Notes to Consolidated Financial Statements
Years Ended December 31,
2016
,
2015
and
2014
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
Mohawk Industries, Inc. (“Mohawk” or the “Company”), a term which includes the Company and its subsidiaries, 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 the production of carpet, rugs, ceramic tile, laminate, wood, stone, luxury vinyl tile ("LVT") and vinyl flooring.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b) Segment Realignment
During the second quarter of 2015, the Company realigned its reportable segments to reflect how the Company’s results will be reported by management. The Company has reorganized its business into
three
segments - Global Ceramic, Flooring North America ("Flooring NA") and Flooring Rest of the World ("Flooring ROW"). In order to leverage its relationship and distribution capabilities, the Company organized its carpet, wood, laminate, LVT and vinyl operations by geography into the Flooring NA segment and Flooring ROW segment. The Company did not make changes to the Global Ceramic segment, which includes our ceramic tile and stone operations. Previously reported segment results have been reclassified to conform to the current period presentation.
This new segment structure is consistent with the strategic objective that management now applies to manage the growth and profitability of the Company’s business. The Global Ceramic segment includes all worldwide tile and natural stone operations. The Flooring NA segment includes North American operations in all product categories except tile and natural stone. The new segment combines the former Carpet segment with the North American operations of the former Laminate and Wood segment and the North American operations of the Company’s newly acquired LVT and vinyl flooring businesses. The Flooring ROW segment includes operations outside of North America in all product categories except tile and natural stone. The new segment combines the European and Rest of the World operations of the former Laminate and Wood segment and the European and Rest of the World operations of the Company’s newly acquired LVT and vinyl flooring businesses.
(c) Cash and Cash Equivalents
The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2016, the Company had cash of
$121,665
of which
$92,419
was held outside the United States. As of December 31, 2015, the Company had cash of
$81,692
of which
$61,173
was held outside the United States.
(d) Accounts Receivable and Revenue Recognition
The Company sells carpet, rugs, ceramic tile, natural stone, hardwood, sheet vinyl, LVT and laminate flooring products in the U.S. and to a lesser extent, Mexico, Europe and Russia principally for residential and commercial use. The Company grants credit to customers, most of whom are retail-flooring dealers, home centers and commercial end users, under credit terms that the Company believes are customary in the industry.
Revenues, which are recorded net of taxes collected from customers, are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectability can be reasonably assured. The Company provides allowances for expected cash discounts, returns, claims, sales allowances and doubtful accounts based upon historical bad debt and claims experience and periodic evaluations of specific customer accounts and the aging of accounts receivable. Licensing revenues received from third parties for patents are recognized based on contractual agreements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(e) Inventories
The Company accounts for all inventories on the first-in, first-out (“FIFO”) method. Inventories are stated at the lower of cost or market (net realizable value). Cost has been determined using the FIFO method. 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 additional reserves may be required.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost, including capitalized interest. Depreciation is calculated on a straight-line basis over the estimated remaining useful lives, which are
25
-
40
years for buildings and improvements,
5
-
15
years for machinery and equipment, the shorter of the estimated useful life or lease term for leasehold improvements and
3
-
7
years for furniture and fixtures.
(g) Accounting for Business Combinations
The Company accounts for business combinations under the acquisition method of accounting which requires it to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of operations.
(h) Goodwill and Other Intangible Assets
In accordance with the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 350,
“Intangibles-Goodwill and Other,”
the Company tests goodwill and other intangible assets with indefinite lives for impairment on an annual basis in the fourth quarter (or on an interim basis if an event occurs that might reduce the fair value of the reporting unit below its carrying value). 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’s 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 continued 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.
The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted during the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The first step of the impairment tests for our indefinite lived intangible assets is a thorough assessment of qualitative factors to determine the existence of events or circumstances that would indicate that it is not more likely than not that the fair value of these assets is less than their carrying amounts. If the qualitative test indicates it is not more likely than not that the fair value of these assets is less than their carrying amounts, a quantitative assessment is not required. If a quantitative test is necessary, the second step of our impairment test involves comparing the estimated fair value of a reporting unit to its carrying amount. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
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 current 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. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Intangible assets that do not have indefinite lives are amortized based on average lives, which range from
7
-
16
years.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense.
(j) Financial Instruments
The Company’s financial instruments consist primarily of receivables, accounts payable, accrued expenses and long-term debt. The carrying amounts of receivables, accounts payable and accrued expenses approximate their fair value because of the short-term maturity of such instruments. The carrying amount of the Company’s floating rate debt approximates its fair value based upon level two fair value hierarchy. Interest rates that are currently available to the Company for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of the Company’s long-term debt.
(k) Advertising Costs and Vendor Consideration
Advertising and promotion expenses are charged to earnings during the period in which they are incurred. Advertising and promotion expenses included in selling, general, and administrative expenses were
$122,148
in 2016,
$100,012
in 2015 and
$93,050
in 2014.
Vendor consideration, generally cash, is classified as a reduction of net sales, unless specific criteria are met regarding goods or services that the Company may receive in return for this consideration. The Company makes various payments to customers, including rebates, slotting fees, advertising allowances, buy-downs and co-op advertising. All of these payments reduce gross sales with the exception of co-op advertising. Co-op advertising is classified as a selling, general and administrative expense in accordance with ASC 605-50. Co-op advertising expenses, a component of advertising and promotion expenses, were
$11,132
in 2016,
$9,417
in 2015 and
$10,064
in 2014.
(l) Product Warranties
The Company warrants certain qualitative attributes of its flooring products. The Company has recorded a provision for estimated warranty and related costs, based on historical experience and periodically adjusts these provisions to reflect actual experience.
(m) Impairment of Long-Lived Assets
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.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(n) Foreign Currency Translation
The Company’s subsidiaries that operate outside the United States use their local currency as the functional currency. The functional currency is translated into U.S. Dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders’ equity, within accumulated other comprehensive income (loss). Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of operations.
(o) 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 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 economically offset by losses and gains on its foreign currency borrowings. The Company designated its
€500,000
2.00%
Senior Notes borrowing as a net investment hedge of a portion of its European operations. For the year ended December 31, 2016, the change in the U.S. dollar value of the Company's euro denominated debt was
$20,644
(
$12,902
net of taxes), which is recorded in the foreign currency translation adjustment component of accumulated 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.
(p) Earnings per Share (“EPS”)
Basic net earnings per share (“EPS”) is calculated using net earnings available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the year. Diluted EPS is similar to basic EPS except that the weighted-average number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method. There were no common stock options and unvested restricted shares (units) that were not included in the diluted EPS computation because the price was greater than the average market price of the common shares for the periods presented for 2016, 2015 and 2014.
Computations of basic and diluted earnings per share are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Earnings attributable to Mohawk Industries, Inc.
|
$
|
930,362
|
|
|
615,302
|
|
|
531,965
|
|
Accretion of redeemable noncontrolling interest
(a)
|
(123
|
)
|
|
(194
|
)
|
|
—
|
|
Net earnings available to common stockholders
|
$
|
930,239
|
|
|
615,108
|
|
|
531,965
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding-basic and diluted:
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
74,104
|
|
|
73,516
|
|
|
72,837
|
|
Add weighted-average dilutive potential common shares - options and RSU’s to purchase common shares, net
|
464
|
|
|
527
|
|
|
526
|
|
Weighted-average common shares outstanding-diluted
|
74,568
|
|
|
74,043
|
|
|
73,363
|
|
Earnings per share attributable to Mohawk Industries, Inc.
|
|
|
|
|
|
Basic
|
$
|
12.55
|
|
|
8.37
|
|
|
7.30
|
|
Diluted
|
$
|
12.48
|
|
|
8.31
|
|
|
7.25
|
|
(a) Represents the accretion of the Company's redeemable noncontrolling interest to redemption value. See Note 2 - Acquisitions for further information.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(q) 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 ASC 718-10, “
Stock Compensation
”. Compensation expense is generally recognized on a straight-line basis over the awards' estimated lives for fixed awards with ratable vesting provisions.
(r) Employee Benefit Plans
The Company has a 401(k) retirement savings plan (the “Mohawk Plan”) open to substantially all U.S. and Puerto Rico based employees who have completed
90
days of eligible service. The Company contributes
$.50
for every
$1.00
of employee contributions up to a maximum of
6%
of the employee’s salary based upon each individual participants election. Employee and employer contributions to the Mohawk Plan were
$50,542
and
$21,002
in
2016
,
$45,279
and
$18,882
in
2015
and
$42,681
and
$17,654
in
2014
, respectively.
