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Text: Today, we'll update you on the company's third quarter results.
As we previously disclosed, we received subpoenas from the Department of and the Securities and Exchange Commission related to allegations in a class action lawsuit filed against us.
With the assistance of outside legal counsel, our Audit Committee completed a thorough internal investigation into these allegations of wrongdoing and concluded that they are without merit.
We are cooperating fully with the ongoing governmental investigations and will continue to vigorously defend against the lawsuit, which we do not believe has merit.
Our third quarter results significantly exceeded our expectations, with sales recovering and operating income substantially increasing from last year's levels.
Under continued pandemic conditions, people all over the world are spending more time in their homes and working remotely.
Globally, this trend increased investments in home remodeling as well as driving new home purchases.
All of our businesses and geographies were stronger due to higher demand and customers increasing inventory in our distribution channels.
Flooring Rest of World delivered the strongest results in the quarter as our Northern European, Russian and Australian businesses were less impacted by the pandemic.
Our Global Ceramic and Flooring North America segments also improved substantially while being more affected by COVID and postponed commercial projects.
Our laminate, LVT and sheet vinyl outperformed our other categories, and our new plants improved their output and efficiencies.
Fluctuations in worldwide exchange rates negatively impacted our EBIT by about $7 million, with declines in most currencies offsetting the strengthening euro.
During the period, demand for our products exceeded our productions, and inventory declined by about $80 million as we ramped up plants across the world.
Our increase in manufacturing in the period was limited by challenges with hiring, training and capacity.
To cover higher operating material and logistics costs, we have announced selective price increases in some markets and product categories.
We've made significant progress on our previously announced restructuring actions and are in line with our planned schedule and savings.
Though in response to higher demand levels, we have postponed some restructuring projects while we assess future conditions.
Our business is responding to the COVID crisis as our focus has remained on keeping our employees safe.
Throughout our offices, operations and distribution systems, we've implemented procedures that exceed the public health guidelines.
We're tracking all identified cases, testing all contacts and successfully containing the spread within our operations.
Throughout the pandemic, our people have collaborated to protect each other and support our customers around the world.
Even with our improved performance in the period, our visibility of the future remains very limited.
As COVID cases increase, governments may expand restrictions on commerce and reduce stimulus activities.
In addition, future consumer spending is uncertain.
Business investments remain low, and inventory growth in the channels could change.
We continue to monitor health information and market trends to respond to the evolving conditions in our market.
In the second quarter, we took advantage of the favorable rate environment to pay off $1.1 billion of short-term debt and prefund our future long-term maturities.
In the third quarter, we generated about $530 million of cash, bringing our cash balance to $1.2 billion at the end of the period.
We will pursue additional investment opportunities, including internal growth, acquisitions and stock purchases as the pandemic and economies improve.
We believe our stock represents an attractive investment, and our Board of Directors recently approved a plan to repurchase $500 million of the company's stock.
Sales for the quarter were $2.575 billion or up 2% as reported and on a constant basis, with the Rest of World segment performing best.
As a note for next quarter, our sales will be impacted by two more days compared to the previous year.
Our gross margin was 27.4% as reported or 28.3% excluding charges, increasing from 27.8% last year.
The year-over-year increase was driven primarily by higher volume, productivity and lower inflation, partially offset by price/mix.
The actual amounts of these items will be included in the 10-Q filed later today.
Our SG&A as reported was $443 million or 17.2% of sales or 16.9% versus 17.8% in the prior year, both excluding charges.
This was primarily impacted by favorable productivity of $21 million.
Our restructuring charges were $32 million for the quarter, of which $6 million was cash.
All of our restructuring and other savings are on track with our original plans.
Our operating margin excluding charges was 11.5%, improving from 9.9% last year.
The increase was driven by stronger volume, productivity and declining raw materials, partially offset by unfavorable price and mix.
Interest expense was $15 million, and we expect interest next quarter to be approximately $16 million.
Our income tax rate was at 17% this year compared to 18% last year.
We expect the fourth quarter to be approximately 5% and then returning to historical levels, ranging from 20% to 21% next year.
Our earnings per share excluding charges was $3.26, up 18% from last year.
Turning to the segments.
In the Global Ceramic segment, sales were $911 million, down 1% as reported, with business up almost 2% on a constant basis.
The non-U.S. businesses turned in our best performances in this segment.
Our operating margin excluding charges was 10.3%, up 110 basis points compared to the 9.2% last year.
Our increase was from productivity and volume, partially offset by unfavorable price/mix.
In the Flooring North American segment, sales were $982 million, down 2% as reported, with growth in all major categories, except the more profitable commercial end market, which remains challenging with postponed projects and slower office and hospitality.
Our operating margin excluding charges was 8.2% compared to 8.7% last year.
The decrease in earnings was driven by lower margin and price/mix, partially offset by favorable productivity and lower inflation.
In the Flooring Rest of World segment, sales were $681 million, up 13% as reported and increased by almost 10% on a constant basis.
A lower exposure to our commercial end markets, along with a larger presence in Northern Europe, supported strong top line growth in this segment.
