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Text: Today, we'll update you on the company's third quarter results.
Our third quarter results exceeded our expectations as net sales rose 9% over the prior year to approximately $2.8 billion.
Our adjusted earnings per share was $3.95 per share.
All of our businesses performed well, managing through a changing environment in a period COVID directly and indirectly impacted many economies, creating supply chain difficulties that disrupted production as well as leading the government lockdowns in Australia, New Zealand and Malaysia that halted manufacturing and retail.
Despite these and other headwinds, our third quarter sales trends continued in most regions, with Europe's results reflecting more normal summer seasonality.
Home sales were robust across most geographies and consumers continued remodeling investments at a strong pace.
Year-over-year, the commercial sector showed improvement though at a slower rate as COVID concerns delayed the timing of some projects.
Our strategy is to enhance organizational flexibility, reduce product and operational complexity and align pricing with cost improved our results in the period.
We continue to implement lean processes and reduce complexity in manufacturing and logistics.
We're managing our investments in SG&A to support new products that will expand our future revenues and margins.
Even with greater external constraints, we ran most of our operations at high levels and we successfully managed many interruptions across the enterprise.
Rather than improving as we expected, the availability of labor, materials and transportation became more challenging, resulting in higher costs in the period.
Tight chemical supplies, in particular, reduced the output of our LVT, carpet, laminate and board panels.
While we are presently seeing COVID cases declining in most of the regions, many of our operations experienced increased absenteeism during the period, affecting our efficiencies in production.
For the near term, we do not see any significant changes in these external pressures.
Due to supply shortages, government regulations and political issues, natural gas costs in Europe are presently about 4 times as high than they were earlier in the year.
This has a temporary challenge to our European businesses as higher costs are reflected in gas, electricity and other materials.
Though our inventories increased during the period, mostly due to higher material costs and transportation delays on customer orders, our service levels remained below historical norms.
Most of our businesses are carrying significant order backlogs, and we plan to run our operations at high levels during the fourth quarter to improve our service and efficiencies.
Currently, some of our fastest-growing products are being limited by material and capacity constraints.
We have initiated additional investments to increase our production of those and increase our sales and service.
Completion of those projects is being extended due to longer lead times on building materials and equipment.
Our results have improved significantly during 2021 and we generated over $1.9 billion of EBITDA for the trailing 12 months.
Given this in our current valuations, our Board increased our stock purchase program by an additional $500 million.
Since the end of the second quarter, we bought approximately $250 million of our stock at an average price of $193 per share.
With our current low leverage, we have the capital to pursue additional investments and acquisitions to expand our sales and profitability.
Jim will now review our third quarter financials.
Sales for the quarter exceeded $2.8 billion and 9.4% increase as reported and 8.7% on a constant basis.
All segments showed growth, primarily due to price and mix actions as volume was generally constrained by supply, labor, transportation and COVID disruptions.
Gross margin, as reported, was 29.7% or 29.8% excluding charges, increasing from 28.3% last year.
The year-over-year increase was driven primarily by improved price and mix, which offset the increasing rate of inflation.
In addition, gains in productivity, less year-over-year downtime and favorable FX improved our margins.
The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed after the call.
SG&A as reported was 16.9% and flat versus prior year, excluding charges.
Increased SG&A dollars versus prior year as a result of costs that were curtailed due to the COVID-19 pandemic, higher sales, increased inflation, new product development and price and mix.
Operating margin as reported was 12.8%.
Restructuring charges were approximately $1 million, and we have reached our original savings goal exceeding $100 million in annual savings.
We continue, though, to pursue other initiatives to lower our costs.
Operating margins, excluding charges, were also 12.8%, improving from 11.5% in the prior year or 130 basis points.
The increase was driven by improved price and mix, offsetting increasing inflation as well as gains in productivity, favorable FX and greater year-over-year manufacturing uptime, improving our results.
We were partially offset by impact of constrained volume and increased cost in product development.
Interest expense was $15 million in the quarter, flat versus prior year.
Our non-GAAP tax rate was 21.4% versus 16.9% in the prior year, and we still expect the full year rate to be between 21.5% and 22.5%.
