# MOHAWK INDUSTRIES INC (MHK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MOHAWK INDUSTRIES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/851968/000085196824000027/mhk-20231231.htm
Accession: 0000851968-24-000027
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MHK/
All MD&A years: /company/MHK/mda/
Previous year: /company/MHK/mda/fy2022/ (FY 2022)
Next year: /company/MHK/mda/fy2024/ (FY 2024)

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following discussion and analysis of the Company’s Results of Operations includes a comparison of fiscal 2023 to fiscal 2022. A similar discussion and analysis that compares fiscal 2022 to fiscal 2021 may be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Form 10-K for the fiscal year ended December 31, 2022.

During the past three decades, the Company has grown significantly through a combination of organic growth and acquisitions. Its current geographic breadth and diverse product offering are reflected in three reporting segments: Global Ceramic, Flooring NA and Flooring ROW. Global Ceramic 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 North America, Europe and Latin America through various selling channels, which include home centers, Company-owned service centers and stores, floor covering retailers, ceramic tile specialists, e-commerce retailers, residential builders, independent distributors, commercial contractors and commercial end users. Flooring NA designs, manufactures, sources and markets its floor covering products, including broadloom carpet, carpet tile, carpet cushion, rugs, laminate, vinyl products, 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. The Segment’s product lines are sold through various channels, including independent floor covering retailers, home centers, mass merchandisers, department stores, shop at home, buying groups, residential builders, independent distributors, commercial contractors and commercial end users. Flooring ROW designs, manufactures, sources, licenses and markets laminate, vinyl products, including LVT and sheet vinyl, wood flooring, roofing panels, insulation boards, medium-density fiberboard (“MDF”), chipboards, decorative surfaces and mezzanine floors, which it distributes primarily in Europe and Australasia through various channels, including independent floor covering retailers, wholesalers, home centers, Company-operated distributors, independent distributors, residential builders, 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 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.

Due to its global footprint, Mohawk’s business is sensitive to macroeconomic and geopolitical events in the United States and abroad. As a result of ongoing Russian military actions in Ukraine, the Company has experienced and may continue to experience supply chain disruption of raw materials sourced from Ukraine, as well as other materials and spare parts needed in the Company’s operations if alternative sources identified in other countries cannot fulfill these needs. The Company can also be impacted by global increases in the cost of natural gas, oil and oil-based raw materials and chemicals, which were among the broader consequences of Russia’s actions in the initial year of the conflict. In addition, 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. Since the first quarter of 2022, the Company has suspended new investments in Russia. The broader 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; 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 conflict’s impact on the Company’s business and results of operations, as well as the global economy, cannot be predicted.

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During 2023, rising interest rates, delayed consumer spending due to inflationary pressures and other macroeconomic factors impacted new single-family home construction and residential remodeling in most of the Company’s major markets. Increased mortgage rates have suppressed the housing market and decreased home renovation activity. In addition, globally, consumers have faced a higher cost of living, reducing discretionary spending on large purchases such as flooring. Mohawk has, to some extent, offset the impact of decreased construction and renovation activity through cost containment, productivity and lower input costs. Declining costs in energy and raw materials, coupled with lower industry volumes, constrained selling prices, although energy prices in certain geographies and materials prices in some product categories remain volatile and may change significantly and unpredictably, which could have an adverse impact on the Company’s results. Similarly, inflationary pressures around the globe may continue to impact consumer and commercial investments in flooring and other large, deferrable purchases. During 2023, the Company focused on reducing costs through restructuring actions and manufacturing enhancements by taking certain actions to enhance future performance, including facility and product rationalizations and workforce reductions. The Company anticipates these global actions will deliver annual savings of approximately $150 million, with an estimated cost of approximately $215 million.

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 risk that could impact the Company’s results, please refer to Risk Factors in Part I, Item 1A of this Form 10-K.

Since becoming a publicly traded company in April 1992, Mohawk has grown both organically and through strategic and bolt-on acquisitions. Mohawk has completed a number of smaller acquisitions in recent years, many of which expanded the Company’s hard surface flooring distribution in Europe. In 2022, the Company completed five small, bolt-on acquisitions: a wood veneer plant in Romania; a sheet vinyl producer in Poland; a mezzanine flooring manufacturer in Germany; a nonwoven carpet and rug producer in the U.S.; and a commercial flooring trim and accessories business in the U.S. During the first quarter of 2023, the Company completed its acquisitions of Vitromex, a Mexican ceramic tile business, and Elizabeth Revestimentos, a Brazilian ceramic tile business. The Company believes these acquisitions have further solidified the Company’s position in the Mexico and Brazilian ceramic tile markets, respectively.

