Mohawk Industries Inc: Form 10-Q for the period ended Sep 30, 2023

Overview

During the past three decades, the Company has grown significantly. Its current geographic breadth and diverse product offering are reflected in three reporting segments: Global Ceramic, Flooring North America (“Flooring NA”) and Flooring Rest of the World (“Flooring ROW”). Global Ceramic designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone tile and other products including natural stone, porcelain slabs and quartz countertops, which it distributes primarily in North America, Europe, Brazil and Russia through various selling channels, which include company-owned stores, independent distributors, residential and commercial contractors and home centers. Flooring NA designs, manufactures, sources and markets its floor covering products, including broadloom carpet, carpet tile, carpet cushion, rugs, laminate, vinyl products, including luxury vinyl tile (“LVT”) and sheet vinyl, and wood flooring, all of which it distributes through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carriers or rail transportation. The Segment’s product lines are sold through various channels, including independent floor covering retailers, independent distributors, home centers, mass merchandisers, department stores, shop at home, online retailers, buying groups, residential contractors, commercial contractors and commercial end users. Flooring ROW designs, manufactures, sources, licenses and markets laminate, vinyl products, including LVT and sheet vinyl, wood flooring, roofing panels, insulation boards, medium-density fiberboard (“MDF”) and chipboards, which it distributes primarily in Europe, Russia, Australia and New Zealand through various channels, including independent floor covering retailers, independent distributors, company-owned distributors, home centers, residential and commercial contractors and commercial end users.

Mohawk is a significant supplier of every major flooring category with manufacturing operations in 19 nations and sales in approximately 170 countries. Based on its annual sales, the Company believes it is the world’s largest flooring manufacturer. A majority of the Company’s long-lived assets are located in the United States and Europe, which are also the Company’s primary markets. Additionally, the Company maintains operations in Australia, Brazil, Malaysia, Mexico, New Zealand, Russia and other parts of the world. The Company is a leading provider of flooring for residential and commercial markets and has earned significant recognition for its innovation in design and performance as well as sustainability.

Due to its global footprint, Mohawk’s business is sensitive to macroeconomic and geopolitical events. The Company may continue to see fluctuating demand across a number of its markets due to higher interest rates, the prolonged impact of consumer inflation, reduced consumer and homebuilder confidence, tightening loan requirements and other factors. In October 2023, attacks against the Israeli people perpetuated by Hamas extremists led to the State of Israel taking military action in Gaza. At this time, the impact of the situation in the Middle East is evolving. A prolonged and more expansive conflict in the region could escalate oil and petroleum-based chemical prices as well as lead to the introduction of sanctions or transportation barriers, though the extent of the conflict’s impact on the Company’s business and results of operations, as well as the global economy, cannot be predicted. In addition, as a result of ongoing Russian military actions in Ukraine, the Company has experienced supply chain disruption of raw materials sourced from Ukraine (primarily clay), as well as other materials and spare parts needed in the Company’s operations. The Company has also been impacted by global increases in the cost of natural gas, oil and oil-based raw materials and chemicals that were among the broader consequences of Russia’s actions. The United States, the European Union and other governments have imposed and extended sanctions on Russia as well as on certain individuals and financial institutions and have proposed the use of broader economic sanctions. Russia also imposed reciprocal sanctions against the United States and the European Union. Since the first quarter of 2022, the Company has suspended new investments in Russia. The broader consequences of this conflict, which may include further economic sanctions, embargoes, regional instability, and geopolitical shifts; potential retaliatory actions, including nationalization of foreign-owned businesses; increased tensions between the United States and countries in which the Company operates; and the extent of the conflict’s effect on the Company’s business and results of operations, as well as the global economy, cannot be predicted.