Earnings per share as reported were $3.93, and excluding charges were 3.95% -- $3.95, excuse me, increasing by 21% versus prior year.
Now turning to the segments.
Global ceramic sales came in just under $1 billion, a 9.6% increase as reported or approximately 9.1% on a constant basis, led by strengthening price and mix across our geographic regions.
Brazil, Mexico and the U.S. countertop business saw the strongest volume gains while other products performed well against a difficult year-over-year Q3 comparison, which had an abnormal seasonality.
Operating margin excluding charges was 11.9%, up 160 basis points versus prior year due to the favorable price/mix offsetting increasing inflation, which improved -- with improved productivity and limited year-over-year shutdowns strengthening our results, partially offset by increased costs in new product development.
Flooring North America sales just exceeded $1 billion, a 6.9% increase as reported.
The sales growth was driven by price and mix actions to offset rising costs as our sales volumes were impacted by supply, transportation and labor constraints.
Operating margin excluding charges was 11.4%.
That's an increase of 320 basis points versus prior year.
The improvement was driven by positive price and mix offsetting the increasing inflation and volume constraints.
In addition, productivity gains and less temporary shutdowns favorably impacted our results.
In Flooring Rest of the World, sales exceeded $760 million, a 12.7% as reported increase or 10.5% on a constant basis, driven again by price and mix actions while volumes here were constrained by material disruptions, especially in LVT, a return to a normal summer seasonality and COVID restrictions, which caused lockdowns in Australia, New Zealand and Malaysia.
Operating margin, excluding charges, was 17.4%.
This is a decrease versus prior year as a result of the return to a normal summer holiday, along with material constraints and COVID lockdowns which increased our costs and lower productivity, volume and increased the temporary shutdown.
Improved price and mix, which offset the increase in inflation and favorable FX benefited our results.
Corporate and eliminations were $11 million, and I would expect that to be $45 million for the full year.
Taking a look at the balance sheet.
Cash for the quarter exceeded $1.1 billion with free cash flow of $351 million in the quarter and over $720 million in third quarter year-to-date.
Receivables were just shy of $1.9 billion with a DSO of just under 57 days.
Inventories were just over $2.2 billion, an increase of approximately $374 million or 20% from the prior year.
That's an increase of about 16% if you compare to the year-end balance.
Inventory days just under 107 days compared to our low point last year at just under 100 days and 103 days at the year-end.
Property, plant and equipment exceeded $4.4 billion with capex for the quarter at $148 million, in line with our D&A.
Full year capex is currently projected to be $650 million, with D&A projected at $586 million.
Looking at the current debt.
One note on October 19, the company redeemed at par their January 2022 EUR500 million 2% senior notes plus unpaid interest, utilizing cash on hand.
The balance sheet overall and cash flow remained very strong with gross debt as of the end of Q3 of $2.3 billion and leverage at 0.6 times to adjusted EBITDA.
For the period, our Flooring Rest of World segment sales increased 12.7% as reported and 10.5% on a constant basis.
Operating margins were 17.4% as a result of pricing and mix improvements, offset by inflation and a return to more normal seasonality in the period.
During the quarter, sales were strong across our product categories and geographies outside those affected by government lockdowns.
Overall, raw material supplies continue to impact our operations, with LVT production affected the most during the quarter.
We expect that material, energy and transportation inflation will continue and chemical costs that rely on gas will accelerate in upcoming periods.
During the period, COVID shutdowns in Malaysia, Australia and New Zealand interrupted our production and sales.
These restrictions have now been lifted, and we are ramping up production to meet demand.
Our laminate collections continue to have strong sales growth with consumers embracing our proprietary waterproof products for their performance and realistic visuals.
Our new premium laminate introductions feature unique services that replicate handcrafted wood floors.
Our sales volume increased during the period, though our margins were pressured by higher-than-anticipated raw material and transportation inflation.
We added new capacity in Europe to meet demand, and we are initiating other projects to support further sales growth.
