Mohawk Industries Inc: Form 10-Q for the period ended Jun 29, 2024

Overview

During the past three decades, the Company has grown significantly through a combination of organic growth and acquisitions. Its current geographic breadth and diverse product offering are reflected in three reporting segments: Global Ceramic, Flooring NA and 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 and Latin America through various selling channels, which include home centers, Company-owned service centers and stores, floor covering retailers, ceramic tile specialists, e-commerce retailers, residential builders, independent distributors, commercial contractors and commercial end users. Flooring NA designs, manufactures, sources and markets its floor covering products, including broadloom carpet, carpet tile, carpet cushion, rugs, laminate, vinyl products, including 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, home centers, mass merchandisers, department stores, shop at home, buying groups, residential builders, independent distributors, commercial contractors and commercial end users. Flooring ROW designs, manufactures, sources, licenses and markets laminate, vinyl products, including LVT and sheet vinyl, wood flooring, broadloom carpet, carpet tiles, roofing panels, insulation boards, MDF and chipboards, and decorative panels, which it distributes primarily in Europe and Australasia through various channels, including independent floor covering retailers, wholesalers, home centers, Company-operated distributors, independent distributors, residential builders, 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 in the United States and abroad. As a result of ongoing Russian military actions in Ukraine, the Company has experienced and may continue to experience supply chain disruption of raw materials sourced from Ukraine, as well as other materials and spare parts needed in the Company’s operations if alternative sources identified in other countries cannot fulfill these needs. The Company may also continue to be impacted by global increases in the cost of natural gas, oil and oil-based raw materials and chemicals. In addition, 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. 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. In addition, a prolonged and more expansive conflict in the Middle East 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.

Elevated interest rates, delayed consumer discretionary spending due to inflationary pressures, and other macroeconomic factors continue to impact new home construction and residential renovation and remodeling activity. Residential remodeling is the primary sales driver of flooring products, and most flooring is replaced before a home is listed for sale or just after a home purchase is completed. The current housing market conditions have suppressed remodeling activity as home sales remain soft. Housing turnover rates remain suppressed due to elevated home mortgage rates and the "locked-in" effect on homeowners, and consumers continue to face a higher cost of living and postpone large purchases of durable goods such as flooring. The Company has, to some extent, offset the impact of a soft housing market and decreased renovation activity through cost containment, productivity and lower input costs. Due to low housing availability, aging stock and greater household formation, the Company believes demand in its markets will accelerate when interest rates decline. In addition, declining costs in energy and raw materials, coupled with lower industry volumes, have continued to exert pressure on selling prices, although energy prices in certain geographies and materials prices in some product categories remain volatile and may change significantly and unpredictably. During 2022 and 2023, the Company implemented a number of restructuring actions, productivity initiatives and manufacturing enhancements focused on reducing costs to enhance future performance, including certain facility, asset and product rationalizations and workforce reductions. The Company anticipates these projects will deliver annual savings of approximately $150 million, with an estimated cost of approximately $215 million. In 2024, the Company announced further restructuring actions to take advantage of additional opportunities related to the activities described above. The Company anticipates these projects will deliver further annual savings of approximately $100 million, of which approximately $20-$25 million will be recognized during 2024. The cash cost of these actions is approximately $40 million, with a total cost of approximately $130 million. Execution timelines will vary by project, with some savings extending into 2026.

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 2023 Annual Report filed on Form 10-K.

In 2024, the Company plans to invest approximately $480 million focused on completing capacity expansion projects and targeted initiatives that will drive cost reduction while improving operational performance.

For the three months ended June 29, 2024, the net earnings attributable to the Company were $157.4 million compared to the net earnings attributable to the Company of $101.2 million for the three months ended July 1, 2023. The change was primarily attributable to lower inflation; productivity gains and lower legal settlements, reserves and fees, partially offset by the unfavorable net impact of price and product mix; higher taxes due to increased earnings for the three months ended June 29, 2024 and the unfavorable net impact of foreign exchange rates.

For the six months ended June 29, 2024, the net earnings attributable to the Company were $262.4 million compared to the net earnings attributable to the Company of $181.4 million for the six months ended July 1, 2023. The change was primarily attributable to lower inflation; productivity gains; lower legal settlements, reserves and fees and lower restructuring, acquisition and integration-related, and other costs, partially offset by the unfavorable net impact of price and product mix and the unfavorable net impact of foreign exchange rates.

The Company believes that a number of circumstances may influence trends in 2024, including high interest rates, 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 six months ended June 29, 2024, the Company generated $417.3 million of cash from operating activities. As of June 29, 2024, the Company had cash and cash equivalents of $497.4 million, of which $283.5 million was in the United States and $213.9 million was in foreign countries.

Results of Operations

Quarter Ended June 29, 2024, as compared with Quarter Ended July 1, 2023

Net sales

Net sales for the three months ended June 29, 2024 were $2,801.3 million compared to net sales of $2,950.5 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $128 million and the unfavorable net impact of foreign exchange rates of approximately $25 million.

