UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

                     [Mark One]

[X]X ]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 20032005

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

 

SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to

 

Commission File Number

                                                     to

01-19826

MOHAWK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

52-1604305

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

P. O. Box 12069, 160 S. Industrial Blvd., Calhoun, Georgia

30701

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code:  (706) 629-7721

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $.01 par value

New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:  None

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ x ]     No [   ]

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act Yes [   ]     No [ x ]

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ]     No [   ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

      Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act Rule 12b-2).  YesAct.  Large accelerated filer [ x ]     NoAccelerated filer [   ]   Non-accelerated filer [   ]

      Indicate by check whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). 
Yes [  ]     No [ x  ]

      The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant (50,552,254(41,675,793 shares) on June 27, 2003 (TheJuly 2, 2005 (the last business day of the Registrant's most recently completed fiscal second quarter) was$2,859,235,486.was$3,425,750,185. The aggregate market value was computed by reference to the closing price of the Common Stock on such date.

      Number of shares of Common Stock outstanding as of March 2, 2004: 66,638,90014,2006:67,621,254 shares of Common Stock, $.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 20042006 Annual Meeting of Stockholders-Part III.




Table of Contents

Page No.

Part I

Item 1.

Business

3

Item 1a.

Risk Factors

9

Item 1b.

Unresolved Staff Comments

14

Item 2.

Properties

914

Item 3.

Legal Proceedings

1014

Item 4.

Submission of Matters to a Vote of Security Holders

1015

Part II

Item 5.

Market for Registrant's Common Equity, and Related Stockholder Matters and Issuer

11   Purchases of Equity Securities

16

Item 6.

Selected Financial Data

1217

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

1418

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

2225

Item 8.

Consolidated Financial Statements and Supplementary Data

2227

Item 9.

Changes in and Disagreements with Accountants on Accounting and FinancialFinancial Disclosure

4959

Item 9A

Controls and Procedures

4959

Item 9B

Other Information

59

Part III

Item 10.

Directors and Executive Officers of the Registrant and Related Stockholder Matters

4960

Item 11.

Executive Compensation

4960

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related

49   Stockholder Matters

60

Item 13.

Certain Relationships and Related Transactions

4960

Item 14.

Principal Accountant Fees and Services

5060

Part IV

Item 15.

Exhibits and Financial Statement Schedules and Reports on Form 8-K

5060



PART I

Item 1. Business

General

      Mohawk Industries, Inc., ("Mohawk" or the "Company"), a term which includes the Company and its subsidiaries, including its primary operating subsidiaries, Mohawk Carpet Corporation, Aladdin Manufacturing Corporation, and Dal-Tile International Inc. ("Dal-Tile"))and Unilin Flooring BVBA, Unilin Holding Inc., and their subsidiaries (the Unilin Group), is thea leading producer of floorcoveringfloor covering products for residential and commercial applications in the United States.States and Europe. The Company is the second largest carpet and rug manufacturer and a leading manufacturer, marketerone of the largest manufacturers, marketers and distributordistributors of ceramic tile and natural stone in the United States.States as well as a leading producer of laminate flooring in the United States and Europe. The Company had annual net sales in 20032005 in excess of $5.0$6.6 billion.

      The Company has two operating segments, the Mohawk segment Approximately 98% of this amount was generated by sales in North America and the Dal-Tile segment. The Mohawk segment sells and distributes its product lines, which include broadloom carpet, rugs, pad, ceramic tile, hardwood, vinyl and laminate through independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products sold through company-operated2% was generated by sales service centers, independent distributors and home center retailers.outside North America. Selected financial information for the Mohawk, Dal-Tile, and Dal-TileUnilin segments is set forth in Note 1716 to the Consolidated Financial Statements.

      Through the Company's     The Mohawk segment the Company designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpet, rug, carpet pad, ceramic tile, laminate, hardwood and rugsresilient, in a broad range of colors, textures and patterns and is a leading producer of woven and tufted broadloom carpet and rugs for residential and commercial applications.applications in both new construction and remodeling. The Company alsoMohawk segment markets and distributes hardwood, laminate, vinylits carpets and rugs under its soft surface floor covering brands and ceramic tile, laminate, hardwood and resilient under its hardsurface line.hard surface floor covering brands. The CompanyMohawk segment positions its products in all price ranges and emphasizes quality, style, performance and service. The CompanyMohawk segment is widely recognized through its premier brand names, which include "Mohawk,"Mohawk®," "Aladdin,"Aladdin®," "Mohawk Home,Home®," "Bigelow,"Bigelow®," "Custom Weave,Weave®," "Durkan,"Durkan®," "Goodwin Weavers,"Helios®," "Helios,"Horizon®," "Horizon,"Karastan®," "Karastan,"Lees®," "Lees,"MeritTM ," "Ralph Lauren®" "Newmark Rug," "World" and "WundaWeve."WundaWeve®." The CompanyMohawk segment markets and distributes its carpetsoft and rughard surface products through over 34,00030,000 customers, which include primarily independent carpetfloor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. Some products are also marketed through private labeling programs. The Company's carpet and rugMohawk segment's soft surface operations are vertically integrated from the extrusion of resin and post-consumer plastics into fiber, to the conversion of fiber into yarn and to the manufacture and shipment of finished carpetcarpets and rugs.

      Through the Company'sThe Dal-Tile segment the Company designs, manufactures, sources, distributes and markets a broad line of wallceramic tile, porcelain tile, natural stone and floor tileother products used in the residential and commercial markets for both new construction and remodeling. Most of the Company'sDal-Tile segment's ceramic tile products are marketed under the "Dal-Tile""Dal-Tile®" and "American Olean"Olean®" brand names. The Company's ceramic tile business is organized into three strategic business channels: company-operated sales service centers,names and sold through independent distributors, and home centers. The Company maintains over 240 sales service centers in the United States, Canada and Puerto Rico. The Company's independent distributor unit distributes the American Olean brand through approximately 200 independent distributor locations serving a variety of residential and commercial customers. The Company's home center retailer unit supplies productsretailers, tile and flooring retailers and contractors. The Dal-Tile segment operations are vertically integrated from the production of raw material for body and glaze preparation to more than 2,000 home center retail outlets operating in the do-it-yourselfmanufacturing and buy-it-yourself markets. Each business unit has a dedicated sales force supporting that unit.distribution of ceramic and porcelain tile.

      On November 10, 2003,October 31, 2005, the Company acquired all the assets and assumed certain liabilitiesoutstanding shares of the commercial carpet divisionUnilin Holding NV (the "Unilin Acquisition").  The total purchase price for acquiring Unilin, net of Burlington Industries, Inc. known as Lees Carpet, from W.L. Ross & Company forcash, was approximately $350 million in cash.Euro 2.2 billion (approximately $2.6 billion).  The results of operations of Lees Carpetfor the Unilin business have been included with the MohawkUnilin segment results and in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpetlaminate flooring market.


      On March 20, 2002, the Company acquired all of the outstanding capital stock of Dal-Tile, The Unilin segment, which is headquartered in Belgium, is a leading manufacturer, distributor and distributormarketer of ceramic tilelaminate flooring in Europe and the United States. Unilin is one of the leaders in laminate flooring technology, having commercialized direct pressure laminate, or DPL, a technology used in a majority of laminates today, and has developed the patented UNICLIC® glueless installation system and a variety of other new technologies, such as beveled edges, multiple length planks and new surface technologies. Unilin is the only vertically-integrated laminate flooring manufacturer in the United States for approximately $1,469 million, consisting of approximately 12.9 million shares ofproducing both laminate flooring and related high density fiberboard. Unilin sells its laminate flooring products under the Company's common stock, options to purchase approximately 2.1 million shares of the Company's common stockQuick-Step® brand through independent distributors and $718 millionspecialty stores in cash. The Company's common stock and options were valued at $751 million based on the measurement date stock price of $55.04 per share ($710.4 million)Europe and the estimated fair value of options usingUnited States, as well as through traditional retailers in France, Belgium and the Black-Scholes option-pricing model ($40.3 million). The transaction has been accounted for using the purchase method of accountingNetherlands and, accordingly, the results of operations of Dal-Tile have been included in the Company's consolidated financial statements from March 20, 2002. The purchase price was allocated to the assets acquiredsome circumstances, under private label names. Unilin also produces insulated roofing and liabilities assumed based upon estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,168.3 million was recorded as goodwill. The primary reason for the acquisition was to expand the Company's presence in the ceramic tile and stone markets.other wood-based panels.

3




Industry

      The floorcoveringUnited States floor covering industry has grown from $12.4 billion in sales in 1992 to $20.3$22.8 billion in 2002.2004. In 2002,2004, the primary categories of the United States floorcoveringfloor covering industry were carpet and rugs (65%rug (62%), ceramic tile (12%(13%), vinylhardwood (10%), resilient and rubber (10%(9%), hardwood (9%) and laminate (4%(6%). Each of these categories has been positively impacted by:

resales;

•            increases in average house size; and

•            increases in home ownership.

     Compound average growth rates for units sold (measured by square yards) for each ofall categories, except the floorcovering categories aboveresilient and rubber category, for the period from 19921999 through 2002, with the exception of the vinyl and rubber category,2004 have met or exceeded the growth raterates (measured in sales dollars) for both the gross domestic product of the United States over the same period.  Ceramic tile, laminate and hardwood continued to exceed the growth rate for housing starts over the same period. During this period, the compound average growth rate was 3.6%3.0% for carpetcarpets and rugs, 10.3%7.0% for ceramic tile, 1.3%0.6% for vinylresilient and rubber, 17.4% for laminate and 8.0%9.4% for hardwood. Laminate, which is a relatively new product, experienced a compound average growth rate of 41.5% from 1996 through 2002.

      According to the most recent figures available from the United States Department of Commerce, worldwide carpet and rug sales volume of American manufacturers and their domestic divisions was 1.9approximately 2.3 billion square yards in 2002.2004. This volume represents a market in excess of approximately $12$14 billion. The overall level of sales in the carpetfloor covering industry is influenced by a number of factors, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

      Broadloom carpet, defined as carpet over six feet by nine feet in size, represented 73% of the amounts shipped by the industry in 2002. Tufted broadloom carpet, a category that refers to the manner of construction in addition to size, represented 86.0% of the broadloom industry volume shipped in 2002. The broadloom carpet industry has two primary markets, residential and commercial, with the residential market making up approximately 75%76% of industry amounts shipped in 20022004 and the commercial market comprising approximately 25%24%. An estimated 50%49% of industry shipments are made in response to replacement demand, which usually involves exact yardage, or "cut order," shipments that typically provide higher profit margins than sales of carpet sold in full rolls. Because the replacement business generally involves higher quality carpet cut to order by the manufacturer, rather than the dealer, this business tends to be more profitable for manufacturers than the new construction business.

      The United States ceramic tile industry shipped 2.63.1 billion square feet, or $2.3$2.9 billion, in 2002. The compound average growth rate of dollar shipments was 8.0% from 1992 through 2002 for ceramic tile.2004. Sales in the ceramic tile industry are influenced by the same factors that influence the carpet industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

     The ceramic tile industry's two primary markets, residential applications and commercial applications, represent 62.0%69.8% and 36.0%28.8% of the industry total, respectively. Of the total residential market, 67%61% of the dollar values of shipments are for new construction.

     In 2004, the United States laminate industry shipped 1.1 billion square feet, representing a market of approximately $1.4 billion, and the European laminate industry shipped 5.2 billion square feet. In 2003, the laminate industry accounted for approximately 10% of the European floor covering markets. Sales in the laminate industry are influenced by the same factors that influence the carpet industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

4




Sales and Distribution

Mohawk Segment.

      Through the Company'sits Mohawk segment, the Company designs, manufactures and markets hundreds of styles of carpet and rugs in a broad range of colors, textures and patterns. In addition, the Mohawk segment markets and distributes ceramic tile, laminate, carpet pad, hardwood and vinylresilient floor covering. The Mohawk segment positions its productsproduct lines in all price ranges and emphasizes quality, style, performance and service. The CompanyMohawk segment markets and distributes carpetits soft and rugs throughhard surface product lines to  over 34,00030,000 customers, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. Some products are also marketed through private labeling programs. Sales to residential customers represent a significant portion of the total industry and the majority of the Company's carpet and rug sales.

      The Company has positioned its premier residential carpet and rug brand names across all price ranges. "Mohawk,"Mohawk®," "Custom Weave,Weave®," "WundaWeve,"WundaWeve®," "Galaxy,"Horizon®," "Horizon,"Helios®" "Helios" and "Karastan""Karastan®" are positioned to sell primarily in the medium-to-high retail price rangechannels in the residential broadloom market, and these lines are also sold under private labels.market. These lines have substantial brand name recognition among carpet dealers and retailers, with the "Karastan,"Karastan®" and "Mohawk""Mohawk®" brands having the highest consumer recognition in the industry. "Karastan""Karastan®" is the leader in the exclusive high-end market. The "Aladdin""Aladdin®" and "World""Mohawk Home®" brand names compete primarily in the low-to-mediumvalue retail price range.channel. The Company markets its hard surface product lines, which include "Mohawk Ceramic®", "Mohawk Hardwood®", "Mohawk Resilient®" and "Mohawk Laminate®" across all price ranges. In addition, the Company markets its decorative throws and pillows, woven bedspreads, textile wall hangings and blankets primarily through the retail channel.

     The Company offers marketing and advertising support through dealer programs like Karastan Gallery, Mohawk ColorCenter, Mohawk Floorscapes and Floorscapes.Mohawk Floorz. These programs offer varying degrees of support to dealers in the form of sales and management training, merchandising systems, exclusive promotions and assistance in certain administrative functions such as consumer credit, advertising and insurance.

     The commercial customer base is divided into several channels: corporate office space, educational institutions, hospitality facilities, retail space and health care facilities. In addition, the Company produces and sells carpet for the federal government and other niche businesses. Different purchase decision makers and decision-making processes exist for each channel.

     The Company's sales forces are generally organized based on product type and sales channels in order to best serve each type of customer. A hub-and-spoke distribution network accomplishes the product distribution on a regional level. In this system, the Company's trucks generally deliver product from manufacturing and central distribution sitescenters to regional and satellite warehouses. From there, it is shipped to retailers or to local distribution warehouses, then to retailers.

      The commercial customer base is divided into several channels: educational institutions, corporate office space, hospitality facilities, retail space and health care facilities. In addition, the Company produces and sells carpet for the export market, the federal government and other niche businesses. Different purchase decision makers and decision-making processes exist for each channel.

      The Company's "Aladdin" commercial brand is sold primarily through retail dealers to customers in the retail space, corporate office and other channels. This sales channel is also commonly referred to as "Main Street." These customers are more price conscious in their purchase decisions. The "Bigelow Commercial" brand is sold primarily to commercial office and retail channels through commercial flooring contractors. The "Mohawk Commercial" brand is marketed to customers in the educational institutional and health care facility channels that are performance oriented. The "Lees" brand is positioned at the higher price points within each sales channel. The "Dura-Color" stain resistant technology and "Unibond" performance backing system enables the "Lees" brand to provide a differentiated product within each sales channel. Additionally, the Company markets its modular (carpet tile) product lines under the "Lees" brand. The "Karastan Contract" and "Durkan Commercial" brands are positioned primarily to service the medium to high-end fashion conscious customer in both the retail and corporate office channels. The "Durkan Hospitality" brand specializes in carpet sold through the hospitality channel to hotels, resorts and casinos.