The Company also has various pension plans covering employees in Belgium, France, and the Netherlands (the “Non-U.S. Plans”) within the Flooring ROW segment. Benefits under the Non-U.S. Plans depend on compensation and years of service. The Non-U.S. Plans are funded in accordance with local regulations. The Company uses December 31 as the measurement date for its Non-U.S. Plans. As of December 31, 2016, the funded status of the Non-U.S. Plans was a liability of
$7,517
of which
$3,803
was recorded in accumulated other comprehensive income, for a net liability of
$3,714
recorded in other long-term liabilities within the consolidated balance sheets. As of December 31, 2015, the funded status of the Non-U.S. Plans was a liability of
$3,224
of which
$1,075
was recorded in accumulated other comprehensive income (loss), for a net liability of
$2,149
recorded in other long-term liabilities within the consolidated balance sheets.
(s) Comprehensive Income (Loss)
Comprehensive income (loss) includes foreign currency translation of assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature and pensions. The Company does not provide income taxes on currency translation adjustments, as earnings from foreign subsidiaries are considered to be indefinitely reinvested.
The changes in accumulated other comprehensive income (loss) by component, net of tax, for years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Pensions and post-retirement benefits
|
|
Total
|
Balance as of December 31, 2013
|
$
|
178,846
|
|
|
(157
|
)
|
|
178,689
|
|
Current period other comprehensive income (loss) before reclassifications
|
(607,351
|
)
|
|
(659
|
)
|
|
(608,010
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2014
|
(428,505
|
)
|
|
(816
|
)
|
|
(429,321
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
(360,147
|
)
|
|
(4,100
|
)
|
|
(364,247
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2015
|
(788,652
|
)
|
|
(4,916
|
)
|
|
(793,568
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
(36,702
|
)
|
|
(2,757
|
)
|
|
(39,459
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2016
|
$
|
(825,354
|
)
|
|
(7,673
|
)
|
|
(833,027
|
)
|
(t) Self-Insurance Reserves
The Company is self-insured in the U.S. for various levels of general liability, auto liability, workers’ compensation and employee medical coverage. Insurance reserves, excluding workers' compensation, are calculated on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed utilizing historical claim trends. Projected settlements and incurred but not reported claims are estimated based on pending claims and historical trends and data. Though the Company does not expect them to do so, actual settlements and claims could differ materially from those estimated. Material
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
differences in actual settlements and claims could have an adverse effect on the Company's results of operations and financial condition.
(u) Fiscal Year
The Company ends its fiscal year on December 31. Each of the first three quarters in the fiscal year ends on the Saturday nearest the calendar quarter end with a thirteen week fiscal quarter.
(v) Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Codification ("ASC") 606,
Revenue from Contracts with Customers
. This topic converges the guidance within U.S. GAAP and International Financial Reporting Standards ("IFRS") and supersedes ASC 605,
Revenue Recognition.
The new standard requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period and early application is not permitted. On July 9, 2015, the FASB decided to defer the effective date of ASC 606 for one year. The deferral results in the new revenue standard being effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The Company currently plans to adopt the provisions of this new accounting standard at the beginning of fiscal year 2018, using the cumulative effect method, and continues to evaluate the impact of the adoption of ASC 606 on its consolidated financial statements. The Company expects to complete its assessment of the impact of adoption of ASC 606 during the first half of 2017.
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
. This topic converges the guidance within U.S. GAAP and IFRS. The new standard intends to simplify the presentation of debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, versus recording the costs as a prepaid expense in other assets that is amortized. The new standard will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS. In August 2015, the FASB issued ASU 2015-15,
Interest - Imputation of Interest
(Subtopic 835-30) to address the measurement of debt issuance costs associated with line-of-credit arrangements. ASU 2015-15 states that an entity can defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless if there are outstanding borrowings on the line-of-credit arrangement. The Company adopted the provisions of this new accounting standard effective January 1, 2016 retrospectively. Accordingly, unamortized debt issuance costs of
$7,964
were reclassified from other non-current assets to long-term debt in the December 31, 2015 consolidated balance sheet.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
. This update changes the measurement principle for inventory for entities using FIFO or average cost from the lower of cost or market to lower of cost and net realizable value. Entities that measure inventory using LIFO or the retail inventory method are not affected. This update will more closely align the accounting for inventory under U.S. GAAP with IFRS. The new guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period and early adoption is permitted. The Company currently accounts for inventory using the FIFO method. Accordingly, the Company plans to adopt the provisions of this update at the beginning of fiscal year 2017. This update is not expected to have a material impact on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under this ASU, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The Company adopted the provisions of this update effectively January 1, 2016 prospectively. This update did not have a material impact on the Company's consolidated financial statements.
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
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
periods beginning after December 15, 2018 including interim periods within that reporting period and early adoption is permitted. The Company plans to adopt the provisions of this update at the beginning of fiscal year 2019, and is currently assessing the impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting.
This update simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance in this update is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted. The Company plans to adopt the provisions of this update at the beginning of fiscal year 2017. This update is not expected to have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of credit losses on financial instruments.
Topic 326 amends guidance on reporting credit losses by replacing the current incurred loss model with a forward-looking expected loss model. Current accounting delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. The Company plans to adopt the provisions of this update at the beginning of fiscal year 2020, and is currently assessing the impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230).
This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. Additionally, the FASB issued ASU 2016-18 in November 2016 to address the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance in these updates should be applied retrospectively and are effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company plans to adopt the provisions of these updates at the beginning of fiscal year 2018 and is currently assessing the impact on its consolidated statement of cash flows.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(2) Acquisitions
IVC Group
On January 13, 2015, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Enterhold S.A., a Luxembourg
societe anonyme
(the “Seller”), to acquire all of the outstanding shares of International Flooring Systems S.A., a Luxembourg
societe anonyme
, and its subsidiaries (collectively, the “IVC Group”). The IVC Group is a global manufacturer, distributor and marketer of luxury vinyl tile ("LVT") and sheet vinyl. On June 12, 2015, pursuant to the terms of the Share Purchase Agreement, the Company completed the acquisition of IVC Group for
$1,146,437
. The results of the IVC Group's operations have been included in the consolidated financial statements since that date in the Flooring NA and the Flooring ROW segments. The IVC Group acquisition will position the Company as a major participant in both the fast growing LVT category and the expanding fiberglass sheet vinyl business.
Pursuant to the terms of the Share Purchase Agreement, the Seller will indemnify the Company for uncertain tax positions and tax liabilities that were incurred by the Seller. The Company has recorded these tax liabilities and related indemnification asset in the amount of
$34,781
as of the acquisition date in other long-term liabilities and other long-term assets, respectively.
The equity value of IVC Group was paid to the Seller in cash and in shares of the Company's common stock (the “Shares”). Pursuant to the Share Purchase Agreement, the Company (i) acquired the entire issued share capital of IVC Group and (ii) acquired
$17,122
of indebtedness of the IVC Group, in exchange for a net cash payment of
$732,189
, debt paid of
$261,152
, and
806
issued treasury shares for a value of
$153,096
.
The Company funded the cash portion of the IVC Group acquisition through a combination of proceeds from the
2.00%
Senior Notes (as discussed in Note 9 - Long-Term Debt), cash on hand and borrowings under the 2015 Senior Credit Facility (as discussed in Note 8 - Long-Term Debt).
KAI Group
On May 12, 2015, the Company purchased approximately
90%
of all outstanding shares of Advent KAI Luxembourg Holdings S.a r.l., a Luxembourg
societe a respsonsabilite limitee
, and its subsidiaries
(collectively, the "KAI Group"), an eastern European ceramic tile floor manufacturer. The Company completed the acquisition of the KAI Group for
$194,613
. The results of the KAI Group's operations have been included in the consolidated financial statements since the date of acquisition in the Global Ceramic segment. The KAI Group has a low cost position in the Bulgarian and Romanian markets. The combination with the Company will present opportunities to enhance the group's product offering, upgrade its technology and expand its exports to other countries. The remaining
10%
ownership interest in the KAI Group is controlled by a third party. The
10%
interest is subject to redemption provisions that are not solely within the Company’s control and therefore is recorded as a redeemable noncontrolling interest in the mezzanine section of the balance sheet for
$23,696
as of December 31, 2016. Pursuant to the share purchase agreement, the Company (i) acquired approximately
90%
of the issued share capital of the KAI Group and (ii) acquired
$24
of indebtedness of the KAI Group, in exchange for a net cash payment of
$169,540
and debt paid of
$25,073
.
The Company accounted for the acquisitions of the IVC Group and the KAI Group (the “Acquisitions”) using the acquisition method of accounting, with the Company as the acquirer of the IVC Group and the KAI Group. The preliminary estimated combined consideration transferred of
$1,341,050
, including debt paid and shares issued, was determined in accordance with the respective share purchase agreements. The preliminary consideration transferred is allocated to tangible and intangible assets and liabilities based upon their respective fair values.
