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To Our Shareholders

We began 2017 with Mohawk in the best position in its history and concluded the year even stronger. For the second consecutive year, Mohawk generated record revenue, operating income and EBITDA — all while supporting new growth opportunities through $900 million in internal investments, also a record level. That performance reflects both the effective execution of our long-term strategy and the strength of our organization.

Jeffrey S. Lorberbaum
Chairman and Chief
Executive Officer

Though Mohawk is the largest flooring manufacturer in the world today, a fragmented global market presents our company with a world of opportunity. And for that reason, even with the success of recent years, we can confidently say, “we’re only halfway there” in realizing our long-term potential.

A Three-in-One Investment Opportunity

To understand our ability to fully realize that potential, it’s helpful to envision buying stock in Mohawk as investing in three types of businesses: a venture capital group; a private equity firm; and a large, well-run public company. Our use of internal resources and market knowledge to invest in opportunities that expand our presence in new product categories and geographic markets is reminiscent of a venture capital firm. We also apply our market knowledge, much like a private equity firm, to evaluate companies and complete successful acquisitions. And finally, we bring the capital strength, discipline and transparency of a large public company to drive product and process innovation, create marketplace differentiation and improve productivity that enhances revenues and margins.

Since 2013, Mohawk has invested
$6.6 billion
to capture growth opportunities
in the global flooring market and
a world of opportunity remains.

 
Revenue

(dollars in millions)

chart1

Adjusted Operating Income1

(dollars in millions)

chart2

1 See non-GAAP reconciliation tables.

Leveraging New Strengths to Invest in New Opportunities

We leveraged all three of these investment approaches to execute our agenda in 2017. Much of the $900 million in internal investments went toward launching new products and expanding our participation in categories and markets in which we already have a presence as well as reducing our costs through automation and system improvements. Those activities included capitalizing on the accelerating popularity of luxury vinyl tile (LVT) by expanding residential and commercial distribution in the U.S. and Europe; preparing to enter the sheet vinyl business in Russia; bringing our carpet tile manufacturing expertise to Europe; broadening our presence in both the U.S. and European countertop market; building out the luxury laminate category in the U.S., Europe and Russia; and growing our carpet and rug business in the U.S. through product extensions. In ceramic tile, we expanded manufacturing capacity and capabilities across our major markets, including the U.S., Mexico, Italy, Poland, Bulgaria and Russia. We anticipate that when fully utilized these combined projects will support sales capacity of approximately $1.6 billion. Our investment theme continues in 2018, when we will spend another $750 million to complete these projects and commence new ones.

Our internal initiatives that create new products and expand our presence into new markets provide us with a greater long-term return for the business. These projects do require initial start-up and marketing investments, which are significantly lower cost than the premium for purchasing sales and distribution through acquisitions. The projects we have underway will require different lengths of time before production is optimized, and we anticipate that before breaking even they will result in start-up investments of $60-$70 million. We are already investing in expanding our present distribution, training sales professionals and building demand for the new products that our expanded capacity will deliver. These projects will greatly enhance the long-term value of our business through innovative new products, entering new product categories, extending our reach into new markets and lowering our cost position through superior technology.

Mohawk Carpet
SmartStrand Silk Reserve
Mohawk Rigid LVT
SolidTech™ Collection

The common thread across these initiatives is the ability to leverage the strengths of one business into another. Consider IVC, which we acquired in 2015 to enter the LVT category. Already the LVT market leader in Europe, IVC was quickly positioned to capitalize on the explosive growth in the U.S. by exploiting Mohawk’s extensive customer relationships, marketing expertise and distribution channels in North America. Similarly, we’ve extended our carpet tile presence into Europe by leveraging the previous experience of IVC’s senior management in that market. And yet another synergy exists in Russia, where we are helping IVC expand its sheet vinyl business by capitalizing on the local market knowledge, infrastructure and distribution of our Russian ceramic operations. These types of scenarios play out again and again across Mohawk’s global flooring footprint. In each case, we’re able to grow our business in capital-efficient ways to maximize returns.