      The Company believes its ability to make woven carpet under the "Mohawk Commercial" and "Karastan Contract" brand names in large volume for commercial applications differentiates it from other manufacturers, most of which produce tufted carpet almost exclusively. Woven carpet, and specifically the Company's woven interlock products, provides unique characteristics that delivers a better value to the customer and the Company. The Company believes that it is one of the largest producers of woven carpet in the United States and that it has several carpet weaving machines and processes that no other manufacturer has, thereby allowing it to create carpet to meet specifications that its competitors cannot duplicate.


      The Mohawk Home Division, markets its product lines under two major brand names, "Mohawk Home" and "Karastan." Mohawk Home's affordable price points strategy for the mainstream retailers and home centers is directed at the mid and lower retail price ranges, while the "Karastan" brand is directed at upscale retail and flooring stores. Product categories are diverse, including woven wool rugs, polypropylene woven and tufted rugs, printed and woven nylon rugs, doormats, washable bath rugs, decorative throws and pillows, woven bedspreads, textile wall hangings and blankets.

Dal-Tile Segment.

      The Dal-Tile segment'ssegment designs, manufactures and markets a broad line of ceramic tile, porcelain tile and natural stone productsproducts. Products are distributed through three separate distribution channels consisting of company-operated sales service centers,retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel. Achannel, and dedicated sales force supports each channel.forces support the various channels.

      The Company has foursix regional distribution centers strategically located in California, Maryland, Texas and Florida.the Dal-Tile operations. These centers help the Company createdeliver high-quality customer service by focusing on shorter lead times, increased order fill rates and improved on-time deliveries to its customers. These distribution centers also enhance the Company's ability to plan and schedule production and manage inventory requirements.

     The Company'sA network of over 240approximately 250 sales service centers located in the United States, Canada and Puerto Rico distributes primarily the Daltile"Dal-Tile®" brand product, serving customers in all 50 states and portions of Canada and Puerto Rico. The service centers provide distribution points for both customer pick-up and delivery and include showrooms to assist customers with product selection.

     The Company serves as a "one-stop" source that provides customers with one of the ceramic tile industry's broadest product lines-a complete selection of glazed floor tile, glazed wall tile, glazed and unglazed ceramic mosaic tile, porcelain tile, quarry tile and stone products, as well as allied products. In addition to products manufactured by the Company's ceramic tile business, the Company carries a selection ofalso purchases products purchased from other manufacturers to provide customers with a broaderenhance its product line.offering.

5




     The independent distributor channel offers a uniquedistinct product line under the "American Olean"Olean®" brand. Currently, the "American Olean"Olean®" brand is distributed through approximately 200 independent distributor locations that service a variety of residential and commercial customers. The Company is focused on increasing its presence in the independent distributor channel, particularly in tile products that are most commonly used in flooring applications.

     The Company believes its Dal-Tile segment is one of the U.S. ceramic tile industry's largest suppliers to the do-it-yourself and buy-it-yourself markets through home center retailers, such as The Home Depot and Lowe's. The home center channel is expected to continue presenting important growth opportunities.

      The Company believes that it has two of the leading brand names in the U.S. ceramic tile industry-"Daltile"Dal-Tile®" and "American Olean.Olean®".  The roots of the "Daltile""Dal-Tile®" and "American Olean"Olean®" brand names date back approximatelyover fifty and seventy-five years, respectively.respectively and are well recognized in the industry.

     The Company's sales service centers primarily distribute the "Daltile""Dal-Tile®" brand, with a fully integrated marketing program, emphasizing a focus on quality and fashion. The broad product offering satisfies the needs of its residential, commercial and builder customers. The "American Olean"Olean®" brand consists of a full product offering and is distributed primarily through independent distributors. Both of these brands are supported by a fully integrated marketing program, including public relations efforts, displays, merchandising (sample boards, chip chests), literature/catalogs and an Internet website.

Unilin Segment

     The Unilin segment's laminate flooring products are distributed through separate distribution channels consisting of retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel.

     In the United States, the Unilin operations have three regional distribution centers. These distribution centers help deliver high-quality customer service and also enhance the Company's ability to plan and schedule production and manage inventory requirements.

     In Europe, the Unilin operations distribute products directly from its manufacturing facilities. This integration with its manufacturing sites allows for quick responses to customer needs and low inventory levels.

     In the Unilin business, the Company markets and sells laminate flooring products under the "Quick-Step®" brand, which the Company believes is one of the leading brand names in the U.S. and European laminate industry.

Advertising and Promotion

      The Company promotes its brands through national advertising in both television and print media as well as in the form of cooperative advertising, point-of-sale displays, advertising and sponsorship of a cycling team, and marketing literature provided to assist in marketing various carpet and ceramic tileflooring styles. The Company also continues to rely on the substantial brand name recognition of its product lines. The cost of producing display samples, a significant promotional expense, is partially offset by sales of samples and support from suppliers in the carpet and rug business.


Manufacturing and Operations

      Carpet and Rugs Business.Mohawk Segment

      The Company's manufacturing operations are vertically integrated and include the extrusion of resin and post-consumer plastics into polypropylene, polyester and nylon fiber, yarn processing, tufting, weaving, dyeing, coating and finishing. Capital expenditures are primarily focused on increasing capacity, improving productivity and reducing costs. Over the past three years, the Company has incurred capital expenditures that have helped increase manufacturing efficiency and capacity and improve overall cost competitiveness.

      Ceramic Tile Business.Dal-Tile Segment

     Over the past three years, the Dal-Tile segment has invested in capital expenditures, principally forin new plantsplant and state-of-the-art fast-fire equipment to increase manufacturing capacity, improve efficiency and develop new capabilities. In addition, the Company has added a porcelain tile manufacturing plant, which will significantly expand its production capacity in 2004.

6


      The ceramic tile business commenced operations in Mexico at the Company's Monterrey facility in 1955 and currently manufactures products at this facility primarily for U.S. consumption. The Monterrey location produces ceramic tile, frit (ground glass) and refractories.



      The Company believes that its manufacturing organization offers competitive advantages due to its ability to manufacture a differentiated product line consisting of one of the industry's broadest product offerings of colors, textures and finishes, as well as the industry's largest offering of trim and angle pieces and its ability to utilize the industry's newest technology.

Unilin Segment

     The Company's laminate flooring manufacturing operations are vertically integrated, both in the United States and in Europe, and include high-density fiberboard ("HDF") production, short-cycle pressing, cutting and milling. The European operations also include resin production. Unilin has state-of-the-art equipment that results in competitive manufacturing in terms of cost and flexibility. Most of the equipment for the production of laminate flooring in Belgium and North Carolina is relatively new. The Company's laminate flooring plant in North Carolina is one of the largest in the United States. In addition, Unilin is the only fully integrated laminate manufacturer in the United States with its own "HDF" production facility.

     The manufacturing facilities for other activities in the Unilin business (insulated roofing and other wood-based panels) are all configured for cost-efficient manufacturing and production flexibility and are competitive in the European market.

Raw Materials and Suppliers

Mohawk Segment

Carpet and Rugs Business.     The principal raw materials the carpet and rug business uses are nylon, polypropylene, polyester and wool resins and fibers,fibers; synthetic backing materials, polyurethanematerials; latex and various dyes and chemicals. The Company obtains all of its majorMajor raw materials used in the Company's manufacturing process are available from independent sources and the Company obtains all of its externally purchased nylon fibers principally from threetwo major suppliers: Koch Industries, Inc., Solutia,Invista Inc., and Honeywell,Solutia, Inc.  TheAlthough temporary disruptions of supply of carpet raw materials have been experienced as a result of recent hurricanes, the carpet and rug business has not experienced significant shortages of raw materials in recent years. The Company believes that there is an adequate supply of all grades of resin and fiber, and that allwhich are readily available from a number of independent sources.available.

Ceramic Tile Business. Dal-Tile Segment

In the Company's ceramic tile business, the Company manufactures tile primarily from clay, talc, claynepheline syenite and nepheline syenite.glazes. The Company has entered into a long-term supply agreement for most of its talc requirements with one supplier.requirements.

     The Company owns long-term clay mining rights in Alabama, Kentucky and Mississippi that satisfy nearly all of its clay requirements for producing unglazed quarry tile. The Company purchases a number of different grades of clay for the manufacture of its non-quarry tile. The Company believes that there is an adequate supply of all grades of clay and that all are readily available from a number of independent sources.

     The Company has a single source suppliertwo suppliers for its nepheline syenite requirements. If this supplierthese suppliers were unable to satisfy the Company's requirements, the Company believes that alternative supply arrangements would be available.

     Glazes are used on a significant percentage of the Company's manufactured tile. Glazes consist of frit (ground glass), zircon, stains and other materials, with frit being the largest ingredient. The Company manufactures approximately 57%45% of its frit requirements.

 Unilin Segment

     The principal raw materials used in producing boards and laminate flooring are wood, paper and resin.

     Wood supply is a very fragmented market in Europe. The Company has long-standing relationships with approximately 25 suppliers. These suppliers provide a wide variety of wood species, varying from fresh round wood to several kinds of by-products of sawmills and used wood recycled specifically for chipboard production, giving the Company a cost-effective and secure supply of raw material.

7




     In the United States, the Company has a long-term contract with a strategic partner that supplies approximately 90% of its total needs for wood on a vendor-managed inventory program.

     Major manufacturers supply the papers required in the laminate flooring business in both Europe and the United States. The Company does more than 90% of the paper impregnation internally in its laminate flooring facilities in Europe and the United States. In Europe, the resins for paper impregnation are manufactured by the Company, which permits greater control over the laminate flooring manufacturing process, enabling the Company to produce higher-quality products.

     The Company buys the balance of its resin requirements from a number of companies. The Company believes there are ample sources of supply. All the plants of the Company are located within a distance of about 100 miles to the chemical plants manufacturing those types of resins used in its laminate products.

Competition

Carpet     The principal methods of competition within the floor covering industry generally are service,  style, quality, price and, Rugs Business.    to a certain extent, product innovation and technology. In each of the markets other than laminate flooring, price competition and market coverage are particularly important because there is limited differentiation among competing product lines. In the laminate flooring market, the Company believes it has a competitive advantage as a result of Unilin's high-end products and patented technologies, which allows the Company to distinguish its laminate flooring products in the areas of finish, quality, installation and assembly. In the Mohawk and Dal-Tile segments, the recent investments in modernized advanced manufacturing and data processing equipment, the extensive diversity of equipment that has been invested, as well as the Company's marketing strategy and distribution system contribute to its ability to compete primarily on the basis of performance, quality, style and service, rather than just price. The carpet and rugsrug industry has experienced substantial consolidation in recent years, and the Company is one of the largest carpet and rug manufacturers in the world. While the ceramic tile industry is more fragmented, the Company believes it is substantially larger than the next largest competitor and that it is the only significant manufacturer with its own North American distribution system. The laminate flooring industry has a number of significant competitors more than either the carpet and rug industry or the ceramic tile industry. The Company faces competition in the laminate flooring market from a large number of domestic and foreign manufacturers.

Mohawk Segment

     The carpet and rug industry is highly competitive. Based on industry publications, the top 20 North American carpet and rug manufacturers (including their American and foreign divisions) in 20022004 had worldwide sales in excess of $13.0$12.5 billion, and in 1998 the top 20 manufacturers in 1990 had sales in excess of $6$9.6 billion. In 2002,2004, the top five manufacturers had worldwide sales in excess of $10.2$10.0 billion. The Company believes it is the second largest producer of carpetcarpets and rugs (in terms of sales volume) in the world.world based on its 2004 sales.

Dal-Tile Segment


Ceramic Tile Business.    The Company estimates that over 100 tile manufacturers, more than half of which are based outside the United States, compete for sales of ceramic tile to customers located in the United States. Although the U.S. ceramic tile industry is highly fragmented at both the manufacturing and distribution levels, the Company believes it is one of the largest manufacturer, distributormanufacturers, distributors and marketermarketers of ceramic tile in the United States and the world.

Unilin Segment

     Laminate flooring is the fastest growing product in the floor covering industry and is produced by more than 130 industrial manufacturers in 25 countries. The Company believes it is one of the largest manufacturers, distributors and marketers of laminate flooring in the world.world, with a focus on high-end products. The Company is also the only vertically-integrated laminate flooring manufacturer in the United States producing both high density fiberboard and laminate flooring.

8




Patents and Trademarks

     The principal methods of competition within the carpet and rugs and ceramic tile industries are price, style, quality and service. In each ofIntellectual property is important to the Company's markets, price competitionbusiness, and market coverage are particularly important because there is limited differentiation among competing product lines. The Company's recent investments in modernized, advanced manufacturing and data processing equipment, the extensive diversity of equipment in which the Company has invested,relies on a combination of patent, copyright, trademark and trade secret laws to protect its marketing strategy and its distribution system contribute to its ability to compete primarily on the basis of performance, quality, style and service, rather than just price.

      In each of the Company's carpet and rug and ceramic tile businesses, the Company faces competition from a large number of domestic and foreign manufacturers and independent distributors of floorcovering products. Some of the Company's existing and potential competitors may be larger and have greater resources and access to capital than the Company does. Maintaining the Company's competitive position may require it to make substantial investments in its product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company's products and in the loss of market share. In addition, the Company faces, and will continue to face, pressure on sales prices of its products from competitors, as well as from large customers. As a result of any of these factors, there could be a material adverse effect on the Company's sales and profitability.

Trademarksinterests.

     The Company uses several trademarks that it considers important in the marketing of its products, including "Aladdin,"Aladdin®," "American Olean®Olean®," "Bigelow,"Bigelow®," "Custom Weave" "Dal-Tile®Weave®," "Durkan," "Galaxy," "Goodwin Weavers," "Helios®"Dal-Tile®," "Home Source," "Horizon®"Durkan®," "Karastan®"Helios®," "Lees®"Horizon®," "Mohawk®"Karastan®," "Lees®," "Mohawk®," "Mohawk Home," "PERSPECTIVE, ®" "Portico, ®" "Quick-Step®," "World®"UNICLIC®," "UNILIN®," and "WundaWeve®"WundaWeve®."

     Unilin owns a number of patent families, totaling approximately 150 patents and applications in Europe and the United States. The most important of these patent families is the UNICLIC® family, which protects Unilin's interlocking laminate flooring panel technology. The patents in the UNICLIC® family are not expected to expire until at least 2017.

Sales Terms and Major Customers

     The Company's sales terms are the same as those generally available throughout the industry. The Company generally permits its customers to return broadloom carpet, andrug, ceramic tile, and laminate flooring purchased from it within 30 daysspecified time periods from the date of sale, if the customer is not satisfied with the quality of the product. This return policy is consistent with the Company's emphasis on quality, style and performance and promotes customer satisfaction without generating enough returns to affect materially its operating results or financial position.

     During 2003,2005, no single customer accounted for more than 10% of Mohawk's total net sales, and the top ten customers accounted for less than 15% of the Company's sales. The Company believes the loss of one or a few major customers would not have a material adverse effect on its business.