In 2023, the Company invested $612.9 million in new and existing projects, cost reduction initiatives, previously initiated expansion projects, investments to upgrade equipment in Brazil and Mexico from recent acquisitions and general maintenance across the business. Primary investment areas include the Company’s LVT portfolio to upgrade its product offering and improve profitability; premium waterproof laminate in North America and Europe; and quartz countertop and porcelain slab expansion in North America and Europe, respectively. In 2024, the Company plans to invest approximately $480 million focused on completing capacity expansion projects and targeted initiatives that will drive cost reduction while improving operational performance.

Net loss attributable to the Company was $439.5 million for 2023 compared to net earnings of $25.2 million for 2022. The change was primarily attributable to lower sales volume; higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles; unfavorable net impact of price and product mix; the unfavorable impact of temporary plant shutdowns; the unfavorable net impact of foreign exchange rates; higher restructuring, acquisition and integration-related and other costs; higher legal settlements, reserves and fees; higher interest expense and higher costs associated with investments in new product development and marketing costs. The unfavorable impact of the aforementioned items was partially offset by lower taxes due to decreased earnings in 2023 compared to the prior year; productivity gains and lower inflation. The Company believes that a number of circumstances may influence trends in 2024, including continued impact of inflation on consumer discretionary spending, barriers to home sales due to higher interest rates, continued softness in residential remodeling and uncertainty in residential and commercial new construction, but the extent and duration of such impact cannot be predicted.

For the year ended December 31, 2023, the Company generated $1,329.2 million of cash from operating activities. As of December 31, 2023, the Company had cash and cash equivalents of $642.6 million, of which $553.1 million was in the United States and $89.5 million was in foreign countries.

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Results of Operations

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(In millions)","2023","","2022"],["Statement of operations data:"],["Net sales","$","11,135.1","","","100.0","%","","11,737.1","","","100.0","%"],["Cost of sales (1)","8,425.5","","","75.7","%","","8,793.6","","","74.9","%"],["Gross profit","2,709.7","","","24.3","%","","2,943.4","","","25.1","%"],["Selling, general and administrative expenses (2)","2,119.7","","","19.0","%","","2,003.4","","","17.1","%"],["Impairment of goodwill and indefinite-lived intangibles","877.7","","","7.9","%","","695.8","","","5.9","%"],["Operating income (loss)","(287.8)","","","(2.6)","%","","244.2","","","2.1","%"],["Interest expense","77.5","","","0.7","%","","51.9","","","0.4","%"],["Other (income) expense, net (3)","(10.8)","","","(0.1)","%","","8.4","","","0.1","%"],["Earnings (loss) before income taxes","(354.5)","","","(3.2)","%","","183.9","","","1.6","%"],["Income tax expense (4)","84.9","","","0.8","%","","158.1","","","1.3","%"],["Net earnings (loss) including noncontrolling interests","(439.4)","","","(3.9)","%","","25.8","","","0.2","%"],["Less: Net earnings attributable to noncontrolling interests","0.1","","","0.0","%","","0.5","","","0.0","%"],["Net earnings (loss) attributable to Mohawk Industries, Inc.","$","(439.5)","","","(3.9)","%","","25.2","","","0.2","%"],["(1) Cost of sales includes:"],["Restructuring, acquisition and integration-related charges and other costs","$","105.0","","","0.9","%","","68.0","","","0.6","%"],["Acquisition inventory step-up","4.5","","","0.0","%","","2.8","","","0.0","%"],["Other charges","\u2014","","","0.0","%","","3.2","","","0.0","%"],["(2) Selling, general and administrative expenses include:"],["Restructuring, acquisition and integration-related charges","27.2","","","0.2","%","","13.7","","","0.1","%"],["Legal settlements, reserves and fees","87.8","","","0.8","%","","54.2","","","0.5","%"],["Other charges","\u2014","","","0.0","%","","1.0","","","0.0","%"],["(3) Other (income) expense includes:"],["Release of indemnification asset","(3.0)","","","0.0","%","","7.3","","","0.1","%"],["Other charges","(2.9)","","","0.0","%","","1.8","","","0.0","%"],["(4) Income tax expense includes:"],["European tax restructuring","(10.0)","","","(0.1)","%","","\u2014","","","\u2014","%"],["Income taxes - reversal of uncertain position","3.0","","","0.0","%","","(7.3)","","","(0.1)","%"],["Other charges","\u2014","","","0.0","%","","0.5","","","0.0","%"]]
[[/GREPCENT_TABLE]]

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Year Ended December 31, 2023, as Compared with Year Ended December 31, 2022

Net Sales

Net sales for 2023 were $11,135.1 million compared to net sales of $11,737.1 million for 2022. The change was primarily attributable to lower legacy sales volume of approximately $743 million; the unfavorable net impact of price and product mix of approximately $143 million and the unfavorable net impact of foreign exchange rates of approximately $72 million, partially offset by higher sales volume attributable to acquisitions of approximately $389 million.

