statement of Cash Flows (Topic 230).
The effect of adopting the new standard was not material.
On January 1, 2018, the Company adopted the new accounting standard, ASU 2017-01,
Business Combinations (Topic 805): Clarifying the definition of a business.
The effect of adopting the new standard was not material.
Recent Accounting Pronouncements - Effective in Future Years
In February 2016, the FASB issued ASU 2016-02,
Leases
. The amendments in this Update create Topic 842, Leases, and supersede the requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The guidance in this update is effective for annual reporting periods beginning after December 15, 2018 including interim periods within that reporting period and early adoption is permitted.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company plans to adopt the provisions of this update at the beginning of fiscal year 2019. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing its assessment,
including identification of new controls and processes designed to meet the requirements of the topic and required new disclosures upon adoption, and may identify additional impacts this guidance will have on its consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and other (Topic 350): Simplifying the test for goodwill impairment.
The amendments remove the second step of the current goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for impairment tests in fiscal years beginning after December 15, 2019.
2. Acquisitions
2018 Acquisitions
On November 20, 2017, the Company announced that it agreed to acquire Godfrey Hirst Group, the leading flooring company in Australia and New Zealand, further extending Mohawk's global position. The acquisition closed on
July 2, 2018
, for
A$556,000
(
$411,882
equivalent at
June 30, 2018
) and the Company is currently determining its preliminary purchase price allocation for acquired tangible and identifiable intangible assets, liabilities assumed, any non-controlling interest acquired, and goodwill. The results of the Godfrey Hirst Group will be reflected in the Flooring ROW segment.
During the first quarter of 2018, the Company completed the acquisition of
three
businesses in the Flooring ROW segment for
$24,410
, resulting in a preliminary goodwill allocation of
$12,548
and intangibles subject to amortization of
$7
.
2017 Acquisitions
On April 4, 2017, the Company completed its purchase of Emilceramica S.r.l (“Emil”), a ceramic company in Italy. The total value of the acquisition was
$186,099
. The Emil acquisition will enhance the Company's cost position and strengthen its combined brand and distribution in Europe. The acquisition's results and purchase price allocation have been included in the consolidated financial statements since the date of the acquisition. The Company's acquisition of Emil resulted in a goodwill allocation of
$59,491
, indefinite-lived tradename intangible asset of
$16,196
and an intangible asset subject to amortization of
$2,348
. The goodwill is not expected to be deductible for tax purposes. The factors contributing to the recognition of the amount of goodwill include product, sales and manufacturing synergies. The Emil results are reflected in the Global Ceramic segment and the results of Emil's operations are not material to the Company's consolidated results of operations.
During the second quarter of 2017, the Company completed the acquisition of
two
businesses in the Global Ceramic segment for
$37,250
, resulting in a goodwill allocation of
$1,002
. The Company also completed the acquisition of a business in the Flooring NA segment for
$26,623
.
During the first quarter of 2017, the Company acquired certain assets of a distribution business in the Flooring ROW segment for
$1,407
, resulting in intangible assets subject to amortization of
$827
.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Revenue from Contracts with Customers
Revenue recognition and accounts receivable
The Company recognizes revenues when it satisfies performance obligations as evidenced by the transfer of control of the promised goods to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. The nature of the promised goods are ceramic, stone, carpet, resilient, laminate, wood and other flooring products. Payment is typically received 90 days or less from the invoice date. The Company adjusts the amounts of revenue for expected cash discounts, sales allowances, returns, and claims, based upon historical experience. The Company adjusts accounts receivable for doubtful account allowances based upon historical bad debt, claims experience, periodic evaluation of specific customer accounts, and the aging of accounts receivable. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Contract liabilities
The Company historically records contract liabilities when it receives payment prior to fulfilling a performance obligation. Contract liabilities related to revenues are recorded in accounts payable and accrued expenses on the accompanying condensed consolidating balance sheets. The Company had contract liabilities of
$42,938
and
$29,124
as of
June 30, 2018
and
January 1, 2018
, respectively.
Performance obligations
Substantially all of the Company’s revenue is recognized at a point-in-time when the product is either shipped or received from the Company's facilities and control of the product is transferred to the customer. Accordingly, in any period, the Company does not recognize a significant amount of revenue from performance obligations satisfied or partially satisfied in prior periods and the amount of such revenue recognized during the
three and six months ended
June 30, 2018
was immaterial.
Costs to obtain a contract
The Company historically incurs certain incremental costs to obtain revenue contracts. These costs relate to marketing display structures and are capitalized when the amortization period is greater than one year, with the amount recorded in other assets on the accompanying condensed consolidated balance sheets. Capitalized costs to obtain contracts were
$50,400
and
$43,259
as of
June 30, 2018
and
January 1, 2018
, respectively. Amortization expense recognized during the
six months ended
June 30, 2018
related to these capitalized costs was
$35,869
.