The following table summarizes the preliminary acquisition-date fair value of the consideration transferred for the Acquisitions and the estimated fair value of the consideration transferred to assets acquired and liabilities assumed as of the date of the Acquisitions, and the allocation of the aggregate purchase price of the IVC Group and the KAI Group acquisitions to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
Fair value of assets, net of cash acquired
|
$
|
1,382,356
|
|
Noncontrolling interests in assets acquired
|
(24,160
|
)
|
Assumed indebtedness
|
(17,146
|
)
|
Consideration transferred
|
$
|
1,341,050
|
|
|
|
Working capital
|
140,606
|
|
Property, plant and equipment
|
363,570
|
|
Tradenames
|
48,563
|
|
Customer relationships
|
224,326
|
|
Goodwill
|
740,140
|
|
Other long-term assets
|
50,236
|
|
Long-term debt, including current portion
|
(17,146
|
)
|
Other long-term liabilities
|
(57,832
|
)
|
Deferred tax liabilities
|
(127,253
|
)
|
Noncontrolling interest
|
(24,160
|
)
|
Consideration transferred
|
$
|
1,341,050
|
|
|
|
Intangible assets subject to amortization of
$224,326
related to customer relationships have estimated lives of
12
to
14
years. In addition to the amortizable intangible assets, there is an additional
$48,563
in indefinite-lived tradename intangible assets. The goodwill of
$740,140
was allocated to the Company's segments as disclosed in Note 6, Goodwill and Other Intangible Assets. The factors contributing to the recognition of the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized from the Acquisitions. These benefits include the opportunities to improve the Company's performance by leveraging best practices, operational expertise, product innovation and manufacturing assets. The recognized goodwill from the Acquisitions is not expected to be deductible for tax purposes.
The results of operations for the Acquisitions were not significant to the Company's consolidated results of operations and, accordingly, the Company has not provided pro forma information relating to the Acquisitions.
Xtratherm
On December 7, 2015, the Company completed its purchase of Xtratherm Limited, an Irish company, and certain of its affiliates (collectively, "Xtratherm"), a manufacturer of insulation boards in Ireland, the UK and Belgium. The total value of the acquisition was
$158,851
. The Xtratherm acquisition will expand the Company's existing insulation board footprint to include Ireland, the UK and Belgium while capitalizing on expanded product offerings in Belgium. 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 Xtratherm resulted in a preliminary goodwill allocation of
$33,307
, indefinite-lived trademark intangible assets of
$4,681
and intangible assets subject to amortization of
$39,784
. The goodwill is
not
expected to be deductible for tax purposes. The factors contributing to the recognition of the amount of goodwill include the opportunity to optimize the assets of Xtratherm with the Company's existing insulation assets. The Xtratherm results are reflected in the Flooring ROW segment.
Other Acquisitions
During the first quarter of 2015, the Company acquired certain assets of a distribution business in the Flooring ROW segment for
$2,822
, resulting in a preliminary goodwill allocation of
$2,659
.
During the third quarter of 2015, the Company acquired certain assets of a ceramic business in the Global Ceramic segment for
$20,423
, resulting in a preliminary goodwill allocation of
$269
.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(3) 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 including accelerated depreciation and workforce reductions.
|
Restructuring, acquisition transaction and integration-related costs consisted of the following during the year ended
December 31, 2016
, 2015 and 2014, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Cost of sales
|
|
|
|
|
|
|
|
Restructuring costs
(a)
|
|
$
|
33,582
|
|
|
35,956
|
|
|
19,795
|
|
|
Acquisition integration-related costs
|
|
4,722
|
|
|
9,597
|
|
|
11,426
|
|
|
Restructuring and integration-related costs
|
|
$
|
38,304
|
|
|
45,553
|
|
|
31,221
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
Restructuring costs
(a)
|
|
$
|
4,881
|
|
|
5,779
|
|
|
5,684
|
|
|
Acquisition transaction-related costs
|
|
—
|
|
|
9,502
|
|
|
—
|
|
|
Acquisition integration-related costs
|
|
7,438
|
|
|
13,770
|
|
|
14,697
|
|
|
Restructuring, acquisition and integration-related costs
|
|
$
|
12,319
|
|
|
29,051
|
|
|
20,381
|
|
|
(a) The restructuring costs for 2016, 2015 and 2014 primarily relate to the Company's actions taken to lower its cost structure and improve efficiencies of manufacturing and distribution operations as the Company adjusted to changing economic conditions as well as actions related to the Company's recent acquisitions. In 2015 and 2014 restructuring costs included accelerated depreciation of
$8,650
and
$8,982
, respectively.
The restructuring activity for the
twelve months ended
December 31, 2016
and 2015, respectively is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
impairments
|
|
Asset write-downs
|
|
Severance
|
|
Other
restructuring
costs
|
|
Total
|
Balance as of December 31, 2014
|
$
|
1,741
|
|
|
—
|
|
|
3,037
|
|
|
100
|
|
|
4,878
|
|
Provision - Global Ceramic segment
|
—
|
|
|
2,318
|
|
|
3,227
|
|
|
(1,180
|
)
|
|
4,365
|
|
Provision - Flooring NA segment
|
1,877
|
|
|
4,279
|
|
|
4,600
|
|
|
8,688
|
|
|
19,444
|
|
Provision - Flooring ROW segment
|
—
|
|
|
8,789
|
|
|
5,366
|
|
|
3,771
|
|
|
17,926
|
|
Cash payments
|
(3,618
|
)
|
|
—
|
|
|
(7,265
|
)
|
|
(11,494
|
)
|
|
(22,377
|
)
|
Non-cash items
|
—
|
|
|
(15,386
|
)
|
|
—
|
|
|
1,180
|
|
|
(14,206
|
)
|
Balance as of December 31, 2015
|
—
|
|
|
—
|
|
|
8,965
|
|
|
1,065
|
|
|
10,030
|
|
Provision - Global Ceramic segment
|
—
|
|
|
795
|
|
|
1,396
|
|
|
79
|
|
|
2,270
|
|
Provision - Flooring NA segment
|
—
|
|
|
10,048
|
|
|
3,850
|
|
|
18,170
|
|
|
32,068
|
|
Provision - Flooring ROW segment
|
—
|
|
|
184
|
|
|
1,932
|
|
|
2,009
|
|
|
4,125
|
|
Cash payments
|
—
|
|
|
—
|
|
|
(10,958
|
)
|
|
(9,982
|
)
|
|
(20,940
|
)
|
Non-cash items
|
—
|
|
|
(11,027
|
)
|
|
(2
|
)
|
|
(5,098
|
)
|
|
(16,127
|
)
|
Balance as of December 31, 2016
|
$
|
—
|
|
|
—
|
|
|
5,183
|
|
|
6,243
|
|
|
11,426
|
|
The Company expects the remaining severance and other restructuring costs to be paid over the next year.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(4) Receivables
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Customers, trade
|
$
|
1,386,306
|
|
|
1,243,533
|
|
Income tax receivable
|
8,616
|
|
|
21,835
|
|
Other
|
59,564
|
|
|
71,084
|
|
|
1,454,486
|
|
|
1,336,452
|
|
Less allowance for discounts, returns, claims and doubtful accounts
|
78,335
|
|
|
78,947
|
|
Receivables, net
|
$
|
1,376,151
|
|
|
1,257,505
|
|
The following table reflects the activity of allowances for discounts, returns, claims and doubtful accounts for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning
of year
|
|
Acquisitions
|
|
Additions
charged to
costs and
expenses
|
|
Deductions(1)
|
|
Balance
at end
of year
|
2014
|
$
|
77,037
|
|
|
—
|
|
|
252,982
|
|
|
257,416
|
|
|
72,603
|
|
2015
|
72,603
|
|
|
7,750
|
|
|
272,329
|
|
|
273,735
|
|
|
78,947
|
|
2016
|
78,947
|
|
|
—
|
|
|
296,419
|
|
|
297,031
|
|
|
78,335
|
|
|
|
(1)
|
Represents charge-offs, net of recoveries.
|
(5) Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Finished goods
|
$
|
1,127,573
|
|
|
1,083,012
|
|
Work in process
|
137,310
|
|
|
137,186
|
|
Raw materials
|
410,868
|
|
|
387,058
|
|
Total inventories
|
$
|
1,675,751
|
|
|
1,607,256
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(6) Goodwill and Other Intangible Assets
The Company conducted its annual impairment assessment in the fourth quarter of 2016 and determined the fair values of its reporting units and trademarks exceeded their carrying values. As a result,
no
impairment was indicated.
