Overview
During the past two decades, the Company has grown significantly. Its current
geographic breadth and diverse product offering are reflected in three reporting
segments: Global Ceramic; Flooring NA; and Flooring ROW. The Global Ceramic
Segment 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
America
include company-owned stores, independent distributors and home centers. The
Flooring NA Segment designs, manufactures, sources and markets its floor
covering products, including broadloom carpet, carpet tile, carpet cushion,
rugs, laminate, resilient, 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.
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, commercial
contractors and commercial end users. The Flooring ROW Segment designs,
manufactures, sources, licenses and markets laminate, resilient, including LVT
and sheet vinyl, wood flooring, roofing panels, insulation boards,
medium-density fiberboard (“MDF”) and chipboards, which it distributes primarily
in
independent floor covering retailers, independent distributors, company-owned
distributors, home centers, 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
Additionally, the Company maintains operations in the
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
events in
in
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 and intentional
disruption of natural gas supply to
and countries in which the Company operates; potential supply chain disruption
of raw materials sourced from
parts needed in the Company’s operations; global increases in the cost of
natural gas, oil and oil-based raw materials and chemicals; 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, the current
environment has placed demands on the Company’s operations as the COVID-19
pandemic has at times caused disruptions in some of the Company’s markets and
operations. The Company anticipates that new variants of the virus could have an
impact on its markets and operations in ways that are difficult to predict due
to the inconsistent effect the variants have had in different regions.
During the past year, rapid cost escalations in materials, energy,
transportation and labor have impacted the Company’s profitability across all
segments. Mohawk has, to some extent, offset the impact of inflationary
pressures through multiple pricing actions across product categories and
geographies; improved mix from sales of higher-value, differentiated products;
and productivity gains in manufacturing and logistics. Given the volatility of
energy prices in some geographies and material prices in some product
categories, these external pressures may change significantly and unpredictably,
which could have an adverse impact on the Company’s results. Similarly,
inflationary pressures around the globe may impact consumer and commercial
investments in flooring and other large, deferrable purchases. During the
quarter, the Company took actions to enhance future performance including
facility and product rationalizations and workforce reductions. We anticipate
these global actions will deliver annual savings of approximately
million
In 2022, the Company intends to invest approximately
existing projects and commence new initiatives. The Company plans to invest in
previously initiated expansion projects, cost reduction initiatives and upgrades
for recent acquisitions as well as maintenance across the businesses. The main
investment areas include the Company’s LVT portfolio to upgrade its product
offering and improve profitability; premium water-proof laminate in
America
slab expansion in
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purchase the Vitromex ceramic tile business from Grupo Industrial Saltillo for
approximately
manufacturing facilities strategically located throughout
transaction is expected to close in the first quarter of 2023 subject to
customary government approvals and closing conditions.
For the three months ended
was
attributable to the Company of
(“EPS”) of
was primarily attributable to the impairment charge to reduce the carrying
amount of goodwill and indefinite-lived intangibles, higher inflation, increased
short-term manufacturing disruptions, lower sales volume, charges related to
legal settlements and reserves, higher restructuring, acquisition and
integration-related, and other costs and higher costs associated with
investments in new product development and marketing costs, partially offset by
the favorable net impact of price and product mix, productivity gains and the
favorable net impact from foreign exchange rates. The Company believes that a
number of circumstances may impact trends in 2022, including Russian military
actions in
material availability due to disruptions in the global supply chain and
inflation, but the extent and duration of such impacts cannot be predicted.
For the nine months ended
was
attributable to the Company of
nine months ended
to higher inflation, the impairment charge to reduce the carrying amount of
goodwill and indefinite-lived intangibles, lower sales volume, increased
short-term manufacturing disruptions, charges related to legal settlements and
reserves, higher restructuring, acquisition and integration-related, and other
costs, the unfavorable net impact from foreign exchange rates, higher costs
associated with investments in new product development and marketing costs and
increased startup costs, partially offset by the favorable net impact of price
and product mix and productivity gains. The Company believes that a number of
circumstances may impact trends in 2022, including Russian military actions in
availability due to disruptions in the global supply chain and inflation, but
the extent and duration of such impacts cannot be predicted.