Practical expedients and policy elections
The Company elected the following practical expedients and policy elections:
|
|
•
|
Incremental costs of obtaining a contract is recorded as an expense when incurred in selling, general and administrative expenses if the amortization period is less than one year.
|
|
|
•
|
Shipping and handling activities performed after control has been transferred is accounted for as a fulfillment cost in cost of sales.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue disaggregation
The following table presents the Company’s segment revenues disaggregated by the geographical location of customer sales and product categories for the
three months ended
June 30, 2018
and
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
Global Ceramic segment
|
|
Flooring NA segment
|
|
Flooring ROW segment
|
|
Total
|
Geographical Markets
|
|
|
|
|
|
|
|
United States
|
$
|
578,535
|
|
|
1,013,994
|
|
|
—
|
|
|
1,592,529
|
|
Europe
|
208,671
|
|
|
1,870
|
|
|
490,885
|
|
|
701,426
|
|
Russia
|
63,709
|
|
|
—
|
|
|
26,553
|
|
|
90,262
|
|
Other
|
78,382
|
|
|
41,706
|
|
|
72,709
|
|
|
192,797
|
|
|
$
|
929,297
|
|
|
1,057,570
|
|
|
590,147
|
|
|
2,577,014
|
|
|
|
|
|
|
|
|
|
Product Categories
|
|
|
|
|
|
|
|
Ceramic & Stone
|
$
|
929,297
|
|
|
18,178
|
|
|
—
|
|
|
947,475
|
|
Carpet & Resilient
|
—
|
|
|
859,179
|
|
|
132,578
|
|
|
991,757
|
|
Laminate & Wood
|
—
|
|
|
180,213
|
|
|
216,754
|
|
|
396,967
|
|
Other
(1)
|
—
|
|
|
—
|
|
|
240,815
|
|
|
240,815
|
|
|
$
|
929,297
|
|
|
1,057,570
|
|
|
590,147
|
|
|
2,577,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
Global Ceramic segment
|
|
Flooring NA segment
|
|
Flooring ROW segment
|
|
Total
|
Geographical Markets
|
|
|
|
|
|
|
|
United States
|
$
|
571,195
|
|
|
990,599
|
|
|
484
|
|
|
1,562,278
|
|
Europe
|
191,397
|
|
|
4,248
|
|
|
414,621
|
|
|
610,266
|
|
Russia
|
62,006
|
|
|
—
|
|
|
22,482
|
|
|
84,488
|
|
Other
|
78,072
|
|
|
45,452
|
|
|
72,482
|
|
|
196,006
|
|
|
$
|
902,670
|
|
|
1,040,299
|
|
|
510,069
|
|
|
2,453,038
|
|
|
|
|
|
|
|
|
|
Product Categories
|
|
|
|
|
|
|
|
Ceramic & Stone
|
$
|
902,670
|
|
|
21,499
|
|
|
—
|
|
|
924,169
|
|
Carpet & Resilient
|
—
|
|
|
829,625
|
|
|
110,836
|
|
|
940,461
|
|
Laminate & Wood
|
—
|
|
|
189,175
|
|
|
201,258
|
|
|
390,433
|
|
Other
(1)
|
—
|
|
|
—
|
|
|
197,975
|
|
|
197,975
|
|
|
$
|
902,670
|
|
|
1,040,299
|
|
|
510,069
|
|
|
2,453,038
|
|
(1)
Other includes roofing elements, insulation boards, chipboards and IP contracts.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the Company’s segment revenues disaggregated by the geographical location of customer sales and product categories for the
six months ended
June 30, 2018
and
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
Global Ceramic segment
|
|
Flooring NA segment
|
|
Flooring ROW segment
|
|
Total
|
Geographical Markets
|
|
|
|
|
|
|
|
United States
|
$
|
1,134,722
|
|
|
1,922,116
|
|
|
—
|
|
|
3,056,838
|
|
Europe
|
398,906
|
|
|
3,520
|
|
|
985,528
|
|
|
1,387,954
|
|
Russia
|
115,131
|
|
|
—
|
|
|
45,982
|
|
|
161,113
|
|
Other
|
157,086
|
|
|
82,292
|
|
|
143,933
|
|
|
383,311
|
|
|
$
|
1,805,845
|
|
|
2,007,928
|
|
|
1,175,443
|
|
|
4,989,216
|
|
|
|
|
|
|
|
|
|
Product Categories
|
|
|
|
|
|
|
|
Ceramic & Stone
|
$
|
1,805,845
|
|
|
35,721
|
|
|
—
|
|
|
1,841,566
|
|
Carpet & Resilient
|
—
|
|
|
1,614,725
|
|
|
261,589
|
|
|
1,876,314
|
|
Laminate & Wood
|
—
|
|
|
357,482
|
|
|
442,897
|
|
|
800,379
|
|
Other
(1)
|
—
|
|
|
—
|
|
|
470,957
|
|
|
470,957
|
|
|
$
|
1,805,845
|
|
|
2,007,928
|
|
|
1,175,443
|
|
|
4,989,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
Global Ceramic segment
|
|
Flooring NA segment
|
|
Flooring ROW segment
|
|
Total
|
Geographical Markets
|
|
|
|
|
|
|
|
United States
|
$
|
1,116,211
|
|
|
1,883,204
|
|
|
1,187
|
|
|
3,000,602
|
|
Europe
|
323,018
|
|
|
8,283
|
|
|
826,816
|
|
|
1,158,117
|
|
Russia
|
106,264
|
|
|
—
|
|
|
40,621
|
|
|
146,885
|
|
Other
|
142,146
|
|
|
88,309
|
|
|
137,624
|
|
|
368,079
|
|
|
$
|
1,687,639
|
|
|
1,979,796
|
|
|
1,006,248
|
|
|
4,673,683
|
|
|
|
|
|
|
|
|
|
Product Categories
|
|
|
|
|
|
|
|
Ceramic & Stone
|
$
|
1,687,639
|
|
|
42,847
|
|
|
—
|
|
|
1,730,486
|
|
Carpet & Resilient
|
—
|
|
|
1,562,878
|
|
|
210,959
|
|
|
1,773,837
|
|
Laminate & Wood
|
—
|
|
|
374,071
|
|
|
393,179
|
|
|
767,250
|
|
Other
(1)
|
—
|
|
|
—
|
|
|
402,110
|
|
|
402,110
|
|
|
$
|
1,687,639
|
|
|
1,979,796
|
|
|
1,006,248
|
|
|
4,673,683
|
|
(1)
Other includes roofing elements, insulation boards, chipboards and IP contracts.