The following table summarizes the components of intangible assets:
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ceramic
|
|
Flooring NA
|
|
Flooring ROW
|
|
Total
|
Balances as of December 31, 2014
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,395,132
|
|
|
538,515
|
|
|
998,130
|
|
|
2,931,777
|
|
Accumulated impairments losses
|
(531,930
|
)
|
|
(343,054
|
)
|
|
(452,441
|
)
|
|
(1,327,425
|
)
|
|
863,202
|
|
|
195,461
|
|
|
545,689
|
|
|
1,604,352
|
|
Goodwill recognized during the year
|
99,848
|
|
|
329,401
|
|
|
345,905
|
|
|
775,154
|
|
Currency translation during the year
|
(22,223
|
)
|
|
—
|
|
|
(63,918
|
)
|
|
(86,141
|
)
|
Balances as of December 31, 2015
|
|
|
|
|
|
|
|
Goodwill
|
1,472,757
|
|
|
867,916
|
|
|
1,280,117
|
|
|
3,620,790
|
|
Accumulated impairments losses
|
(531,930
|
)
|
|
(343,054
|
)
|
|
(452,441
|
)
|
|
(1,327,425
|
)
|
|
940,827
|
|
|
524,862
|
|
|
827,676
|
|
|
2,293,365
|
|
Goodwill recognized during the year
|
$
|
—
|
|
|
1,848
|
|
|
1,158
|
|
|
3,006
|
|
Currency translation during the year
|
9,469
|
|
|
—
|
|
|
(31,414
|
)
|
|
(21,945
|
)
|
Balances as of December 31, 2016
|
|
|
|
|
|
|
|
Goodwill
|
1,482,226
|
|
|
869,764
|
|
|
1,249,861
|
|
|
3,601,851
|
|
Accumulated impairments losses
|
(531,930
|
)
|
|
(343,054
|
)
|
|
(452,441
|
)
|
|
(1,327,425
|
)
|
|
$
|
950,296
|
|
|
526,710
|
|
|
797,420
|
|
|
2,274,426
|
|
Intangible assets:
During the third quarter of 2016, the Company determined that it needed to simplify the branding strategy in the Flooring NA segment by consolidating products under the Mohawk Group brands and discontinuing the Lees brand. This resulted in the Company writing off the full value of the Lees tradename and recording an impairment charge of
$47,905
in selling, general and administrative expenses in the consolidated statements of operations.
|
|
|
|
|
|
Tradenames
|
Indefinite life assets not subject to amortization:
|
|
Balance as of December 31, 2014
|
$
|
622,691
|
|
Intangible assets acquired during the year
|
53,244
|
|
Currency translation during the year
|
(43,586
|
)
|
Balance as of December 31, 2015
|
632,349
|
|
Intangible assets acquired during the year
|
—
|
|
Intangible assets impaired during the year
|
(47,905
|
)
|
Currency translation during the year
|
(4,297
|
)
|
Balance as of December 31, 2016
|
$
|
580,147
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
Patents
|
|
Other
|
|
Total
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
Balances as of December 31, 2014
|
$
|
33,917
|
|
|
44,591
|
|
|
810
|
|
|
79,318
|
|
Intangible assets acquired during the year
|
258,875
|
|
|
—
|
|
|
5,290
|
|
|
264,165
|
|
Amortization during the year
|
(16,567
|
)
|
|
(13,331
|
)
|
|
(11
|
)
|
|
(29,909
|
)
|
Currency translation during the year
|
(5,102
|
)
|
|
(4,275
|
)
|
|
(5
|
)
|
|
(9,382
|
)
|
Balances as of December 31, 2015
|
271,123
|
|
|
26,985
|
|
|
6,084
|
|
|
304,192
|
|
Intangible assets acquired during the year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization during the year
|
(25,778
|
)
|
|
(13,141
|
)
|
|
(626
|
)
|
|
(39,545
|
)
|
Currency translation during the year
|
(9,641
|
)
|
|
(420
|
)
|
|
(127
|
)
|
|
(10,188
|
)
|
Balances as of December 31, 2016
|
$
|
235,704
|
|
|
13,424
|
|
|
5,331
|
|
|
254,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Cost
|
Acquisitions
|
Currency translation
|
Accumulated amortization
|
Net Value
|
Customer Relationships
|
$
|
588,716
|
|
—
|
|
(18,736
|
)
|
334,276
|
|
235,704
|
|
Patents
|
243,258
|
|
—
|
|
(9,236
|
)
|
220,598
|
|
13,424
|
|
Other
|
6,790
|
|
—
|
|
(460
|
)
|
999
|
|
5,331
|
|
Total
|
$
|
838,764
|
|
—
|
|
(28,432
|
)
|
555,873
|
|
254,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Cost
|
Acquisitions
|
Currency translation
|
Accumulated amortization
|
Net Value
|
Customer Relationships
|
$
|
354,768
|
|
258,875
|
|
(24,927
|
)
|
317,593
|
|
271,123
|
|
Patents
|
270,466
|
|
—
|
|
(27,208
|
)
|
216,273
|
|
26,985
|
|
Other
|
1,479
|
|
5,290
|
|
21
|
|
706
|
|
6,084
|
|
Total
|
$
|
626,713
|
|
264,165
|
|
(52,114
|
)
|
534,572
|
|
304,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amortization expense
|
$
|
39,545
|
|
|
29,909
|
|
|
24,724
|
|
Estimated amortization expense for the years ending December 31 are as follows:
|
|
|
|
|
2017
|
$
|
34,302
|
|
2018
|
26,013
|
|
2019
|
22,967
|
|
2020
|
22,967
|
|
2021
|
22,936
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(7) Property, Plant and Equipment
Following is a summary of property, plant and equipment:
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Land
|
$
|
288,633
|
|
|
305,943
|
|
Buildings and improvements
|
1,189,408
|
|
|
1,120,193
|
|
Machinery and equipment
|
3,979,349
|
|
|
3,750,787
|
|
Furniture and fixtures
|
236,183
|
|
|
133,857
|
|
Leasehold improvements
|
77,976
|
|
|
68,977
|
|
Construction in progress
|
472,226
|
|
|
403,500
|
|
|
6,243,775
|
|
|
5,783,257
|
|
Less accumulated depreciation and amortization
|
2,873,427
|
|
|
2,636,139
|
|
Net property, plant and equipment
|
$
|
3,370,348
|
|
|
3,147,118
|
|
Additions to property, plant and equipment included capitalized interest of
$5,608
,
$7,091
and
$9,202
in 2016, 2015 and 2014, respectively. Depreciation expense was
$366,233
,
$328,486
and
$315,840
for 2016, 2015 and 2014, respectively. Included in the property, plant and equipment are capital leases with a cost of
$7,986
and
$8,233
and accumulated depreciation of
$4,436
and
$4,431
as of December 31, 2016 and 2015, respectively.
(8) Long-Term Debt
Senior Credit Facility
On
September 25, 2013
, the Company entered into a
$1,000,000
,
5
-year, senior revolving credit facility (the "2013 Senior Credit Facility"). The 2013 Senior Credit Facility provided for a maximum of
$1,000,000
of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of
$1,836
in connection with its 2013 Senior Credit Facility. These costs were deferred and, along with unamortized costs of
$11,440
related to the Company’s previous credit facility, were amortized over the term of the 2013 Senior Credit Facility.
On March 26, 2015, the Company amended and restated the 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 eliminates 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 and to extend the maturity date from March 26, 2020 to March 26, 2021 with respect to all but
$120,000
of the total amount committed under the 2015 Senior Credit Facility. On October 17, 2016, the Company extended the maturity date for the remaining
$120,000
commitment to March 26, 2021.
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, 2016), or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus
0.5%
, and a monthly LIBOR rate plus
1.0%
, plus an applicable margin ranging between
0.00%
and
0.75%
(
0.125%
as of December 31, 2016). 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' under the 2015 Senior Credit Facility exceed utilization. The commitment fee ranges from
0.10%
to
0.225%
per annum (
0.125%
as of December 31, 2016). 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).
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The obligations of the Company and its subsidiaries in respect of the 2015 Senior Credit Facility are unsecured.
The 2015 Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial and business operations, including limitations on liens, subsidiary indebtedness, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, future negative pledges, and changes in the nature of the Company's business. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least
3.0
to 1.0 and a Consolidated Net Leverage Ratio of no more than
3.75
to 1.0, each as of the last day of any fiscal quarter. The limitations contain customary exceptions or, in certain cases, do not apply as long as the Company is in compliance with the financial ratio requirements and is not otherwise in default.
The 2015 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
Also on March 1, 2016, the Company entered into a
three
-year, senior, unsecured delayed-draw term loan facility (the “Term Loan Facility”) by and among the Company, Wells Fargo Bank, National Association, as administrative agent, and each of the lenders party thereto. Subject to customary conditions precedent, the Company could borrow up to
$200,000
under the Term Loan Facility in no more than
2
borrowings between March 1, 2016 and September 1, 2016. The Company did not borrow under the Term Loan Facility, and it has since expired on its stated expiration date.