Employees

     As of March 2, 2004,10, 2006, the Company employed approximately 33,300 persons, of which approximately 635 of its employees in the37,700 persons. Approximately 460  United States employees, approximately 3,500 Mexico employees, and approximately 3,100the majority of itsEuropean manufacturing employees in Mexico are members of unions. Other than with respect to these employees, the Company is not a party to any collective bargaining agreements. Additionally, the Company has not experienced any strikes or work stoppages in the United States or Mexico for over 20 years. The Company believes that its relations with its employees are good.

Available Information

      The Company's Internet address is http://mohawkind.com. The Company makes the following reports filed by it available, free of charge, on its website under the heading "Investor Information:"

  • annual reports on Form 10-K;
  • quarterly reports on Form 10-Q;
  • current reports on Form 8-K; and
  • amendments to the foregoing reports.

      The foregoing reports are made available on the Company's website as soon as practicable after they are filed with, or furnished to, the Securities and Exchange Commission ("SEC").

Item 1a. Risk Factors

Certain Factors affecting the Company's Performance

      In addition to the other information provided in this Annual Report on Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock.

      If any of the events described in these risks were to occur, it could have a material adverse effect on the Company's business, financial condition and results of operations.

9




The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels and demand for housing. A prolonged decline in spending for replacement floor covering products or new construction activity could have a material adverse effect on the Company's business.

      The floor covering industry in which the Company participates is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending and interest rate levels. The Company derives a majority of the Company's sales from the replacement segment of the market. Therefore, economic changes that result in a prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company's business and results of operations.

      The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, a prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company's business and results of operations.

      The construction industry has experienced significant downturns in the past, which have adversely affected suppliers to the industry. The industry could experience similar downturns in the future, which could have a negative impact on the Company's business.

The Company may be unable to pass increases in the costs of raw materials and fuel-related costs on to its customers, which could have a material adverse effect on the Company's profitability.

      The prices of raw materials and fuel-related costs vary with market conditions. As a result of recent hurricanes and other general economic factors, the Company's costs of carpet raw materials and fuel-related costs are currently higher than historical averages and may remain so indefinitely. Although the Company generally attempts to pass on increases in the costs of raw materials 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 recovered. During such periods of time, the Company's profitability may be materially adversely affected.

The Company faces intense competition in the industry, which could decrease demand for the Company's products or force it to lower prices, which could have a material adverse effect on the Company's profitability.

      The floor covering industry is highly competitive. The Company faces competition from a number of manufacturers and independent distributors. Some of the Company's competitors are larger and have greater resources and access to capital than the Company does. Maintaining the Company's competitive position may require substantial investments in the Company's product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company's products or force the Company to lower prices. Any of these factors could have a material adverse effect on the Company's business.

The Company may not be able to successfully integrate Unilin or other acquisitions that the Company may make in the future.

      The process of combining the businesses of Unilin with the Company's existing businesses involves risks. The Company will face challenges in consolidating functions, integrating the Company's organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel. These challenges will result principally because the two companies currently

  •  maintain executive offices in different locations;

  • manufacture and sell different types of products through different distribution channels;

  • conduct business from various locations;

  • maintain different operating systems and software on different computer hardware; and

  • have different employment and compensation arrangements for their employees.

10




      In addition, the majority of Unilin's operating facilities are located in Europe, where the Company has not previously operated a manufacturing facility. As a result, the integration will be complex and will require additional attention from members of management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company's revenues, level of expenses and operating results. The Company may face similar challenges in combining the Company's businesses with any other businesses that the Company acquires in the future.

      Failure to successfully manage and integrate Unilin with the Company's existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect the Company's financial condition and results of operations. Even if integration occurs successfully, failure of the Unilin Acquisition or any future acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise not perform as expected, may adversely impact the Company's financial condition and results of operations. The Company has incurred, and will continue to incur, certain liabilities and expenses in connection with the Unilin Acquisition or any future acquisitions.

The Company has not yet completed the testing of the adequacy of Unilin's internal control over financial reporting, and it is possible that the Company's testing or that of the Company's independent auditors in connection with the audit of the Company's financial results for the year ended December 31, 2006, will reveal material weaknesses in Unilin's internal control over financial reporting.

      As part of the integration of Unilin, the Company is in the process of documenting and testing of the Unilin's internal control over financial reporting to allow management and the Company's independent registered public accounting firm to report in 2006 on the effectiveness of the internal control over financial reporting as it pertains to Unilin's operations. The adequacy of Unilin's internal control over financial reporting has not previously been attested to by any independent accounting firm, as no such attestation was required by virtue of Unilin's status as a foreign, privately-held company. The Company anticipates completing the testing of Unilin's internal control over financial reporting by the end of 2006. The Company's testing, or the subsequent testing by the Company's independent registered public accounting firm, may reveal deficiencies in the Company's internal control over financial reporting. In that event, the Company's management may not be able to report that the Company's internal control over financial reporting is effective, and the Company's auditors will not be able to express an opinion on the Company's internal control over financial reporting, which could have a material adverse effect on the Company's business.

A failure to identify suitable acquisition candidates and to complete acquisitions could have a material adverse effect on the Company's business.

      As part of the Company's business strategy, the Company intends to continue to pursue acquisitions of complementary businesses. Although the Company regularly evaluates acquisition opportunities, the Company may not be able successfully to identify suitable acquisition candidates; to obtain sufficient financing on acceptable terms to fund acquisitions; to complete acquisitions; or to manage profitably acquired businesses.

The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on the Company's business.

      The principal raw materials used in the Company's manufacturing operations include nylon, polyester and polypropylene resins and fibers and carpet backings, which are used primarily in the Company's carpet and rugs business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in the Company's ceramic tile business; wood, paper, and resins which are used primarily in the Company's laminate flooring business; and other materials. An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on the Company's business.

11




The Company has been, and in the future may be, subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

      The Company's operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of hazardous materials. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.

      The nature of the Company's operations, including the potential discovery of presently unknown environmental conditions, exposes it to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.

Changes in international trade laws and in the business, political and regulatory environment in Mexico and Europe could have a material adverse effect on the Company's business.

      The Company's Monterrey, Mexico manufacturing facility and the Company's manufacturing facilities in Europe represent a significant portion of the Company's total manufacturing capacity for ceramic tile and laminate flooring, respectively.  In addition, as a result of the Unilin Acquisition, the Company now has more significant general operations abroad, particularly in Europe. Accordingly, an event that has a material adverse impact on the Company's Mexican operations could have a material adverse effect on the Company's tile operations as a whole.  Similarly, an event that has a material adverse impact on the Company's European operations could have a material adverse effect on the Company's laminate flooring operations, as a whole.  The business, regulatory and political environments in Mexico and in Europe differ from those in the United States, and the Company's Mexican and European operations are exposed to legal, currency, tax, political, and economic risks specific to the countries in which they occur, particularly with respect to labor regulations, which tend to be more stringent in Europe and, to a lesser extent, Mexico.  The Company cannot assure investors that the Company will succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where the Company does business and therefore that the foregoing factors will not have a material adverse effect on the Company's operations or upon the Company's financial condition and results of operations.

The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ("GATT") and the North American Free Trade Agreement ("NAFTA").

      The Company is uncertain what effect reduced import duties under GATT may have on the Company's operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States.

      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico.

Fluctuations in currency exchange rates may impact the Company's financial condition and results of operations and may affect the comparability of results between the Company's financial periods.

      The results of the Company's foreign subsidiaries reported in the local currency are translated into U.S. dollars for balance sheet accounts using exchange rates in effect at the balance sheet date and for the statement of earnings accounts using the Company's weighted average rates during the period.  The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. Although the Company has not yet experienced material losses due to foreign currency fluctuation, the Company may not be able to manage effectively the Company's currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the carrying value of the Company's debt and results of operations and affect comparability of the Company's results between financial periods.

12




If the Company is unable to protect the Company's intellectual property rights, particularly with respect to the Company's patented laminate flooring technology and the Company's registered trademarks, the Company's business and prospects could be harmed.

      The future success and competitive position of certain of the Company's businesses, particularly the Company's laminate flooring business, depend in part upon the Company's ability to obtain and maintain proprietary technology used in the Company's principal product families. The Company relies, in part, on the patent, trade secret and trademark laws of the United States and countries in Europe, as well as confidentiality agreements with some of the Company's employees, to protect that technology.

      The Company has obtained a number of patents relating to the Company's products and associated methods and has filed applications for additional patents, including the UNICLIC® family of patents, which protects Unilin's interlocking laminate flooring panel technology. The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Company's pending patent applications will be approved. In addition, patent filings by third parties, whether made before or after the date of the Company's filings, could render the Company's intellectual property less valuable.

      Furthermore, despite the Company's efforts, the Company may be unable to prevent competitors and/or third parties from using the Company's technology without the Company's authorization, independently developing technology that is similar to that of the Company or designing around the Company's patents. The use of the Company's technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause us to lose sales or otherwise harm the Company's business. In addition, if the Company does not obtain sufficient protection for the Company's intellectual property, the Company's competitiveness in the markets it serves could be significantly impaired, which would limit the Company's growth and future revenue.

      The Company has obtained and applied for numerous U.S. and foreign service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of the Company's pending or future applications will be approved by the applicable governmental authorities. Moreover, even if such applications are approved, third parties may seek to oppose or otherwise challenge the registrations. A failure to obtain trademark registrations in the United States and in other countries could limit the Company's ability to protect the Company's trademarks and impede the Company's marketing efforts in those jurisdictions.

      The Company requires third parties with access to the Company's trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company's trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties. In any of these circumstances, the Company's competitiveness could be significantly impaired, which would limit the Company's growth and future revenue.

Companies may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Company's products.

      The Company has in the past had companies claim that certain technologies incorporated in the Company's products infringe their patent rights. There can be no assurance that the Company will not receive notices in the future from parties asserting that the Company's products infringe, or may infringe, those parties' intellectual property rights. The Company cannot be certain that the Company's products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States and some foreign countries have not been publicly disclosed until the patent is issued (or, in some recent cases, until 18 months following submission), and the Company may not be aware of currently filed patent applications that relate to the Company's products or processes. If patents are later issued on these applications, the Company may be liable for infringement.

13




      Furthermore, the Company may initiate claims or litigation against parties for infringement of the Company's proprietary rights or to establish the invalidity, noninfringement, or unenforceability of the proprietary rights of others. Likewise, the Company may have similar claims brought against it by competitors. Litigation, either as plaintiff or defendant, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from operations, whether or not such litigation is resolved in the Company's favor. In the event of an adverse ruling in any such litigation, the Company might be required to pay substantial damages (including punitive damages and attorneys fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. There can be no assurance that licenses to disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Company's business, financial condition and results of operations would be materially and adversely affected.

Forward-Looking Information

      Certain of the statements in this Annual Report on Form 10-K, particularly those anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "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 industry conditions; competition; raw material prices; energy costs; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; litigation; and other risks identified in Mohawk's SEC reports and public announcements.

Item 1b. Unresolved Staff Comments

      None

Item 2. Properties

       The Company owns a 47,500 square foot headquarters office in Calhoun, Georgia on an eight-acre site. The Company also owns a 2,089,000 square foot manufacturing facility located in Dalton, Georgia, andused by the Mohawk segment, a 1,464,5971,773,145 square foot manufacturing facility located in Monterey, Mexico.Mexico used by the Dal-Tile segment and a 1,128,535 square foot manufacturing facility located in Wielsbeke, Belgium used by the Unilin segment. The following table summarizes the Company's facilities both owned and leased for each segment in square feet:

Mohawk SegmentDal-Tile Segment

Mohawk Segment

 

Dal-Tile Segment

 

Unilin Segment

Primary PurposeOwnedLeasedOwnedLeased

Owned

 

Leased

 

Owned

 

Leased

 

Owned

 

Leased

class="edi" bgcolor="#97DDFF" Manufacturing  8,573,139  1,363,092  4,510,601  22,000 

Manufacturing

20,059,803 

685,338 

4,589,135 

22,000 

6,676,517 

831,600 

Selling and Distribution          3,399,339          4,406,423               97,511          5,036,151 

4,174,479 

5,996,943 

152,811 

6,961,621 

Other             948,855             216,016             147,930               36,000 

910,548 

321,312 

36,000 

Total       22,921,333          5,985,531          4,756,042          5,094,151 

25,144,830 

6,682,281 

5,063,258 

7,019,621 

6,676,517 

831,600 

          The Company's properties are in good condition and adequate for its requirements. The Company also believes its principal plants are generally adequate to meet its production plans pursuant to itsthe Company's long-term sales goals. In the ordinary course of its business, the Company monitors the condition of its facilities to ensure that they remain adequate to meet long-term sales goals and production plans.

Item 3. Legal Proceedings

      The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below or under the section "-Environmental Matters," there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

14




      In Shirley Williams, et al vs. Mohawk Industries, Inc., four plaintiffs filed a purported class action lawsuit in January 2004, in the United States District Court for the Northern District of Georgia, alleging that they are former and current employees of the Company and that the actions and conduct of the Company, including the employment of persons who are not permitted to work in this country, have damaged them and the other members of the purported class by suppressing the wages of the Company's hourly employees in Georgia. The plaintiffs seek a variety of relief, including (a) treble damages; (b) return of any allegedly unlawful profits; and (c) attorney's fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District in April 2004. The Company then sought and obtained permission to file an immediate appeal of the Northern District's decision to the United States Court of Appeals for the 11th Circuit. In June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (Williams v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005, the Company filed a motion requesting review by the full 11th Circuit, which was denied in August 2005. In October 2005, the Company filed a petition for certiorari with the United States Supreme Court, which petition was granted in December of 2005. The Company believes it has meritorious defenses and intends to continue vigorously defending itself against this action.

      The Company believes that adequate provisions have been made for all pending litigation for probable losses with respect to the resolution of all claims and pending litigation and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material effect on its results of operations in a given quarter or annual period.

Environmental Matters

      The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment and disposal of solid and hazardous materials, and the cleanup of contamination associated therewith.  Because of the nature of the Company's business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations.  The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided reservesaccruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities will have a material adverse effect on it.

      Three sites near Mohawk's Dallas facility in its Dal-Tile segment are involved in environmental cleanup projects relating principally to the disposal or alleged disposal by Dal-Tile of waste materials containing lead compounds. Dal-Tile's approved closure plansoperations, but may have been implemented and each site is now undergoing post-closure care.  Dal-Tile has been named as a potentially responsible party under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state statutes for the disposal of certain hazardous substances at various other sites in the United States.  The Company does not believe that any future costs for these sites will have a material adversean effect on it.the results of operations for a given quarter or annual period.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders of the Company during the fourth quarter ended December 31, 2003.2005.

15




PART II

Item 5. Market for the Registrant's Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for the Common Stock

      The Company's common stock, $.01 par value per share (the "Common Stock") is quoted on the New York Stock Exchange ("NYSE") under the symbol "MHK."  The table below shows the high and low sales prices per share of the Common Stock as reported on the NYSE Composite Tape, for each fiscal period indicated.