4. Restructuring, acquisition and integration-related costs
The Company incurs costs in connection with acquiring, integrating and restructuring acquisitions and in connection with its global cost-reduction/productivity initiatives. For example:
|
|
•
|
In connection with acquisition activity, the Company typically incurs costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and
|
|
|
•
|
In connection with the Company's cost-reduction/productivity initiatives, it typically incurs costs and charges associated with site closings and other facility rationalization actions and workforce reductions.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restructuring, acquisition transaction and integration-related costs consisted of the following during the
three and six months ended
June 30, 2018
and
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2018
|
|
July 1, 2017
|
|
June 30, 2018
|
|
July 1, 2017
|
Cost of sales
|
|
|
|
|
|
|
|
Restructuring costs
(a)
|
$
|
9,331
|
|
|
12,165
|
|
|
23,421
|
|
|
15,063
|
|
Acquisition integration-related costs
|
2,687
|
|
|
863
|
|
|
3,095
|
|
|
777
|
|
Restructuring and integration-related costs
|
$
|
12,018
|
|
|
13,028
|
|
|
26,516
|
|
|
15,840
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
Restructuring costs
(a)
|
$
|
3,798
|
|
|
1,163
|
|
|
7,890
|
|
|
1,290
|
|
Acquisition transaction-related costs
|
63
|
|
|
212
|
|
|
63
|
|
|
212
|
|
Acquisition integration-related costs
|
163
|
|
|
1,475
|
|
|
3,677
|
|
|
2,514
|
|
Restructuring, acquisition and integration-related costs
|
$
|
4,024
|
|
|
2,850
|
|
|
11,630
|
|
|
4,016
|
|
(a) The restructuring costs for
2018
and
2017
primarily relate to the Company's actions taken to lower its cost structure and improve efficiencies of manufacturing and distribution operations as well as actions related to the Company's recent acquisitions.
The restructuring activity for the
six months ended
June 30, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
impairments
|
|
Asset write-downs
|
|
Severance
|
|
Other
restructuring
costs and currency translation
|
|
Total
|
Balance as of December 31, 2017
|
$
|
359
|
|
|
—
|
|
|
584
|
|
|
152
|
|
|
1,095
|
|
Provision - Global Ceramic segment
|
—
|
|
|
30
|
|
|
6,557
|
|
|
87
|
|
|
6,674
|
|
Provision - Flooring NA segment
|
236
|
|
|
684
|
|
|
4,814
|
|
|
18,472
|
|
|
24,206
|
|
Provision - Flooring ROW segment
|
—
|
|
|
—
|
|
|
152
|
|
|
(74
|
)
|
|
78
|
|
Provision - Corporate
|
—
|
|
|
—
|
|
|
353
|
|
|
—
|
|
|
353
|
|
Cash payments
|
(335
|
)
|
|
—
|
|
|
(7,271
|
)
|
|
(18,112
|
)
|
|
(25,718
|
)
|
Non-cash items
|
—
|
|
|
(714
|
)
|
|
(143
|
)
|
|
(409
|
)
|
|
(1,266
|
)
|
Balance as of June 30, 2018
|
$
|
260
|
|
|
—
|
|
|
5,046
|
|
|
116
|
|
|
5,422
|
|
The Company expects the remaining severance and other restructuring costs to be paid over the next 12 months.
5. Receivables, net
Receivables, net are as follows:
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Customers, trade
|
$
|
1,716,748
|
|
|
1,538,348
|
|
Income tax receivable
|
7,959
|
|
|
9,835
|
|
Other
|
91,369
|
|
|
96,079
|
|
|
1,816,076
|
|
|
1,644,262
|
|
Less: allowance for discounts, claims and doubtful accounts
|
78,141
|
|
|
86,103
|
|
Receivables, net
|
$
|
1,737,935
|
|
|
1,558,159
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Finished goods
|
$
|
1,446,883
|
|
|
1,326,038
|
|
Work in process
|
156,428
|
|
|
159,921
|
|
Raw materials
|
457,893
|
|
|
462,704
|
|
Total inventories
|
$
|
2,061,204
|
|
|
1,948,663
|
|
7. Goodwill and intangible assets
The components of goodwill and other intangible assets are as follows:
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ceramic segment
|
|
Flooring NA segment
|
|
Flooring ROW segment
|
|
Total
|
Balance as of December 31, 2017
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,567,872
|
|
|
869,764
|
|
|
1,361,248
|
|
|
3,798,884
|
|
Accumulated impairment losses
|
(531,930
|
)
|
|
(343,054
|
)
|
|
(452,441
|
)
|
|
(1,327,425
|
)
|
|
$
|
1,035,942
|
|
|
526,710
|
|
|
908,807
|
|
|
2,471,459
|
|
|
|
|
|
|
|
|
|
Goodwill recognized during the period
|
$
|
—
|
|
|
—
|
|
|
12,548
|
|
|
12,548
|
|
Currency translation during the period
|
$
|
(11,342
|
)
|
|
—
|
|
|
(25,619
|
)
|
|
(36,961
|
)
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,556,530
|
|
|
869,764
|
|
|
1,348,177
|
|
|
3,774,471
|
|
Accumulated impairment losses
|
(531,930
|
)
|
|
(343,054
|
)
|
|
(452,441
|
)
|
|
(1,327,425
|
)
|
|
$
|
1,024,600
|
|
|
526,710
|
|
|
895,736
|
|
|
2,447,046
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
Tradenames
|
Balance as of December 31, 2017
|
$
|
644,208
|
|
Intangible assets acquired during the period
|
—
|
|
Currency translation during the period
|
(13,843
|
)
|
Balance as of June 30, 2018
|
$
|
630,365
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amounts:
|
Customer
relationships
|
|
Patents
|
|
Other
|
|
Total
|
Balance as of December 31, 2017
|
$
|
625,263
|
|
|
266,969
|
|
|
6,825
|
|
|