In Russia and Brazil, our laminate businesses are growing as we expand distribution with our leading collections.
As anticipated, our LVT sales were lower during the period, given material shortages and lower production that reduced our output.
We minimized the impact by improving our product mix and raising prices to pass through inflation.
Sales of our higher-value rigid LVT collections with patented water-type joint outperformed and benefited our mix.
We anticipate improved material availability in the fourth quarter to support higher LVT production levels and improve our service.
We have announced additional price increases as our energy and material costs continue to rise.
Our sheet vinyl production and sales were impacted by tight material supply and transportation bottlenecks and outbound shipments.
Our Russian sheet vinyl business performed well with sales growing as our distribution expanded.
Our wood plant in Malaysia resumed full operations in September after 12 weeks of government lockdowns due to COVID.
Sales of our wood products will be down in both the third and fourth quarters as our inventories have been depleted.
We have acquired a European wood veneer plant to improve supply, yields and cost of our wood flooring.
We're introducing waterproof wood collections with our patented Wet Protect Technology in our markets after its successful launch in the U.S. Production stops in Australia and New Zealand reduced our sales and margins, and we are scaling up our operations to meet demand as the markets reopen.
Our new premium collections, enhanced merchandising and consumer advertising will benefit our business as the markets return to normal.
We are increasing pricing to offset inflation and transportation costs.
Sales of our European insulation panels grew in the period as we implemented another price increase to offset rising material inflation.
Our income improved with disruptions in manufacturing due to tight material supplies.
We acquired an insulation manufacturer in Ireland and have begun integrating their operations with our existing business.
During the third quarter, our panels business grew and margins expanded as we increased our price mix and pricing.
We're introducing a new decorative range to enhance our participation in specified markets.
We have added new press that will increase our capacity and add more differentiated features to our products.
Our ongoing pricing actions offset rapidly rising material prices, and we will increase prices further in response to inflation.
In the fourth quarter, we will complete the acquisition of an MDF manufacturer in France to expand our capacity in Western Europe.
The company is a pioneer in bio-based resins, which will enhance our sustainability position.
In the third quarter period, our Flooring North America segment sales increased 6.9% and operating margins were 11.3% as reported as a result of productivity, pricing and mix improvements, partially offset by inflation.
Flooring North America had strong results given the material, transportation and labor constraints impacting our sales and production during the period.
Supplies of most oil-related chemicals were restricted, creating unscheduled production stops that lowered our sales and raised our costs.
We implemented additional price increases across most product categories as inflationary pressures intensified.
We continue to streamline our product portfolio and reduce operational complexity, benefiting our efficiencies and quality.
In residential carpet, limited material and labor availability are affecting our production and manufacturing costs.
We continue to increase prices to recover continued inflation.
Volume and efficiencies are being negatively impacted by low inventories, shorter runs and labor challenges.
We are replacing older assets with more efficient equipment, which is improving our labor productivity.
We have an elevated backlog, and we plan to run our operations at high levels in the fourth quarter to improve service and replenish inventories.
We are enhancing our sales and mix as consumers upgrade their homes with our premium SmartStrand and luxury nylon collections.
Commercial sales improved in the period, though the rate of growth has slowed as COVID cases increased.
The government, education and healthcare sectors outpaced office, retail and hospitality channels which are recovering more slowly.
Our hard surface sales are growing as we expand our offering and increase specifications in commercial projects.
We are investing in more efficient assets to improve cost, enhance styling and reduce labor requirements.
Our laminate and wood business continues to grow, though our sales were restricted by our capacities.
Our new laminate line should be operational by the end of this year to expand our sales and provide more advanced features.
Chemical shortages limited our laminate production in the period as we responded by reengineering our formulations to maximize our output.
We are reducing complexities to simplify our operations and improve our efficiencies and production.
Our new high-performance UltraWood collections are increasing our mix in wood and the productivity of our new plant is improving as volume increases.
Our LVT sales increased in the period, even with material supplies limiting production and shipping days in our sourced products.
We have improved our mix with enhanced features and lowered our costs by streamlining our processes.