*Global Ceramic—*Net sales for the three months ended June 29, 2024 were $1,115.6 million compared to net sales of $1,155.4 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $23 million and the unfavorable net impact of foreign exchange rates of approximately $15 million.

*Flooring NA—*Net sales for the three months ended June 29, 2024 were $958.5 million compared to net sales of $1,001.7 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $49 million.

*Flooring ROW—*Net sales for the three months ended June 29, 2024 were $727.2 million compared to net sales of $793.4 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $56 million and the unfavorable net impact of foreign exchange rates of approximately $10 million.

Gross profit

Gross profit for the three months ended June 29, 2024 was $723.8 million compared to gross profit of $732.0 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix and the unfavorable net impact of foreign exchange rates, partially offset by lower input costs and productivity gains. Gross profit did not significantly change as a percentage of net sales for the three months ended June 29, 2024 compared to the three months ended July 1, 2023.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 29, 2024 were $509.8 million compared to $578.9 million for the three months ended July 1, 2023. The change was primarily attributable to lower legal settlements, reserves and fees. Selling, general and administrative expenses did not significantly change as a percentage of net sales for the three months ended June 29, 2024 compared to the three months ended July 1, 2023.

Operating income

Operating income for the three months ended June 29, 2024 was $214.0 million compared to operating income of $153.1 million for the three months ended July 1, 2023. The change was primarily attributable to lower input costs of approximately $83 million, productivity gains of approximately $49 million and lower legal settlements, reserves and fees of approximately $47 million, partially offset by the unfavorable net impact of price and product mix of approximately $111 million and the unfavorable net impact of foreign exchange rates of approximately $11 million.

*Global Ceramic—*Operating income was $83.1 million for the three months ended June 29, 2024 compared to operating income of $84.0 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $25 million and the unfavorable net impact of foreign exchange rates of approximately $10 million, partially offset by lower input costs of approximately $17 million and productivity gains of approximately $14 million.

*Flooring NA—*Operating income was $78.3 million for the three months ended June 29, 2024 compared to operating income of $37.2 million for the three months ended July 1, 2023. The change was primarily attributable to lower input costs of approximately $36 million, productivity gains of approximately $19 million and lower restructuring, acquisition and integration-related, and other costs of approximately $15 million, partially offset by the unfavorable net impact of price and product mix of approximately $36 million.

*Flooring ROW—*Operating income was $65.6 million for the three months ended June 29, 2024 compared to operating income of $87.0 million for the three months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $50 million and higher restructuring, acquisition and integration-related, and other costs of approximately $16 million, partially offset by lower input costs of approximately $30 million and productivity gains of approximately $15 million.

Interest Expense

Interest expense was $12.6 million for the three months ended June 29, 2024 compared to interest expense of $22.9 million for the three months ended July 1, 2023. The change was primarily attributable to strong cash flow and the resulting lower debt level.

Other Income and Expense

Other expense, net was $1.6 million for the three months ended June 29, 2024 compared to of $2.2 million for the three months ended July 1, 2023. Other expense, net did not significantly change for the three months ended June 29, 2024 from the three months ended July 1, 2023.

Income Tax Expense

For the three months ended June 29, 2024, the Company recorded income tax expense of $42.3 million on a earnings before income taxes of $199.8 million, for an effective tax rate of 21.2%. For the three months ended July 1, 2023, the Company recorded income tax expense of $26.8 million on earnings before income taxes of $128.0 million, for an effective tax rate of 20.9%. The increase in the effective tax rate was primarily driven by higher earnings before taxes and the Company’s geographic dispersion of profits and losses for the respective periods, partially offset by a larger increase in unrecognized tax benefits during the three months ended July 1, 2023.

Six Months Ended June 29, 2024, as compared with Six Months Ended July 1, 2023

Net sales

Net sales for the six months ended June 29, 2024 were $5,480.7 million compared to net sales of $5,756.7 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $300 million and the unfavorable net impact of foreign exchange rates of approximately $29 million, partially offset by higher sales volume attributable to acquisitions of approximately $48 million and higher legacy sales volume of approximately $19 million.

*Global Ceramic—*Net sales for the six months ended June 29, 2024 were $2,160.4 million compared to net sales of $2,214.7 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $66 million, the unfavorable net impact of foreign exchange rates of approximately $18 million and lower legacy sales volume of approximately $17 million, partially offset by higher sales volume attributable to acquisitions of approximately $48 million.

*Flooring NA—*Net sales for the six months ended June 29, 2024 were $1,858.7 million compared to net sales of $1,955.1 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $72 million and lower legacy sales volume of approximately $25 million.

*Flooring ROW—*Net sales for the six months ended June 29, 2024 were $1,461.6 million compared to net sales of $1,586.9 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $163 million and the unfavorable net impact of foreign exchange rates of approximately $11 million, partially offset by higher legacy sales volume of approximately $60 million.