899,057
|
|
Intangible assets recognized during the period
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
Currency translation during the period
|
(11,108
|
)
|
|
(7,185
|
)
|
|
(123
|
)
|
|
(18,416
|
)
|
Balance as of June 30, 2018
|
$
|
614,155
|
|
|
259,784
|
|
|
6,709
|
|
|
880,648
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
Customer
relationships
|
|
Patents
|
|
Other
|
|
Total
|
Balance as of December 31, 2017
|
$
|
390,428
|
|
|
259,908
|
|
|
1,162
|
|
|
651,498
|
|
Amortization during the period
|
13,875
|
|
|
1,155
|
|
|
20
|
|
|
15,050
|
|
Currency translation during the period
|
(7,051
|
)
|
|
(7,006
|
)
|
|
(10
|
)
|
|
(14,067
|
)
|
Balance as of June 30, 2018
|
$
|
397,252
|
|
|
254,057
|
|
|
1,172
|
|
|
652,481
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization, net
|
$
|
216,903
|
|
|
5,727
|
|
|
5,537
|
|
|
228,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2018
|
|
July 1,
2017
|
|
June 30,
2018
|
|
July 1,
2017
|
Amortization expense
|
$
|
7,483
|
|
|
9,322
|
|
|
15,050
|
|
|
19,381
|
|
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Outstanding checks in excess of cash
|
$
|
7,325
|
|
|
8,879
|
|
Accounts payable, trade
|
951,200
|
|
|
810,034
|
|
Accrued expenses
|
384,147
|
|
|
363,919
|
|
Product warranties
|
38,973
|
|
|
39,035
|
|
Accrued interest
|
16,725
|
|
|
22,363
|
|
Accrued compensation and benefits
|
191,191
|
|
|
207,442
|
|
Total accounts payable and accrued expenses
|
$
|
1,589,561
|
|
|
1,451,672
|
|
9. Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss) by component, for the
six months ended
June 30, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Pensions, net of tax
|
|
Total
|
Balance as of December 31, 2017
|
$
|
(547,927
|
)
|
|
(10,600
|
)
|
|
(558,527
|
)
|
Current period other comprehensive income
|
(112,829
|
)
|
|
223
|
|
|
(112,606
|
)
|
Balance as of June 30, 2018
|
$
|
(660,756
|
)
|
|
(10,377
|
)
|
|
(671,133
|
)
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Stock-based compensation
The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of the FASB ASC 718-10. Compensation expense is recognized on a straight-line basis over the options’ or other awards’ estimated lives for fixed awards with ratable vesting provisions.
The Company granted
4
restricted stock units ("RSUs") at a weighted average grant-date fair value of
$204.35
per unit for the three months ended June 30, 2018. The Company granted
127
RSUs at a weighted average grant-date fair value of
$237.94
per unit for the
six months ended
June 30, 2018
. The Company granted
153
RSUs at a weighted average grant-date fair value of
$226.85
per unit for the
six months ended
July 1, 2017
. The Company recognized stock-based compensation costs related to the issuance of RSUs of
$13,645
(
$10,097
net of taxes) and
$13,875
(
$8,419
net of taxes) for the
three months ended
June 30, 2018
and
July 1, 2017
, respectively, which has been allocated to cost of sales and selling, general and administrative expenses. The Company recognized stock-based compensation costs related to the issuance of RSUs of
$21,593
(
$15,979
net of taxes) and
$23,424
(
$14,214
net of taxes) for the
six months ended
June 30, 2018
and
July 1, 2017
, respectively, which has been allocated to cost of sales and selling, general and administrative expenses. Pre-tax unrecognized compensation expense for unvested RSUs granted to employees, net of estimated forfeitures, was
$32,114
as of
June 30, 2018
, and will be recognized as expense over a weighted-average period of approximately
1.60
years. The Company also recognized stock-based compensation costs related to stock options of
$6
(
$4
net of taxes) for the
six months ended
July 1, 2017
which was allocated to cost of sales and selling, general and administrative expenses.
11. Other expense (income), net
Other expense (income), net is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2018
|
|
July 1,
2017
|
|
June 30,
2018
|
|
July 1,
2017
|
Foreign currency losses (gains), net
|
$
|
3,317
|
|
|
5,008
|
|
|
4,722
|
|
|
2,685
|
|
Release of indemnification asset
|
—
|
|
|
—
|
|
|
1,749
|
|
|
—
|
|
All other, net
|
(1,227
|
)
|
|
(2,006
|
)
|
|
(383
|
)
|
|
(2,515
|
)
|
Total other expense, net
|
$
|
2,090
|
|
|
3,002
|
|
|
6,088
|
|
|
170
|
|
12. Income Taxes
For the
quarter ended
June 30, 2018
, the Company recorded income tax expense of
$118,809
on earnings before income taxes of
$316,354
for an effective tax rate of
37.6%
, as compared to an income tax expense of
$82,682
on earnings before income taxes of
$344,430
, for an effective tax rate of
24.0%
for the
quarter ended
July 1, 2017
. For the
six months ended
June 30, 2018
, the Company recorded income tax expense of
$166,441
on earnings before income taxes of
$573,227
for an effective tax rate of
29.0%
as compared to an income tax expense of
$151,040
on earnings before income taxes of
$613,844
, for an effective tax rate of
24.6%
for the
six months ended
July 1, 2017
.
