Mohawk Industries Inc: Form 10-Q for the period ended Sep 28, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this report, as well as our audited consolidated financial statements for the year ended December 31, 2023, which are included in our Annual Report on Form 10-K for the year ended December 31, 2023.

References to “Mohawk,” “the Company,” “we,” “our” and “us” refer to Mohawk Industries, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires.

Overview

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.

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, including additional facility, assets and product rationalizations and workforce reductions to further reduce costs and prepare the business for the future. The Company anticipates these projects will deliver annual savings of approximately $115 million, with an estimated cost of approximately $130 million. Execution timelines will vary by project, with some savings extending into 2026.

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. Currently, consumers are delaying their discretionary spending habits due to inflationary pressures and other macroeconomic factors, and this trend continues to impact new home construction and residential renovation and remodeling activity. While the U.S. federal funds rate decreased in September 2024 for the first time since March 2020, 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.

Due to its global footprint, Mohawk’s business is sensitive to geopolitical conflict, including the Russia-Ukraine conflict and conflicts in the Middle East. Since the first quarter of 2022, the Company has suspended new investments in Russia in response to ongoing Russian military actions in Ukraine, and 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. Increased restrictions on global trade could result in, among other things, increased volatility in foreign exchange rates and financial markets, supply chain disruptions, and decreased consumer discretionary spending, any of which may adversely affect the Company’s business and supply chain. While the Company has had success sourcing alternate suppliers of raw materials to counteract supply chain disruptions, the Company may be negatively impacted by additional supply chain disruption in the future caused by further escalation of geopolitical conflict. In addition, the Company may be impacted by global increases in the cost of natural gas, oil and oil-based raw materials and chemicals. The broader consequences of current ongoing military conflicts, 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 impact on the Company’s business and results of operations, as well as the global economy, cannot be predicted.

The Company believes that a number of circumstances may influence trends in 2024, including interest rates, escalation of geopolitical conflict and decreased availability of material due to disruptions in the global supply chain, but the extent and duration of such impacts cannot be predicted.

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 $450 million focused on completing capacity expansion projects and targeted initiatives that will drive cost reduction while improving operational performance.

For the three months ended September 28, 2024, the net earnings attributable to the Company were $162.0 million compared to the net loss attributable to the Company of $760.4 million for the three months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles; productivity gains; lower legal settlements, reserves and fees; lower restructuring, acquisition and integration-related, and other costs and lower input costs, partially offset by the unfavorable net impact of price and product mix.

For the nine months ended September 28, 2024, the net earnings attributable to the Company were $424.5 million compared to the net loss attributable to the Company of $579.0 million for the nine months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles; lower input costs; 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.

For the nine months ended September 28, 2024, the Company generated $736.9 million of cash from operating activities. As of September 28, 2024, the Company had cash and cash equivalents of $424.0 million, of which $245.6 million was in the United States and $178.4 million was in foreign countries.

Results of Operations

Quarter Ended September 28, 2024, as compared with Quarter Ended September 30, 2023

Net sales

Net sales for the three months ended September 28, 2024 were $2,719.0 million compared to net sales of $2,766.1 million for the three months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $56 million, partially offset by more shipping days for the quarter ended September 28, 2024 of approximately $14 million.

*Global Ceramic—*Net sales for the three months ended September 28, 2024 were $1,058.0 million compared to net sales of $1,091.7 million for the three months ended September 30, 2023. The change was primarily attributable to lower sales volume of approximately $18 million and the unfavorable net impact of foreign exchange rates of approximately $13 million.

*Flooring NA—*Net sales for the three months ended September 28, 2024 were $974.0 million compared to net sales of $962.2 million for the three months ended September 30, 2023. The change was primarily attributable to higher sales volume of approximately $39 million, partially offset by the unfavorable net impact of price and product mix of approximately $27 million.

*Flooring ROW—*Net sales for the three months ended September 28, 2024 were $687.0 million compared to net sales of $712.2 million for the three months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $26 million and lower sales volume of approximately $19 million, partially offset by more shipping days for the quarter ended September 28, 2024 of approximately $11 million and the favorable net impact of foreign exchange rates of approximately $9 million.

Gross profit

Gross profit for the three months ended September 28, 2024 was $692.6 million compared to gross profit of $692.0 million for the three months ended September 30, 2023. The change was primarily attributable to productivity gains of approximately $33 million; lower input costs of approximately $25 million and lower restructuring, acquisition and integration-related, and other costs of approximately $24 million, partially offset by the unfavorable net impact of price and product mix of approximately $69 million. Gross profit did not significantly change as a percentage of net sales for the three months ended September 28, 2024 compared to the three month ended September 30, 2023.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended September 28, 2024 were $480.3 million compared to $549.6 million for the three months ended September 30, 2023. The change was primarily attributable to lower legal settlements, reserves and fees of $43 million.