During 2022, rapid cost escalations in materials, energy, transportation and labor impacted the Company’s profitability across all segments, and high inflation and rising interest rates affected new home construction and residential remodeling in most of the Company’s markets. As consumers faced a higher cost of living, discretionary spending – including flooring purchases – declined; and, as a result, the Company’s customers reduced inventories, which has continued through the third quarter of 2023. Despite multiple pricing actions, improved product mix; productivity gains and cost containment measures, the Company did not completely offset inflation in 2023. Recently, material and energy prices have declined, which will benefit the Company’s future results as the costs flow through the statement of operations. To further address energy price volatility, the Company has invested in renewable energy initiatives, which provide lower cost power to its facilities. During 2023, energy from the Company’s biomass plants lowered its cost and benefited its performance. During 2023 and 2022, the Company took actions to enhance future performance including facility and product rationalizations, restructuring initiatives and workforce reductions. The Company has continued to reduce costs across the enterprise by enhancing productivity, streamlining processes, controlling administrative expenses and executing restructuring actions. The Company anticipates these global actions will deliver annual savings of approximately $135 million, with an estimated cost of approximately $215 million.

The Company believes it is well positioned with a strong balance sheet. Based on its current liquidity and available credit, the Company is in a position to finance internal investments, acquisitions and/or additional stock purchases and pay current debt as it becomes due. For information on risks that could impact the Company’s results, please refer to Risk Factors in Part I, Item 1A in the Company’s 2022 Annual Report filed on Form 10-K.

During the first quarter of 2023, the Company acquired two ceramic tile businesses in Brazil and Mexico. During 2022, the Company completed five small, bolt-on acquisitions: a wood veneer plant in Romania; a sheet vinyl producer in Poland; a mezzanine flooring manufacturer in Germany; a nonwoven carpet and rug producer in the U.S.; and a commercial flooring trim and accessories business in the U.S.

In 2023, the Company plans to invest approximately $600 million in new and existing projects, cost reduction initiatives, investments to upgrade equipment in Brazil and Mexico from recent acquisitions and previously initiated expansion projects and general maintenance across the business. The primary investment areas include the Company’s LVT portfolio to upgrade its product offering and improve profitability; premium waterproof laminate in North America and Europe; and quartz countertop and porcelain slab expansion in North America and Europe, respectively.

For the three months ended September 30, 2023, the net loss attributable to the Company was $760.5 million compared to the net loss attributable to the Company of $534.0 million for the three months ended October 1, 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles; the unfavorable net impact of price and product mix; lower sales volume; the unfavorable net impact of foreign exchange rates; higher restructuring, acquisition and integration-related, and other costs and higher interest expense. The unfavorable impact of the aforementioned items was partially offset by lower inflation; productivity gains and lower legal settlements, reserves and fees. The Company believes that a number of circumstances may influence trends in 2023, including the impact of inflation and material availability due to disruptions in the global supply chain, but the extent and duration of such impact cannot be predicted.

For the nine months ended September 30, 2023, the net loss attributable to the Company was $579.0 million compared to the net loss attributable to the Company of $8.2 million for the nine months ended October 1, 2022. The change was primarily attributable to lower sales volume; higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles; higher restructuring, acquisition and integration-related and other costs; higher inflation; the unfavorable impact of temporary plant shutdowns; higher legal settlements, reserves and fees; the unfavorable net impact of foreign exchange rates; higher interest expense and higher costs associated with investments in new product development and marketing costs. The unfavorable impact of the aforementioned items was partially offset by lower taxes due to decreased earnings in 2023 compared to the prior year and an increase in the impairment of non-deductible goodwill; productivity gains and the favorable net impact of price and product mix. The Company believes that a number of circumstances may influence trends in 2023, including the impact of inflation and material availability due to disruptions in the global supply chain, but the extent and duration of such impact cannot be predicted.

For the nine months ended September 30, 2023, the Company generated $1,032.9 million of cash from operating activities. As of September 30, 2023, the Company had cash and cash equivalents of $518.5 million, substantially all of which was held in the United States.