The effective tax rates for the
three and six months ended
June 30, 2018
were unfavorably impacted by Notice 2018-26, issued by the Department of the Treasury on April 2, 2018, which provided additional guidance on determining the amount of gross income to be recognized by U.S. taxpayers under the deemed repatriation of previously deferred foreign earnings. The effective tax rates for the
three and six months ended
June 30, 2018
were favorably impacted by tax reforms in Belgium and the U.S., which reduced the statutory rates from 33.99% to 29.58%, and 35% to 21%, respectively. The effective tax rates for the
three and six months ended
July 1, 2017
were favorably impacted by discrete items that occurred in the quarter ended
July 1, 2017
.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the income tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of the TCJA for companies to complete the accounting under ASC 740, Income Taxes ("ASC 740"). In accordance with SAB 118, a company must (1) reflect the income tax effects of those aspects of TCJA for which the accounting under ASC 740 is complete, (2) record a provisional estimate for those aspects of TCJA for which the accounting is incomplete but a reasonable estimate can be made, and/or (3) continue to apply ASC 740 on the basis of the provisions of tax laws in effect immediately before the enactment of the TCJA if no reasonable estimate can be made. The Company has not completed
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
its accounting for the income tax effects of the TCJA but this will be completed within the one-year time period permitted by SAB 118.
As disclosed in its December 31, 2017 10-K, the Company was able to make reasonable estimates and recorded a provisional amount in 2017 for the reduction of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. This estimate may be affected in future periods by other analysis to the TCJA, including, but not limited to, calculations of deemed repatriation of deferred foreign income and the state tax effect, expenditures that qualify for immediate expensing, and amounts limited for payments to covered employees. The Company analyzed Notice 2018-26, and has recorded
$54,674
of additional net tax expense resulting from an increase of
$100,865
for estimated Deemed Repatriation Transition Tax ("Transition Tax"), and decreases of
$27,485
and
$18,706
for reversals of unrecognized tax liabilities and transaction tax liabilities, respectively, during the
quarter ended
June 30, 2018
.
The Transition Tax is a tax on previously untaxed earnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries, as well as the amount of non-U.S. income tax paid on such earnings. The Company made a provisional estimate of the Transition Tax obligation in 2017 and updated the provisional amount in the second quarter of
2018
; however, the Company is continuing to gather additional information to compute a more precise amount. As of
June 30, 2018
and
December 31, 2017
, the Company has a liability of
$206,030
and
$105,165
, respectively, related to Transition Tax and will elect to pay the transition tax liability over the 8-year deferral period, with 8% due in each of the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the eighth year. As of
June 30, 2018
,
$17,522
of the Transition Tax obligation is recorded in accounts payable and accrued expenses, with the remaining
$188,508
recorded in other long-term liabilities within the accompanying condensed consolidating balance sheets.
Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Accordingly, the accounting is incomplete, and the Company is not yet able to make reasonable estimates of the effects; therefore, no provisional estimates were recorded. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend on complex calculations that the Company is unable to reasonably estimate at this time.
The Company will continue to evaluate the interpretations of the TCJA, the assumptions made within the calculations, and future guidance that may be issued to determine the impact, if any, on these provisional calculations, which may materially change the Company’s tax determinations.
13. Earnings per share
Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per common share assumes the exercise of outstanding stock options and the vesting of RSUs using the treasury stock method when the effects of such assumptions are dilutive. A reconciliation of net earnings available to common stockholders and weighted-average common shares outstanding for purposes of calculating basic and diluted earnings per share is as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2018
|
|
July 1,
2017
|
|
June 30,
2018
|
|
July 1,
2017
|
Net earnings attributable to Mohawk Industries, Inc.
|
$
|
196,586
|
|
|
260,681
|
|
|
405,352
|
|
|
461,235
|
|
Accretion of redeemable noncontrolling interest
(a)
|
—
|
|
|
—
|
|
|
(305
|
)
|
|
—
|
|
Net earnings available to common stockholders
|
$
|
196,586
|
|
|
260,681
|
|
|
405,047
|
|
|
461,235
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding-basic and diluted:
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—basic
|
74,597
|
|
|
74,327
|
|
|
74,525
|
|
|
74,269
|
|
Add weighted-average dilutive potential common shares—options to purchase common shares and RSUs, net
|
340
|
|
|
474
|
|
|
403
|
|
|
504
|
|
Weighted-average common shares outstanding-diluted
|
74,937
|
|
|
74,801
|
|
|
74,928
|
|
|
74,773
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Mohawk Industries, Inc.
|
|
|
|
|
|
|
|
Basic
|
$
|
2.64
|
|
|
3.51
|
|
|
5.44
|
|
|
6.21
|
|
Diluted
|
$
|
2.62
|
|
|
3.48
|
|
|
5.41
|
|
|
6.17
|
|
(a) Represents the accretion of the Company's redeemable noncontrolling interest to redemptive value resulting from the May 12, 2015 purchase of approximately
90%
of all outstanding shares of the KAI Group. The Company has had the option to call and the holder the option to put this noncontrolling interest since May 12, 2018.
14. Segment reporting
The Company has
three
reporting segments: the Global Ceramic segment, the Flooring NA segment and the Flooring ROW segment. The Global Ceramic segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, quartz and porcelain slab countertops, which it distributes primarily in North America, Europe and Russia through its network of regional distribution centers and Company-operated service centers. The segment’s product lines are sold through Company-operated service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Flooring NA segment designs, manufactures, sources and markets its floor covering product lines, including carpets, rugs, carpet pad, hardwood, laminate and vinyl products, including LVT, which it distributes through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment’s product lines are sold through various selling channels, including independent floor covering retailers, home centers, mass merchandisers, department stores, shop at home, buying groups, commercial dealers and commercial end users. The Flooring ROW segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, roofing elements, insulation boards, medium-density fiberboard, chipboards, sheet vinyl and LVT, which it distributes primarily in Europe and Russia through various selling channels, which include retailers, independent distributors and home centers.