For the nine months ended
of cash from operating activities. As of
and cash equivalents of
United States
33 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Quarter Ended
Net sales
Net sales for the three months ended
reflecting an increase of
reported for the three months ended
attributable to the favorable net impact of price and product mix of
approximately
approximately
rates of approximately
shipping day in
million
Global Ceramic Segment-Net sales increased
million
for the three months ended
attributable to the favorable net impact of price and product mix of
approximately
approximately
rates of approximately
shipping day in
Flooring NA Segment-Net sales increased
million
for the three months ended
attributable to the favorable net impact of price and product mix of
approximately
approximately
Flooring ROW Segment-Net sales decreased
million
for the three months ended
attributable to the unfavorable net impact from foreign exchange rates of
approximately
the unfavorable impact from one less shipping day in
of 2022 of approximately
impact of price and product mix of approximately
Gross profit
Gross profit for the three months ended
(24.5% of net sales), a decrease of
profit of
points. The decrease in gross profit dollars was primarily attributable to
higher inflation of approximately
manufacturing disruptions of approximately
approximately
integration-related, and other costs of approximately
unfavorable net impact from foreign exchange rates of approximately
partially offset by the favorable net impact of price and product mix of
approximately
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
million
ended
administrative expenses increased 100 basis points. The increase in selling,
general and administrative expenses in dollars was primarily attributable to
million
approximately
of approximately
integration-related, and other costs of approximately
costs associated with investments in new product development and marketing costs
of approximately
foreign exchange rates of approximately
approximately
Impairment of goodwill and indefinite-lived intangibles
During the third quarter of 2022, 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
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.
34 -------------------------------------------------------------------------------- Table of Contents Operating (loss) income
Operating loss for the three months ended
((17.3)% of net sales), reflecting a decrease of
compared to operating income of
three months ended
primarily attributable to the impairment charge to reduce the carrying amount of
goodwill and indefinite-lived intangibles of approximately
inflation of approximately
disruptions of approximately
restructuring, acquisition and integration-related, and other costs of
approximately
product development and marketing costs of approximately
offset by the favorable net impact of price and product mix of approximately
net impact from foreign exchange rates of approximately
Global Ceramic Segment-Operating loss was
sales) for the three months ended
net sales) for the three months ended
income was primarily attributable to the impairment charge to reduce the
carrying amount of goodwill of approximately
approximately
higher costs associated with investments in new product development and
marketing costs of approximately
and integration-related, and other costs of approximately
increased short-term manufacturing disruptions of approximately
partially offset by the favorable net impact of price and product mix of
approximately
the favorable net impact from foreign exchange rates of approximately
million
Flooring NA Segment-Operating income was
sales) for the three months ended
net sales) for the three months ended
income was primarily attributable to higher inflation of approximately
million
million
costs of approximately
million
indefinite-lived intangibles of approximately
the favorable net impact of price and product mix of approximately
and productivity gains of approximately
Flooring ROW Segment-Operating income was
sales) for the three months ended
net sales) for the three months ended
income was primarily attributable to higher inflation of approximately
million
million
acquisition and integration-related, and other costs of approximately
million
intangibles of approximately
approximately
and product mix of approximately
Interest expense
Interest expense was
reflecting a decrease of
million
expense was primarily due to the Company’s redemption of the 2.00% Senior Notes
on
offset by the increase in commercial paper borrowings.
Other (income) expense, net
Other income, net was
reflecting a favorable change of
primarily attributable to the favorable net impact of other miscellaneous items
of approximately
foreign exchange rates of approximately
35 -------------------------------------------------------------------------------- Table of Contents Income tax expense
For the three months ended
expense of
effective tax rate of (3.0)%, as compared to an income tax expense of
million
rate of 21.4% for the three months ended
effective tax rates for the comparative periods was primarily impacted by the
impairment of non-deductible goodwill and lower earnings in the three months
ended
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Nine Months Ended
2021
Net sales
Net sales for the nine months ended
reflecting an increase of
reported for the nine months ended
attributable to the favorable net impact of price and product mix of
approximately
from foreign exchange rates of approximately
approximately
for the nine months ended
Global Ceramic Segment-Net sales increased
million
for the nine months ended
attributable to the favorable net impact of price and product mix of
approximately
foreign exchange rates of approximately
approximately
for the nine months ended
Flooring NA Segment-Net sales increased
million
for the nine months ended
attributable to the favorable net impact of price and product mix of
approximately
approximately
for the nine months ended
Flooring ROW Segment-Net sales increased
million
for the nine months ended
attributable to the favorable net impact of price and product mix of
approximately
foreign exchange rates of approximately
approximately
for the nine months ended
Gross profit
Gross profit for the nine months ended
(26.3% of net sales), a decrease of
profit of
points. The decrease in gross profit dollars was primarily attributable to
higher inflation of approximately
approximately
approximately
rates of approximately
integration-related, and other costs of approximately
startup costs of approximately
impact of price and product mix of approximately
productivity gains of approximately
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended
million
ended
administrative expenses decreased 60 basis points. The increase in selling,
general and administrative expenses in dollars was primarily attributable to the
unfavorable net impact of price and product mix of approximately
approximately
product development and marketing costs of approximately
unfavorable impact due to sales volume changes of approximately
higher restructuring, acquisition and integration-related, and other costs of
approximately
foreign exchange rates of approximately
approximately
37
-------------------------------------------------------------------------------- Table of Contents Impairment of goodwill and indefinite-lived intangibles
During the nine months ended
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
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
(2.0% of net sales), reflecting a decrease of
to operating income of
ended
attributable to higher inflation of approximately
charge to reduce the carrying amount of goodwill and indefinite-lived
intangibles of approximately
restructuring, acquisition and integration-related, and other costs of
approximately
rates of approximately
new product development and marketing costs of approximately
increased startup costs of approximately
favorable net impact of price and product mix of approximately
and productivity gains of approximately
Global Ceramic Segment-Operating loss was
sales) for the nine months ended
net sales) for the nine months ended
income was primarily attributable to the impairment charge to reduce the
carrying amount of goodwill of approximately
approximately
higher costs associated with investments in new product development and
marketing costs of approximately
manufacturing disruptions of approximately
favorable net impact of price and product mix of approximately
productivity gains of approximately
Flooring NA Segment-Operating income was
sales) for the nine months ended
million
sales) for the nine months ended
income was primarily attributable to higher inflation of approximately
million
manufacturing disruptions of approximately
of approximately
integration-related, and other costs of approximately
impairment charge to reduce the carrying amount of indefinite-lived intangibles
of approximately
price and product mix of approximately
approximately
Flooring ROW Segment-Operating income was
sales) for the nine months ended
net sales) for the nine months ended
income was primarily attributable to higher inflation of approximately
million
million
of approximately
integration-related, and other costs of approximately
unfavorable net impact of foreign exchange rates of approximately
and the impairment charge to reduce the carrying amount of indefinite-lived
intangibles of approximately
impact of price and product mix of approximately
Interest expense
Interest expense was
reflecting a decrease of
million
expense was primarily due to the Company’s redemption of the 2.00% Senior Notes
on
offset by the increase in commercial paper borrowings.