The Company paid financing costs of
$532
in connection with the amendment and extension of its 2015 Senior Credit Facility. These costs were deferred and, along with unamortized costs of
$8,785
related to the Company’s 2013 Senior Credit Facility, are being amortized over the term of the 2015 Senior Credit Facility. The Company also paid financing costs of
$553
in connection with its Term Loan Facility.
As of December 31, 2016, amounts utilized under the 2015 Senior Credit Facility included
$60,672
of borrowings and
$941
of standby letters of credit related to various insurance contracts and foreign vendor commitments. The outstanding borrowings of
$820,303
under the Company's U.S. and European commercial paper programs as of December 31, 2016 reduce the availability of the 2015 Senior Credit Facility. Including commercial paper borrowings, the Company has utilized
$881,916
under the 2015 Senior Credit Facility resulting in a total of
$918,084
available under the 2015 Senior Credit Facility.
Commercial Paper
On February 28, 2014, the Company established a U.S. commercial paper program for the issuance of unsecured commercial paper in the United States capital markets. Under the commercial paper program, the Company issues commercial paper notes from time to time. The U.S. commercial paper notes have maturities ranging from
one
day to
397
days and may not be voluntarily prepaid or redeemed by the Company. The U.S. commercial paper notes rank pari passu with all of the Company's other unsecured and unsubordinated indebtedness. As of December 31, 2016 there was
$283,800
outstanding under the U.S. commercial paper program.
On July 31, 2015, the Company established a European commercial paper program for the issuance of unsecured commercial paper in the Eurozone capital markets. The European commercial paper notes have maturities ranging from
one
day to
183
days and may not be voluntarily prepaid or redeemed by the Company. The European commercial paper notes 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. As of December 31, 2016, the euro equivalent of
$536,503
was outstanding under the European commercial paper program.
The Company uses its 2015 Senior Credit Facility as a liquidity backstop for its commercial paper programs. Accordingly, the total amount due and payable 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 sale of commercial paper notes will be available for general corporate purposes. The Company used the initial proceeds from the sale of U.S. commercial paper notes to repay borrowings under its 2013 Senior Credit Facility and certain of its industrial revenue bonds. The Company used the initial proceeds from the sale of European commercial paper notes to repay euro-denominated borrowings under its 2015 Senior Credit Facility. As of December 31, 2016, the amount utilized
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
under the commercial paper programs was
$820,303
with a weighted-average interest rate and maturity period of
0.98%
and
15.62
days, respectively for the U.S. commercial paper program and
(0.11)%
and
28.92
days, respectively for the European commercial paper program.
Senior 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 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
$4,218
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 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
$6,000
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.
On January 17, 2006, the Company issued
$900,000
aggregate principal amount of
6.125%
Senior Notes due
January 15, 2016
. During 2014, the Company purchased for cash approximately
$254,445
aggregate principal amount of its outstanding
6.125%
senior notes due
January 15, 2016
. On January 15, 2016, the Company paid the remaining
$645,555
outstanding principal of its
6.125%
Senior Notes (plus accrued but unpaid interest) utilizing cash on hand and borrowings under its U.S. commercial paper program.
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. On December 10, 2015, the Company amended the terms of the Securitization Facility extending the termination date from December 19, 2015 to December 19, 2016. The Company further amended the terms of the Securitization Facility on December 13, 2016, extending the termination date to December 19, 2017. The Company paid financing costs of
$250
in connection with this extension. These costs were deferred and are being amortized over the remaining term of the Securitization Facility.
Under the terms of the Securitization Facility, certain subsidiaries of the Company sell at a discount certain of their trade accounts receivable (the “Receivables”) to Mohawk Factoring, LLC (“Factoring”) on a revolving basis. The Company has determined that Factoring is a bankruptcy remote subsidiary, meaning that Factoring is a separate legal entity whose assets are available to satisfy the claims of the creditors of Factoring only, not the creditors of the Company or the Company’s other subsidiaries. Factoring may borrow up to
$500,000
based on the amount of eligible Receivables owned by Factoring, and Factoring has granted a security interest in all of such Receivables to the third-party lending group as collateral for such borrowings. Amounts loaned to Factoring under the Securitization Facility bear interest at LIBOR plus an applicable margin of
0.70%
per annum. Factoring also pays a commitment fee at a per annum rate of
0.30%
on the unused amount of each lender’s commitment. At December 31, 2016, the amount utilized under the Securitization Facility was
$500,000
.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The fair values and carrying values of our debt instruments are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
3.85% senior notes, payable February 1, 2023; interest payable semiannually
|
$
|
615,006
|
|
|
600,000
|
|
|
584,730
|
|
|
600,000
|
|
6.125% notes, payable January 15, 2016; interest payable semiannually
|
—
|
|
|
—
|
|
|
646,130
|
|
|
645,555
|
|
2.00% senior notes, payable January 14, 2022; interest payable annually
|
556,460
|
|
|
525,984
|
|
|
554,209
|
|
|
546,627
|
|
U.S. commercial paper
|
283,800
|
|
|
283,800
|
|
|
284,800
|
|
|
284,800
|
|
European commercial paper
|
536,503
|
|
|
536,503
|
|
|
472,067
|
|
|
472,067
|
|
Five-year senior secured credit facility, due March 26, 2021
|
60,672
|
|
|
60,672
|
|
|
134,075
|
|
|
134,075
|
|
Securitization facility
|
500,000
|
|
|
500,000
|
|
|
500,000
|
|
|
500,000
|
|
Capital leases and other
|
11,643
|
|
|
11,643
|
|
|
16,805
|
|
|
16,807
|
|
Unamortized debt issuance costs
|
(7,117
|
)
|
|
(7,117
|
)
|
|
(7,964
|
)
|
|
(7,964
|
)
|
Total debt
|
2,556,967
|
|
|
2,511,485
|
|
|
3,184,852
|
|
|
3,191,967
|
|
Less current portion of long term debt and commercial paper
|
1,382,738
|
|
|
1,382,738
|
|
|
2,003,578
|
|
|
2,003,003
|
|
Long-term debt, less current portion
|
$
|
1,174,229
|
|
|
1,128,747
|
|
|
1,181,274
|
|
|
1,188,964
|
|
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.
The aggregate maturities of long-term debt as of December 31, 2016 are as follows:
|
|
|
|
|
2017
|
$
|
1,382,738
|
|
2018
|
1,694
|
|
2019
|
1,441
|
|
2020
|
961
|
|
2021
|
824
|
|
Thereafter
|
1,123,827
|
|
|
$
|
2,511,485
|
|
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(9) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Outstanding checks in excess of cash
|
$
|
12,269
|
|
|
14,023
|
|
Accounts payable, trade
|
729,415
|
|
|
696,974
|
|
Accrued expenses
|
333,942
|
|
|
293,867
|
|
Product warranties
|
46,347
|
|
|
35,516
|
|
Accrued interest
|
20,396
|
|
|
34,623
|
|
Accrued compensation and benefits
|
193,213
|
|
|
181,022
|
|
Total accounts payable and accrued expenses
|
$
|
1,335,582
|
|
|
1,256,025
|
|
|
|
|
|
(10) Stock-Based Compensation
The Company recognizes compensation expense for all share-based payments granted for the years ended December 31, 2016, 2015 and 2014 based on the grant-date fair value estimated in accordance with the provisions of 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.
Under the Company’s 2012 Incentive Plan (“2012 Plan”), the Company's principal stock compensation plan as of May 9, 2012, the Company reserved up to a maximum of
3,200
shares of common stock for issuance upon the grant or exercise of stock options, restricted stock, restricted stock units (“RSUs”) and other types of awards, to directors and key employees through
December 31, 2022
. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of the grant and generally vest between
three
and
five
years with a
10
-year contractual term. Restricted stock and RSUs are granted with a price equal to the market price of the Company’s common stock on the date of the grant and generally vest between
three
and
five
years.
Stock Option Plans
Additional information relating to the Company’s stock option plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Options outstanding at beginning of year
|
169
|
|
|
298
|
|
|
425
|
|
Options exercised
|
(78
|
)
|
|
(66
|
)
|
|
(108
|
)
|
Options forfeited and expired
|
—
|
|
|
(63
|
)
|
|
(19
|
)
|
Options outstanding at end of year
|
91
|
|
|
169
|
|
|
298
|
|
Options exercisable at end of year
|
90
|
|
|
164
|
|
|
257
|
|
Option prices per share:
|
|
|
|
|
|
Options exercised during the year
|
$ 28.37-93.65
|
|
|
28.37-93.65
|
|
|
28.37-93.65
|
|
Options forfeited and expired during the year
|
$
|
—
|
|
|
28.37-88.33
|
|
|
46.80-93.65
|
|
Options outstanding at end of year
|
$ 57.34-66.14
|
|
|
28.37-93.65
|
|
|
28.37-93.65
|
|
Options exercisable at end of year
|
$ 57.34-66.14
|
|
|
28.37-93.65
|
|
|
28.37-93.65
|
|
During 2016, 2015 and 2014, a total of
1
,
1
and
0
shares, respectively, were awarded to the non-employee directors in lieu of cash for their annual retainers.