The accounting policies for each operating segment are consistent with the Company’s policies for the consolidated financial statements. Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses attributable to each segment are estimated and allocated accordingly. Segment performance is evaluated based on operating income.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2018
|
|
July 1,
2017
|
|
June 30,
2018
|
|
July 1,
2017
|
Net sales:
|
|
|
|
|
|
|
|
Global Ceramic segment
|
$
|
929,297
|
|
|
902,670
|
|
|
1,805,845
|
|
|
1,687,639
|
|
Flooring NA segment
|
1,057,570
|
|
|
1,040,299
|
|
|
2,007,928
|
|
|
1,979,795
|
|
Flooring ROW segment
|
590,147
|
|
|
510,069
|
|
|
1,175,443
|
|
|
1,006,249
|
|
Intersegment sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
2,577,014
|
|
|
2,453,038
|
|
|
4,989,216
|
|
|
4,673,683
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Global Ceramic segment
|
$
|
134,760
|
|
|
152,557
|
|
|
248,177
|
|
|
268,593
|
|
Flooring NA segment
|
100,662
|
|
|
127,482
|
|
|
175,410
|
|
|
219,624
|
|
Flooring ROW segment
|
100,166
|
|
|
86,052
|
|
|
189,226
|
|
|
162,147
|
|
Corporate and intersegment eliminations
|
(9,281
|
)
|
|
(10,266
|
)
|
|
(18,107
|
)
|
|
(19,755
|
)
|
|
$
|
326,307
|
|
|
355,825
|
|
|
594,706
|
|
|
630,609
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Assets:
|
|
|
|
Global Ceramic segment
|
$
|
4,974,791
|
|
|
4,838,310
|
|
Flooring NA segment
|
3,927,190
|
|
|
3,702,137
|
|
Flooring ROW segment
|
3,701,419
|
|
|
3,245,424
|
|
Corporate and intersegment eliminations
|
290,639
|
|
|
308,982
|
|
|
$
|
12,894,039
|
|
|
12,094,853
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Commitments and contingencies
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
Alabama Municipal Litigation
In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “Gadsden Water Board”) filed an individual complaint in the Circuit Court of Etowah County, Alabama against certain manufacturers, suppliers, and users of chemicals containing perfluorinated compounds, including the Company. On October 26, 2016, the defendants removed the case to the United States District Court for the Northern District of Alabama, Middle Division, alleging diversity of citizenship and fraudulent joinder. The Gadsden Water Board filed a motion to remand the case back to the state court, and the defendants opposed the Gadsden Water Board’s motion. The federal court granted Gadsden Water Board's motion for remand. On October 24, 2017, the Company appealed the federal court's determination that co-defendant Industrial Chemicals, Inc. ("ICI") was properly joined as a party to the case. On February 22, 2018, the Court of Appeals dismissed the appeal for lack of jurisdiction. ICI's presence in the case deprives the federal court of jurisdiction over the case.
In May, 2017, the Water Works and Sewer Board of the Town of Centre, Alabama (the “Centre Water Board”) filed a very similar complaint to the Gadsden Water Board complaint in the Circuit Court of Cherokee County. On June 19, 2017, the defendants removed this case to the United States District Court for the Northern District of Alabama, Middle Division, again alleging diversity of citizenship and fraudulent joinder. The Centre Water Board filed a motion to remand the case back to state court, and the defendants opposed the Centre Water Board’s motion. The federal court granted Centre Water Board's motion for remand. On December 6, 2017, the Company appealed the federal court's determination that co-defendant ICI was properly joined as a party to that case as well. On January 31, 2018, the Court of Appeals dismissed the appeal for lack of jurisdiction. ICI's presence in the case deprives the federal court of jurisdiction over the case.
The Company filed a motion to dismiss in the Centre Water Board case on November 30, 2017 and a motion for judgment on the pleadings in the Gadsden Water Board case on October 25, 2017. Both motions argued that the courts did not have personal jurisdiction over the Company and that the complaints failed to state a claim on which relief could be granted. The Centre Water Board court denied the motion on May 15, 2018. On June 19, 2018, the Company filed a petition to the Alabama Supreme Court, seeking a ruling that the trial court erred in denying the motion to dismiss on the personal jurisdiction argument. That petition remains pending. The motion for judgment on the pleadings in the Gadsden Water Board case also remains pending.
The Company has never manufactured perfluorinated compounds but purchased them for use in the manufacture of its carpets prior to 2007. The Gadsden and Centre Water Boards are not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Gadsden and Centre Water Boards are seeking lost profits based on allegations that their customers decreased water purchases, as well as reimbursement for the cost of a filter and punitive damages.
Belgian Tax Matter
In January 2012, the Company received a
€23,789
assessment from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position. The Belgian tax authority set aside the assessment in the third quarter of 2012 and refunded all related deposits, including interest income of
€1,583
earned on such deposits. However, on October 23, 2012, the Belgian tax authority notified the Company of its intent to increase the Company's taxable income for the year ended December 31, 2008 under a revised theory. On December 28, 2012, the Belgian tax authority issued assessments for the years ended December 31, 2005 and December 31, 2009, in the amounts of
€46,135
and
€35,567
, respectively, including penalties, but excluding interest.