Mohawk

Mohawk

Common Stock

Common Stock

HighLow

High

 

Low

2002
2004      
First quarter  $   68.10       50.50 

 $

85.79 

68.77 

Second quarter      70.60       57.25 

82.98 

68.89 

Third quarterThird quarter      62.24       40.25 

81.60 

69.07 

Fourth quarterFourth quarter      63.40       43.75 

92.44 

74.05 

2003
2005      
First quarter $   59.38       41.00 

 $

94.72 

82.15 

Second quarter       63.04       47.65 

89.00 

76.54 

Third quarter Third quarter       75.75       55.25 

92.45 

76.19 

Fourth quarter Fourth quarter       75.48       67.07 

89.71 

74.55 

2004
First quarter (through March 2, 2004)      84.16       68.77 
2006      

First quarter (through March 13, 2006)

 $

90.88 

80.05 

      As of March 2, 2004,13, 2006, there were approximately 411384 holders of record of Common Stock. The Company has not paid or declared any cash dividends on shares of its Common Stock since completing its initial public offering. The Company's policy is to retain all net earnings for the development of its business, and presently, it does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of future cash dividends will be at the sole discretion of the Board of Directors and will depend upon the Company's profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.

      The Company did not repurchase any of its common stock during the fourth quarter of 2005.

      On October 31, 2005, the Company entered into an agreement to issue 585,549 shares of Common Stock to certain Unilin officers for $81.00 per share, for an aggregate purchase price of $47.4 million. The shares of Common Stock purchased by the Unilin officers, 389,976 of which were issued on November 7, 2005, and 195,573 of which were issued on November 9, 2005, were issued in reliance on the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by the issuer not involving a public offering. All of these securities were acquired by the recipients for investment and with no view toward public resale or distribution of the securities without registration. There was not any public solicitation and the issued stock certificates bear restrictive legends.

16




Item 6. Selected Financial Data

      The following table sets forth the selected financial data of the Company for the periods indicated, which information is derived from the consolidated financial statements of the Company. On January 29, 1999, the Company acquired certain assets and assumed certain liabilities of Image Industries, Inc. ("Image"). The acquisition was recorded using the purchase method of accounting. On March 9, 1999, the Company acquired all of the outstanding capital stock of Durkan Patterned Carpets, Inc. ("Durkan") in exchange for approximately 3.1 million shares of the Company's common stock in a transaction recorded using the pooling-of-interests method of accounting. On November 14, 2000, the Company acquired certain fixed assets and inventory of Crown Crafts, Inc. ("Crown Crafts"). The acquisition was accounted for using the purchase method of accounting. On March 20, 2002, the Company acquired all the outstanding capital stock of Dal-Tile International Inc. ("Dal-Tile") in exchange for approximately of $1,469 million, consisting of approximately 12.9 million shares of the Company's common stock, options to purchase approximately 2.1 million shares of the Company's common stock and $718 million in cash. The acquisition was accounted for using the purchase method of accounting. On November 10, 2003, the Company acquired certain assets and assumed certain liabilities of the Lees Carpet division of Burlington Industries, Inc. ("Lees Carpet") for approximately $350 million in cash. The acquisition was recorded using the purchase method of accounting.  AllOn October 31, 2005 the Company acquired all the outstanding shares of Unilin Holding NV.  The total purchase price of the Unilin Acquisition, net of cash, was approximately Euro .2 billion (approximately $2.6 billion).  The acquisition was recorded using the purchase method of accounting. The consolidated financial data have been restated tostatements include the accounts and results of operationsall acquisitions from the date of Durkan.acquisition. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere herein.


At or for the Years Ended December 31,

At or for the Years Ended December 31,

20032002 (c)200120001999

2005

2004

 

2003

2002 (c)

2001

(In thousands, except per share data)

(In thousands, except per share data)

Statement of earnings data:

 

 

 

 

 

 

Net sales $ 5,005,053    4,522,336    3,445,945    3,404,034    3,211,575 

 $

6,620,099 

5,880,372 

4,999,381 

4,516,957 

3,441,267 

Cost of sales(a)    3,645,677    3,282,269    2,613,043    2,581,185    2,434,716 

4,896,965 

4,259,531 

3,605,579 

3,247,865 

2,583,669 

Gross profit    1,359,376    1,240,067       832,902       822,849       776,859 

1,723,134 

1,620,841 

1,393,802 

1,269,092 

857,598 

Selling, general and administrative
expenses       817,347       718,002       505,745       505,734       482,062 

1,095,862 

985,251 

851,773 

747,027 

530,441 

Class action legal settlement (a)                   -                  -                  -           7,000                  - 
Operating income       542,029       522,065       327,157       310,115       294,797 

627,272 

635,590 

542,029 

522,065 

327,157 

Interest expense (b)          55,575         68,972         29,787         38,044         32,632 

66,791 

53,392 

55,575 

68,972 

29,787 

Other (income) expense, net         (1,980)          9,464           5,954           4,442           2,266 

Other expense (income), net

3,460 

4,809 

(1,980)

9,464 

5,954 

         53,595         78,436         35,741         42,486         34,898 

70,251 

58,201 

53,595 

78,436 

35,741 

Earnings before income taxes       488,434       443,629       291,416       267,629       259,899 

557,021 

577,389 

488,434 

443,629 

291,416 

Income taxes        178,285       159,140       102,824       105,030       102,660 

198,826 

208,767 

178,285 

159,140 

102,824 

Net earnings  $    310,149       284,489       188,592       162,599       157,239 

 $

358,195 

368,622 

310,149 

284,489 

188,592 

Basic earnings per share $          4.68             4.46             3.60             3.02             2.63 

 $

5.35 

5.53 

4.68 

4.46 

3.60 

Weighted-average common shares
outstanding         66,251         63,723         52,418         53,769         59,730 

66,932 

66,682 

66,251 

63,723 

52,418 

Diluted earnings per share $          4.62             4.39             3.55             3.00             2.61 

 $

5.30 

5.46 

4.62 

4.39 

3.55 

Weighted-average common and
dilutive potential common shares
outstanding          67,121         64,861         53,141         54,255         60,349 

67,644 

67,557 

67,121 

64,861 

53,141 

Balance sheet data:

 

Working capital $    646,483       640,846       449,361       427,192       560,057 

 $

1,228,573 

968,923 

592,310 

640,846 

449,361 

Total assets     4,163,575    3,596,743    1,768,485    1,795,378    1,682,873 

7,991,523 

4,403,118 

4,163,575 

3,596,743 

1,768,485 

Long-term debt (including
current portion)    1,012,413       820,427       308,433       589,828       596,065 

3,308,370 

891,341 

1,012,413 

820,427 

308,433 

Stockholders' equity    2,297,801    1,982,879       948,551       754,360       692,546 

3,027,120 

2,666,337 

2,297,801 

1,982,879 

948,551 

(a)     TheIn 2005, the Company recorded a one-time chargenon-recurring $34,300 (net of $7.0 million in 2000, reflecting the settlementtax of two class action lawsuits.$22,300) fair value adjustment  to Unilin's acquired inventory.

(b)     In December 2002, the Company discontinued hedge accounting for its interest rate swap. The impact of discontinuing the hedge was to increase interest expense by approximately $10.7 million.

17




(c)     In 2002, the Company adopted the provisions of Financial Accounting Standards Board SFAS No. 142 "Goodwill and Other Intangible Assets" which required the Company to cease amortizing goodwill and evaluate such goodwill and indefinite intangibles for impairment.


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

Overview

      The Company is thea leading producer of floorcoveringfloor covering products for residential and commercial applications in the United States.States and Europe with net sales in 2005 in excess of $6.6 billion. The Company is the second largest carpet and rug manufacturer, and a leading manufacturer, marketer and distributor of ceramic tile and natural stone, in the United States. Annual floorcovering sales withinStates and a leading producer of laminate flooring in the United States in 2002 were approximately $20.3 billion.and Europe.

      The Company had annual nethas three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment distributes its product lines, which include carpet, rug, pad, ceramic tile, hardwood, resilient and laminate through its network of approximately 52 regional distribution centers and satellite warehouses using its fleet of company-operated trucks, common carrier or rail transportation. The segment product lines are purchased by independent floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products distributed through approximately 250 company-operated sales in 2003 in excessservice centers and regional distribution centers using primarily common carriers and rail transportation. The segment product lines are purchased by tile specialty dealers, tile contractors, floor covering retailers, commercial end users, independent distributors and home centers. The Unilin segment manufactures and markets laminate flooring products which are distributed through separate distribution channels consisting of $5.0 billion.retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel.

      The primary categories of the floorcoveringUnited States floor covering industry include carpet and rugs (65%rug (62%), ceramic tile (12%), vinylhardwood (10%), resilient and rubber (10%), hardwood (9%) and laminate (4%(6%). Compound average growth rates in units sold (measured in square yards) for all categories, except the vinylresilient and rubber category, for the period from 19921999 through 20022004 have met or exceeded the growth raterates (measured in sales dollars) for both the gross domestic product of the United States over the same period.  Ceramic tile, laminate and hardwood continued to exceed the growth rate for housing starts over the same period. During this period, the compound average growth rate was 3.6%3.0% for carpet and rugs, 10.3%rug, 7.0% for ceramic tile, 1.3%0.6% for vinylresilient and rubber, 17.4% for laminate and 8.0%9.4% for hardwood.  Laminate, which is a relatively new product, experienced a compound average growth rate of 41.5% from 1996 through 2002.  Although beginning from a smaller base, the growth rates for hard floorcoverings may indicate increasing consumer preference for these products for certain applications.  In response to this increasing demand, the Company has increased its distribution of hard surface products, including ceramic tile, vinyl, hardwood and laminate. The acquisition of Dal-Tile provided a unique opportunity to help the Company achieve its strategic goal of becoming one of the world's leading floorcovering manufacturers and distributors.

      The Company continues to experience growth both internally and through acquisitions.

       On March 20, 2002,October 31, 2005, the Company acquired all the outstanding shares of Unilin Holding NV. The total purchase price of the outstanding capital stockUnilin Acquisition, net of Dal-Tile, a leading manufacturer and distributorcash of ceramic tile in the United States, for$167.5 million, was approximately $1,469 million in stock and cash.Euro 2.2 billion (approximately $2.6 billion).  The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of Dal-Tilefor the Unilin segment have been included in the Company's consolidated financial statements from March 20, 2002.since that date. The primary reason for the acquisition was to expand the Company's presence in the ceramic tile and stone markets.laminate flooring market.

      On November 10, 2003, the Company acquired the assets and assumed certain liabilities of the commercial carpet division of Burlington Industries, Inc., known as Lees Carpet, from W.L. Ross & Company for approximately $350 million in cash. The results of operations for Lees Carpet have been included with the Mohawk segment results and in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpet market.

     The Company has two operating segments,reported net earnings of $358.2 million or diluted earnings per share ("EPS") of $5.30, compared to net earnings of $368.6 million and $5.46 EPS for 2004. The decrease in EPS resulted from a non-recurring $34.3 million (net of tax of $22.3 million) fair value adjustment applied to Unilin's acquired inventory, continuing raw material and energy cost increases, offset by sales growth and better leveraging of selling, general and administrative costs when compared to the year ended December 31, 2004.

18




Results of Operations

Following are the results of operations for the last three years:

For the Years Ended December 31,

2005

 

2004

 

2003

 

(In thousands)

Statement of earnings data:

Net sales

 $

6,620,099 

100.0 %

5,880,372 

100.0 %

4,999,381 

100.0 %

Cost of sales

4,896,965 

74.0 %

4,259,531 

72.4 %

3,605,579 

72.1 %

 Gross profit

1,723,134 

26.0 %

1,620,841 

27.6 %

1,393,802 

27.9 %

Selling, general and administrative

 expenses

1,095,862 

16.6 %

985,251 

16.8 %

851,773 

17.0 %

 Operating income

627,272 

9.5 %

635,590 

10.8 %

542,029 

10.9 %

Interest expense

66,791 

1.0 %

53,392 

0.9 %

55,575 

1.1 %

Other (income) expense, net

3,460 

0.1 %

4,809 

0.1 %

(1,980)

0.0 %

70,251 

1.1 %

58,201 

1.0 %

53,595 

1.1 %

 Earnings before income taxes

557,021 

8.4 %

577,389 

9.8 %

488,434 

9.8 %

Income taxes

198,826 

3.0 %

208,767 

3.6 %

178,285 

3.6 %

 Net earnings.

 $

358,195 

5.4 %

368,622 

6.3 %

310,149 

6.2 %

Year Ended December 31, 2005, as Compared with Year Ended December 31, 2004

      Net sales for the year ended December 31, 2005, were $6,620.1 million, reflecting an increase of $739.7 million, or approximately 12.6%, over the $5,880.4 million reported for the year ended December 31, 2004. The increased net sales are primarily attributable to price increases and internal sales growth and the Unilin Acquisition. The Mohawk segment recorded net sales of $4,716.7 million in 2005 compared to $4,368.8 million in 2004, representing an increase of $347.9 million or approximately 8.0%. The increase was attributable to price increases and internal growth within the nylon filament and polyester carpets, commercial carpet tile, and hard surface flooring offset by declines in nylon staple and polypropylene carpets and home products. The Dal-Tile segment recorded net sales of $1,734.8 million in 2005, reflecting an increase of $223.3 million or 14.8%, over the $1,511.5 million reported in the year ended December 31, 2004. The increase was mostly attributable to strong internal growth in all product categories with stone and floor tile reflecting the strongest growth.

      Quarterly net sales and the percentage changes in net sales by quarter for 2005 versus 2004 were as follows (dollars in thousands)

2005

2004

Change

        First quarter

 $

1,493,222 

1,389,725 

7.4 

%

        Second quarter

1,624,692 

1,485,897 

9.3 

        Third quarter

1,697,634 

1,529,651 

11.0 

        Fourth quarter

1,804,551 

1,475,099 

22.3 

               Total year

 $

6,620,099 

5,880,372 

12.6 

%

      Gross profit was $1,723.1 million (26.0% of net sales) for 2005 and $1,620.8 million (27.6% of net sales) for 2004. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs, an increase in the LIFO reserve requirement, a non-recurring fair value adjustment applied to Unilin's acquired inventory, and higher import costs.

      Selling, general and administrative expenses for 2005 were $1,095.9 million (16.6% of net sales) compared to $985.3 million (16.8% of net sales) for 2004. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

19




      Operating income for 2005 was $627.3 million (9.5% of net sales) compared to $635.6 million (10.8% of net sales) in 2004. Operating income attributable to the Mohawk segment was $381.7 million (8.1% of segment net sales) in 2005 compared to $424.3 million (9.7% of segment net sales) in 2004. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $260.2 million (15.0% of segment net sales) in 2005, compared to $219.8 million (14.5% of segment net sales) in 2004. The increase in operating income as a percentage of net sales is primarily attributable to product mix shift and implementing increased pricing to help offset increased raw material, energy, transportation, and higher import costs.

      Interest expense for 2005 was $66.8 million compared to $53.4 million in 2004. The increase in interest expense was attributable to the debt raised to fund the Unilin Acquisition.

      Income tax expense was $198.8 million, or 35.7% of earnings before income taxes for 2005 compared to $208.8 million, or 36.2% of earnings before income taxes for 2004. The improved rate was primarily attributable to the utilization of tax credits and the one-time effect of state tax law changes.