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Table of Contents Other (income) expense, net
Other income, net was
reflecting an unfavorable change of
of
primarily driven by the release of an indemnification receivable related to the
resolution of foreign non-income tax contingencies of approximately
during the nine months ended
positions recorded with the Emil acquisition of approximately
unfavorable net impact of foreign exchange rates of approximately
partially offset by other miscellaneous items of approximately
Income tax expense
For the nine months ended
expense of
an effective tax rate of 105.3%, as compared to an income tax expense of
million
tax rate of 19.6% for the nine months ended
the effective tax rates for the comparative periods was primarily impacted by
the impairment of non-deductible goodwill and lower earnings in the nine months
ended
39 -------------------------------------------------------------------------------- Table of Contents 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 2022 was
million
lower net earnings.
Net cash used in investing activities in the first nine months of 2022 was
million
increase in the purchases of short-term investments of
redemptions of short-term investments), the increase of capital expenditures of
Net cash used in financing activities in the first nine months of 2022 was
million
the nine months of 2021. The change in cash used in financing activities is
primarily attributable to the higher net proceeds from commercial paper of
repurchases of
As of
million
reinvest the cash held outside
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
repurchase program, authorizing the Company to repurchase up to
its common stock (the “2022 Share Repurchase Program”). For the nine months
ended
exhausting the
authorized on
utilizing
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.
40 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations
There have been no significant changes to the Company’s contractual obligations
as disclosed in the Company’s 2021 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 2021 Annual Report filed on Form 10-K.
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 judgements 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,
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, comparable
company market multiples, projected future cash flows and an increase in the
WACC due to increases in the risk free rate and applicable risk premiums, the
Company determined that a triggering event occurred requiring goodwill
impairment testing for each of its reporting units as of
impairment test indicated a pre-tax, non-cash goodwill impairment charge related
to the Global Ceramic reporting unit of
Company recorded during the three months ended
concluded goodwill of its other reporting units was not impaired at
2022
The Company compared the estimated fair values of its indefinite-lived
intangibles to their carrying values and determined that there were impairments
of
units during the three months ended
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. The excess of fair value over carrying value for
the Flooring ROW reporting unit was approximately 20% and the excess of fair
value over carrying value for the
of
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.
Recent Accounting Pronouncements
See Note 1 in the Notes to Condensed Consolidated Financial Statements of this
Form 10-Q under the heading “Recent Accounting Pronouncements” for a discussion
of new accounting pronouncements which is incorporated herein by reference.
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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 process. 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,
reduce costs 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
2022
Seasonality
The Company is a calendar year-end company. With respect to its Global Ceramic
Segment, the second quarter typically sees higher net sales, followed by the
third and first quarters, while the fourth quarter shows weaker net sales. For
the Global Ceramic Segment’s operating income, generally, the second quarter
shows stronger earnings, followed by third and first quarters, and the fourth
quarter shows weaker earnings.
typically produces higher net sales followed by moderate third and fourth
quarters, and a weaker first quarter. For the
income, historically, the third quarter shows stronger earnings, followed by
second and fourth quarters, and a weaker first quarter. The Flooring ROW
Segment’s second quarter historically produces higher net sales followed by
moderate fourth and third quarters, and a weaker first quarter. For the Flooring
ROW Segment’s operating income, generally, the second quarter shows stronger
earnings, followed by first and third quarters, and the fourth quarter shows
weaker earnings.
42 -------------------------------------------------------------------------------- Table of Contents 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
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
public announcements.
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