The Company filed a formal protest during the first quarter of 2013 relating to the new assessments. In September 2013, the Belgian tax authority denied the Company's protests, and the Company has brought these two years before the Court of First Appeal in Bruges. In December 2013, the Belgian tax authority issued additional assessments related to the years ended December 31, 2006, 2007, and 2010, in the amounts of
€38,817
,
€39,635
, and
€43,117
, respectively, including penalties, but excluding interest. The Company filed formal protests during the first quarter of 2014, refuting the Belgian tax authority's position for each of the years assessed. In the quarter ended June 28, 2014, the Company received a formal assessment for the year ended December 31, 2008, totaling
€30,131
, against which the Company also submitted its formal protest. All 4 additional years have been brought before the Court of First Appeal in November 2014. In January of 2015, the Company met with the Court of First Appeal in Bruges, Belgium and agreed with the Belgium tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
apply the ruling to all of the open years (to the extent there are no additional facts/procedural arguments in the other years). In May 2017, the statute of limitation was extended to include 2011.
On January 27, 2016, the Court of First Appeal in Bruges, Belgium ruled in favor of the Company with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal. On June 13, 2018, the Court of First Appeal in Bruges, Belgium again ruled in favor of the Company with respect to the calendar years ending December 31, 2006, December 31, 2007, December 31, 2008, and December 31, 2010. The Company has now received positive rulings from the Court of First Appeal in Bruges on all calendar years 2005 through 2010, inclusive.
The Company continues to disagree with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company's properties in Wielsbeke (Ooigemstraat and Breestraat), Oostrozebeke (Ingelmunstersteenweg) and Desselgem (Waregemstraat) included in the Flooring ROW segment. The purpose of the lien is to provide security for payment should the Belgian tax authority prevail on its appeal. The lien does not interfere with the Company's operations at these properties.
General
The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses that are reasonably estimable. These contingencies are subject to significant uncertainties and the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
16. Debt
Senior Credit Facility
On March 26, 2015, the Company amended and restated its 2013 senior credit facility increasing its size from
$1,000,000
to
$1,800,000
and extending the maturity from
September 25, 2018
to
March 26, 2020
(as amended and restated, the "2015 Senior Credit Facility"). The 2015 Senior Credit Facility eliminated certain provisions in the 2013 Senior Credit Facility, including those that: (a) accelerated the maturity date to 90 days prior to the maturity of senior notes due in January 2016 if certain specified liquidity levels were not met; and (b) required that certain subsidiaries guarantee the Company's obligations if the Company’s credit ratings fell below investment grade. The 2015 Senior Credit Facility also modified certain negative covenants to provide the Company with additional flexibility, including flexibility to make acquisitions and incur additional indebtedness.
On March 1, 2016, the Company amended the 2015 Senior Credit Facility to, among other things, carve out from the general limitation on subsidiary indebtedness the issuance of Euro-denominated commercial paper notes by subsidiaries. Additionally, at several points in 2016, the Company extended the maturity date of the 2015 Senior Credit Facility from March 26, 2020 to March 26, 2021. In the first half of 2017, the Company amended the 2015 Senior Credit Facility to extend the maturity date from March 26, 2021 to March 26, 2022.
At the Company's election, revolving loans under the 2015 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between
1.00%
and
1.75%
(
1.125%
as of
June 30, 2018
), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus
0.5%
, or a monthly LIBOR rate plus
1.0%
, plus an applicable margin ranging between
0.00%
and
0.75%
(
0.125%
as of
June 30, 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
June 30, 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
least
3.0
to 1.0 and a Consolidated Net Leverage Ratio of no more than
3.75
to 1.0, each as of the last day of any fiscal quarter. The limitations contain customary exceptions or, in certain cases, do not apply as long as the Company is in compliance with the financial ratio requirements and is not otherwise in default.
The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
The Company paid financing costs of
$567
in connection with the extension of its 2015 Senior Credit Facility from March 26, 2021 to March 26, 2022. These costs were deferred and, along with unamortized costs of
$6,873
are being amortized over the term of the 2015 Senior Credit Facility.
As of
June 30, 2018
, amounts utilized under the 2015 Senior Credit Facility included
$59,233
of borrowings and
$55,220
of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of
$1,069,208
under the Company's U.S. and European commercial paper programs as of
June 30, 2018
reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized
$1,183,661
under the 2015 Senior Credit Facility resulting in a total of
$616,339
available as of
June 30, 2018
.
Commercial Paper
On
February 28, 2014
and
July 31, 2015
, the Company established programs for the issuance of unsecured commercial paper in the United States and Eurozone capital markets, respectively. Commercial paper issued under the U.S. and European programs will have maturities ranging up to
397
days and
183
days, respectively. None of the commercial paper notes may be voluntarily prepaid or redeemed by the Company and all rank pari passu with all of the Company's other unsecured and unsubordinated indebtedness. To the extent that the Company issues European commercial paper notes through a subsidiary of the Company, the notes will be fully and unconditionally guaranteed by the Company.
The Company uses its 2015 Senior Credit Facility as a liquidity backstop for its commercial paper programs. Accordingly, the total amount outstanding under all of the Company's commercial paper programs may not exceed
$1,800,000
(less any amounts drawn on the 2015 Credit Facility) at any time.
The proceeds from the issuance of commercial paper notes are available for general corporate purposes. As of
June 30, 2018
, there was
$508,460
outstanding under the U.S. program, and the euro equivalent of
$560,748
was outstanding under the European program. The weighted-average interest rate and maturity period for the U.S. program were
2.36%
and
26.18
days, respectively. The weighted average interest rate and maturity period for the European program were
(0.20)%
and
26.53
days, respectively.