Global Ceramic—Net sales for 2023 were $4,300.1 million compared to net sales of $4,307.7 million for 2022. The change was primarily attributable to lower legacy sales volume of approximately $271 million and the unfavorable net impact of foreign exchange rates of approximately $41 million, partially offset by higher sales volume attributable to acquisitions of approximately $294 million and the favorable net impact of price and product mix of approximately $38 million.

Flooring NA—Net sales for 2023 were $3,829.4 million compared to net sales of $4,207.0 million for 2022. The change was primarily attributable to lower legacy sales volume of approximately $304 million and the unfavorable net impact of price and product mix of approximately $139 million, partially offset by higher sales volume attributable to acquisitions of approximately $66 million.

Flooring ROW—Net sales for 2023 were $3,005.6 million compared to net sales of $3,222.3 million for 2022. The change was primarily attributable to lower legacy sales volume of approximately $168 million; the unfavorable net impact of price and product mix of approximately $42 million and the unfavorable net impact of foreign exchange rates of approximately $31 million, partially offset by higher sales volume attributable to acquisitions of approximately $30 million.

Quarterly net sales and the percentage changes in net sales by quarter for 2023 versus 2022 were as follows (dollars in millions):

[[GREPCENT_TABLE]]
[["","2023","","2022","","Change"],["First quarter","$","2,806.2","","","3,015.7","","","(6.9)","%"],["Second quarter","2,950.4","","","3,153.2","","","(6.4)","%"],["Third quarter","2,766.2","","","2,917.5","","","(5.2)","%"],["Fourth quarter","2,612.3","","","2,650.7","","","(1.4)","%"],["Full year","$","11,135.1","","","11,737.1","","","(5.1)","%"]]
[[/GREPCENT_TABLE]]

Gross Profit

Gross profit for 2023 was $2,709.7 million compared to gross profit of $2,943.4 million for 2022. The change was primarily attributable to lower sales volume of approximately $190 million; the unfavorable net impact of price and product mix of approximately $111 million; the unfavorable impact of temporary plant shutdowns of approximately $76 million; the unfavorable net impact of foreign exchange rates of approximately $51 million and higher restructuring, acquisition and integration-related, and other costs of approximately $35 million, partially offset by lower inflation of approximately $132 million and productivity gains of approximately $121 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2023 were $2,119.7 million compared to $2,003.4 million for 2022. The change was primarily attributable to higher inflation of approximately $52 million and an increase in expenses due to the net impact of acquired businesses of approximately $33 million.

Impairment of Goodwill and Indefinite-lived Intangibles

Impairment of goodwill and indefinite-lived intangibles for 2023 was $877.7 million compared to impairment of goodwill and indefinite-lived intangibles of $695.8 million for 2022. As a result of a decrease in the Company’s market capitalization, a higher WACC and macroeconomic conditions, the Company performed interim impairment tests of its goodwill and indefinite-lived intangibles, which resulted in the impairment charges.

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Operating Income (Loss)

Operating loss for 2023 was $287.8 million compared to operating income of $244.2 million for 2022. The change was primarily attributable to lower sales volume of approximately $223 million; higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $182 million; the unfavorable net impact of price and product mix of approximately $111 million; the unfavorable impact of temporary plant shutdowns of approximately $76 million; the unfavorable net impact of foreign exchange rates of approximately $49 million; higher restructuring, acquisition and integration-related, and other costs of approximately $48 million and higher legal settlements, reserves and fees of approximately $34 million, partially offset by productivity gains of approximately $111 million and lower inflation of approximately $80 million.

Global Ceramic—Operating loss was $166.4 million for 2023 compared to operating loss of $236.1 million for 2022. The change was primarily attributable to lower impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $262 million and productivity gains of approximately $59 million, partially offset by lower sales volume of approximately $94 million; higher inflation of approximately $62 million; the unfavorable impact of temporary plant shutdowns of approximately $40 million and higher restructuring, acquisition and integration-related, and other costs of approximately $37 million.

