Mohawk Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended October 1, 2022. Unless otherwise stated, amounts below are in U.S. dollars.
Business context and results
Mohawk manufactures and sells flooring and related products through Global Ceramic, Flooring North America (NA), and Flooring Rest of the World (ROW). Q3 sales rose despite lower volumes, as pricing and product mix gains more than offset inflation and foreign-exchange headwinds.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.918B | $2.817B | $9.086B | $8.440B |
| Gross profit / margin | $713.7M / 24.5% | $837.3M / 29.7% | $2.389B / 26.3% | $2.531B / 30.0% |
| Operating income (loss) | ($505.6M) | $360.0M | $183.1M | $1.082B |
| Net income (loss) attributable to Mohawk | ($534.0M) | $271.0M | ($8.2M) | $844.1M |
| Diluted EPS | ($8.40) | $3.93 | ($0.13) | $12.11 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $427.4M | $1.097B |
Material changes and drivers
- Q3 sales increased 3.6%; favorable price and mix of about $374M was partly offset by lower volume of about $139M and unfavorable currency effects of about $117M. For the first nine months, sales increased 7.7%, while volume fell about $272M and currency reduced sales by about $327M.
- Q3 gross margin contracted 520 basis points. Management attributed the decline chiefly to approximately $348M of inflation, manufacturing disruptions, lower volume and higher restructuring-related costs; price and mix contributed approximately $359M of benefit.
- A $695.8M non-cash impairment charge was recorded in Q3: $688.5M against Global Ceramic goodwill and $7.3M against indefinite-lived intangibles. The impairment was prompted by lower market capitalization and comparable-company multiples, reduced projected cash flows, and higher discount rates. The charge drove the reported quarterly operating loss.
- All three segments had lower Q3 operating income year over year. Global Ceramic reported a $559.7M operating loss, including its goodwill impairment; Flooring NA earned $64.7M and Flooring ROW earned $45.5M.
- Nine-month operating cash flow fell $669.3M year over year, primarily due to working-capital changes and lower earnings. Inventory rose to $2.900B from $2.392B at year-end 2021.
Financial position, debt and liquidity
- At October 1, cash and cash equivalents were $327.0M and short-term investments were $110.0M, compared with $268.9M and $323.0M, respectively, at December 31, 2021.
- Total debt carrying value was $2.562B, versus $2.325B at year-end 2021. Current debt was $1.542B, including $932M of U.S. commercial paper; the 3.85% $600M senior notes were due February 2023 and scheduled for redemption November 1, 2022.
- The amended revolving credit facility was extended to August 2027 and had approximately $1.000B of availability after commercial paper and letters of credit. A delayed-draw term facility provided up to $575M and €220M as of quarter-end, with an additional $100M of capacity added October 3, 2022. Term-loan principal is due August 2024.
- Management said cash, operating cash generation and available credit should cover capital expenditure, working capital and debt service needs for at least the next 12 months. Nine-month capital expenditures were $430.1M; investing activities also included net acquisitions of $157.3M.
- Mohawk repurchased $307.6M of shares during the first nine months, leaving $229.2M authorized under its $500M 2022 program.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cited uncertainty from inflation, consumer demand, input availability, foreign exchange, and the Russia-Ukraine conflict and COVID-19 effects.
- Management expects facility and product rationalizations and workforce reductions to generate annual savings of approximately $35–$40M, at estimated costs of $90–$95M. It planned approximately $620M of 2022 investment in growth, productivity, acquisition upgrades and maintenance.
- The company suspended new investments in Russia. It also agreed to acquire Vitromex, a Mexican ceramic-tile business, for approximately $293M, with closing expected in Q1 2023 subject to approvals and other conditions.
- Further impairment remains possible: at quarter-end, fair value exceeded carrying value by approximately 20% for Flooring ROW and less than 5% for Flooring NA. Management identified further economic deterioration, cost pressures, lower projected cash flows or higher discount rates as potential triggers.
- Legal matters include ongoing PFC claims, securities and investor litigation, derivative actions, and ongoing SEC and U.S. Attorney investigations related to allegations similar to those in securities litigation. Mohawk denies wrongdoing and says it will defend the matters; it cannot estimate losses beyond amounts accrued. The Gadsden Water Board settled its claims against Mohawk in October 2022; other PFC claims remain pending.
- A Belgian tax dispute involves assessments of €186.7M, including penalties but excluding interest, for 2013–2018, with a further 2019 assessment expected. The company disputes the assessments and may be asked to provide security.
Key facts for investors to verify
- Whether price increases and productivity can offset inflation while sales volumes remain pressured.
- Inventory levels, working-capital cash use and subsequent operating cash-flow trends.
- Liquidity and refinancing plans around the November 2022 redemption and February 2023 note maturity, including commercial-paper exposure and use of the term facility.
- Assumptions behind the impairment tests and the limited valuation cushion in Flooring NA and ROW.
- Actual restructuring costs and realized savings, planned capital spending, and the timing and funding of the Vitromex acquisition.
- Developments in litigation, government investigations and the Belgian tax matter, including potential cash, earnings or liquidity effects.