Our plant has increased throughput and yields despite disruptions from a lack of material supply.
To support future growth, we are expanding our LVT operations adding approximately $160 million of production, with the initial phase beginning at the end of this year.
We are also increasing our sheet vinyl plant's production to satisfy expanding sales of our collections.
In the quarter, our Global Ceramic segment sales increased 9.6% as reported and 9.1% on a constant basis.
Operating margins were 11.9% as a result of higher volume, productivity, pricing and mix improvements, partially offset by inflation.
Our U.S. Ceramic business grew during the period with the residential sector remaining strong and commercial continuing to show improvement.
Our margins improved in the quarter as we implemented price increases to offset higher transportation and raw material costs, enhanced our mix and increased output from our plants.
Additional pricing actions are being taken to offset continuing inflation.
We are reducing our manufacturing costs by reengineering our products, utilizing alternative materials and enhancing our logistics strategies.
We are introducing higher-value products with new printing technologies, textured finishes and polished services to provide alternatives to premium imported tile.
We are growing our studio direct program that focuses on high-end remodeling and exterior collections that sell-through outdoor specialists and home centers.
Our quartz countertop sales continue to grow substantially as our production recovered during the period.
Our countertop mix is improving as sales of our higher-end visuals grow at a faster rate.
Our Mexican and Brazilian ceramic businesses are growing as we increased prices to offset inflation in both countries.
We are refining our product offering, improving our efficiencies and increasing our output.
We have expanded our participation in residential projects and commercial sales.
We are increasing the number of retailers that exclusively sell our products.
We are investing in new manufacturing assets in both countries to expand our production and enhance our product offering.
Sales in our European ceramic business remained strong as vacation schedules return to normal.
Increases in price, mix and productivity enhanced our results, though they were more than offset by rising inflation.
Our new products with enhanced visuals, unique shapes and large slabs increased our average selling price and improved our mix.
We are upgrading production lines to further enhance our styling and improve our efficiencies.
In the period, natural gas and electricity prices in Europe rose to unprecedented levels due to anticipated shortages.
Our margins will be negatively impacted until our prices align with energy cost in the future.
Sales and margins increased in our Russian ceramic business as enhanced mix and increased prices offset higher inflation.
Lower inventories and capacity limitations impacted our sales volume in the period, and we will continue to manage our mix until new capacity is operational.
Due to an equipment delay, our production expansion will not be ready until the third quarter of next year.
Our sanitary ware sales are growing significantly as we expand production and operate -- and our operations.
Throughout 2021, Mohawk has delivered exceptional results with higher sales growth, margin expansion and robust cash generation.
For the fourth quarter, we anticipate that industry seasonality will be more typical unlike last year when demand was unusually high.
In the period, we'll run our operations at high levels to support our sales, improve our service and increase our inventory.
Our sales in some categories are being limited by our manufacturing capacities, and we're increasing investments to expand the production of these growing categories.
We are continuing to implement additional price increases and manage staffing, supply and transportation constraints across the business.
We're maintaining aggressive cost management, leveraging technology and enhancing our strategies across the enterprise.
In Ceramic Europe, record gas prices are increasing the net cost by approximately $25 million in the fourth quarter, and it will take some time for the industry to adjust to the higher cost.
In addition, our fourth quarter calendar has 6% fewer days than the prior year.
Given these factors, we anticipate our fourth quarter adjusted earnings per share to be $2.80 to $2.90, excluding any restructuring charges.
Despite temporary challenges from inflation and material availability, our long-term outlook remains optimistic with new home construction and residential remodeling projected to remain robust, and the commercial sector improving as businesses invest and grow.
Next year, our sales should grow with capacity expansions and new innovative product introductions.
Our strategies to optimize our results continue to evolve with the economic and supply chain conditions.
Our balance sheet is the strongest in history and it supports increased internal investments and strategic acquisitions.

user
q3 earnings per share $3.95 excluding items.
sees q4 adjusted earnings per share $2.80 to $2.90 excluding items.
q3 earnings per share $3.93.
q3 sales rose 9.4 percent to $2.8 billion.

assistant