Flooring NA—Operating loss was $57.2 million for 2023 compared to operating income of $231.1 million for 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $214 million; the unfavorable net impact of price and product mix of approximately $93 million and lower sales volume of approximately $71 million, partially offset by lower inflation of approximately $89 million and productivity gains of approximately $30 million.

Flooring ROW—Operating income was $69.7 million for 2023 compared to operating income of $340.2 million for 2022. The change was primarily attributable to higher impairment charges to reduce the carrying amount of goodwill and indefinite-lived intangibles of approximately $229 million; lower sales volume of approximately $58 million and the unfavorable net impact of foreign exchange rates of approximately $35 million, partially offset by lower inflation of approximately $59 million.

Interest Expense

Interest expense was $77.5 million for 2023 compared to interest expense of $51.9 million for 2022. The change was primarily attributable to a significant increase in interest rates, as well as increased borrowings due to the acquisitions made in 2022 and the first quarter of 2023.

Other Income and Expense

Other income was $10.8 million for 2023 compared to other expense of $8.4 million for 2022. The change was primarily attributable to the reversal of an uncertain tax position recorded with the Company’s 2017 acquisition of Emilceramica S.r.l during the twelve months ended December 31, 2022.

Income Tax Expense

For 2023, the Company recorded income tax expense of $84.9 million on loss before income taxes of $354.5 million for an effective tax rate of (23.9)%, as compared to an income tax expense of $158.1 million on earnings before income taxes of $183.9 million, resulting in an effective tax rate of 86.0% for 2022. The change in the effective tax rate was primarily driven by a shift from earnings before income taxes to a loss before income taxes and an increase in the impairment of non-deductible goodwill.

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. As of December 31, 2023, the Company had a total of $1,882.1 million available under its Senior Credit Facility. The Company also maintains local currency revolving lines of credit and other credit facilities to provide liquidity to its businesses around the world.  None of such local facilities are material in amount.

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Net cash provided by operating activities for the year ended 2023 was $1,329.2 million, compared to net cash provided by operating activities of $669.2 million for the year ended 2022. The change was primarily attributable to the change in inventory and accounts receivable, partially offset by lower net earnings and the change in accounts payable.

Net cash used in investing activities for the year ended 2023 was $970.3 million compared to net cash used in investing activities of $625.3 million for the year ended 2022. The change was primarily due to the increase in acquisitions of $305.8 million and the increase in capital expenditures of $32.2 million.

Net cash used in financing activities for the year ended 2023 was $210.7 million compared to net cash provided by financing activities of $194.3 million for the year ended 2022. The change was primarily attributable to lower proceeds (net of payments) from commercial paper of $1,044 million, lower proceeds from the Term Loan Facility of $908 million, partially offset by higher proceeds (net of payments) on the Senior Notes of $1,200 million and lower share repurchases of $308 million.

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 December 31, 2023, there remains $229.2 million authorized under the 2022 Share Repurchase Program.

As of December 31, 2023, the Company had cash of $642.6 million, of which $89.5 million was held outside the United States. The Company plans to permanently reinvest the cash held outside the United States. The Company believes that its cash and cash equivalents, cash generated from operations and availability under its Senior Credit Facility will be sufficient to meet its planned capital expenditures, working capital investments and debt servicing requirements over the next twelve months.

On January 31, 2024, the Company prepaid the entirety of the USD portion of the Term Loan Facility, in the amount of $675,000. On February 16, 2024, the Company prepaid the entirety of the EUR portion of the Term Loan Facility, in the amount of €220,000.

See Note 10, Long-Term Debt, of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K 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.

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Contractual Obligations and Commitments

The following is a summary of the Company’s future minimum payments under contractual obligations and commitments as of December 31, 2023 (in millions):

[[GREPCENT_TABLE]]
[["Contractual Obligations and Commitments:","Total","","2024","","2025","","2026","","2027","","2028","","Thereafter"],["Long-term debt, including current maturities","$","2,714.5","","","1,001.9","","","16.2","","","14.0","","","562.7","","","607.6","","","512.2"],["Interest payments on long-term debt and finance leases (1)","373.8","","","100.4","","","64.4","","","64.0","","","63.6","","","53.6","","","27.8"],["Operating leases","497.7","","","134.0","","","117.8","","","96.5","","","67.3","","","43.6","","","38.5"],["Purchase commitments (2)","336.6","","","188.2","","","24.5","","","23.7","","","23.7","","","23.5","","","53.0"],["Expected pension contributions (3)","4.1","","","4.1","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Uncertain tax positions (4)","22.1","","","22.1","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Guarantees (5)","19.4","","","19.4","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","$","3,968.2","","","1,470.1","","","222.9","","","198.2","","","717.3","","","728.3","","","631.5"]]
[[/GREPCENT_TABLE]]

(1) For fixed-rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable-rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect as of December 31, 2023 to these balances.