The Company’s Board of Directors has authorized the repurchase of up to
15,000
shares of the Company’s outstanding common stock. For the years ended December 31, 2016 and December 31, 2015, the Company did not repurchase any shares. The Company purchased common stock for the year ended December 31, 2014, of
2
shares. Since the inception of the program, a total of approximately
11,521
shares have been repurchased at an aggregate cost of approximately
$335,455
. All of these repurchases have been financed through the Company’s operations and banking arrangements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
A summary of the Company’s options under the 2002, 2007 and 2012 Plans as of December 31, 2016, and changes during the year then ended is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Aggregate
intrinsic
value
|
Options outstanding, December 31, 2015
|
169
|
|
|
$
|
61.73
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(78
|
)
|
|
59.24
|
|
|
|
|
|
Forfeited and expired
|
—
|
|
|
—
|
|
|
|
|
|
Options outstanding, December 31, 2016
|
91
|
|
|
$
|
63.84
|
|
|
4.9
|
|
$
|
12,360
|
|
Vested and expected to vest as of December 31, 2016
|
91
|
|
|
$
|
63.84
|
|
|
4.9
|
|
$
|
12,360
|
|
Exercisable as of December 31, 2016
|
90
|
|
|
$
|
63.82
|
|
|
4.9
|
|
$
|
12,227
|
|
The Company has not granted options since the year ended December 31, 2012. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was
$10,571
,
$7,252
and
6,613
, respectively. Total compensation expense recognized for the years ended December 31, 2016, 2015 and 2014 was
$40
(
$24
, net of tax),
$209
(
$131
, net of tax) and $
865
($
548
, net of tax), respectively, which was allocated to selling, general and administrative expenses. The remaining unamortized expense for non-vested compensation expense as of December 31, 2016 was
$4
with a weighted average remaining life of
0.15
years.
The following table summarizes information about the Company’s stock options outstanding as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Exercise price range
|
Number of
shares
|
|
Average
life
|
|
Average
price
|
|
Number of
shares
|
|
Average
price
|
$57.34-$57.34
|
23,735
|
|
|
4.1
|
|
57.34
|
|
|
23,735
|
|
|
57.34
|
|
$66.14-$66.14
|
67,258
|
|
|
5.1
|
|
66.14
|
|
|
66,258
|
|
|
66.14
|
|
Total
|
90,993
|
|
|
4.9
|
|
$
|
63.84
|
|
|
89,993
|
|
|
$
|
63.82
|
|
Restricted Stock Plans
A summary of the Company’s RSUs under the 2007 and 2012 Plans as of December 31, 2016, and changes during the year then ended is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
average grant date fair value
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Aggregate
intrinsic value
|
Restricted Stock Units outstanding, December 31, 2015
|
750
|
|
|
$
|
84.67
|
|
|
|
|
|
Granted
|
187
|
|
|
184.88
|
|
|
|
|
|
Released
|
(226
|
)
|
|
78.94
|
|
|
|
|
|
Forfeited
|
(16
|
)
|
|
84.20
|
|
|
|
|
|
Restricted Stock Units outstanding, December 31, 2016
|
695
|
|
|
$
|
113.51
|
|
|
1.4
|
|
$
|
127,856
|
|
Expected to vest as of December 31, 2016
|
682
|
|
|
|
|
|
1.4
|
|
$
|
125,203
|
|
The Company recognized stock-based compensation costs related to the issuance of RSUs of
$35,019
(
$21,250
, net of taxes),
$32,343
(
$20,832
, net of taxes) and
$27,016
(
10,735
, net of taxes) for the years ended December 31, 2016, 2015 and 2014, respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
for unvested RSUs granted to employees, net of estimated forfeitures, was
$27,917
as of December 31, 2016, and will be recognized as expense over a weighted-average period of approximately
1.61
years.
Additional information relating to the Company’s RSUs under the 2007 and 2012 Plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Restricted Stock Units outstanding, January 1
|
750
|
|
|
725
|
|
|
733
|
|
Granted
|
187
|
|
|
248
|
|
|
189
|
|
Released
|
(226
|
)
|
|
(212
|
)
|
|
(189
|
)
|
Forfeited
|
(16
|
)
|
|
(11
|
)
|
|
(8
|
)
|
Restricted Stock Units outstanding, December 31
|
695
|
|
|
750
|
|
|
725
|
|
Expected to vest as of December 31
|
682
|
|
|
731
|
|
|
691
|
|
(11) Other (Income) Expense
Following is a summary of other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency losses (gains)
|
$
|
1,099
|
|
|
9,295
|
|
|
6,869
|
|
Release of indemnification asset
|
5,371
|
|
|
11,180
|
|
|
—
|
|
All other, net
|
(8,199
|
)
|
|
(2,856
|
)
|
|
3,829
|
|
Total other expense
|
$
|
(1,729
|
)
|
|
17,619
|
|
|
10,698
|
|
(12) Income Taxes
Following is a summary of earnings from continuing operations before income taxes for United States and foreign operations:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
627,567
|
|
|
324,210
|
|
|
331,553
|
|
Foreign
|
613,558
|
|
|
424,651
|
|
|
332,338
|
|
Earnings before income taxes
|
$
|
1,241,125
|
|
|
748,861
|
|
|
663,891
|
|
Income tax expense (benefit) from continuing operations for the years ended December 31, 2016, 2015 and 2014 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current income taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
247,917
|
|
|
117,602
|
|
|
100,826
|
|
State and local
|
31,939
|
|
|
11,175
|
|
|
13,686
|
|
Foreign
|
61,712
|
|
|
31,981
|
|
|
41,151
|
|
Total current
|
341,568
|
|
|
160,758
|
|
|
155,663
|
|
Deferred income taxes:
|
|
|
|
|
|
U.S. federal
|
(16,167
|
)
|
|
4,165
|
|
|
31,052
|
|
State and local
|
(22,115
|
)
|
|
(3,983
|
)
|
|
(3,473
|
)
|
Foreign
|
4,273
|
|
|
(29,065
|
)
|
|
(51,605
|
)
|
Total deferred
|
(34,009
|
)
|
|
(28,883
|
)
|
|
(24,026
|
)
|
Total
|
$
|
307,559
|
|
|
131,875
|
|
|
131,637
|
|
The geographic dispersion of earnings and losses contributes to the annual changes in the Company’s effective tax rates. Approximately
51%
of the Company’s current year earnings from continuing operations before income taxes was generated in
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
the United States at a combined federal and state effective tax rate that is higher than the Company’s overall effective tax rate. The Company is also subject to taxation in other jurisdictions where it has operations, including Australia, Belgium, Bulgaria, France, Ireland, Italy, Luxembourg, Malaysia, Mexico, the Netherlands, Russia and Spain. The effective tax rates that the Company accrues in these jurisdictions vary widely, but they are generally lower than the Company’s overall effective tax rate. The Company’s domestic effective tax rates for the years ended December 31, 2016, 2015 and 2014 were
38.5%
,
39.8%
, and
42.8%
, respectively, and its non-U.S. effective tax rates for the years ended December 31, 2016, 2015 and 2014 were
10.8%
,
0.7%
, and
(3.1)%
, respectively. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, historical loss carry-forwards, financing arrangements, and other factors. The Company’s effective tax rate has been and will continue to be impacted by the geographical dispersion of the Company’s earnings and losses. To the extent that domestic earnings increase while the foreign earnings remain flat or decrease, or increase at a lower rate, the Company’s effective tax rate will increase.
Income tax expense (benefit) attributable to earnings from continuing operations before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings from continuing operations before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income taxes at statutory rate
|
$
|
434,394
|
|
|
262,102
|
|
|
232,362
|
|
State and local income taxes, net of federal income tax benefit
|
6,298
|
|
|
4,951
|
|
|
9,239
|
|
Foreign income taxes
(a)
|
(111,217
|
)
|
|
(95,198
|
)
|
|
(89,385
|
)
|
Change in valuation allowance
|
(21,106
|
)
|
|
(14,237
|
)
|
|
(6,482
|
)
|
Tax contingencies and audit settlements
(b)
|
2,496
|
|
|
(23,032
|
)
|
|
(7,882
|
)
|
Other, net
|
(3,306
|
)
|
|
(2,711
|
)
|
|
(6,215
|
)
|
|
$
|
307,559
|
|
|
131,875
|
|
|
131,637
|
|
(a) Foreign income taxes includes statutory rate differences, financing arrangements, withholding taxes, local income taxes, notional deductions, and other miscellaneous items.