Acquisition Pipeline Remains Strong

Many of these opportunities arise after we successfully complete and integrate acquisitions, which continues to be an effective way to broaden our product offerings and expand our geographic reach. During the past five years, we’ve successfully completed 13 acquisitions, including four in 2017. In Europe, we increased our ceramic design strength and product range and extended our market leadership into Northern and Central Europe through bolt-on acquisitions in Italy and Poland. In the U.S., we further enhanced our vertically integrated manufacturing capabilities through the purchase of a talc mine to feed our ceramic manufacturing operations and a polymerization plant that can support multiple fibers for our carpet and rug businesses.

Late in 2017, we announced an agreement to acquire Godfrey Hirst, the leading flooring manufacturer in Australia and New Zealand. Mohawk presently operates a comprehensive warehouse and sales network in those markets to distribute our wood, laminate, LVT, vinyl and carpet products. Pending government approvals, Godfrey Hirst’s marketing, manufacturing and distribution leadership will complement our current hard surface distribution in the region and strengthen our portfolio. As our global resources support Godfrey Hirst’s management, we will accelerate its growth strategies – again, imparting the strengths of one business to another. The acquisition is expected to close during the summer of 2018, pending government approvals.

Mohawk Laminate
Boardwalk Collective
Mohawk Unified Soft Flooring
AIR.O™

Innovative Organization Optimizes Performance

While our management team devotes a great deal of attention to new opportunities, it is equally focused on ensuring that our existing businesses perform at optimal levels through process improvements, increased levels of automation and other efficiency initiatives. In 2017, these measures resulted in productivity gains of approximately $180 million. Our teams also drive margins through innovations that differentiate Mohawk products in their respective marketplaces to command premium pricing. New printed extra-large porcelain slabs, slip-resistant ceramic tile, embossed LVT that resembles natural hardwood and a new unified soft flooring with an integrated cushion made with 100 percent recycled polyester are just a few examples of how we are exceeding evolving customer expectations.

Starting in the Right Place

As Mohawk grows around the world, it’s more important than ever to understand how consumers’ tastes and needs vary by market. That’s one of the many reasons we continue to run the business in a decentralized fashion, placing the majority of decisions in the hands of the management teams closest to the market. These teams are not only well-positioned to maximize results, but also best-positioned to spot adjacent opportunities and to serve as centers of category excellence that cascade synergies throughout the enterprise. This grassroots approach maximizes flexibility and agility at the operating level, enables us to work on multiple projects at any one time and creates a strong bench of management talent. We support these teams with a lean corporate organization, prioritizing the success of our operations over centralized bureaucracy.

While we manage the company from bottom to top, our strategy is converse, starting with the shareholder and working back. Our ultimate purpose is to maximize shareholder returns. With that goal, we’ve discovered that everything else will follow. To generate the best returns, we have to satisfy customers. To satisfy customers, we need a high-performing organization, which requires attracting the best talent. To do so, we must cultivate a workplace of choice and give our people growth opportunities. And, ensuring our financial strength positions us to reinvest in the communities that provide us with talent, both by creating good careers and improving the quality of life. Once again, the leveraging of one strength to feed another strength works for the greater good.

Delivering a World of Opportunity

As we enter 2018, the strength of our business is evident – we have the lowest leverage and the highest profit margins in our history. We’ve built leading and fortified market positions in the U.S., Western and Eastern Europe, Russia and Mexico and are poised to soon do the same in Australia. Yet, we still have little to no footprint in much of the world where the highest concentrations of the global population live. That represents a world of opportunity. By applying the same long-term investment strategies, deploying the strength of our balance sheet and empowering our management teams, we have no doubt that we can turn that opportunity into greater shareholder value. We appreciate your support as we work to get the rest of the way there.

Jeffrey S. Lorberbaum
Chairman and Chief Executive Officer

Daltile Porcelain Tile
Woodbridge™ Series