Results of Operations

Quarter Ended September 30, 2023, as compared with Quarter Ended October 1, 2022

Net sales

Net sales for the three months ended September 30, 2023 were $2,766.2 million compared to net sales of $2,917.5 million for the three months ended October 1, 2022. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $133 million; lower legacy sales volume of approximately $102 million; the unfavorable net impact of foreign exchange rates of approximately $11 million and fewer shipping days for the quarter ended September 30, 2023 of approximately $2 million, partially offset by higher sales volume attributable to acquisitions of approximately $97 million.

*Global Ceramic—*Net sales for the three months ended September 30, 2023 were $1,091.7 million compared to net sales of $1,096.7 million for the three months ended October 1, 2022. The change was primarily attributable to lower legacy sales volume of approximately $42 million; the unfavorable net impact of price and product mix of approximately $24 million; the unfavorable net impact of foreign exchange rates of approximately $19 million and fewer shipping days for the quarter ended September 30, 2023 of approximately $2 million, partially offset by higher sales volume attributable to acquisitions of approximately $83 million.

*Flooring NA—*Net sales for the three months ended September 30, 2023 were $962.2 million compared to net sales of $1,089.6 million for the three months ended October 1, 2022. The change was primarily attributable to lower legacy sales volume of approximately $75 million and the unfavorable net impact of price and product mix of approximately $57 million, partially offset by higher sales volume attributable to acquisitions of approximately $5 million.

*Flooring ROW—*Net sales for the three months ended September 30, 2023 were $712.3 million compared to net sales of $731.2 million for the three months ended October 1, 2022. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $52 million, partially offset by higher legacy sales volume of approximately $15 million; higher sales volume attributable to acquisitions of approximately $10 million and the favorable net impact of foreign exchange rates of approximately $8 million.

Gross profit

Gross profit for the three months ended September 30, 2023 was $692.0 million compared to gross profit of $713.7 million for the three months ended October 1, 2022. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $108 million; lower sales volume of approximately $24 million; the unfavorable net impact of foreign exchange rates of approximately $18 million and higher restructuring, acquisition and integration-related, and other costs of approximately $11 million, partially offset by lower inflation of approximately $120 million; productivity gains of approximately $14 million and the favorable impact of fewer temporary plant shutdowns of approximately $1 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended September 30, 2023 were $549.6 million compared to $523.5 million for the three months ended October 1, 2022. The change was primarily attributable to the unfavorable net impact of acquired businesses of approximately $10 million; lower productivity of approximately $9 million, with increased spending on customer support, samples and marketing initiatives; higher inflation of approximately $8 million and the unfavorable net impact of foreign exchange rates of approximately $2 million, partially offset by lower legal settlements, reserves and fees of approximately $2 million and the favorable net impact of price and product mix of approximately $2 million.

Impairment of goodwill and indefinite-lived intangibles

Impairment of goodwill and indefinite-lived intangibles for the three months ended September 30, 2023 was $876.1 million compared to impairment of goodwill and indefinite-lived intangibles of $695.8 million for the three months ended October 1, 2022. As a result of a decrease in the Company’s market capitalization, a higher WACC and macroeconomic conditions, the Company performed interim impairment tests of its goodwill and indefinite-lived intangible assets, which resulted in the impairment charges.

Operating income (loss)

Operating loss for the three months ended September 30, 2023 was $733.7 million compared to operating loss of $505.6 million for the three months ended October 1, 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $180 million; the unfavorable net impact of price and product mix of approximately $106 million; lower sales volume of approximately $34 million; the unfavorable net impact of foreign exchange rates of approximately $20 million and higher restructuring, acquisition and integration-related, and other costs of approximately $11 million, partially offset by lower inflation of approximately $112 million; productivity gains of approximately $5 million and lower legal settlements, reserves and fees of approximately $2 million.

*Global Ceramic—*Operating loss was $355.3 million for the three months ended September 30, 2023 compared to operating loss of $559.7 million for the three months ended October 1, 2022. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $263 million and productivity gains of approximately $15 million, partially offset by the unfavorable net impact of price and product mix of approximately $25 million; higher restructuring, acquisition and integration-related, and other costs of approximately $14 million; the unfavorable impact of temporary plant shutdowns of approximately $14 million; lower sales volume of approximately $12 million and the unfavorable net impact of foreign exchange rates of approximately $10 million.