(2) Includes volume commitments, primarily for raw material purchases.

(3) Includes the estimated pension contributions for 2024 only, as the Company is unable to estimate the pension contributions beyond 2024. The Company’s projected benefit obligation and plan assets as of December 31, 2023 were $80.0 million and $73.7 million, respectively. The projected benefit obligation liability has not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.

(4) Excludes $71.7 million of non-current accrued income tax liabilities and related interest and penalties for uncertain tax positions. These liabilities have not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.

(5) Includes bank guarantees and letters of credit.

Critical Accounting Policies

In preparing the Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, the Company must make decisions which impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and analysis of the relevant circumstances and historical experience. Actual amounts could differ from those estimated at the time the Consolidated Financial Statements are prepared.

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting estimates are defined as those that are both most important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The Company believes the following accounting policies require it to use judgments and estimates in preparing its consolidated financial statements and represent critical accounting policies.

•Acquisition accounting. The fair value of the consideration the Company pays for each new acquisition is allocated to tangible assets and identifiable intangible assets, liabilities assumed, any noncontrolling interest in the acquired entity and goodwill.  The accounting for acquisitions involves a considerable amount of judgment and estimate, including the fair value of certain forms of consideration; fair value of acquired intangible assets involving projections of future revenues and cash flows that are then either discounted at an estimated discount rate or measured at an estimated royalty rate; fair value of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of the acquired assets. The assumptions used are determined at the time of the acquisition in accordance with accepted valuation models.  Projections are developed using internal forecasts, available industry and market data and estimates of long-term rates of growth for the business. The impact of prior or future acquisitions on the Company’s financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates. See Note 2, Acquisitions included in Part II, Item 8 of this Form 10-K for further discussion of business combination accounting valuation methodology and assumptions.  

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•Goodwill and other intangibles - The Company performs its annual testing of goodwill and indefinite-lived intangibles on the first day of 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 judgments 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, Flooring NA and Flooring ROW as its reporting units for the purposes of allocating and testing for impairment. Indefinite-lived intangibles are recorded and tested for impairment at the asset level. 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, macroeconomic conditions and an increase in the WACC, the Company determined that a triggering event occurred requiring goodwill impairment testing for each of its reporting units as of September 30, 2023 and October 1, 2022. The impairment tests indicated pre-tax, non-cash goodwill impairment charges related to all 3 reporting units of $870,750 ($859,725 net of tax) and in the Global Ceramic reporting unit of $688,514 ($679,664 net of tax) which the Company recorded during 2023 and 2022, respectively.

The Company compared the estimated fair values of its indefinite-lived intangibles to their carrying values and determined that there were impairment charges of $6,994 ($5,181 net of tax) in all 3 reporting units and $7,257 ($5,939 net of tax) in the Flooring ROW and Flooring NA reporting units during the third quarter of 2023 and 2022, respectively.

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. Future declines in estimated after tax cash flows, increases 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.

•Long-lived assets. The Company reviews its long-lived asset groups, which include intangible assets subject to amortization, which for the Company are its patents and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset groups may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated by these asset groups. If such asset groups are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets held for sale are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.

•Income taxes. The Company’s effective tax rate is based on its income, statutory tax rates and tax planning opportunities available in the jurisdictions in which it operates. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company’s tax expense and in evaluating the Company’s tax positions. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in a future period. The Company evaluates the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that the Company is not able to realize all or a portion of its deferred tax assets in the future, a valuation allowance is provided. The Company would recognize such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. For further information regarding the Company’s valuation allowances, see Note 15, Income Taxes, included in Part II, Item 8 of this Form 10-K.

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In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information, as required by the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740-10. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. For further information regarding the Company’s uncertain tax positions, see Note 15, Income Taxes, included in Part II, Item 8 of this Form 10-K.

Recent Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, of the Company’s accompanying Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for a description of recent accounting pronouncements and the potential impact on our financial statements and disclosures.

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.

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 first and second 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.

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Table of Contents

Index to Financial Statements