Senior Notes
On
May 18, 2018
, Mohawk Capital Finance S.A. (“Mohawk Finance”), an indirect wholly-owned finance subsidiary of the Company, completed the issuance and sale of
€300,000
aggregate principal amount of its Floating Rate Notes due
May 18, 2020
("2020 Floating Rate Notes"). The 2020 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2020 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus
0.3%
(but in no event shall the interest rate be less than zero). Interest on the Floating Rate Notes is payable quarterly on
August 18
,
November 18
,
February 18
, and
May 18
of each year. Mohawk Finance paid financing costs of
$800
in connection with the 2020 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2020 Floating Rate Notes.
On
September 11, 2017
, Mohawk Finance completed the issuance and sale of
€300,000
aggregate principal amount of its Floating Rate Notes due
September 11, 2019
("2019 Floating Rate Notes"). The 2019 Floating Rate Notes are senior unsecured obligations of Mohawk Finance and rank pari passu with all of Mohawk Finance’s other existing and future senior unsecured indebtedness. The 2019 Floating Rate Notes are fully, unconditionally and irrevocably guaranteed by the Company on a senior unsecured basis. These notes bear interest at a rate per annum, reset quarterly, equal to three-month EURIBOR plus
0.3%
(but in no event shall the interest rate be less than zero). Interest on the 2019 Floating Rate Notes is payable quarterly on
September 11
,
December 11
,
March 11
, and
June 11
of each year. Mohawk Finance paid financing costs of
$911
in connection with the 2019 Floating Rate Notes. These costs were deferred and are being amortized over the term of the 2019 Floating Rate Notes.
On June 9, 2015, the Company issued
€500,000
aggregate principal amount of
2.00%
Senior Notes due
January 14, 2022
. The
2.00%
Senior Notes are senior unsecured obligations of the Company and rank pari passu with all of the Company’s existing
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
and future unsecured indebtedness. Interest on the
2.00%
Senior Notes is payable annually in cash on
January 14
of each year. The Company paid financing costs of
$4,218
in connection with the
2.00%
Senior Notes. These costs were deferred and are being amortized over the term of the
2.00%
Senior Notes.
On January 31, 2013, the Company issued
$600,000
aggregate principal amount of
3.85%
Senior Notes due
February 1, 2023
. The
3.85%
Senior Notes are senior unsecured obligations of the Company and rank pari passu with all the Company's existing and future unsecured indebtedness. Interest on the
3.85%
Senior Notes is payable semi-annually in cash on
February 1
and
August 1
of each year. The Company paid financing costs of
$6,000
in connection with the
3.85%
Senior Notes. These costs were deferred and are being amortized over the term of the
3.85%
Senior Notes.
As defined in the related agreements, the Company's senior notes contain covenants, representations and warranties and events of default, subject to exceptions, and restrictions on the Company’s financial and business operations, including limitations on liens, restrictions on entering into sale and leaseback transactions, fundamental changes, and a provision allowing the holder of the notes to require repayment upon a change of control triggering event.
Accounts Receivable Securitization
On December 19, 2012, the Company entered into a
three
-year on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). On September 11, 2014, the Company made certain modifications to its Securitization Facility, which modifications, among other things, increased the aggregate borrowings available under the facility from
$300,000
to
$500,000
and decreased the interest margins on certain borrowings. Amounts borrowed under the Securitization Facility bore interest at LIBOR plus an applicable margin of
0.70%
per annum and the borrower paid a commitment fee at a per annum rate of
0.30%
on the unused amount of each lender’s commitment. On
December 10, 2015
, the Company extended the termination date to December 19, 2016, and on December 13, 2016, the Company extended the termination date to December 19, 2017. The Company paid financing costs of
$250
in connection with the second extension. These costs were deferred and are being amortized over the remaining term of the Securitization Facility. The Securitization Facility expired in accordance with its terms on December 19, 2017.
The fair values and carrying values of our debt instruments are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
3.85% senior notes, payable February 1, 2023; interest payable semiannually
|
$
|
606,348
|
|
|
600,000
|
|
|
622,752
|
|
|
600,000
|
|
2.00% senior notes, payable January 14, 2022; interest payable annually
|
614,936
|
|
|
584,112
|
|
|
634,193
|
|
|
600,096
|
|
Floating Rate Notes, payable September 11, 2019, interest payable quarterly
|
351,115
|
|
|
350,467
|
|
|
360,807
|
|
|
360,058
|
|
Floating Rate Notes, payable May 18, 2020, interest payable quarterly
|
349,437
|
|
|
350,467
|
|
|
—
|
|
|
—
|
|
U.S. commercial paper
|
508,460
|
|
|
508,460
|
|
|
228,500
|
|
|
228,500
|
|
European commercial paper
|
560,748
|
|
|
560,748
|
|
|
912,146
|
|
|
912,146
|
|
2015 Senior Credit Facility
|
59,233
|
|
|
59,233
|
|
|
62,104
|
|
|
62,104
|
|
Capital leases and other
|
23,189
|
|
|
23,189
|
|
|
6,934
|
|
|
6,934
|
|
Unamortized debt issuance costs
|
(6,142
|
)
|
|
(6,142
|
)
|
|
(6,260
|
)
|
|
(6,260
|
)
|
Total debt
|
3,067,324
|
|
|
3,030,534
|
|
|
2,821,176
|
|
|
2,763,578
|
|
Less current portion of long-term debt and commercial paper
|
1,145,481
|
|
|
1,146,511
|
|
|
1,203,683
|
|
|
1,203,683
|
|
Long-term debt, less current portion
|
$
|
1,921,843
|
|
|
1,884,023
|
|
|
1,617,493
|
|
|
1,559,895
|
|
The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values.