*Flooring NA—*Operating loss was $167.0 million for the three months ended September 30, 2023 compared to operating income of $64.7 million for the three months ended October 1, 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $214 million; the unfavorable net impact of price and product mix of approximately $44 million; lower sales volume of approximately $21 million; lower productivity of approximately $8 million, in part due to the underutilization of plant assets; higher restructuring, acquisition and integration-related, and other costs of approximately $6 million and higher legal settlements, reserves and fees of approximately $2 million, partially offset by lower inflation of approximately $56 million and the favorable impact of fewer temporary plant shutdowns of approximately $5 million.

*Flooring ROW—*Operating loss was $159.6 million for the three months ended September 30, 2023 compared to operating income of $45.5 million for the three months ended October 1, 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $229 million; the unfavorable net impact of price and product mix of approximately $38 million; the unfavorable net impact of foreign exchange rates of approximately $10 million and lower productivity of approximately $2 million, in part due to the underutilization of plant assets, partially offset by lower inflation of approximately $54 million; the favorable impact of fewer temporary plant shutdowns of approximately $10 million and lower restructuring, acquisition and integration-related, and other costs of approximately $9 million.

Interest expense

Interest expense was $20.1 million for the three months ended September 30, 2023 compared to interest expense of $13.8 million for the three months ended October 1, 2022. The change was primarily attributable to a significant increase in interest rates, as well as increased borrowings due to the acquisitions made in 2022 and the first quarter of 2023.

Other (income) expense, net

Other income, net was $8.6 million for the three months ended September 30, 2023 compared to other income, net of $1.2 million for the three months ended October 1, 2022. The change was primarily attributable to the favorable net impact of foreign exchange rates of approximately $6 million.

Income tax expense

For the three months ended September 30, 2023, the Company recorded income tax expense of $15.0 million on a loss before income taxes of $745.3 million, for an effective tax rate of (2.0)%. For the three months ended October 1, 2022, the Company recorded income tax expense of $15.6 million on a loss before income taxes of $518.1 million, for an effective tax rate of (3.0)%. The change in the effective tax rate was primarily driven by a larger loss before income tax and an increase in the impairment of non-deductible goodwill.

Nine Months Ended September 30, 2023, as compared with Nine Months Ended October 1, 2022

Net sales

Net sales for the nine months ended September 30, 2023 were $8,522.8 million compared to net sales of $9,086.4 million for the nine months ended October 1, 2022. The change was primarily attributable to lower legacy sales volume of approximately $767 million; the unfavorable net impact of foreign exchange rates of approximately $62 million; fewer shipping days for the nine months ended September 30, 2023 of approximately $19 million and the unfavorable net impact of price and product mix of approximately $18 million, partially offset by higher sales volume attributable to acquisitions of approximately $306 million.

*Global Ceramic—*Net sales for the nine months ended September 30, 2023 were $3,306.4 million compared to net sales of $3,320.0 million for the nine months ended October 1, 2022. The change was primarily attributable to lower legacy sales volume of approximately $265 million; the unfavorable net impact of foreign exchange rates of approximately $25 million and fewer shipping days for the nine months ended September 30, 2023 of approximately $6 million, partially offset by higher sales volume attributable to acquisitions of approximately $213 million and the favorable net impact of price and product mix of approximately $70 million.

*Flooring NA—*Net sales for the nine months ended September 30, 2023 were $2,917.3 million compared to net sales of $3,261.1 million for the nine months ended October 1, 2022. The change was primarily attributable to lower legacy sales volume of approximately $301 million and the unfavorable net impact of price and product mix of approximately $108 million, partially offset by higher sales volume attributable to acquisitions of approximately $66 million.

