Mohawk Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparisons are with the three months ended April 2, 2022. Mohawk manufactures and sells flooring and related products through Global Ceramic, Flooring North America (Flooring NA), and Flooring Rest of the World (Flooring ROW).
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2,806.2 million | $3,015.7 million | Down 6.9% |
| Gross profit / margin | $643.4 million / 22.9% | $802.1 million / 26.6% | Margin down 370 bps |
| Operating income / margin | $125.8 million / 4.5% | $320.8 million / 10.6% | Down 60.8% |
| Net earnings attributable to Mohawk | $80.2 million | $245.3 million | Down 67.3% |
| Diluted EPS | $1.26 | $3.78 | Down 66.7% |
| Operating cash flow | $257.3 million | $55.0 million | Up $202.3 million |
Interest expense was $17.1 million versus $11.5 million. The effective tax rate was 26.5%, compared with 20.0%.
Segment results
- Global Ceramic: Sales of $1,059.3 million, down 0.5%; operating income of $63.3 million, versus $100.3 million.
- Flooring NA: Sales of $953.4 million, down 11.1%; operating loss of $2.0 million, versus operating income of $95.3 million.
- Flooring ROW: Sales of $793.5 million, down 9.7%; operating income of $75.2 million, versus $134.7 million.
Balance sheet, debt and liquidity
At April 1, 2023, cash and cash equivalents were $572.9 million and short-term investments were $150.0 million. Total debt was $3,321.6 million, including $1,056.5 million classified as current; long-term debt was $2,265.1 million. Cash plus short-term investments less total debt was approximately $2.60 billion. The company reported $624.9 million of remaining availability under its senior credit facility after considering commercial paper and other utilization. Management said cash, operating cash generation and available credit should cover capital, working-capital and debt-service needs for at least 12 months.
Cash from investing activities was a use of $639.9 million, including $519.4 million for acquisitions and $128.5 million of capital expenditures. Financing activities provided $451.0 million. The company held $189.6 million of cash outside the U.S., which it plans to permanently reinvest. Approximately 67% of debt was floating-rate; management estimated a one-percentage-point increase in floating rates would add $5.5 million to quarterly interest expense.
Material changes and management commentary
Lower sales volume (approximately $335 million unfavorable) and foreign exchange (approximately $31 million unfavorable) drove the sales decline, partly offset by price and product mix (approximately $160 million favorable). Management attributed weaker earnings mainly to inflation, lower volume, temporary plant shutdowns, restructuring and acquisition-related costs, product-development and marketing investment, and higher interest expense. Price and mix actions and productivity gains partly offset these pressures. Management said material and energy prices had recently declined and expected the benefit to reach results as costs flow through.
Mohawk completed acquisitions of two ceramic-tile businesses in Brazil and Mexico for net consideration of approximately $519.3 million. The purchase-price allocation was preliminary. First-quarter restructuring and acquisition/integration-related costs were approximately $32.1 million across cost of sales and SG&A.
Outlook, risks and contingencies
- Management expects restructuring and cost-reduction initiatives to generate annual savings of approximately $60–$65 million, with estimated costs of approximately $135–$140 million.
- Planned 2023 capital investment is approximately $570 million, including cost-reduction work, acquisition upgrades, maintenance, and product and capacity initiatives.
- Management cited inflation, higher interest rates, lower housing and remodeling demand, customer inventory reductions, supply-chain disruption, and uncertainty associated with the Russia-Ukraine conflict. The extent and duration of these effects are uncertain.
- The securities class action has a $60 million settlement agreement in principle, subject to court approval; a significant portion is expected to be insured. Related government investigations remained ongoing, and Mohawk said it was cooperating and disputed the allegations. Other investor, derivative, environmental and PFC matters also remain; the company said probable, estimable losses were accrued but it could not estimate additional exposure.
- Disclosure controls were assessed as effective at a reasonable assurance level. The filing reported no material change in risk factors from the 2022 Form 10-K.
Important facts for investors to verify
- Whether sales volumes stabilize and pricing, mix, lower input costs and productivity restore margins, particularly in Flooring NA.
- Progress, total cash costs and realized savings from restructuring, alongside the planned $570 million capital program.
- Commercial-paper refinancing needs, floating-rate exposure, credit-facility availability and the 2024 term-loan maturity.
- Integration and valuation outcomes for the Brazil and Mexico acquisitions.
- Final court approval, insurance recoveries and potential cash or operating impacts from litigation and ongoing investigations.