Mohawk(MHK) - 2023 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The company reported a significant net loss for Q3 and the first nine months of 2023, primarily driven by an $876.1 million impairment charge, while also completing acquisitions and improving operating cash flow Condensed Consolidated Statements of Operations Mohawk reported a net loss of $760.5 million in Q3 2023 and $579.0 million for the nine-month period, primarily due to an $876.1 million impairment charge, alongside decreased net sales Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,766,186 | $2,917,539 | $8,522,837 | $9,086,390 | | Gross profit | $692,007 | $713,661 | $2,067,358 | $2,388,986 | | Impairment of goodwill and intangibles | $876,108 | $695,771 | $876,108 | $695,771 | | Operating (loss) income | $(733,742) | $(505,589) | $(454,906) | $183,139 | | Net earnings (loss) attributable to Mohawk | $(760,459) | $(533,969) | $(579,004) | $(8,209) | | Diluted earnings (loss) per share | $(11.94) | $(8.40) | $(9.10) | $(0.13) | Condensed Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $13.14 billion from $14.12 billion at year-end 2022, primarily due to a significant reduction in goodwill following impairment charges Key Balance Sheet Items (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $5,504,325 | $5,895,099 | | Goodwill | $1,125,434 | $1,927,759 | | Total assets | $13,138,495 | $14,120,432 | | Total current liabilities | $3,188,574 | $3,070,285 | | Total liabilities | $5,867,105 | $6,102,518 | | Total stockholders' equity | $7,271,390 | $8,017,914 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased to $1.03 billion for the nine months ended September 30, 2023, driven by favorable working capital changes, despite increased cash used in investing and financing activities Cash Flow Summary (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,032,907 | $427,435 | | Net cash used in investing activities | $(729,970) | $(374,358) | | Net cash provided by (used in) financing activities | $(273,756) | $(2,978) | | Net change in cash and cash equivalents | $8,829 | $58,076 | Notes to the Condensed Consolidated Financial Statements Key notes detail significant events including the $515.5 million Q1 2023 acquisition, an $869.1 million Q3 goodwill impairment, $108.2 million in restructuring costs, issuance of $600 million senior notes, and a $60 million securities class action settlement - In Q1 2023, the company acquired two ceramic tile businesses in Brazil and Mexico for $515.5 million, resulting in $85.9 million of goodwill[21] - A triggering event in Q3 2023 led to a pre-tax, non-cash goodwill impairment charge of $869.1 million and an indefinite-lived intangible impairment of $7.0 million across all three reporting units[41][42] - For the nine months ended September 30, 2023, the company incurred total restructuring costs of $108.2 million, primarily related to asset write-downs and other costs in the Global Ceramic, Flooring NA, and Flooring ROW segments[34] - In September 2023, the company issued $600 million of 5.850% Senior Notes due 2028[87] - The company reached an agreement to settle a securities class action for $60 million, with the SEC staff separately notifying the company of no recommended enforcement action following an investigation into similar matters[68][69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes declining sales and profitability to a challenging macroeconomic environment and a significant $876.1 million impairment charge, while implementing restructuring for $135 million in annual savings and maintaining strong operating cash flow - The company is facing headwinds from higher interest rates, consumer inflation, and reduced homebuilder confidence, leading to decreased discretionary spending on flooring[105][106] - Global restructuring and cost-reduction initiatives are anticipated to deliver annual savings of approximately $135 million, with an estimated cost of $215 million[106] - Capital investment for 2023 is planned at approximately $600 million, focusing on LVT, premium laminate, quartz countertops, and porcelain slab expansion[109] - A decrease in the company's market capitalization, macroeconomic conditions, and a higher WACC triggered an interim impairment test, resulting in a pre-tax, non-cash goodwill impairment charge of $869.1 million in Q3 2023[154] Results of Operations Net sales declined by 5.2% to $2.77 billion in Q3 2023 and 6.2% to $8.52 billion for the nine-month period, with operating losses widening due to an $876.1 million impairment charge Q3 2023 vs Q3 2022 Performance (in millions) | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,766.2 | $2,917.5 | -5.2% | | Gross Profit | $692.0 | $713.7 | -3.0% | | Operating Loss | $(733.7) | $(505.6) | +45.1% | Nine Months 2023 vs 2022 Performance (in millions) | Metric | YTD 2023 | YTD 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $8,522.8 | $9,086.4 | -6.2% | | Gross Profit | $2,067.4 | $2,389.0 | -13.5% | | Operating (Loss) Income | $(454.9) | $183.1 | N/A | Liquidity and Capital Resources The company maintains strong liquidity with net cash from operating activities increasing to $1.03 billion for the first nine months of 2023, supported by $518.5 million cash on hand and remaining share repurchase authorization - Net cash provided by operating activities increased by $605.5 million in the first nine months of 2023 compared to the same period in 2022, primarily due to favorable changes in inventory and accounts receivable[144] - The company's Board of Directors approved a $500 million share repurchase program in February 2022, with $229.2 million remaining authorized as of September 30, 2023[148] - The company believes its cash on hand, cash from operations, and available credit will be sufficient to meet its capital expenditure, working capital, and debt servicing needs for at least the next twelve months[147] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure remains largely unchanged, with a 1.0 percentage point increase in floating-rate debt interest rates potentially increasing interest expense by $6.8 million for the nine months ended September 30, 2023 - A 1.0 percentage point increase in the interest rate on floating-rate debt would have increased interest expense by $2.3 million for Q3 2023 and $6.8 million for the nine months ended September 30, 2023[160] - There have been no significant changes to the Company's exposure to market risk as disclosed in the 2022 Annual Report on Form 10-K[161] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[162] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[163] Part II. OTHER INFORMATION Legal Proceedings The company is involved in various legal matters, with detailed discussions available in Note 17 of the Condensed Consolidated Financial Statements - For a detailed discussion of legal proceedings, refer to Note 17, Commitments and Contingencies, in Part I, Item 1 of this report[167] Risk Factors No material changes have occurred in the company's risk factors since the filing of the 2022 Annual Report on Form 10-K - No material changes have occurred in the company's risk factors since the filing of the 2022 Annual Report on Form 10-K[168] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in Q3 2023, with $229.2 million remaining available under the $500 million share repurchase program - The company did not purchase any of its common stock in the third quarter of 2023[170] Share Repurchase Activity (Q3 2023) | Period | Total Number of Shares Purchased (in Millions) | Average Price Paid per Share | Approximate Dollar Value of Shares That May Yet Be Purchased (in Millions) | | :--- | :--- | :--- | :--- | | Q3 2023 Total | 0.0 | $ — | $229.2 | Defaults Upon Senior Securities The company reports no defaults upon senior securities - The company reports no defaults upon senior securities[173] Mine Safety Disclosures Mine safety disclosures, as required by the Dodd-Frank Act, are included in Exhibit 95.1 of this quarterly report - Mine safety disclosures are provided in Exhibit 95.1 to this Form 10-Q[174] Other Information The company reports no other information for this item - The company reports no other information for this item[176] Exhibits This section lists exhibits filed with the Form 10-Q, including bylaws, debt indentures, officer certifications, mine safety disclosures, and XBRL data files - Key exhibits filed include debt agreements, CEO/CFO certifications, and XBRL interactive data files[177]