*Flooring ROW—*Net sales for the nine months ended September 30, 2023 were $2,299.1 million compared to net sales of $2,505.3 million for the nine months ended October 1, 2022. The change was primarily attributable to lower legacy sales volume of approximately $201 million; the unfavorable net impact of foreign exchange rates of approximately $37 million and fewer shipping days for the nine months ended September 30, 2023 of approximately $13 million, partially offset by higher sales volume attributable to acquisitions of approximately $27 million and the favorable net impact of price and product mix of approximately $20 million.

Gross profit

Gross profit for the nine months ended September 30, 2023 was $2,067.4 million compared to gross profit of $2,389.0 million for the nine months ended October 1, 2022. The change was primarily attributable to lower sales volume of approximately $197 million; higher restructuring, acquisition and integration-related, and other costs of approximately $73 million; the unfavorable impact of temporary plant shutdowns of approximately $71 million; higher inflation of approximately $38 million and the unfavorable net impact of foreign exchange rates of approximately $29 million, partially offset by productivity gains of approximately $57 million and the favorable net impact of price and product mix of approximately $17 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the nine months ended September 30, 2023 were $1,646.2 million compared to $1,510.1 million for the nine months ended October 1, 2022. The change was primarily attributable to higher legal settlements, reserves and fees of approximately $47 million; higher inflation of approximately $38 million; lower sales volume of approximately $24 million; higher costs associated with investments in new product development and marketing costs of approximately $14 million; higher restructuring, acquisition and integration-related, and other costs of approximately $12 million and lower productivity of approximately $3 million, partially offset by the favorable net impact of foreign exchange rates of approximately $2 million.

Impairment of goodwill and indefinite-lived intangibles

Impairment of goodwill and indefinite-lived intangibles for the nine months ended September 30, 2023 was $876.1 million compared to impairment of goodwill and indefinite-lived intangibles of $695.8 million for the three months ended October 1, 2022. As a result of a decrease in the Company’s market capitalization, a higher WACC and macroeconomic conditions, the Company performed interim impairment tests of its goodwill and indefinite-lived intangible assets, which resulted in the impairment charges.

Operating income (loss)

Operating loss for the nine months ended September 30, 2023 was $454.9 million compared to operating income of $183.1 million for the nine months ended October 1, 2022. The change was primarily attributable to lower sales volume of approximately $221 million; higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $180 million; higher restructuring, acquisition and integration-related, and other costs of approximately $85 million; higher inflation of approximately $76 million; the unfavorable impact of temporary plant shutdowns of approximately $71 million; higher legal settlements, reserves and fees of approximately $47 million; the unfavorable net impact of foreign exchange rates of approximately $27 million and higher costs associated with investments in new product development and marketing costs of approximately $14 million, partially offset by productivity gains of approximately $54 million and the favorable net impact of price and product mix of approximately $16 million.

*Global Ceramic—*Operating loss was $208.0 million for the nine months ended September 30, 2023 compared to operating loss of $305.1 million for the nine months ended October 1, 2022. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $263 million; productivity gains of approximately $43 million and the favorable net impact of price and product mix of approximately $38 million, partially offset by higher inflation of approximately $91 million; lower sales volume of approximately $83 million; the unfavorable impact of temporary plant shutdowns of approximately $40 million and higher restructuring, acquisition and integration-related, and other costs of approximately $33 million.

*Flooring NA—*Operating loss was $131.8 million for the nine months ended September 30, 2023 compared to operating income of $260.0 million for the nine months ended October 1, 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $214 million; lower sales volume of approximately $71 million; the unfavorable net impact of price and product mix of approximately $55 million; higher restructuring, acquisition and integration-related, and other costs of approximately $31 million; the unfavorable impact of temporary plant shutdowns of approximately $21 million; higher costs associated with investments in new product development and marketing costs of approximately $15 million and higher legal settlements, reserves and fees of approximately $6 million, partially offset by lower inflation of approximately $16 million and productivity gains of approximately $2 million.

