To Our
Shareholders
Jeffrey S. Lorberbaum Chairman and
Chief Executive Officer
In an extraordinary year, we successfully managed through the most disruptive market environment in our company’s history by aggressively enhancing our strategies, organization, cost structures and balance sheet. We saw the immediate benefit of these initiatives as we delivered record revenues in the second half of the year and increased operating income approximately 38% year over year for that same period. Our actions improved our 2020 results and laid the groundwork for Mohawk to capitalize on economic recovery and heightened interest in home improvements around the world.
| Total Debt (millions) | |
|---|---|
| Sept 2021 €300MM Note | $369 |
| Jan 2022 €500MM Note | 615 |
| Feb 2023 USD Note | 600 |
| June 2027 €500MM Note | 615 |
| May 2030 USD Note | 500 |
| Finance Leases & Other | 46 |
| Total Debt | 2,745 |
| Less: Cash1 | (1,340) |
| Net Debt | $1,405 |
| Liquidity (millions) | |
| Cash1 | $1,340 |
| Available Revolving Credit Facilities2 | 1,799 |
| Total Available Liquidity | $3,139 |
1 Cash includes investments in money market and mutual funds
2 After Letters of Credit issuance of $0.8MM
Essential Actions in a Global Crisis
In the first half of 2020, our results were decimated by the steepest sales decline in the history of our industry, when most of our customers and facilities operated either at a limited capacity or were completely shut down for varying amounts of time. To address rapidly changing conditions, we formed an enterprise-wide team focused on protecting the company in the face of these unprecedented challenges. We quickly implemented strategic initiatives to protect our people, support our customers and stabilize the business at that moment as well as strengthen it for the long term. As the pandemic spread, we responded by minimizing costs, lowering inventory levels, initiating restructuring actions and increasing our liquidity.
Even with the scale of our business, we execute actions rapidly. We took an aggressive approach to cost containment, limiting investments to only business-essential spending and protecting employees. We reduced every category from basic expenses to capital expenditures without sacrificing operational integrity or service to our customers.
As we aligned production with historically low demand, we initiated furloughs across the business. Orders were fulfilled from existing supplies to effectively leverage our inventories.
We also began to implement restructuring initiatives to reduce structural cost, improve productivity and create a foundation for our future performance. We scaled our workforce to market conditions by streamlining processes and optimizing technology. We curtailed SG&A investments and promotional activities to protect our margins. We closed less-efficient operations, invested in equipment upgrades and rationalized lower-performing products and SKUs. The majority of these changes were in the U.S., where LVT growth has disrupted other product categories for several years.
Rapid Response to a Rebound
In the second half of the year, residential flooring demand around the globe recovered significantly faster than our industry expected. People spent more time in their homes due to the pandemic and shifted disposable income from travel, entertainment and leisure activities to home improvement projects, particularly when their homes had to double as offices, schools and gyms. We benefited from our strength in all residential sales channels and from the differentiation of our products, which provided solutions to enhance comfort and style or to accommodate family needs for work and learning spaces. In most markets, home construction and existing home sales saw a boost as people sought larger dwellings or relocated from crowded cities to suburbs and small towns.
The office, hospitality, retail and aviation sectors have remained under pressure due to Covid, which kept commercial flooring demand depressed due to business investments being postponed or canceled. Consequently, we have maximized the production of our residential products while maintaining most of our commercial infrastructure for the eventual rebound.
As our sales accelerated, shipments exceeded production rates, which lowered our inventory and challenged service levels. Even as order rates increased, our manufacturing levels continued to be impacted by government restrictions, Covid-related disruptions and employee absenteeism across the organization. Across the business, we took actions to increase productivity and meet demand for new and legacy products.
During 2020, we maintained a strong financial position through both the decline and rebound of global markets.
Delivering Product Innovation
With families investing in their homes, a key to sales is delivering value through products with enhanced style and performance features. As an example, while spending more time at home, consumers rediscovered the comfort and noise-dampening values of carpet. Our patterned carpets in a variety of colors and textures offer sophisticated and elegant looks for the home. We are reinvigorating our proprietary SmartStrand collections to support growth in the luxury carpet category. In addition to SmartStrand’s superlative softness and stain resistance, we have added a revolutionary hypoallergenic backing that makes the products fully recyclable as well as easier to install.
We are also responding to consumer desires for healthier homes by introducing ceramic tile collections with built-in antimicrobial protection. We are extending the reach of our ceramic products with large-scale porcelain panels and outdoor pavers used for landscaping, both of which are building sales through new and existing channels.
Waterproof flooring is another key focus for today’s consumers. Accordingly, we are introducing groundbreaking technology in laminate and LVT collections to create watertight joints that provide protection for both the floor surface and subfloor.
We are also introducing a luxury wood flooring collection that has been in development for four years. This truly waterproof wood flooring features exclusive technologies that provide dramatically improved scratch, dent and wear resistance for today’s active households.