Year Ended December 31, 2004, as Compared with Year Ended December 31, 2003

      Net sales for the year ended December 31, 2004, were $5,880.4 million, reflecting an increase of $881.0 million, or approximately 17.6%, over the $4,999.4 million reported for the year ended December 31, 2003. The increased net sales are primarily attributable to strong internal sales growth from both the Mohawk and Dal-Tile segment.segments. The Mohawk segment sellsrecorded net sales of $4,368.8 million in 2004 compared to $3,730.8 million in 2003, representing an increase of $638.0 million or approximately 17.1%. The increase was attributable to strong internal growth in all product categories and distributes its product lines, which include broadloom carpet, rugs, pad, ceramic tile, hardwood, vinyl and laminate through independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users.the Lees Carpet acquisition. The Dal-Tile segment recorded net sales of $1,511.5 million in 2004, reflecting an increase of $243.0 million or 19.2%, over the $1,268.5 million reported in the year ended December 31, 2003. The increase was mostly attributable to strong internal growth in all product categories with stone and floor tile reflecting the strongest growth.

      Quarterly net sales and the percentage changes in net sales by quarter for 2004 versus 2003 were as follows (dollars in thousands):

2004

2003

Change

        First quarter

 $

1,389,725 

1,083,422 

28.3 

%

        Second quarter

1,485,897 

1,245,870 

19.3 

        Third quarter

1,529,651 

1,301,547 

17.5 

        Fourth quarter

1,475,099 

1,368,542 

7.8 

               Total year

 $

5,880,372 

4,999,381 

17.6 

%

      Sales in the first and fourth quarters of 2004 were impacted by a shift of four days from the fourth to the first quarter when compared to 2003.

      Gross profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8 million (27.9% of net sales) for 2003. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs and higher import costs.

      Selling, general and administrative expenses for 2004 were $985.3 million (16.8% of net sales) compared to $851.8 million (17.0% of net sales) for 2003. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

      Operating income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0 million (10.9% of net sales) in 2003. Operating income attributable to the Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared to $364.0 million (9.8% of segment net sales) in 2003. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $219.8 million (14.5% of segment net sales) in 2004, compared to $187.2 million (14.8% of segment net sales) in 2003. The decrease in operating income as a percentage of net sales is primarily attributable to higher energy costs, import costs and transportation costs.

20




      Interest expense for 2004 was $53.4 million compared to $55.6 million in 2003. The decrease in interest expense was attributable to a larger benefit from a fair value adjustment related to an interest rate swap during 2004 when compared to 2003.

      Income tax expense was $208.8 million, or 36.2% of earnings before income taxes for 2004 compared to $178.3 million, or 36.5% of earnings before income taxes for 2003. The improved rate was a result of the utilization of tax credits.

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, bank credit lines, include ceramic tile, porcelain tileterm and stone products soldsenior notes, the sale of receivables and credit terms from suppliers.

      Cash flows generated by operations for 2005 were $561.5 million compared to $242.8 million for 2004. The increase was primarily attributable to an increase in accounts payable and accrued expenses, which increased from $623.1 million at the beginning of 2005 to $998.1 million at December 31, 2005.  In addition, inventory turnover increased during 2005. The increases were primarily attributable to sales growth within both the Mohawk and Dal-Tile segments and the Unilin Acquisition.

      Net cash used in investing activities in 2005 was $2.9 billion compared to $121.6 million for 2004. The increase was primarily attributable to the Unilin Acquisition and higher capital expenditures. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment. Capital expenditures, including $3.0 billion for acquisitions, have totaled $3.5 billion over the past three years. Capital spending during 2005 for the Mohawk, Dal-Tile and Unilin segments combined, excluding acquisitions, is expected to range from $290 million to $310 million, and will be used primarily to purchase equipment and to add manufacturing and distribution capacity.

      Net cash provided by financing activities for 2005 was $2,440.7 million compared to cash provided in 2004 of $121.2 million. The primary reason for the change was an increase in debt levels as a result of the Unilin Acquisition in 2005 when compared to 2004.

      On October 28, 2005, the Company entered into a $1.5 billion 364-day senior, unsecured, bridge term loan facility, which is referred to as the bridge credit facility, and a $1.5 billion five-year, senior, unsecured, revolving credit and term loan facility, which is referred to as the new senior unsecured credit facilities.  The new senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines.  The Company entered into both the bridge credit facility and the new senior unsecured credit facilities to finance the Unilin Acquisition and to provide for working capital requirements.

      The senior multi-currency unsecured credit facility consists of (i) a $750 million revolving credit facility, (ii) a $389.2 million term loan facility and (iii) a Euro 300 million term loan facility, all of which mature on October 28, 2010. Availability under the revolving credit facility is reduced by the amount of letters of credit issued under this facility. At December 31, 2005, the amount of these letters of credit was $78.3 million.  At the Company's election, both the credit facility and the new senior credit facilities bear interest at (i) the greater of (x) prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130 million , or approximately $156 million (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred to as the Euro revolving credit facility. This revolving credit facility bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

21




      The Company's new senior unsecured credit facilities and the Euro revolving credit facility both contain debt to capital ratio requirements and other customary covenants. The Company was in compliance with these covenants at December 31, 2005. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.06% to 0.25%, depending upon the Company's senior unsecured long-term debt rating as determined by certain credit rating agencies.

      At December 31, 2005, a total of approximately $507.9 million was available under the new senior unsecured credit facilities, and the Euro revolving credit facility, compared to $234.1 million available under both the then-existing credit facility and uncommitted credit lines at December 31, 2004. The amount used under the new senior unsecured credit facilities at December 31, 2005, was $1.1 billion. The amount used under the unsecured credit facilities is composed of $1.1 billion in borrowings, $55.6 million in letters of credit guaranteeing the Company's industrial revenue bonds and $22.7 million in standby letters of credit related to various insurance contracts and foreign vendor commitments.

      On January 17, 2006, the Company issued $500 million aggregate principal amount of 5.750% notes due 2011 and $900 million aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the outstanding balance of the bridge credit facility and accordingly the Company reclassified the bridge credit facility as long-term debt. Interest payable on each series of notes will be increased in the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum increase in the event of a downgrade is 2%. If the Company's debt rating subsequently improves, then the interest rates would be reduced accordingly.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. At December 31, 2005, the Company had $40 million outstanding compared to $90 million at December 31, 2004. The Securitization Facility is secured with trade receivables. During the third quarter of 2005, the Company extended the term of its Securitization Facility until August 2006.

      The Company's Board of Directors has authorized the repurchase of up to 15 million shares of the Company's outstanding common stock. For the year ended December 31, 2005, a total of approximately 186,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $14.5 million. Since the inception of the program in 1999, a total of approximately 11.4 million shares have been repurchased at an aggregate cost of approximately $326.1 million. All of these repurchases have been financed through company-operated sales service centers, independent distributorsthe Company's operations and home centers.banking arrangements.

      The outstanding checks in excess of cash represent trade payables checks that have not yet cleared the bank. When the checks clear the bank, they are funded by the revolving credit facility. This policy does not impact any liquid assets on the consolidated balance sheets.

      The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2005 (in thousands):

Payments due by period

2006

2007

2008

2009

2010

Thereafter

Total

Long-term debt

 $

113,809 

314,277 

11,259 

4,275 

1,063,178 

1,801,572 

3,308,370 

Estimated interest payments (1)

174,731 

160,205 

154,393 

153,885 

146,479 

316,354 

1,106,047 

Operating leases

93,553 

75,247 

61,973 

51,558 

37,064 

103,116 

422,511 

Purchase commitments (2)

168,235 

163,995 

161,545 

72,497 

566,272 

 $

550,328 

713,724 

389,170 

282,215 

1,246,721 

2,221,042 

5,403,200 


(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 at December 31, 2005 to these balances.
(2)     Includes commitments for natural gas, foreign currency, and raw material purchases.

22




Critical Accounting Policies

      The Company's discussion and analysis of financial condition and results of operations are based on itsIn preparing the consolidated financial statements that were prepared in accordanceconformity with accounting principles generally accepted in the United States of America.

      TheAmerica, the Company makes estimates and assumptions when preparing financial statements. These estimates and assumptions affect various matters, including:

  • must make decisions which impact the reported amounts of assets, and liabilities, in the Company's Consolidated Balance Sheets at the dates of the financial statements,
  • disclosure of contingent assets and liabilities at the dates of the financial statements, and

  • reported amounts of revenues and expenses, inand related disclosures. Such decisions include the Company's Consolidated Statementsselection of Earnings duringappropriate accounting principles to be applied and the reporting periods. These estimates involve judgments with respectassumptions on which to among other things, future economic factors that are difficult to predictbase accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and are beyond management's control. As a result, actualanalysis of the relevant circumstances and historical experience. Actual amounts could differ from these estimates.
those estimated at the time the consolidated financial statements are prepared.

      The SEC issued disclosure guidance forCompany's significant accounting policies that management believes are most "critical." The SEC defines these criticaldescribed in Note 1 to the Consolidated Financial Statements included elsewhere in this report. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting policies 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 could represent critical accounting policies as defined by the SEC. The Company discusses its significant accounting policies, including those that do not require management to make difficult, subjective, or complex judgments or estimates, in Note 1 to the Consolidated Financial Statements.policies.

  • Accounts receivable and revenue recognition. Revenues are recognized when goods are shippedthere is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and legal title passes to the customer.collectibility can be reasonably assured. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical bad debt and claims experience and periodic evaluation of specific customer accounts and the aging of accounts receivable. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
  • Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the last-in, first-out method (LIFO) predominantlyfor approximately 86% (69% of total consolidated inventory) of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in, first-out method (FIFO), which is used to value inventory within both the Dal-Tile and Unilin segments and inventory not valued under the LIFO method in the Mohawk segment. Inventories on hand are compared against anticipated future usage, which is a function of historical usage and anticipated future selling price, in order to evaluate obsolescence,expected sales below cost, excessive quantities and expected sales below cost.an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.
  • Goodwill and indefinite life intangible assets are subject to annual impairment testing. The impairment tests are based on determining the fair value of the specified reporting units and indefinite life intangible assets based on management judgments and assumptions using estimated future cash flows. These judgments and assumptions could materially change the value of the specified reporting units and indefinite life intangible assets and, therefore, could materially impact the Company's consolidated financial statements. Intangible assets with definite lives are amortized over their useful lives. The useful life of a definite-lived intangible asset is based on assumptions and judgments made by management at the time of acquisition. Changes in these judgments and assumptions that could include a loss of customers, a change in the assessment of future operations or a prolonged economic downturn could materially change the value of the definite-lived intangible assets and, therefore, could materially impact the Company's financial statements.

23




  • Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes the enactment date. Additionally, taxing jurisdictions could retroactively disagree with the Company's tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner.

  • Results of Operations

          FollowingEnvironmental and legal accruals are the results of operations for the last three years:

    At or for the Years Ended December 31,

    200320022001
    (In thousands)
    Statement of earnings data:
    Net sales $ 5,005,053 100.0%   4,522,336 100.0%   3,445,945 100.0%
    Cost of sales    3,645,677 72.8%   3,282,269 72.6%   2,613,043 75.8%
      Gross profit    1,359,376 27.2%   1,240,067 27.4%      832,902 24.2%
    Selling, general and administrative
      expenses       817,347 16.3%      718,002 15.9%      505,745 14.7%
      Operating income       542,029 10.9%      522,065 11.5%      327,157 9.5%
    Interest expense         55,575 1.1%        68,972 1.5%        29,787 0.9%
    Other (income) expense, net         (1,980)0.0%          9,464 0.2%          5,954 0.2%
             53,595 1.1%        78,436 1.7%        35,741 1.1%
      Earnings before income taxes        488,434 9.8%      443,629 9.8%      291,416 8.4%
    Income taxes       178,285 3.6%      159,140 3.5%      102,824 3.0%
      Net earnings  $    310,149 6.2%      284,489 6.3%      188,592 5.4%

          During 2003, specifically the first half of 2003,estimates based on judgments made by the Company relating to ongoing environmental and industry performancelegal proceedings, as a whole was impacted negatively by the overall weak conditionsdisclosed in the U.S. economyCompany's consolidated financial statements. In determining whether a liability is probable and cautious consumer and commercial spending.reasonably estimable, the Company consults with its internal experts. The Company believes that the residential replacement business is recovering in response to improved economic conditions. The Company believes that the commercial business is also beginning to show signs of improvement at certain price points and anticipates the higher end business will improve later in 2004. The Company is implementing a price increase in both the Mohawk and Dal-Tile segment during the first quarter of 2004 to compensate for increased raw material prices resulting from higher oil and natural gas prices and higher import prices.

    Year Ended December 31, 2003, as Compared with Year Ended December 31, 2002

          Net sales for the year ended December 31, 2003, were $5,005.1 million, reflecting an increase of $482.7 million, or approximately 10.7%, over the $4,522.3 million reportedamounts recorded in the year ended December 31, 2002. The increased net sales were attributable to the acquisition of Dal-Tile and Lees Carpet and internal growth. The Mohawk segment recorded net sales of $3,736.5 million in 2003 compared to $3,624.2 million in 2002, representing an increase of $112.4 million or approximately 3.1%. The growth was attributable to the Lees Carpet acquisition and internal growth of product lines. The Dal-Tile segment recorded net sales of $1,268.5 million in 2003, reflecting an increase of $370.4 million or 41.2%, over the $898.2 million reported in the year ended December 31, 2002. The Dal-Tile results are not included in the Company's consolidatedaccompanying financial statements prior to the March 20, 2002, acquisition. However, when the Dal-Tile net sales for the year ended December 31, 2003, are compared to the Dal-Tile pro forma net sales of $1,134.2 million for the year ended December 31, 2002 (derived by combining Dal-Tile net sales of $236.0 million prior to the March 20, 2002, acquisition date, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile net sales of $898.2 million for the period ending December 31, 2002), an increase of approximately 11.8% for the period was realized. The growth was primarily attributable to growth within residential products. The Company believes this pro forma net sales information will be useful to investors because it allows investors to compare the results of the two periods.


          Quarterly net sales and the percentage changes in net sales by quarter for 2003 versus 2002 were as follows (dollars in thousands):

    20032002Change
            First quarter $     1,084,715            866,710 25.2%
            Second quarter        1,247,181         1,227,747 1.6
            Third quarter        1,303,166         1,224,403 6.4
            Fourth quarter         1,369,991         1,203,476 13.8
                   Total year $     5,005,053         4,522,336 10.7%

          Gross profit was $1,359.4 million (27.2% of net sales) for 2003 and $1,240.1 million (27.4% of net sales) for 2002. The reduction in percentage was primarily attributable to a change in the selling mix, increased raw material prices resulting from higher oil and natural gas prices, higher import prices and start up costs related to the new Dal-Tile manufacturing facility.

          Selling, general and administrative expenses for 2003 were $817.3 million (16.3% of net sales) compared to $718.0 million (15.9% of net sales) for 2002. The increased percentage was primarily attributable to the acquisition of Dal-Tile, which has higher selling, general and administrative expenses.

          Operating income for 2003 was $542.0 million (10.9% of net sales) compared to $522.1 million (11.5% of net sales) in 2002. Operating income attributable to the Mohawk segment was $364.0 million (9.7% of segment net sales) in 2003 compared to $390.9 million (10.8% of segment net sales) in 2002. The percentage decrease in operating income was attributable to the higher costs associated with oil and natural gas prices and a change in the selling mix. Operating income attributable to the Dal-Tile segment was $187.2 million (14.8% of segment net sales) in 2003, compared to $139.9 million (15.6% of segment net sales) in 2002. The decrease in operating income as a percentage of net sales is primarily attributable to a change in product mix, higher import prices and start up costs of a new manufacturing facility. On a pro forma combined basis, the Dal-Tile segment operating income was $171.7 million (15.1% of pro forma segment net sales) for 2002 (derived by combining Dal-Tile operating income of $31.8 million prior to the March 20, 2002 acquisition, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile operating income of $139.9 million for the period ended December 31, 2002). The Company believes that presentation of this pro forma combined operating income information will be useful to investors because it allows investors to compare the results between the two periods.