*Flooring ROW—*Operating income was $2.6 million for the nine months ended September 30, 2023 compared to operating income of $304.3 million for the nine months ended October 1, 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $229 million; lower sales volume of approximately $67 million; the unfavorable net impact of foreign exchange rates of approximately $27 million; higher restructuring, acquisition and integration-related, and other costs of approximately $21 million and the unfavorable impact of temporary plant shutdowns of approximately $10 million partially offset by the favorable net impact of price and product mix of approximately $33 million and productivity gains of approximately $10 million.

Interest expense

Interest expense was $60.1 million for the nine months ended September 30, 2023 compared to interest expense of $37.3 million for the nine months ended October 1, 2022. The change was primarily attributable to a significant increase in interest rates, as well as increased borrowings due to the acquisitions made in 2022 and the first quarter of 2023.

Other (income) expense, net

Other income, net was $6.9 million for the nine months ended September 30, 2023 compared to other income, net of $1.6 million for the nine months ended October 1, 2022. The change was primarily attributable to the reversal of an uncertain tax position recorded with the Emil acquisition of approximately $7 million during the nine months ended October 1, 2022, partially offset by the unfavorable net impact of foreign exchange rates of approximately $5 million.

Income tax expense

For the nine months ended September 30, 2023, the Company recorded income tax expense of $70.7 million on a loss before income taxes of $508.1 million, for an effective tax rate of (13.9)%. For the nine months ended October 1, 2022, the Company recorded income tax expense of $155.2 million on earnings before income taxes of $147.4 million, for an effective tax rate of 105.3%. The change in the effective tax rate was primarily driven by a shift from earnings before income taxes to a loss before income taxes and an increase in the impairment of non-deductible goodwill.

Liquidity and Capital Resources

The Company’s primary capital requirements are for working capital, capital expenditures and acquisitions. The Company’s capital needs are met primarily through a combination of internally generated funds, commercial paper, bank credit lines, term and senior notes and credit terms from suppliers.

Net cash provided by operating activities in the first nine months of 2023 was $1,032.9 million, compared to net cash provided by operating activities of $427.4 million in the first nine months of 2022. The increase of $605.5 million in 2023 was primarily attributable to the change in inventory and accounts receivable, partially offset by lower net earnings and the change in accounts payable.

Net cash used in investing activities in the first nine months of 2023 was $730.0 million compared to net cash used in investing activities of $374.4 million in the first nine months of 2022. The increase was primarily due to the increase in acquisition costs of $358.1 million and a decrease in the redemptions of short-term investments of $55.0 million (net of purchases of short-term investments), partially offset by the decrease of capital expenditures of $57.5 million.

Net cash used in financing activities in the first nine months of 2023 was $273.8 million compared to net cash used in financing activities of $3.0 million in the first nine months of 2022. The change in cash used in financing activities is primarily attributable to lower proceeds from commercial paper of $1,147.4 million (net of borrowing of commercial paper), partially offset by the proceeds from the Senior Notes of $600.0 million and lower share repurchase of $307.5 million.

As of September 30, 2023, the Company had cash of $518.5 million, substantially all of which was held in the United States. The Company plans to permanently reinvest the cash held outside the United States. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its existing credit facilities will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over at least the next twelve months. The Company continually evaluates its projected needs and may conduct additional debt financings, subject to market conditions, to increase its liquidity and to take advantage of attractive financing opportunities.

On February 10, 2022, the Company’s Board of Directors approved a new share repurchase program, authorizing the Company to repurchase up to $500 million of its common stock (the “2022 Share Repurchase Program”). As of September 30, 2023, there remained $229.2 million authorized under the 2022 Share Repurchase Program.

See Note 18, Debt, of the notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion of the Company’s long-term debt. The Company may continue, from time to time, to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amount involved may be material.

Contractual Obligations

There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 2022 Annual Report filed on Form 10-K except as described herein.

Critical Accounting Policies and Estimates

Other than the Critical Accounting Policy described below, there have been no significant changes to the Company’s critical accounting policies and estimates during the period. The Company's critical accounting policies are described in its 2022 Annual Report filed on Form 10-K.