Investing for Growth
Our premium laminate collections have earned renewed consumer attention as their superior visuals and waterproof performance make them a desirable alternative to both natural wood and LVT. Our plants are running at capacity to meet the exceptional demand. By the end of 2021, a new U.S. laminate production line with additional capabilities should be operational.
Our European and U.S. LVT category is delivering substantial sales growth. Our rigid collections have become increasingly popular with consumers seeking durable, low-maintenance floors, while the acoustic dampening properties of our flexible collections have made them valued in commercial spaces. In Europe, where our LVT manufacturing is now running seven days a week, the profitability of our operations improved due to increased volume and lower production costs. Engineers from our European LVT business are working with their U.S. counterparts to implement demonstrated improvements that increase output, reduce material cost and enhance the visuals and performance of our collections.
The investments we have made in our most recent acquisitions continue to expand their growth and profitability. Since acquiring Godfrey Hirst, our results in Australia and New Zealand have improved, thanks to refinements to our carpet and hard surface product offering, along with enhanced manufacturing assets and distribution capabilities. This year, we are upgrading a porcelain production line in Brazil to further strengthen our manufacturing and support sales growth.
Greenfield investments are also enhancing our results. Production volume at our Russian sheet vinyl plant has now reached a level where its margins are in line with our other businesses, and we are expanding sales to further optimize our results. Also in Russia, we are successfully ramping up our new premium sanitary ware manufacturing and will expand it further this year. The sanitary ware complements our ceramic tile collections and will enhance our product offering in our owned and franchised stores.
Our U.S. countertop business is increasing substantially, driven by growth in our quartz collections. Our quartz countertop plant’s production, costs and margins continue to improve our results, and we are increasing our mix with higher-value stylized products. We are investing significantly in SG&A to grow our carpet tile sales from the plant we launched in Europe, which is impacting its margins particularly as the commercial sector faces headwinds due to Covid-related reductions in demand.
Benefiting From Financial Strength
During 2020, we maintained a strong financial position through both the decline and rebound of global markets. In the second quarter, we issued over $1 billion of new bonds, which allowed us to pay off short-term debt and prefund longer-term maturities. For the year, we generated record free cash flow of more than $1.3 billion and liquidity is now at $3.1 billion. Net debt leverage dropped to a historical low of 1.0x adjusted EBITDA at the end of 2020. From January 1, 2020 to March 16, 2021, we purchased 1.58 million shares of Mohawk stock for about $198 million as part of our stock repurchase plan. This strong financial position gives us the flexibility to pursue additional opportunities, including internal investments, acquisitions and stock purchases.
CARRYING MOMENTUM INTO THE FUTURE
This year, we expect to benefit further from the actions we implemented throughout 2020 as well as from improving economic conditions, favorable government policies, low interest rates and greater consumer confidence. Around the world, we anticipate that the flooring business in residential remodeling and new construction will remain strong, while the rebound in commercial investments will require more time. Our commercial products have a higher margin than residential, so lower commercial sales will have some impact on our 2021 performance.
In the fourth quarter of 2020, our plants across the enterprise ran at high production levels, but we fell short of our anticipated inventory build. With consumer demand strong across product categories, we remain focused on optimizing production, increasing inventories, and achieving desired service levels. This year, we will benefit from last year’s cost reduction and restructuring initiatives. By the end of 2020, we had achieved approximately $50 million of our projected $100 to $110 million in anticipated savings from these initiatives. We continue to assess some of the planned restructuring projects based on changing market conditions. High-value, innovative products will also enhance our mix. All of our businesses are introducing new collections with features and benefits that will improve our margins and excite consumers who are eager to remodel their homes.
At this time, Covid-related issues around the world are disrupting some material supply streams, and we are managing through these shortages. In the U.S., businesses in most areas have continued to operate without government restrictions. Lockdowns in Europe and Australia have had limited impact on the sales and installation of our products. We continue to mitigate Covid-related risks within our operations in all regions. We are experiencing inflationary pressures in materials, energy, labor and transportation around the world and have implemented price increases as necessary. Though we remain optimistic about the year ahead, our strategies and initiatives are flexible enough to adapt to potential economic changes. With significant momentum coming off record sales at the end of 2020, our highest annual free cash flow and a strong balance sheet, we are well positioned to take advantage of opportunities that will drive profitable growth for the business.
Mohawk’s history is distinguished by how we have proactively responded to challenging circumstances and then leveraged our actions to optimize our performance in the stronger periods that follow. In 2020, we took essential steps that steadied our company through the pandemic, and we are now poised to reap the benefits of those initiatives in 2021 and beyond. We appreciate your continued support of the business as we work to deliver the best possible returns for the near and long term.
Jeffrey S. Lorberbaum
Chairman and Chief Executive Officer