          Interest expense for 2003 was $55.6 million compared to $69.0 million in 2002.  The decrease in interest expense was attributable to lower average debt levels during 2003 when compared to 2002, offset by an increase in the average borrowing rate due to a change in the mix of fixed and variable rate debt in 2003 when compared to 2002. Additionally, interest expense for 2002 included $10.7 million related to the write-off of an interest rate swap previously accounted for as a cash flow hedge.

          Income tax expense was $178.3 million, or 36.5% of earnings before income taxes for 2003 compared to $159.1 million, or 35.9% of earnings before income taxes for 2002. The change in tax rate resulted from the use of fewer available tax credits in 2003 when compared to 2002.

    Year Ended December 31, 2002, as Compared with Year Ended December 31, 2001

          Net sales for the year ended December 31, 2002, were $4,522.3 million, reflecting an increase of $1,076.4 million, or approximately 31.2%, over the $3,445.9 million reported in the year ended December 31, 2001. The increased net sales were attributable to the Dal-Tile acquisition and internal growth of the Mohawk segment product lines. The Mohawk segment recorded net sales of $3,624.2 million in 2002 compared to $3,445.9 million in 2001, representing an increase of $178.2 million or approximately 5.2%. The growth was attributable to all segment product lines. Since the completion of the Dal-Tile acquisition, the Dal-Tile segment recorded net sales of $898.2 million in 2002. On a pro forma combined basis, the Dal-Tile segment net sales were $1,134.2 million (derived by combining Dal-Tile net sales of $236.0 million prior to the March 20, 2002 acquisition date, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile net sales of $898.2 million for the period ending December 31, 2002) for 2002. This compares to Dal-Tile net sales of $1,036.8 million


    (derived from net sales prior to the March 20, 2002 acquisition) for 2001, resulting in an increase of approximately 9.4% for the period. The growth was primarily attributable to growth within residential products. The Company believes this pro forma net sales information will be useful to investors because it allows investors to compare the results of the two periods.

          Quarterly net sales and the percentage changes in net sales by quarter for 2002 versus 2001 were as follows (dollars in thousands):

    20022001Change
            First quarter $        866,710            777,339 11.5%
            Second quarter        1,227,747            864,958 41.9
            Third quarter        1,224,403            907,850 34.9
            Fourth quarter        1,203,476            895,798 34.3
                   Total year $     4,522,336         3,445,945 31.2%

          Gross profit was $1,240.1 million (27.4% of net sales) for 2002 and $832.9 million (24.2% of net sales) for 2001. Gross profit as a percentage of net sales in 2002 was favorably impacted when compared to 2001 by Dal-Tile's higher gross profit percentage and improved manufacturing efficiencies within the Mohawk segment.

          Selling, general and administrative expenses for 2002 were $718.0 million (15.9% of net sales) compared to $505.7 million (14.7% of net sales) for 2001. The increased percentage was attributable to the Dal-Tile segment which has higher selling, general and administrative expenses but also has higher gross profit as a percentage of net sales. The Mohawk and Dal-Tile (including selling, general and administrative costs prior to the acquisition of Dal-Tile) segments selling, general and administrative expenses reflected improvements over 2001, when compared to 2002. The improvements were due to better control of operating costs as net sales increased.

          Operating income for 2002 was $522.1 million (11.5% of net sales) compared to $327.2 million (9.5% of net sales) in 2001. Operating income attributable to the Mohawk segment was $390.9 million (10.8% of segment net sales) in 2002 compared to $336.7 million (9.8% of segment net sales) in 2001. Operating income attributable to the Dal-Tile segment was $139.9 million (15.6% of segment net sales) in 2002. On a pro forma combined basis, the Dal-Tile segment operating income was $171.7 million (15.1% of pro forma segment net sales) for 2002 (derived by combining Dal-Tile operating income of $31.8 million prior to the March 20, 2002 acquisition, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile operating income of $139.9 million for the period ended December 31, 2002). This compares to Dal-Tile operating income of $154.6 million (14.9% of Dal-Tile net sales) for 2001. The Company believes that presentation of this pro forma combined operating income information will be useful to investors because it allows investors to compare the results between the two periods.

          Interest expense for 2002 was $69.0 million compared to $29.8 million in 2001.  The increase in interest expense was attributable to additional debt incurred in March 2002 to finance the acquisition of Dal-Tile, the write-off of approximately $10.7 million relating to an interest rate swap previously accounted for as a cash flow hedge and an increase in the average borrowing rate due to a change in the mix of fixed rate and variable rate debt, when compared to 2001.

          Income tax expense was $159.1 million, or 35.9% of earnings before income taxes for 2002 compared to $102.8 million, or 35.3% of earnings before income taxes for 2001.

    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, bank credit lines, term and senior notes, the sale of receivables and credit terms from suppliers.

          The level of accounts receivable increased from $501.1 million at the beginning of 2003 to $573.5 million at December 31, 2003.  The $72.4 million increase was primarily attributable to the acquisition of Lees Carpet and internal sales growth.  Inventories increased from $678.0 million at the beginning of 2003 to $832.4 million at December 31, 2003, due primarily to building inventory for hard surface product categories within the Mohawk and Dal-Tile segments and the acquisition of Lees Carpet.


          The outstanding checks in excess of cash represent trade payables checks that have not yet cleared the bank. When the checks clear the bank, they are funded by the revolving credit facility. This policy does not impact any liquid assetsbased on the consolidated balance sheets.

          Excluding acquisitions, capital expenditures totaled $114.6 million during 2003. The capital expenditures made during 2003 were incurred primarilybest estimates and judgments available to modernize and expand manufacturing facilities and equipment.  The Company's capital projects are primarily focused on increasing capacity, improving productivity and reducing costs.  Capital expenditures, including $1,101.8 million for acquisitions, have totaled $1,381.2 million over the past three years. The Company's capital spending during 2004, excluding acquisitions, is expected to range from $140 million to $160 million, and will be used primarily to purchase equipment to increase production capacity and productivity.

          On September 30, 2003, the Company entered into a new revolving line of credit agreement providing up to $300 million with interest rates of either (i) LIBOR plus 0.4% to 1.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.6% depending upon the Company's performance measured against certain financial ratios. The new facility replaces a $450 million facility that was due to expire in January 2004. The facility is comprised of two tranches, a $200 million tranche expiring in September 2008 and a $100 million tranche expiring in September 2004. The  $100 million tranche of the facility is renewable annually. The credit agreement contains customary financial and other covenants.  The Company must pay an annual facility fee ranging from .15% to .50% of the total credit commitment, depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line. Additionally, at December 31, 2003, the Company had credit facilities of $300 million under its revolving credit facility and $50 million under various short-term uncommitted credit lines. At December 31, 2003, a total of $237.3 million was unused under the combined revolving credit facility and uncommitted credit lines. The revolving credit facility and uncommitted lines of credit are unsecured.

          In connection with the Dal-Tile acquisition during 2002, the Company entered into a 364-day term loan facility (the "Bridge Facility") to finance a portion of the acquisition. On April 2, 2002, the Company sold $300 million of its 6.50% senior notes due 2007, Series A and $400 million of its 7.20% senior notes due 2012, Series B through institutional private placements and used the proceeds to repay outstanding indebtedness of approximately $601 million under the Bridge Facility and approximately $90 million under the Company's revolving credit facility. On June 13, 2002, the Company exchanged $295 million of its registered 6.50% senior notes due 2007, Series C for an equal amount of its Series A senior notes and $397.8 million of its registered 7.20% senior notes due 2012, Series D for an equal amount of its Series B senior notes. Interest on each series is payable semiannually.

          On August 4, 2003, the Company entered into an on-balance sheet trade accounts receivable securitization agreement ("Securitization Facility") replacing two previous facilities that were due to expire in October 2003. The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. The Company sells, on a non-recourse revolving basis, its accounts receivable to a special purpose entity, which in turn obtains loan advances that are secured by the receivable pool from a third-party commercial paper conduit sponsored by financial institutions. The Securitization Facility is subject to annual renewal. At December 31, 2003, the Company had approximately $182 million outstanding secured by approximately $649.0 million of trade receivables.

          The Company's Board of Directors has authorized the repurchase of up to 15 million shares of its outstanding common stock. For the year ended December 31, 2003, a total of approximately 593,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $27.8 million. Since the inception of the program, a total of approximately 11 million shares have been repurchased at an aggregate cost of approximately $293.1 million. All of these repurchases have been financed through the Company's operations and banking arrangements.

          The Company believes that the combined total of the revolving credit facility, short-term uncommitted credit lines and the Securitization Facility of $700 million is adequate to support its capital and working capital requirements.


          The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2003 (in thousands):

    Payments due by period

    20042005200620072008ThereafterTotal
    Long-term debt $ 248,795       9,445       6,500   300,000               -   447,673   1,012,413 
    Operating leases      72,857     57,202     44,517     31,183     22,602     45,363      273,724 
    Purchase commitments (1)      66,481     48,968     48,000     48,000     48,000              -      259,449 
     $ 388,133   115,615     99,017   379,183     70,602   493,036   1,545,586 


    it.
    (1) Includes commitments for natural gas and foreign currency and fiber purchases.

Recent Accounting Pronouncements

     In January 2003,December 2004, the Financial Accounting Standards Board ("FASB")FASB issued FASB InterpretationStaff Position 109-1, Application of FASB Statement No. 46109, "Accounting for Income Taxes" ("FIN 46"SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"), "Consolidationenacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of Variable Interest Entities,January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an Interpretationenterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 51,43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," which addresses consolidation by business enterprisesto clarify the accounting for abnormal amounts of variable interest entities ("VIEs") either: (1)idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that do not have sufficient equity investment at riskitems such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristiccosts of a controlling financial interest. In December 2003, the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective datesconversion be based on the nature as well as the creation datenormal capacity of the VIE. VIEs createdproduction facilities. SFAS 151 is effective for fiscal years beginning after January 31, 2003, but prior toJune 15, 2005. The Company will adopt SFAS 151 effective January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than the first quarter of fiscal 2004. The Company has adopted FIN 46, which did not have,2006 and the Company does not expect the Revised Interpretations toits adoption will have a material impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the prospective or retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 which did not have a material impact on the Company's consolidated financial statements.

24




      In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this standard, if any, will depend upon accounting changes or errors that may occur in future periods. The Company adopted SFAS 154 effective December 31, 2005.

Impact of Inflation

     Inflation affects the Company's manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry have experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004. For the period from 1999 through 2005 the carpet and tile industry has experienced moderate inflation in the prices of raw materials and fuel-related costs. In the past, the Company has generally passedbeen able to pass along these price increases to its customers and has been able to enhance productivity to help offset increases in costs resulting from inflation in both the United States and Mexico.its operations.

Seasonality

     The Company is a calendar year-end companycompany. With respect to its Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest.  The second, third and fourth quarters typically produce higher net sales and operating income.income in these segments.  These results are primarily due to consumer residential spending patterns for floorcovering,floor covering, which historically have decreased during the first two months of each year following the holiday season.

Certain Factors affecting The Unilin segment second and fourth quarters typically produce higher net sales and earnings followed by a moderate first quarter and a weaker third quarter. The third quarter is traditionally the Company's Performance

      In additionweakest due to the other information providedEuropean holiday in this Annual Report on Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock.late summer,

      If any of the events described in these risks were to occur, it could have a material adverse effect on the Company's business, financial condition and results of operations.


The floorcovering industry is cyclical and prolonged declines in residential or commercial construction activity could have a material adverse effect on the Company's business.

      The U.S. floorcovering industry is highly dependent on residential and commercial construction activity, including new construction as well as remodeling which are cyclical in nature. A prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company's business.

      The U.S. construction industry has experienced significant downturns in the past, which have adversely affected suppliers to the industry. The industry could experience similar downturns in the future, which could have a negative impact on the Company's business.

The Company faces intense competition in its industry, which could decrease demand for its products and could have a material adverse effect on its profitability.

      The industry is highly competitive. The Company faces competition from a large number of manufacturers and independent distributors. Some of its competitors may be larger and have greater resources and access to capital.  Maintaining the Company's competitive position may require: substantial investments in its product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for its products.  Any of these factors could have a material adverse effect on the Company.

A failure to identify suitable acquisition candidates, to complete acquisitions and to integrate successfully the acquired operations could have a material adverse effect on the Company's business.

      As part of its business strategy, the Company intends to pursue acquisitions of complementary businesses.  Although it regularly evaluates acquisition opportunities, it may not be able to successfully identify suitable acquisition candidates; obtain sufficient financing on acceptable terms to fund acquisitions; complete acquisitions; or profitably manage acquired businesses.

      Acquired operations may not achieve expected performance levels and may involve a number of special risks, including among others an inability to successfully integrate acquired operations and the diversion of management resources.

The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on its business.

      The principal raw materials used in the Company's manufacturing operations include: nylon fiber and polypropylene resin, which are used exclusively in its carpet and rug business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in its ceramic tile business and other materials. The Company has a single source supplier for all of its nepheline syenite requirements.  An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on its business.

The Company may be unable to pass on to its customers increases in the costs of raw materials and energy, which could have a material adverse effect on its profitability.

      The prices of raw materials and natural gas vary with market conditions. Although the Company generally attempts to pass on increases in the costs of raw materials and natural gas 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 its products.  There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered.  During such periods of time, there could be a material adverse effect on the Company's profitability.


The Company has been, and in the future may be subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

      The Company's operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of hazardous materials.  The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.

      The nature of the Company's operations, including the potential discovery of presently unknown environmental conditions, exposes the Company to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.

Changes in international trade laws and in the business, political and regulatory environment in Mexico could have a material adverse effect on the Company's business.

      The Company's Monterrey, Mexico manufacturing facility represents a significant portion of the Company's total manufacturing capacity for ceramic tile. Accordingly, an event that has a material adverse impact on the Company's Mexican operations could have a material adverse effect on the tile operations as a whole. The business, regulatory and political environments in Mexico differ from those in the United States, and the Company's Mexican operations are exposed to legal, currency, tax, political, and economic risks, specific to Mexico.

The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ("GATT") and the North American Free Trade Agreement ("NAFTA").

      The Company is uncertain what effect reduced import duties under GATT may have on its operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States.

      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico.

Forward-Looking Information

      Certain of the statements in this Annual Report on Form 10-K, particularly anticipating of future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "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 and 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 industry conditions; competition; raw material prices; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; and other risks identified in Mohawk's SEC reports and public announcements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Financial exposures are managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effect that the volatility of the interest rate, exchange rate and natural gas markets may have on its operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes.


Natural Gas Risk Management

      The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU").

      The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset goingapplied to other comprehensive income, net of applicable income taxes and any hedge ineffectiveness.