(b) 2016 and 2015 include reversals of uncertain tax positions of
$5,371
and
$11,180
, respectively.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2016 and 2015 are presented below:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Accounts receivable
|
$
|
23,521
|
|
|
11,134
|
|
Inventories
|
48,673
|
|
|
42,558
|
|
Employee benefits
|
76,143
|
|
|
70,989
|
|
Accrued expenses and other
|
72,258
|
|
|
54,652
|
|
Deductible state tax and interest benefit
|
5,186
|
|
|
491
|
|
Intangibles
|
12,874
|
|
|
34,003
|
|
Federal, foreign and state net operating losses and credits
|
456,130
|
|
|
458,743
|
|
Gross deferred tax assets
|
694,785
|
|
|
672,570
|
|
Valuation allowance
|
(289,078
|
)
|
|
(287,580
|
)
|
Net deferred tax assets
|
405,707
|
|
|
384,990
|
|
Deferred tax liabilities:
|
|
|
|
Inventories
|
(13,099
|
)
|
|
(8,663
|
)
|
Plant and equipment
|
(426,087
|
)
|
|
(429,258
|
)
|
Intangibles
|
(243,339
|
)
|
|
(267,571
|
)
|
Other liabilities
|
(50,041
|
)
|
|
(30,256
|
)
|
Gross deferred tax liabilities
|
(732,566
|
)
|
|
(735,748
|
)
|
Net deferred tax liability
|
$
|
(326,859
|
)
|
|
(350,758
|
)
|
The Company evaluates its ability to realize the tax benefits associated with deferred tax assets by analyzing its forecasted taxable income using both historic and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. The valuation allowance as of December 31, 2016, and 2015 is
$289,078
and
$287,580
, respectively. The valuation allowance as of December 31, 2016 relates to the net deferred tax assets of certain of the Company’s foreign subsidiaries as well as certain state net operating losses and tax credits. The total change in the
2016
valuation allowance was an increase of
$1,498
which includes (
$9,364
) related to foreign currency translation. The total change in the 2015 valuation allowance was a decrease of
$12,892
, which includes
$(24,718)
related to foreign currency translation.
Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of valuation allowances, based upon the expected reversal of deferred tax liabilities and the level of historic and forecasted taxable income over periods in which the deferred tax assets are deductible.
As of December 31, 2016, the Company has state net operating loss carry forwards and state tax credits with potential tax benefits of
$53,874
, net of federal income tax benefit; these carry forwards expire over various periods based on taxing jurisdiction. A valuation allowance totaling
$26,992
has been recorded against these state deferred tax assets as of December 31, 2016. In addition, as of December 31, 2016, the Company has net operating loss carry forwards in various foreign jurisdictions with potential tax benefits of
$402,255
. A valuation allowance totaling
$249,529
has been recorded against these deferred tax assets as of December 31, 2016.
The Company does not provide for U.S. federal and state income taxes on the cumulative undistributed earnings of its foreign subsidiaries because such earnings are deemed to be permanently reinvested. As of December 31, 2016, the Company had not provided federal income taxes on earnings of approximately
$1,400,000
from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in various foreign jurisdictions. These taxes may be partially offset by U.S. foreign tax credits. Determination of the amount of the unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this hypothetical calculation.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Tax Uncertainties
In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing jurisdictions. Accordingly, the Company accrues liabilities when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken in its tax returns or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with ASC 740-10. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest and penalties in income tax expense (benefit). Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but could possibly be material to the Company’s consolidated results of operations or cash flow in any given quarter or annual period.
As of December 31, 2016, the Company’s gross amount of unrecognized tax benefits is
$46,434
, excluding interest and penalties. If the Company were to prevail on all uncertain tax positions,
$28,489
of the unrecognized tax benefits would affect the Company’s effective tax rate, exclusive of any benefits related to interest and penalties.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance as of January 1
|
$
|
51,037
|
|
|
49,599
|
|
Additions based on tax positions related to the current year
|
2,221
|
|
|
684
|
|
Additions for tax positions of acquired companies
|
—
|
|
|
27,455
|
|
Additions for tax positions of prior years
|
6,412
|
|
|
2,330
|
|
Reductions resulting from the lapse of the statute of limitations
|
(6,294
|
)
|
|
(13,471
|
)
|
Settlements with taxing authorities
|
(6,555
|
)
|
|
(11,693
|
)
|
Effects of foreign currency translation
|
(387
|
)
|
|
(3,867
|
)
|
Balance as of December 31
|
$
|
46,434
|
|
|
51,037
|
|
The Company will continue to recognize interest and penalties related to unrecognized tax benefits as a component of its income tax provision. As of December 31, 2016 and 2015, the Company has
$8,020
and
$5,394
, respectively, accrued for the payment of interest and penalties, excluding the federal tax benefit of interest deductions where applicable. During the years ending December 31, 2016 , 2015 and 2014, the Company accrued interest and penalties through the consolidated statements of operations of
$2,170
,
$(5,635)
and
$(3,579)
, respectively.
The Company believes that its unrecognized tax benefits could decrease by
$10,336
within the next twelve months. The Company has effectively settled all Federal income tax matters related to years prior to 2010. Various other state and foreign income tax returns are open to examination for various years.
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
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
additional years have been brought before the Court of First Appeal in November 2014. In January of 2015, the Company met with the Court of First Appeal in Bruges, Belgium and agreed with the Belgium tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and apply the ruling to all of the open years (to the extent there are no additional facts/procedural arguments in the other years).
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.
The Company disagrees with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company's properties in Wielsbeke (Ooigemstraat and Breestraat), Oostrozebeke (Ingelmunstersteenweg) and Desselgem (Waregemstraat) included in the Flooring ROW segment. The purpose of the lien is to provide security for payment should the Belgian tax authority prevail on its appeal. The lien does not interfere with the Company's operations at these properties.
(13) Commitments and Contingencies
The Company is obligated under various operating leases for office and manufacturing space, machinery, and equipment. Future minimum lease payments under non-cancelable capital and operating leases (with initial or remaining lease terms in excess of one year) as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
Total Future
Payments
|
2017
|
$
|
1,463
|
|
|
99,091
|
|
|
100,554
|
|
2018
|
1,158
|
|
|
75,238
|
|
|
76,396
|
|
2019
|
869
|
|
|
54,187
|
|
|
55,056
|
|
2020
|
531
|
|
|
36,811
|
|
|
37,342
|
|
2021
|
523
|
|
|
20,535
|
|
|
21,058
|
|
Thereafter
|
3,983
|
|
|
17,612
|
|
|
21,595
|
|
Total payments
|
8,527
|
|
|
303,474
|
|
|
312,001
|
|
Less amount representing interest
|
1,506
|
|
|
|
|
|
Present value of capitalized lease payments
|
$
|
7,021
|
|
|
|
|
|
Rental expense under operating leases was
$125,103
,
$116,663
and
$120,677
in
2016
, 2015 and 2014, respectively.
The Company had approximately
$941
and
$1,381
in standby letters of credit for various insurance contracts and commitments to foreign vendors as of December 31, 2016 and 2015, respectively that expire within
two
years.
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below and in Note 12-Income Taxes
Belgian Tax Matter
, 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.
Gadsden, Alabama Litigation
In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama (the “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 Water Board filed a motion to remand the case back to the state court and the defendants have opposed the Water Board’s motion. The parties await a ruling from the federal court on the motion to remand. The Company has never manufactured perfluorinated compounds, but purchased them for use in the manufacture of its carpets prior to 2007. The Water Board is not alleging that chemical levels in the Company’s wastewater discharge exceeded legal limits. Instead, the Water Board
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
is seeking lost profits based on allegations that its customers decreased water purchases, reimbursement for the cost of a filter and punitive damages.
The Company intends to pursue all available defenses related to this matter. The Company does not believe that the ultimate outcome of this case will have a material adverse effect on its financial condition, but there can be no assurances at this stage that the outcome will not have a material adverse effect on the Company’s results of operations, liquidity or cash flows in a given period. Furthermore, the Company cannot predict whether any additional civil or regulatory actions against it may arise from the allegations in this matter.
Polyurethane Foam Litigation
Beginning in August 2010, a series of civil lawsuits were initiated in several U.S. federal courts alleging that certain manufacturers of polyurethane foam products and competitors of the Company’s carpet underlay division had engaged in price fixing in violation of U.S. antitrust laws. The Company was named as a defendant in a number of the individual cases, as well as in
two
consolidated amended class action complaints on behalf of a class of all direct purchasers of polyurethane foam products and on behalf of a class of indirect purchasers. In these actions, the plaintiffs, on behalf of themselves and/or a class of purchasers, sought damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Any damages actually awarded at trial would have been subject to being tripled under US antitrust laws.