Impairment of goodwill and indefinite-lived intangibles

Impairment of goodwill and indefinite-lived intangibles for the three months ended September 28, 2024 was zero compared to impairment of goodwill and indefinite-lived intangibles of $876.1 million for the three months ended September 30, 2023. During the third quarter of 2023, due to the impact of a higher WACC, macroeconomic conditions, and the reduction in the Company's market capitalization, the Company performed interim impairment tests of its goodwill and indefinite-lived intangible assets, which resulted in impairment charges of $876.1 million. If, in the future, the Company's market capitalization and/or the estimated fair value of the Company's reporting units were to decline further, it may be necessary to record additional impairment charges.

Operating income (loss)

Operating income for the three months ended September 28, 2024 was $212.3 million compared to operating loss of $733.7 million for the three months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $876 million; productivity gains of approximately $44 million; lower legal settlements, reserves and fees of approximately $43 million; lower restructuring, acquisition and integration-related, and other costs of approximately $20 million and lower input costs of approximately $15 million, partially offset by the unfavorable net impact of price and product mix of approximately $70 million.

*Global Ceramic—*Operating income was $83.4 million for the three months ended September 28, 2024 compared to operating loss of $355.2 million for the three months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $425 million; productivity gains of approximately $22 million and lower restructuring, acquisition and integration-related, and other costs of approximately $10 million, partially offset by the unfavorable net impact of price and product mix of approximately $15 million.

*Flooring NA—*Operating income was $73.0 million for the three months ended September 28, 2024 compared to operating loss of $167.0 million for the three months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $216 million; productivity gains of approximately $14 million; lower input costs of approximately $12 million; lower restructuring, acquisition and integration-related, and other costs of approximately $11 million and higher sales volume of approximately $11 million, partially offset by the unfavorable net impact of price and product mix of approximately $28 million.

*Flooring ROW—*Operating income was $67.8 million for the three months ended September 28, 2024 compared to operating loss of $159.6 million for the three months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $235 million, partially offset by the unfavorable net impact of price and product mix of approximately $27 million.

Interest expense

Interest expense was $11.2 million for the three months ended September 28, 2024 compared to interest expense of $20.1 million for the three months ended September 30, 2023. The change was primarily attributable to strong cash flow and the resulting lower debt level.

Other income and expense, net

Other income and expense, net was income of $0.7 million for the three months ended September 28, 2024 compared to other income of $8.5 million for the three months ended September 30, 2023. Other income and expense, net did not significantly change for the three months ended September 28, 2024 from the three months ended September 30, 2023.

Income tax expense

For the three months ended September 28, 2024, the Company recorded income tax expense of $39.8 million on earnings before income taxes of $201.8 million, for an effective tax rate of 19.7%. For the three months ended September 30, 2023, the Company recorded income tax expense of $15.0 million on loss before income taxes of $745.3 million, for an effective tax rate of (2.0)%. The increase in the effective tax rate was primarily driven by a shift from losses before income taxes to earnings before income taxes and the impairment of non-deductible goodwill during the three months ended September 30, 2023.

Nine Months Ended September 28, 2024, as compared with Nine Months Ended September 30, 2023

Net sales

Net sales for the nine months ended September 28, 2024 were $8,199.7 million compared to net sales of $8,522.8 million for the nine months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $357 million and the unfavorable net impact of foreign exchange rates of approximately $34 million, partially offset by higher sales volume attributable to acquisitions of approximately $48 million and higher legacy sales volume of approximately $20 million.

*Global Ceramic—*Net sales for the nine months ended September 28, 2024 were $3,218.4 million compared to net sales of $3,306.4 million for the nine months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $69 million; lower legacy sales volume of approximately $35 million and the unfavorable net impact of foreign exchange rates of approximately $32 million, partially offset by higher sales volume attributable to acquisitions of approximately $48 million.

*Flooring NA—*Net sales for the nine months ended September 28, 2024 were $2,832.7 million compared to net sales of $2,917.3 million for the nine months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $99 million.

*Flooring ROW—*Net sales for the nine months ended September 28, 2024 were $2,148.6 million compared to net sales of $2,299.1 million for the nine months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $189 million, partially offset by higher sales volume of approximately $41 million.

Gross profit

Gross profit for the nine months ended September 28, 2024 was $2,065.9 million compared to gross profit of $2,067.4 million for the nine months ended September 30, 2023. The change was primarily attributable to the unfavorable net impact of price and product mix of approximately $332 million, partially offset by lower input costs of approximately $266 million and productivity gains of approximately $117 million. Gross profit did not significantly change as a percentage of net sales for the nine months ended September 28, 2024 compared to the nine month ended September 30, 2023.