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2003,2005, the Company had natural gas contracts that mature from January 20042006 to December 2004October 2006 with an aggregate notional amount of approximately 3.9 million660,000 MMBTU's. The fair value of these contracts was an asset of $3.6$1.9 million. At December 31, 2002,2004, the Company had natural gas contracts outstandingthat matured from January 2005 to March 2005 with aan aggregate notional amount of approximately 1.41 million MMBTU's. The fair value of these contracts was an asseta liability of $1.9$1.3 million. The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized directly in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates will be reclassified out of accumulated other comprehensive income in the next twelve months is a gain of approximately $1.9 million.

25




      The Company's natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2003,2005, the Company hashad normal purchase commitments of approximately 3.11.8 million MMBTU's for periods maturing from January 20042006 through September 2005.October 2006. The contracted value of these commitments was approximately $13.8$17.2 million and the fair value of these commitments was approximately $17.0$20.5 million, at December 31, 2003.2005. At December 31, 2002,2004, the Company had normal purchase commitments of approximately 4.61.9 million MMBTU's.MMBTU's for periods maturing from January 2005 through March 2006. The contracted value of these commitments was approximately $17.4$9.9 million and the fair value of these commitments was approximately $19.7 million.$11.9 million, at December 31, 2004.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in U.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. Accordingly, these contracts have been designated as cash flow hedges. The Company had forward contracts to purchase approximately 145.3 million and 357.58 million Mexican pesos at December 31, 2003 and 2002, respectively.2005. The aggregate U.S. Dollardollar value of these contracts at December 31, 2003 and 20022005 was approximately $12.7 million and $34,581, respectively.$0.7 million. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstanding at December 31, 2003 and 2002 respectively, were not significant.2004.

Interest Rate Management

      In 2002, the Company determined that its $100 million interest rate swap was ineffective. Consequently, the $10.7 million unrealized loss associated with the swap was recorded as a realized loss in interest expense during the fourth quarter of 2002.      The Company continuesalso had forward exchange contracts to carrysell the liability on its consolidated balance sheetsBritish Pound and the interest rate swap isCanadian Dollar for a notional amount of $5.6 million at December 31, 2005. The contracts do not qualify for hedge accounting and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and the contracts do not qualify for hedge accounting. The impact of the change in fair value on the statements of operations was not significant for the yearperiod ended December 31, 2003 was not significant.2005.

26




Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Auditors' ReportRegistered Public Accounting Firms

2328

Consolidated Balance Sheets as of December 31, 20032005 and 20022004

2432

Consolidated Statements of Earnings for the Years ended December 31, 2003, 20022005, 2004 and 20012003

2533

Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years ended

     December 31, 2003, 20022005, 2004 and 20012003

2634

Consolidated Statements of Cash Flows for the Years ended December 31, 2003, 20022005, 2004 and 20012003

2735

Notes to Consolidated Financial Statements

2836

27




INDEPENDENT AUDITORS' REPORTReport of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders


Mohawk Industries, Inc.:

      We have audited the accompanying consolidated financial statementsbalance sheets of Mohawk Industries, Inc. and subsidiaries as listedof December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the accompanying index.  In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(a)2.three-year period ended December 31, 2005. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.  We did not audit the combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (Unilin Group), which financial statements reflect total assets constituting approximately 41 percent and total revenues constituting approximately 3 percent in 2005, of the related consolidated totals.  Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Unilin Group, is based solely on the report of the other auditors.

      We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

      In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mohawk Industries, Inc. and subsidiaries as of December 31, 20032005 and 2002,2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003,2005, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Mohawk Industries, Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

/s/: KPMG
      KPMG

Atlanta, Georgia
March 15, 2006

28




Report of Independent Registered Public Accounting Firm

The Shareholders and the Board of Directors
Unilin Flooring BVBA and Unilin Holding Inc.
Ooigem, Belgium

      We have audited the accompanying combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (the Unilin Group) as of December 31, 2005 and the related combined consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the two month period then ended. These financial statements are the responsibility of the combined Companies' management. Our responsibility is to express an opinion on these combined consolidated financial statements based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The combined Companies are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the combined Companies' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Unilin Group at December 31, 2005 and the results of their operations and their cash flows for the two month period then ended in conformity with accounting principles generally accepted in the United States of America.

February 17, 2006

/s/: BDO Atrio Bedrijfsrevisoren Burg. CVBA
      BDO Atrio Bedrijfsrevisoren Burg. CVBA

29




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Mohawk Industries, Inc.:

      We have audited management's assessment, included in the "Management's Report on Internal Control over Financial Reporting" set forth in Item 9A of Mohawk Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005, that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Mohawk Industries, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management's assessment that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly,Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the information set forth therein.Committee of Sponsoring Organizations of the Treadway Commission (COSO).

      As discusseddescribed in notes 1the Management's Report on Internal Control Over Financial Reporting, management excluded from  its assessment of the effectiveness of Mohawk Industries, Inc.'s internal control over financial reporting as of December 31, 2005, Unilin Flooring BVBA and 5 toUnilin Holding Inc. and their subsidiaries (Unilin Group), which  businesses were acquired on October 31, 2005 and whose financial statements reflect total assets constituting approximately 14% (excluding goodwill and identified intangible assets of approximately 27%) and revenues of approximately 3% of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.  Accordingly, our audit of internal control over financial reporting of Mohawk Industries, Inc. also excluded an evaluation of the internal control over financial reporting of the Unilin Group.

30




      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mohawk Industries, Inc., and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 15, 2006expressed an unqualified opinion on those consolidated financial statements the Company changed its method of accounting for goodwill and other intangible assets in 2002..

 /s//s/: KPMG  LLP
      KPMG LLP

Atlanta, Georgia
February 5, 2004March 15, 2006

31




MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2003 and 2002

(In thousands, except per share data)

ASSETS

20032002
Current assets:
       Receivables   $     573,500          501,129 
       Inventories         832,415          678,008 
       Prepaid expenses           43,043            37,368 
       Deferred income taxes           84,260            82,074 
                      Total current assets      1,533,218       1,298,579 
Property, plant and equipment, net .        919,085         855,324 
Goodwill     1,368,700      1,277,453 
Other intangible assets         325,339         146,700 
Other assets            17,233            18,687 
  $  4,163,575       3,596,743 
  

LIABILITIES AND STOCKHOLDERS' EQUITY

    
Current liabilities:  
       Current portion of long-term debt  $     248,795            27,427 
       Accounts payable and accrued expenses         637,940          630,306 
                      Total current liabilities          886,735          657,733 
Deferred income taxes         183,669          145,973 
Long-term debt, less current portion         763,618          793,000 
Other long-term liabilities           31,752            17,158 
                       Total liabilities     1,865,774      1,613,864 
  
Stockholders' equity:  
       Preferred stock, $.01 par value; 60 shares authorized;
        no shares issued                    -                    - 
       Common stock, $.01 par value; 150,000 shares authorized; 77,050
         and 76,371 shares issued in 2003 and 2002, respectively                770                763 
       Additional paid-in capital      1,035,733      1,006,550 
       Retained earnings     1,541,761      1,231,612 
       Accumulated other comprehensive income            2,313             1,126 
     2,580,577      2,240,051 
       Less treasury stock at cost; 10,515 and 10,006 shares in 2003
         and 2002, respectively         282,776         257,172 
                       Total stockholders' equity     2,297,801      1,982,879 
Commitments and contingencies (Note 14) 
 $  4,163,575      3,596,743 

See accompanying notes to consolidated financial statements.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Consolidated Statements of Earnings
Years Ended December 31, 2003, 2002 and 2001

(In thousands, except per share data)

200320022001
Net sales  $  5,005,053      4,522,336      3,445,945 
Cost of sales       3,645,677      3,282,269      2,613,043 
       Gross profit       1,359,376      1,240,067         832,902 
Selling, general and administrative expenses         817,347         718,002         505,745 
       Operating income        542,029         522,065         327,157 
Other expense (income):
   Interest expense          55,575           68,972           29,787 
   Other expense            6,252           13,455             7,780 
   Other income          (8,232)          (3,991)          (1,826)
          53,595           78,436           35,741 
       Earnings before income taxes         488,434         443,629         291,416 
Income taxes         178,285         159,140         102,824 
       Net earnings  $     310,149         284,489         188,592 
Basic earnings per share  $           4.68               4.46               3.60 
Weighted-average common shares outstanding           66,251           63,723           52,418 
Diluted earnings per share   $           4.62               4.39               3.55 
Weighted-average common and dilutive potential
    common shares outstanding          67,121           64,861           53,141 

See accompanying notes to consolidated financial statements.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2003,  2002 and 2001

(In thousands)

Accumulated
AdditionalotherTotal
Common stockpaid-inRetainedcomprehensiveTreasurystockholders'
SharesAmountcapitalearningsincome (loss)stockequity
Balances at December 31, 2000   60,838  $       608           183,303         758,531                                 -      (188,082)                 754,360 
Stock options exercised          570                6               9,097                    -                                 -                     -                       9,103 
Purchase of treasury stock              -                 -                        -                    -                                 -           (8,159)                    (8,159)
Grant to employee profit sharing plan              -                 -                        -                    -                                 -            2,500                      2,500 
Grant to executive incentive plan              -                 -                        -                    -                                 -                 145                           145 
Tax benefit from exercise of stock
 options             -                 -               4,847                     -                                 -                     -                      4,847 
Comprehensive Income:
 Unrealized loss on hedge instruments
  net of taxes               -                 -                        -                    -                      (2,837)                    -                    (2,837)
 Net earnings             -                 -                        -        188,592                                 -                     -                  188,592 
Total Comprehensive Income                    185,755 
Balances at December 31, 2001     61,408            614            197,247        947,123                      (2,837)     (193,596)                  948,551 
Stock options exercised       2,056              20              50,165                    -                                 -                     -                     50,185 
Purchase of Dal-Tile     12,907            129            750,558                    -                                 -                     -                  750,687 
Purchase of treasury stock               -                 -                        -                    -                                 -       (64,034)                (64,034)
Grant to employee profit sharing plan               -                 -               3,040                    -                                 -               282                      3,322 
Grant to executive incentive plan               -                 -                      77                    -                                 -                 176                          253 
Tax benefit from exercise of stock
 options               -                 -               5,463                    -                                 -                     -                      5,463 
Comprehensive Income:
 Discontinued hedge on
   interest rate swap              -                 -                        -                    -                        6,768                     -                      6,768 
 Unrealized loss on hedge instruments
  net of taxes               -                 -                        -                    -                      (2,805)                    -                    (2,805)
 Net earnings               -                 -                        -      284,489                                 -                     -                 284,489 
Total Comprehensive Income        288,452 
Balances at December 31, 2002      76,371            763        1,006,550      1,231,612                          1,126       (257,172)              1,982,879 
Stock options exercised         679                 7             18,283                    -                                 -                     -                    18,290 
Purchase of treasury stock               -                 -                        -                    -                                 -        (27,839)                 (27,839)
Grant to employee profit sharing plan               -                 -               2,080                    -                                 -             1,929                      4,009 
Grant to executive incentive plan.              -                 -                     63                    -                                 -               306                         369 
Tax benefit from exercise of stock
 options              -                 -                8,757                    -                                 -                     -                       8,757 
Comprehensive Income:
Currency translation adjustment              -                 -                        -                    -                              47                     -                            47 
 Unrealized gain on hedge instruments
  net of taxes               -                 -                        -                    -                          1,140                     -                        1,140 
 Net earnings              -                 -                        -        310,149                                 -                     -                   310,149 
Total Comprehensive Income               311,336 
Balances at December 31, 2003    77,050  $        770        1,035,733  1,541,761                          2,313      (282,776)              2,297,801 
              

See accompanying notes to consolidated financial statements.
26


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash FlowsBalance Sheets
Years Ended December 31, 2003,  20022005 and 2001

2004

(In thousands)thousands, except per share data)

200320022001
Cash flows from operating activities:
     Net earnings  $     310,149         284,489         188,592 
     Adjustments to reconcile net earnings to net cash 
       provided  by operating activities: 
          Depreciation and amortization          106,615         101,942           84,167 
          Deferred income taxes            34,775           33,712             5,563 
          Tax benefit on stock options exercised            8,757             5,463             4,847 
          Loss on sale of property, plant and equipment             3,267             2,762             2,910 
          Changes in assets and liabilities, net of 
           effects of acquisitions: 
             Receivables         (47,443)          34,657         (46,066)
             Inventories       (104,964)        (15,215)          43,190 
             Accounts payable and accrued expenses            (2,769)        105,464           48,754 
             Other assets and prepaid expenses            (5,592)        (13,111)             (811)
             Other liabilities              6,595             9,347                101 
               Net cash provided by operating activities          309,390         549,510         331,247 
Cash flows from investing activities: 
      Additions to property, plant and equipment        (114,631)      (111,934)        (52,913)
      Acquisitions       (384,121)      (717,638)                   - 
               Net cash used in investing activities       (498,752)      (829,572)        (52,913)
Cash flows from financing activities: 
     Net change in revolving line of credit            37,299         (29,491)      (181,964)
     Proceeds from issuance of senior notes                   -         700,000                    - 
     Proceeds from bridge credit facility                    -         600,000                    - 
     Repayment of bridge credit facility                   -       (600,000)                   - 
     Net change in asset securitizations        182,000       (125,000)        (66,104)
     Payments on term loans          (26,492)        (32,208)        (32,212)
     Redemption of acquisition indebtedness                     -       (202,564)                   - 
     Industrial revenue bonds and other, 
            net of payments              (821)          (1,307)          (1,115)
     Change in outstanding checks in excess of cash             6,925         (15,519)            2,117 
     Acquisition of treasury stock         (27,839)        (64,034)          (8,159)
     Common stock transactions           18,290           50,185             9,103 
                Net cash provided by (used in) financing activities         189,362         280,062       (278,334)
                Net change in cash                    -                    -                    - 
Cash, beginning of year                    -                    -                    - 
Cash, end of year  $                -                    -                    - 

ASSETS

2005

2004

Current assets:

       Cash and cash equivalents

 $

134,585 

-   

       Receivables

848,666 

  

660,650 

       Inventories

1,166,913 

  

1,017,983 

       Prepaid expenses and other assets

140,789 

  

49,381 

       Deferred income taxes

49,534 

  

55,311 

                      Total current assets

2,340,487 

  

1,783,325 

Property, plant and equipment, net

1,810,728 

  

905,332 

Goodwill

2,621,963 

1,377,349 

Tradenames

622,094 

272,280 

Other intangible assets

552,003 

50,366 

Other assets

44,248 

  

14,466 

 $

7,991,523 

  

4,403,118 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

       Current portion of long-term debt

 $

113,809 

191,341 

       Accounts payable and accrued expenses

998,105 

  

623,061 

                      Total current liabilities

1,111,914 

814,402 

Deferred income taxes

625,887 

  

191,761 

Long-term debt, less current portion

3,194,561 

  

700,000 

Other long-term liabilities.

32,041 

  

30,618 

                       Total liabilities

4,964,403 

1,736,781 

  

Stockholders' equity:

  

       Preferred stock, $.01 par value; 60 shares authorized;

        no shares issued

-   

-   

       Common stock, $.01 par value; 150,000 shares authorized; 78,478

         and 77,514 shares issued in 2005 and 2004, respectively

785 

775 

       Additional paid-in capital

1,123,991 

1,058,537 

       Retained earnings.