On March 23 and April 30, 2015, the Company entered into agreements to settle all claims brought by the class of direct and indirect purchasers, and the trial court entered orders granting approval of the settlements on November 19, 2015 and January 27, 2016. Certain individual members of the indirect purchaser class sought to overturn the approval through an appeal to the Sixth Circuit of Appeals. As of June 21, 2016, all of these appeals have been dismissed, provided that one request to reconsider remains pending. The Company has also entered into settlement agreements resolving all of the claims brought on behalf of all of the consolidated individual lawsuits.
In December 2011, the Company was named as a defendant in a Canadian Class action, which alleged similar claims against the Company as raised in the U.S. actions. On June 12, 2015, the Company entered into an agreement to settle all claims brought by the class of Canadian plaintiffs.
The Company denies all allegations of wrongdoing but settled to avoid the uncertainty, risk, expense and distraction of protracted litigation.
During the twelve months ended December 31, 2015 the Company recorded a
$122,480
charge within selling, general and administrative expenses for the settlement and defense of the antitrust cases. All of the antitrust cases have now been finally settled and with the exception of the single issue pending on appeal in the indirect purchaser class case, all consolidated cases have been dismissed. The Company does not believe that the ultimate outcome of the one remaining issue in the indirect purchaser case will have a material adverse effect on its financial condition.
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 we are 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.
The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment, recycling and disposal of solid and hazardous materials and finished product, and the cleanup of contamination associated therewith. Because of the nature of the Company’s business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations. The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided accruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities 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.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(14) Consolidated Statements of Cash Flows Information
Supplemental disclosures of cash flow information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net cash paid (received) during the years for:
|
|
|
|
|
|
Interest
|
$
|
57,269
|
|
|
67,974
|
|
|
109,451
|
|
Income taxes
|
$
|
276,789
|
|
|
133,283
|
|
|
148,991
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
Fair value of net assets acquired in acquisition
|
—
|
|
|
1,564,970
|
|
|
7,267
|
|
Noncontrolling interest of assets acquired
|
—
|
|
|
(24,160
|
)
|
|
—
|
|
Liabilities assumed in acquisition
|
—
|
|
|
(17,147
|
)
|
|
(7,286
|
)
|
Shares issued for acquisitions
|
—
|
|
|
(153,096
|
)
|
|
—
|
|
|
$
|
—
|
|
|
1,370,567
|
|
|
(19
|
)
|
(15) 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 and other products, which it distributes primarily in North America, Europe and Russia through its network of regional distribution centers and Company-operated service centers using company-operated trucks, common carriers or rail transportation. 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 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, buying groups, commercial contractors and commercial end users. The Flooring ROW segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, roofing elements, insulation boards, medium-density fiberboard ("MDF"), chipboards, other wood products, 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. Previously reported segment results have been reclassified to conform to the current period presentation. No single customer accounted for more than 10% of net sales for the years ended December 31, 2016, 2015 or 2014.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net sales:
|
|
|
|
|
|
Global Ceramic
|
$
|
3,174,706
|
|
|
3,012,859
|
|
|
3,015,279
|
|
Flooring NA
|
3,865,746
|
|
|
3,602,112
|
|
|
3,441,018
|
|
Flooring ROW
|
1,918,635
|
|
|
1,456,898
|
|
|
1,354,018
|
|
Intersegment sales
|
—
|
|
|
(306
|
)
|
|
(6,869
|
)
|
|
$
|
8,959,087
|
|
|
8,071,563
|
|
|
7,803,446
|
|
Operating income (loss):
|
|
|
|
|
|
Global Ceramic
|
$
|
478,448
|
|
|
414,154
|
|
|
351,113
|
|
Flooring NA
|
505,115
|
|
|
264,271
|
|
|
299,992
|
|
Flooring ROW
|
333,091
|
|
|
203,370
|
|
|
151,528
|
|
Corporate and intersegment eliminations
|
(36,711
|
)
|
|
(44,229
|
)
|
|
(29,837
|
)
|
|
$
|
1,279,943
|
|
|
837,566
|
|
|
772,796
|
|
Depreciation and amortization:
|
|
|
|
|
|
Global Ceramic
|
$
|
135,370
|
|
|
118,801
|
|
|
120,121
|
|
Flooring NA
|
148,067
|
|
|
137,064
|
|
|
122,677
|
|
Flooring ROW
|
116,048
|
|
|
97,239
|
|
|
92,090
|
|
Corporate
|
9,982
|
|
|
9,543
|
|
|
10,682
|
|
|
$
|
409,467
|
|
|
362,647
|
|
|
345,570
|
|
Capital expenditures (excluding acquisitions):
|
|
|
|
|
|
Global Ceramic
|
$
|
263,401
|
|
|
247,829
|
|
|
192,642
|
|
Flooring NA
|
248,843
|
|
|
148,598
|
|
|
258,987
|
|
Flooring ROW
|
144,207
|
|
|
95,447
|
|
|
100,899
|
|
Corporate
|
15,674
|
|
|
11,783
|
|
|
9,276
|
|
|
$
|
672,125
|
|
|
503,657
|
|
|
561,804
|
|
Assets:
|
|
|
|
|
|
Global Ceramic
|
$
|
4,024,859
|
|
|
3,846,133
|
|
|
3,542,594
|
|
Flooring NA
|
3,410,856
|
|
|
3,164,525
|
|
|
2,587,151
|
|
Flooring ROW
|
2,689,592
|
|
|
2,805,246
|
|
|
1,909,487
|
|
Corporate and intersegment eliminations
|
105,289
|
|
|
118,496
|
|
|
246,312
|
|
|
$
|
10,230,596
|
|
|
9,934,400
|
|
|
8,285,544
|
|
Geographic net sales:
|
|
|
|
|
|
United States
|
$
|
5,842,683
|
|
|
5,399,561
|
|
|
5,233,796
|
|
All other countries
|
3,116,404
|
|
|
2,672,002
|
|
|
2,569,650
|
|
|
$
|
8,959,087
|
|
|
8,071,563
|
|
|
7,803,446
|
|
Long-lived assets (1):
|
|
|
|
|
|
United States
|
$
|
3,092,902
|
|
|
2,945,783
|
|
|
2,381,843
|
|
Belgium
|
1,371,397
|
|
|
1,377,533
|
|
|
949,169
|
|
All other countries
|
1,180,475
|
|
|
1,117,167
|
|
|
976,550
|
|
|
$
|
5,644,774
|
|
|
5,440,483
|
|
|
4,307,562
|
|
Net sales by product categories (2):
|
|
|
|
|
|
Soft surface
|
$
|
3,414,956
|
|
|
3,056,946
|
|
|
2,764,370
|
|
Tile
|
3,258,136
|
|
|
3,094,389
|
|
|
3,087,895
|
|
Laminate and wood
|
2,285,995
|
|
|
1,920,228
|
|
|
1,951,181
|
|
|
$
|
8,959,087
|
|
|
8,071,563
|
|
|
7,803,446
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
|
|
(1)
|
Long-lived assets are composed of property, plant and equipment, net, and goodwill.
|
|
|
(2)
|
The soft surface product category includes carpets, rugs, carpet pad, LVT and sheet vinyl. The tile product category includes ceramic tile, porcelain tile and natural stone. The laminate and wood product category includes laminate, hardwood, roofing elements, insulation boards, MDF, chipboards, and licensing, with most of the UNICLIC family of patents expiring in 2017.
|
(16) Quarterly Financial Data (Unaudited)
The supplemental quarterly financial data are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
April 2,
2016
|
|
July 2,
2016
|
|
October 1,
2016
|
|
December 31,
2016
|
Net sales
|
$
|
2,172,046
|
|
|
2,310,336
|
|
|
2,294,139
|
|
|
2,182,566
|
|
Gross profit
|
639,679
|
|
|
755,588
|
|
|
726,559
|
|
|
690,999
|
|
Net earnings
|
171,548
|
|
|
255,188
|
|
|
269,878
|
|
|
233,748
|
|
Basic earnings per share
|
2.32
|
|
|
3.44
|
|
|
3.64
|
|
|
3.15
|
|
Diluted earnings per share
|
2.30
|
|
|
3.42
|
|
|
3.62
|
|
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
April 4,
2015
|
|
July 4,
2015
|
|
October 3,
2015
|
|
December 31,
2015
|
Net sales
|
$
|
1,881,177
|
|
|
2,041,733
|
|
|
2,150,656
|
|
|
1,997,997
|
|
Gross profit
|
511,943
|
|
|
615,129
|
|
|
661,404
|
|
|
622,210
|
|
Net earnings
|
22,346
|
|
|
186,492
|
|
|
214,905
|
|
|
191,559
|
|
Basic earnings per share
|
0.31
|
|
|
2.54
|
|
|
2.91
|
|
|
2.59
|
|
Diluted earnings per share
|
0.30
|
|
|
2.53
|
|
|
2.89
|
|
|
2.57
|
|