Gross profit

Gross profit for the six months ended June 29, 2024 was $1,373.3 million compared to gross profit of $1,375.4 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix and the unfavorable net impact of foreign exchange rates, partially offset by lower input costs and productivity gains. Gross profit did not significantly change as a percentage of net sales for the six months ended June 29, 2024 compared to the six months ended July 1, 2023.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 29, 2024 were $1,012.7 million compared to $1,096.6 million for the six months ended July 1, 2023. The change was primarily attributable to lower legal settlements, reserves and fees. Selling, general and administrative expenses did not significantly change as a percentage of net sales for the six months ended June 29, 2024 compared to the six months ended July 1, 2023.

Operating income

Operating income for the six months ended June 29, 2024 was $360.6 million compared to operating income of $278.8 million for the six months ended July 1, 2023. The change was primarily attributable to lower input costs of approximately $219 million; productivity gains of approximately $96 million, lower legal settlements, reserves and fees of approximately $39 million and lower restructuring, acquisition and integration-related, and other costs of approximately $29 million, partially offset by the unfavorable net impact of price and product mix of approximately $264 million and the unfavorable net impact of foreign exchange rates of approximately $23 million.

*Global Ceramic—*Operating income was $131.9 million for the six months ended June 29, 2024 compared to operating income of $147.3 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $65 million and the unfavorable net impact of foreign exchange rates of approximately $21 million, partially offset by lower input costs of approximately $50 million and productivity gains of approximately $28 million.

*Flooring NA—*Operating income was $123.3 million for the six months ended June 29, 2024 compared to operating income of $35.2 million for the six months ended July 1, 2023. The change was primarily attributable to lower input costs of approximately $92 million, productivity gains of approximately $42 million and lower restructuring, acquisition and integration-related, and other costs of approximately $21 million, partially offset by the unfavorable net impact of price and product mix of approximately $56 million.

*Flooring ROW—*Operating income was $136.5 million for the six months ended June 29, 2024 compared to operating income of $162.2 million for the six months ended July 1, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $143 million, partially offset by lower input costs of approximately $78 million and productivity gains of approximately $25 million.

Interest expense

Interest expense was $27.5 million for the six months ended June 29, 2024 compared to interest expense of $40.0 million for the six months ended July 1, 2023. The change was primarily attributable to strong cash flow and the resulting lower debt level.

Other Income and Expense

Other expense, net was $0.5 million for the six months ended June 29, 2024 compared to other expense, net of $1.6 million for the six months ended July 1, 2023. Other expense, net did not significantly change for the six months ended June 29, 2024 from the three months ended July 1, 2023.

Income tax expense

For the six months ended June 29, 2024, the Company recorded income tax expense of $70.1 million on earnings before income taxes of $332.6 million, for an effective tax rate of 21.1%. For the six months ended July 1, 2023, the Company recorded income tax expense of $55.7 million on earnings before income taxes of $237.2 million, for an effective tax rate of 23.5%. The change in the effective tax rate was primarily driven by a larger increase in unrecognized tax benefits and the write-off of an income tax receivable no longer expected during the six months ended July 1, 2023, partially offset by the Company’s geographic dispersion of profits and losses for the respective periods.

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 six months of 2024 was $417.3 million, compared to net cash provided by operating activities of $520.9 million in the first six months of 2023. The change was primarily attributable to the change in inventory and accounts receivable, partially offset by the change in accounts payable and higher net earnings.

Net cash used in investing activities in the first six months of 2024 was $178.2 million compared to net cash used in investing activities of $602.6 million in the first six months of 2023. The change was primarily attributable to the decrease in acquisition costs of $515.4 million and the decrease in capital expenditures of $67.0 million, partially offset by the decrease in the redemptions of short-term investments of $158.0 million (net of purchases of short-term investments)

Net cash used in financing activities in the first six months of 2024 was $381.5 million compared to net cash provided by financing activities of $156.3 million in the first six months of 2023. The change was primarily attributable to higher payments of term loan facility of $912.3 million, higher share repurchase of $87.8 million and lower proceeds from Senior Credit Facility of $66.4 million (net of payments), partially offset by the higher proceeds from commercial paper of $517.0 million (net of borrowing).

As of June 29, 2024, the Company had cash of $497.4 million, of which $283.5 million was in the United States and $213.9 million was in foreign countries. 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 June 29, 2024, there remained $141.4 million authorized under the 2022 Share Repurchase Program.

See Note 17, 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 2023 Annual Report filed on Form 10-K except as described herein.

Critical Accounting Policies and Estimates

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 2023 Annual Report filed on Form 10-K.

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 June 29, 2024.

Seasonality

The Company is a calendar year-end company. Global Ceramic and 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 June 29, 2024, approximately 71% of the Company’s debt portfolio was comprised of fixed-rate debt and 29% 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 $1.7 million and $3.5 million for the three and six months ended June 29, 2024.

There have been no significant changes to the Company’s exposure to market risk as disclosed in the Company’s 2023 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, 2023. 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 Statements

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; identification and consummation of acquisitions on favorable terms, if at all; integration of acquisitions; international operations; introduction of new products; rationalization of operations; tax and tax reform, product and other claims; litigation; geopolitical conflicts; 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.