Goodwill and other intangibles - The Company performs its annual testing of goodwill and indefinite-lived intangibles in the fourth quarter of each year. Between annual testing dates, the Company monitors factors such as its market capitalization, comparable company market multiples and macroeconomic conditions to identify conditions that could impact the Company’s assumptions utilized in the determination of the estimated fair values of the Company’s reporting units and indefinite-lived intangible assets significantly enough to trigger an impairment.

The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows under the income approach classified in Level 3 of the fair value hierarchy and comparable company market valuation classified in Level 2 of the fair value hierarchy 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 judgements and assumptions about appropriate sales growth rates, operating margins, WACC and comparable company market multiples.

As a result of a decrease in the Company’s market capitalization, macroeconomic conditions and an increase in the WACC, the Company determined that a triggering event occurred requiring goodwill impairment testing for each of its reporting units as of September 30, 2023. The impairment test indicated a pre-tax, non-cash goodwill impairment charge related to all 3 reporting units of $869,115 ($858,090 net of tax) which the Company recorded during the three months ended September 30, 2023.

The Company compared the estimated fair values of its indefinite-lived intangibles to their carrying values and determined that there were impairment charges of $6,994 ($5,181 net of tax) in all 3 reporting units during the three months ended September 30, 2023.

A significant or prolonged deterioration in economic conditions, continued increases in the costs of raw materials and energy combined with an inability to pass these costs on to customers, a further decline in the Company’s market capitalization or comparable company market multiples, projected future cash flows, or increases in the WACC, could impact the Company’s assumptions and require a reassessment of goodwill or indefinite-lived intangible assets for impairment in future periods. Future declines in estimated after tax cash flows, increases in the WACC or a decline in market capitalization could result in an additional indication of impairment in one or more of the Company’s reporting units.

Impact of Inflation

Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses. The Company expects raw material prices, many of which are petroleum-based, to fluctuate based upon worldwide supply and demand of commodities utilized in the Company’s production processes. Although the Company attempts to pass on increases in raw material, labor, energy and fuel-related costs to its customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. In the past, the Company has often been able to enhance productivity and develop new product innovations to help offset increases in costs resulting from inflation in its operations.

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements as of September 30, 2023.

Seasonality

The Company is a calendar year-end company. Global Ceramic and the Flooring NA typically have higher net sales in the second and third quarters. Flooring ROW typically has higher net sales in the second and fourth quarters. Because periods of economic downturn can affect the seasonality of each segment, sales for any one quarter are not necessarily indicative of the sales that may be achieved for any other quarter or for the full year.

As of September 30, 2023, approximately 65% of the Company’s debt portfolio was comprised of fixed-rate debt and 35% was floating-rate debt. A 1.0 percentage point increase in the interest rate of the floating-rate debt would have resulted in an increase in interest expense of $2.3 million and $6.8 million for the three and nine months ended September 30, 2023.

There have been no significant changes to the Company’s exposure to market risk as disclosed in the Company’s 2022 Annual Report filed on Form 10-K.

Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), which have been designed to provide reasonable assurance that such controls and procedures will meet their objectives, as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective at a reasonable assurance level for the period covered by this report.

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in the Company’s risk factors from those disclosed in Part I, Item 1A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The risk factors disclosed in these reports, in addition to the other information set forth in this report, could materially affect the Company's business, financial condition or results.

Forward-Looking Information

Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies, and similar matters, and those that include the words “could,” “should,” “believes,” “anticipates,” “expects” and “estimates” or similar expressions constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in economic or industry conditions; competition; inflation and deflation in raw material prices, freight and other input costs; inflation and deflation in consumer markets; currency fluctuations; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company’s products; impairment charges; integration of acquisitions; international operations; introduction of new products; rationalization of operations; tax and tax reform, product and other claims; litigation; Russian military actions in Ukraine or other geopolitical events; the risks and uncertainty related to the COVID-19 pandemic; regulatory and political changes in the jurisdictions in which the Company does business; and other risks identified in Mohawk’s SEC reports and public announcements.