Our operating margin excluding charges was 19.3%.
That's up 480 basis points from 14.5% last year.
The main drivers were higher volume, favorable productivity and lower raw materials, partially offset by unfavorable price/mix.
In the Corporate and Eliminations segment, the operating loss excluding charges was $10 million.
We expect the total year to come in at a loss of about $40 million.
Then jumping to the balance sheet.
Our receivables ended the quarter at $1.711 billion.
Our days sales outstanding improved to 56 from 61 days last year.
Our inventories ended the quarter to $1.842 billion and dropped almost $500 million or 21% from last year as all businesses saw significant reductions in inventory with production lagging sales.
Our inventory days were at 100 versus 127 days last year.
Fixed assets at the end of the quarter were $4.405 billion and included capital expenditures during the quarter of $69 million and depreciation and amortization of $151 million.
We estimate the annual capital expenditures to be about $420 million, with D&A estimated at $595 million.
And finally, the balance sheet and cash flow remains strong with total debt of $2.6 billion, total cash and short-term investments of almost $1.2 billion and leverage at 1.1 times to adjusted EBITDA.
For the quarter, our Global Ceramic segment sales increased 2% on a constant days and currency basis.
Our operating income grew 11% with a margin of 10% excluding restructuring costs compared to last year.
All of our ceramic businesses improved substantially in the third quarter, with low inventories limiting both our sales and service.
The residential sector experienced a more significant rebound in the period, while commercial demand remained sluggish.
Most of our plants have stepped up to run all of their capacity to meet present demand and increased inventories in the fourth quarter.
Overall, demand was solid, but our visibility is hampered by COVID, the sustainability of residential sales growth and postponed commercial projects.
In the U.S., we are seeing increased traffic in our showrooms and galleries as well as our customers' retail shops.
We have shifted sales focus from commercial to new home construction, which is expected to increase through next year.
Commercial sales improved from the prior period but are still lagging.
Our inventories decreased slightly during the quarter, even as we increased our production levels.
We have announced price increases to cover higher freight and operations costs.
Our quartz countertop plant is performing as planned, and we are increasing our higher style collections to improve our mix.
Our restructuring initiatives are being executed as we planned.
We have closed two tile manufacturing facilities and consolidated distribution points.
We've also reduced SG&A and labor cost and discontinued lower-performing products.
Our Mexican ceramic business is experiencing many of the same trends as the U.S.
Our plants in Mexico are operating near capacity to reduce order backlogs, running shorter production quantities and optimizing our SKU offering.
To replace higher-end imports, we are manufacturing new porcelain collections in larger sizes.
We are expanding our sales footprint with exclusive Daltile-branded shops being opened by our customers.
Our Brazilian ceramic business had its best quarter in its history, with significant growth in both its domestic and export markets.
We are presently operating at full capacity and allocating production as consumer demand increased and inventories are rebalanced.
To offset rising inflation, we have announced a price increase that will go into effect later this year.
We are continuing our investments to upgrade our Brazilian assets, create higher-value products and reduce our cost.
Our European ceramic business delivered strong results in the period as residential sales improved and inventories in the channel are replenished.
Our performance was hindered by substantial reduction in higher-value commercial category and lower exports for projects around the world.
We achieved higher manufacturing levels by reducing the traditional August shutdown periods.
As production rose during the period, our service improved, and we will continue to increase inventories to enhance our service.
Increased pricing pressures during the period were offset by higher volumes and productivity, lower inputs and SG&A leverage.
Our major markets in Europe are increasing restrictions due to recent spikes in COVID cases, which could impact future demand.
Our Russian ceramic business recovered and is performing better than last year, even with the political crisis in the Eurasian Union lowering our exports.
The growth was driven by our strong results in the new construction channel and company-owned retail stores.
Like our other businesses, low inventories constrained our sales in the period.
Our new sanitary ware plant is operating as planned and will support our premium strategy with products that coordinate with other offerings.
During the quarter, our Flooring North America segment sales decreased approximately 2% as reported, with operating income margin exceeding 8% excluding restructuring charges.
The segment's performance improved substantially from the prior period due to improving residential sales.
Revenue in the quarter were limited by our low inventory levels and difficulties increasing production due to staffing shortages and higher employee absentee rates.
Commercial demand improved from the prior period but remains weak, with the hospitality, retail and office impacted the most.
Inventories in the period continued to fall, though we expect them to increase through the end of the year.
As our production aligns with demand, our service levels are improving.
Our restructuring programs are progressing and achieving the expected cost savings in manufacturing, logistics and SG&A.
Our residential carpet business improved from the prior period, with retail remodeling performing best.
Our polyester products are outperforming other fiber categories, which is impacting our mix and average selling price.
As we progressed through the period, we achieved higher manufacturing rates, which improved our productivity and cost.
Increased overtime in shorter runs improved our service but raised our production cost.
To cover higher costs, we are implementing price increases in the market.
Our rug sales increased as consumers use them as an easy way to update their home decor.
In the period, we are allocating our rug production as demand increased and retailers restock their inventories.
Commercial flooring remains depressed as businesses reduce remodeling and postpone construction projects.