Selling, general and administrative expenses

Selling, general and administrative expenses for the nine months ended September 28, 2024 were $1,493.0 million compared to $1,646.2 million for the nine months ended September 30, 2023. The change was primarily attributable to lower legal settlements, reserves and fees of $82 million.

Impairment of goodwill and indefinite-lived intangibles

Impairment of goodwill and indefinite-lived intangibles for the nine months ended September 28, 2024 was zero compared to impairment of goodwill and indefinite-lived intangibles of $876.1 million for the nine months ended September 30, 2023. During the nine months ended September 30, 2023, due to the impact of a higher WACC, macroeconomic conditions, and the reduction in the Company's market capitalization, the Company performed interim impairment tests of its goodwill and indefinite-lived intangible assets, which resulted in impairment charges of $876.1 million. If, in the future, the Company's market capitalization and/ or the estimated fair value of the Company's reporting units were to decline further, it may be necessary to record additional impairment charges.

Operating income (loss)

Operating income for the nine months ended September 28, 2024 was $572.9 million compared to operating loss of $454.9 million for the nine months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $876 million; lower input costs of approximately $234 million; productivity gains of approximately $139 million; lower legal settlements, reserves and fees of approximately $82 million and lower restructuring, acquisition and integration-related, and other costs of approximately $49 million, partially offset by the unfavorable net impact of price and product mix of approximately $334 million.

*Global Ceramic—*Operating income was $215.3 million for the nine months ended September 28, 2024 compared to operating loss of $207.9 million for the nine months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $425 million; productivity gains of approximately $50 million and lower input costs of approximately $50 million, partially offset by the unfavorable net impact of price and product mix of approximately $80 million.

*Flooring NA—*Operating income was $196.3 million for the nine months ended September 28, 2024 compared to operating loss of $131.8 million for the nine months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $216 million; lower input costs of approximately $104 million; productivity gains of approximately $56 million and lower restructuring, acquisition and integration-related, and other costs of approximately $32 million, partially offset by the unfavorable net impact of price and product mix of approximately $84 million.

*Flooring ROW—*Operating income was $204.3 million for the nine months ended September 28, 2024 compared to operating income of $2.6 million for the nine months ended September 30, 2023. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $235 million; lower input costs of approximately $84 million and productivity gains of approximately $32 million, partially offset by the unfavorable net impact of price and product mix of approximately $170 million.

Interest expense

Interest expense was $38.6 million for the nine months ended September 28, 2024 compared to interest expense of $60.1 million for the nine months ended September 30, 2023. The change was primarily attributable to strong cash flow and the resulting lower debt level.

Other income and expense, net

Other income and expense, net was income of $0.2 million for the nine months ended September 28, 2024 compared to other income of $6.9 million for the nine months ended September 30, 2023. Other income and expense, net did not significantly change for the nine months ended September 28, 2024 from the nine months ended September 30, 2023.

Income tax expense

For the nine months ended September 28, 2024, the Company recorded income tax expense of $109.9 million on earnings before income taxes of $534.5 million, for an effective tax rate of 20.6%. For the nine months ended September 30, 2023, the Company recorded income tax expense of $70.7 million on loss before income taxes of $508.1 million, for an effective tax rate of (13.9)%. The change in the effective tax rate was primarily driven by a shift from losses before income taxes to earnings before income taxes and the impairment of non-deductible goodwill during the nine months ended September 30, 2023.

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 2024 was $736.9 million, compared to net cash provided by operating activities of $1,032.9 million in the first nine months of 2023. The change was primarily attributable to cash used for inventory and accounts receivable, partially offset by cash provided by higher net earnings and the change in accounts payable.

Net cash used in investing activities in the first nine months of 2024 was $293.6 million compared to net cash used in investing activities of $730.0 million in the first nine 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 $79.0 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 nine months of 2024 was $651.6 million compared to net cash used in financing activities of $273.8 million in the first nine months of 2023. The change was primarily attributable to higher payments of term loan facility of $912.3 million, lower proceeds from Senior Notes of $600.0 million, higher share repurchase of $87.9 million and lower proceeds from Senior Credit Facility of $35.9 million (net of payments), partially offset by the higher proceeds from commercial paper of $1,239.3 million (net of payments).

As of September 28, 2024, the Company had cash of $424.0 million, of which $245.6 million was in the United States and $178.4 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 September 28, 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 September 28, 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 September 28, 2024, approximately 80% of the Company’s debt portfolio was comprised of fixed-rate debt and 20% 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 $1.1 million and $3.3 million for the three and nine months ended September 28, 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.