While our commercial sales improved from the deep second quarter decline, we anticipate a slower recovery in the sector.
During the period, laminate had strong growth with expanding distribution and sales in all channels.
The beauty of our waterproof laminate collections are attracting more consumer interest and has enhanced our mix.
Even with our laminate operations running at full capacity, we are unable to satisfy demand and have postponed our new product introductions.
To increase our laminate production and provide new features, we are installing a new line that should begin production in the fourth quarter of next year.
We have reduced our commodity wood manufacturing and are repurposing our operations to produce premium wood collections with unique features.
Sales of our residential LVT collections continued to expand at a rapid pace, with rigid products increasing their share and our new product launches improving our mix.
To compensate for higher tariffs on sourced collections, we implemented price increases in the period.
We are continuing to make significant progress in our U.S. manufacturing facilities.
Output is increasing, although some of our productivity initiatives fell behind schedule due to COVID-related interruptions in travel from Europe.
We have recently relocated European engineers to the U.S. to implement enhanced LVT processes that are being used in our Belgian operations.
Our sheet vinyl collections continue to take market share, and our cost in the category improved due to greater efficiencies.
For the quarter, our Flooring Rest of World segment sales increased approximately 13% as reported.
The segment's operating income grew 56% with a margin of 19% as reported.
During the period, the segment outperformed in all of its geographies as home sales and remodeling expanded with people spending more time at home and reducing other discretionary spending.
Our inventories remain low in all product categories as order rates exceeded our increasing production levels.
To meet higher consumer demand, our plants took less time off in the August vacation period to maximize production levels and service.
With higher service and lower marketing expenditures, we leveraged our SG&A cost across the business.
Our Flooring Rest of the World segment has less participation in commercial end markets that more negatively affected our other two segments.
Our laminate sales growth was limited by manufacturing capacity in Europe.
We began shipping laminate from Russia to support higher demand in Europe.
Our strong brands and industry-leading innovations continue to attract the consumer, and our differentiated products are improving our mix.
We postponed new product launches and reduced our marketing and promotional activities in the period.
During the quarter, sales of our LVT collections grew the most as our production levels, efficiencies and costs improved as we anticipated.
We expect our productivity and cost to continue improving as we expand the utilization of our operations and enhance our material yields and efficiencies.
The rigid LVT category is also growing faster in Europe, and we will be adding a weekend shift to support the increased demand.
In the fourth quarter, we will begin shipping our next generation of rigid LVT products with new features that will strengthen our market position.
Our sheet vinyl provides the best flooring value in the market, and our sales increased as our retail customers reopened.
Higher production volumes positively impacted our cost and better leveraged our SG&A.
Our Russian sheet vinyl plant performed well with higher utilization and margins.
We're adding another shift in the plant to satisfy our expanding business.
We completed the consolidation of our wood manufacturing operations in Malaysia and significantly reduced our cost.
We have improved our output, allowing us to satisfy increasing demand.
We are gradually lowering our material costs through our initiatives to vertically integrate.
Our insulation products rebounded with increased volumes after our markets reopened.
Even though our selling prices have declined, our margins remain strong as material costs were lower as well.
Our raw material costs are now rising, and we have announced price increases to compensate.
Our boards business benefited from strong demand, improved product mix and lower material prices.
We also reduced our cost with the investments we made in expanding our glue manufacturing and new energy plant.
Our Australia and New Zealand business performed very well with strong sales growth, improved product margins and the success of our updated product offering.
The company is well positioned with its strong branding in both carpet and hard surface.
We entered the fourth quarter with improved sales and margin trends and have a solid order backlog across the enterprise.
Residential remodeling and new home construction are forecasted to remain strong as the pandemic has transformed our living spaces into schools and offices and as participation in other activities has fallen.
The fourth quarter is slower for our industry due to normal seasonality, and we expect lower growth in channel inventory levels.
Our higher-margin commercial channels will continue to be slow, with completed projects likely to outpace new starts.
We anticipate service improving with our inventories rising as production levels exceed sales.
We are implementing our restructuring plans and are on track to reduce costs as expected.
Our visibility continues to be limited by many uncertainties, including how government restrictions and demand will evolve.
Assuming the current economic trends continue, we anticipate our fourth quarter earnings per share to be $2.75 to $2.87 with a nonrecurring tax rate of approximately 5% for the period.
Our business has responded effectively to the COVID crisis, changing government restrictions and varying market conditions.
Residential remodeling and new construction are expected to improve next year.
The commercial business should increase from its present low levels as economies recover going forward.
Our strong balance sheet, cash generation and liquidity will allow us to move from a defensive posture to a more aggressive growth strategy.

user
compname posts q3 adj earnings per share $3.26.
q3 earnings per share $3.26 excluding items.
q3 earnings per share $2.87.
q3 sales $2.6 billion versus refinitiv ibes estimate of $2.49 billion.
sees q4 earnings per share $2.75 to $2.87.
audit committee completed internal investigation into allegations of wrong doing.
cooperating fully with the ongoing governmental investigations.
audit committee concluded the allegations are without merit.

assistant