2,268,578 

1,910,383 

       Accumulated other comprehensive loss

(47,433)

(2,441)

3,345,921 

2,967,254 

       Less treasury stock at cost; 10,981 and 10,755 shares in 2005

         and 2004, respectively

318,801 

300,917 

                       Total stockholders' equity

3,027,120 

2,666,337 

 $

7,991,523 

  

4,403,118 

See accompanying notes to consolidated financial statements.

32




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements of Earnings
Years Ended December 31, 2003,  20022005, 2004 and 2001

2003

(In thousands, except per share data)

2005

2004

2003

Net sales

 $

6,620,099 

5,880,372 

4,999,381 

Cost of sales

4,896,965 

4,259,531 

3,605,579 

       Gross profit

1,723,134 

1,620,841 

1,393,802 

Selling, general and administrative expenses

1,095,862 

985,251 

851,773 

       Operating income

627,272 

635,590 

542,029 

Other expense (income):

   Interest expense

66,791 

53,392 

55,575 

   Other expense

11,714 

9,731 

6,252 

   Other income

(8,254)

(4,922)

(8,232)

70,251 

58,201 

53,595 

       Earnings before income taxes

557,021 

577,389 

488,434 

Income taxes

198,826 

208,767 

178,285 

       Net earnings

 $

358,195 

368,622 

310,149 

Basic earnings per share

 $

5.35 

5.53 

4.68 

Weighted-average common shares outstanding

66,932 

66,682 

66,251 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

Weighted-average common and dilutive potential

    common shares outstanding

67,644 

67,557 

67,121 

See accompanying notes to consolidated financial statements.

33




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

 Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2005, 2004 and 2003

(In thousands)

Accumulated

Additional

other

Total

Common stock

paid-in

Retained

comprehensive

Treasury stock

stockholders'

Shares

Amount

capital

earnings

income (loss)

Shares

Amount

equity

Balances at December 31, 2002

76,371 

 $

763 

 $

1,006,550 

 $

1,231,612 

 $

1,126 

(10,006)

 $

(257,172)

 $

1,982,879 

Stock options exercised

679 

18,283 

18,290 

Purchase of treasury stock

(593)

(27,839)

(27,839)

Grant to employee profit sharing plan

2,080 

72 

1,929 

4,009 

Grant to executive incentive plan

63 

12 

306 

369 

Tax benefit from exercise of stock

 options

8,757 

8,757 

Comprehensive Income:

 Currency translation adjustment

47 

47 

 Unrealized gain on hedge instruments

 net of taxes

1,140 

1,140 

 Net earnings

310,149 

310,149 

Total Comprehensive Income

311,336 

Balances at December 31, 2003

77,050 

770 

1,035,733 

1,541,761 

2,313 

(10,515)

(282,776)

2,297,801 

Stock options exercised

464 

14,952 

14,957 

Purchase of treasury stock

(250)

(18,413)

(18,413)

Grant to executive incentive plan

 and other

307 

10 

272 

579 

Tax benefit from exercise of stock

 options

7,545 

7,545 

Comprehensive Income:

 Currency translation adjustment

(1,675)

(1,675)

 Unrealized loss on hedge instruments

 net of taxes

(3,079)

(3,079)

 Net earnings

368,622 

368,622 

Total Comprehensive Income

363,868 

Balances at December 31, 2004

77,514 

775 

1,058,537 

1,910,383 

(2,441)

(10,755)

(300,917)

2,666,337 

Stock options exercised

378 

10,070 

10,074 

Stock issuance

586 

47,429 

47,435 

Purchase of treasury stock . ..

(186)

(14,521)

(14,521)

Grant to executive incentive plan

 

 

 and other

2,717 

(40)

(3,363)

(646)

Tax benefit from exercise of stock

    

 options

5,238 

5,238 

Comprehensive Income:

 Currency translation adjustment

(47,074)

(47,074)

 Unrealized gain on hedge instruments

 net of taxes

2,082 

2,082 

 Net earnings

358,195 

358,195 

Total Comprehensive Income

313,203 

Balances at December 31, 2005

78,478 

 $

785 

 $

1,123,991 

 $

2,268,578 

 $

(47,433)

(10,981)

 $

(318,801)

 $

3,027,120 

See accompanying notes to consolidated financial statements.

34




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

 Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003

(In thousands)

2005

2004

2003

Cash flows from operating activities:

     Net earnings

 $

358,195 

368,622 

310,149 

     Adjustments to reconcile net earnings to net cash

       provided  by operating activities:

          Depreciation and amortization

149,329 

123,088 

106,615 

          Deferred income taxes

(6,866)

38,700 

34,775 

          Tax benefit on stock options exercised

5,238 

7,545 

8,757 

          Loss on sale of property, plant and equipment

4,676 

3,037 

3,267 

          Changes in assets and liabilities, net of

           effects of acquisitions:

             Receivables

3,574 

(85,417)

(47,443)

             Inventories

11,542 

(179,765)

(104,964)

             Accounts payable and accrued expenses

91,960 

(25,241)

(2,769)

             Other assets and prepaid expenses

(60,877)

(6,598)

(5,592)

             Other liabilities

4,773 

(1,134)

6,595 

               Net cash provided by operating activities

561,544 

242,837 

309,390 

Cash flows from investing activities:

      Additions to property, plant and equipment

(247,306)

(106,601)

(114,631)

      Acquisitions, net of cash

(2,613,529)

(14,998)

(384,121)

               Net cash used in investing activities

(2,860,835)

(121,599)

(498,752)

Cash flows from financing activities:

     Net change in short term credit lines

(37,721)

(3,981)

37,299 

     Payments on revolving line of credit

(539,294)

     Proceeds from revolving line of credit

856,940 

     Proceeds from bridge credit facility

1,400,000 

     Net change in asset securitization borrowings

(50,000)

(92,000)

182,000 

     Payments on term loans

(15,055)

(25,034)

(26,492)

     Proceeds on term loans

750,000 

     Payments of other debt

(30,861)

(57)

(821)

     Change in outstanding checks in excess of cash

63,670 

3,290 

6,925 

     Acquisition of treasury stock

(14,521)

(18,413)

(27,839)

     Common stock transactions

57,509 

14,957 

18,290 

                Net cash provided by (used in) financing activities

2,440,667 

(121,238)

189,362 

                Effect of exchange rate changes on cash and cash equivalents

(6,791)

                Net change in cash.

134,585 

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

 $

134,585 

See accompanying notes to consolidated financial statements.

35




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003

(In thousands, except per share data)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation

      The consolidated financial statements include the accounts of Mohawk Industries, Inc. and its subsidiaries (the "Company" or "Mohawk").  All significant intercompany balances and transactions have been eliminated in consolidation.

      The preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

(b) Cash and Cash Equivalents

      The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents.

(c) Accounts Receivable and Revenue Recognition

      The Company is principally a broadloom carpet, rug andrugs, ceramic tile and laminate manufacturer and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and other floorcovering materials throughoutlaminate flooring products in the United StatesStates. In addition, the Company manufactures laminate and sells carpet, rugs and laminate flooring products in Europe principally for residential and commercial use. The Company grants credit to customers, most of whom are retail-flooring dealers and commercial end users, under credit terms that the Company believes are customary in the industry.

      The Company warrants certain qualitative attributes of its flooring products. The Company has recorded a provision for estimated warranty and related costs, based on historical experience and periodically adjusts these provisions to reflect actual experience.

Revenues are recognized when goods are shipped, whichthere is whenpersuasive evidence of an arrangement, delivery has occurred, the legal title passes to the customer.price has been fixed or is determinable, and collectibility can be reasonably assured.  The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical bad debt and claims experience and periodic evaluations of specific customer accountsaccounts. Royalty revenues received from third parties for patents are recognized based on contractual agreements. The amount of patent revenue for the year ended December 31, 2005 was $10,461 and the aging of the accounts receivable.is recorded in net sales.

(c)(d) Inventories

      Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the last-in, first-out method (LIFO) method,for approximately 86% (69% of total inventory) of the inventory within the Mohawk segment, which matches current costs with current revenues, for substantially all inventories within the Mohawk segment and the first-in, first-out (FIFO) method for(FIFO), which is used to value inventory within the Dal-Tile segment inventories.and Unilin segments and inventory not valued under the LIFO method in the Mohawk segment. Inventories on hand are compared against anticipated future usage, which is a function of historical usage, anticipated future selling price, expected sales below cost,  excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

36




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(d)(e) Property, Plant and Equipment

      Property, plant and equipment are stated at cost, including capitalized interest.  Depreciation is calculated on a straight-line basis over the estimated remaining useful lives, which are 3525-35 years for buildings and improvements, 155-15 years for extrusion equipment, 10 years for tuftingmachinery and equipment, the shorter of the estimated useful life or life of the lease term for leasehold improvements fiveand 3-7 years for vehicles and seven years for other equipment and furniture and fixtures.

(e)(f) Goodwill and Other Intangible Assets

      In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" the Company tests goodwill and other intangible assets with indefinite lives for impairment on an annual basis (or on an interim basis if an event occurs that might reduce the fair value of the reporting unit below its carrying value). The Company conducts testing for impairment during the fourth quarter of its fiscal year. Intangible assets that do not have indefinite lives are amortized based on weighted average lives.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
lives, which range from 7-16 years.

(f)(g) Income Taxes

      Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(g)(h) Financial Instruments

      The Company's financial instruments consist primarily of receivables, accounts payable, accrued expenses and long-term debt.  The carrying amount of receivables, accounts payable and accrued expenses approximates theirits fair value because of the short-term maturity of such instruments. The carrying amount of the Company's floating rate debt approximates its fair value. Interest rates that are currently available to the Company for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of the Company's long-term debt. The estimated fair value of the Company's long-term debt at December 31, 20032005 and 20022004 was $1,095,590$3,282,715 and $894,462,$961,120, compared to a carrying amount of $1,012,413$3,308,370 and $820,427,$891,341, respectively.

(h)(i) Derivative Instruments

      Effective January 1, 2001, the Company adopted SFAS No. 133 "AccountingAccounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") and its amendments which requireActivities requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in its fair value are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company engages in activities that expose it to market risks, including the effects of changes in interest rates, exchange rates and changes in natural gas commodity prices. Financial exposures are managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effect that the volatility of the interest rate, exchange rate and natural gas commodity markets may have on operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes. There was no impact on the consolidated financial statements upon adoption of SFAS No. 133.

37




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The Company formally documents all hedging instruments and hedging items, as well as its risk management objective and strategy for undertaking hedged items. This process includes linking all derivatives that are designated as fair value and cash flow hedges to specific assets, liabilities or liabilitiesfirm commitments on the consolidated balance sheet or to forecasted transactions. The Company also formally assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective, the derivative expires, or is sold, terminated, or exercised, or the derivative is discontinued because it is unlikely that a forecasted transaction will occur, the Company discontinues hedge accounting prospectively for that specific hedge instrument.

(i) Shipping and Handling

      Costs related to shipping and handling are included in cost of sales for all periods presented.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(j) Advertising Costs and Vendor Consideration

      Advertising and promotion expenses are charged to earnings during the period in which they are incurred.  Advertising and promotion expenses included in selling, administrative, and general expenses were $41,339 in 2005, $31,474 in 2004 and $26,990 in 2003, $31,829 in 2002 and $28,845 in 2001.2003.

      In 2001, the EITF reached consensus on Issue No. 01-09 "Accounting for Consideration Given by a      Vendor to a Customer" ("EITF 01-09"). This issuance provides guidance primarily on income statement classification of consideration, from a vendor to a purchaser of the vendor's products. Generally,generally cash, consideration is to be classified as a reduction of net sales, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. The Company makes various payments to customers, including slotting fees, advertising allowances, buy-downs and co-op advertising. All of these payments reduce gross sales with the exception of co-op advertising. Co-op advertising is classified as a selling, general and administrative expense.expense in accordance with EITF 01-09. Co-op advertising expenses, a component of advertising and promotion expenses, were $14,408 in 2005, $10,389 in 2004 and $9,355 in 2003, $14,090 in 2002 and $11,803 in 2001.2003.

(k) Impairment of Long-Lived Assets

      In 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144 did not affect the Company's financial statements. SFAS No. 144 replaced SFAS No. 121, "Accounting for the Impairment of Long Lived Assets to be disposed of." SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations.  In accordance with SFAS No. 144, long-livedLong-lived assets and intangibles subject to amortization are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds the expected undiscounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.

(l) Foreign Currency Translation

      The Company's subsidiaries that operate outside the United States use their local currency as the functional currency, with the exception of operations carried out in Canada and Mexico, in which case the functional currency is the U.S. dollar. Other than Canada and Mexico, the functional currency is translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of shareholders'stockholders' equity, within other comprehensive income.income, net of tax where applicable. Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of earnings. The assets and liabilities of the Company's Canada and Mexico operations are re-measured using a month end rate, except for non-monetary assets and liabilities, which are re-measured using the historical exchange rate. Income and expense accounts are re-measured using an average monthly rate for the period, except for expenses related to those balance sheet accounts that are re-measured using historical exchange rates. The resulting re-measurement adjustment is reported in the consolidated statements of operations when incurred.

38




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(m) Earnings per Share ("EPS")

      The Company applies the provisions of Financial Accounting Standards BoardBasic net earnings per share ("FASB"EPS") SFAS No. 128, Earnings per Share, which requires companies to present basic EPS and diluted EPS.  Basic EPS excludes dilution and is computed by dividing incomecalculated using net earnings available to common stockholders divided by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock outstanding during the year. Diluted EPS is similar to basic EPS except that then shared in the earningsweighted-average number of shares is increased to include the Company.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

      Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method.  Common stock options that were not included in the diluted EPS computation because the options' exercise price was greater than the average market price of the common shares for the periods presented are not significant.were 351, 21 and 605 for 2005, 2004 and 2003, respectively.

      Computations of basic and diluted earnings per share are presented in the following table:

Years Ended December 31,

Years Ended December 31,

200320022001

2005

2004

2003

(In thousands, except per share data)
Net earnings $     310,149         284,489         188,592 

Net earnings.

 $

358,195 

368,622 

310,149 

Weighted-average common and dilutive potential
common shares outstanding:
Weighted-average common shares outstanding           66,251           63,723           52,418 

Weighted-average common shares outstanding.

Weighted-average common shares outstanding.

66,932 

66,682 

66,251 

Add weighted-average dilutive potential common
shares - options to purchase common shares, net               870             1,138                723 

shares - options to purchase common

shares, net.

712 

875 

870 

Weighted-average common and dilutive potential
common shares outstanding          67,121           64,861           53,141 

67,644 

67,557 

67,121 

Basic earnings per share $           4.68               4.46               3.60 

 $

5.35 

5.53 

4.68 

Diluted earnings per share  $           4.62               4.39               3.55 

 $

5.30 

5.46 

4.62 

(n) Stock BasedStock-Based Compensation

      Effective January 1, 2003, the Company adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and requires prominent disclosure in both the annual and interim financial statements of the method of accounting used and the financial impact of stock-based compensation. As permitted by SFAS No.SFAS. 123, the Company accounts for stock options granted as prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based upon the intrinsic value of the award.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123, and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the modified prospective or modified retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

39




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

If the Company had elected to recognize compensation expense under SFAS 123 based upon the fair value at the grant dates for awards under its plans, the Company's net earnings per share would have been reduced as follows:


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

200320022001

2005

2004

2003

Net earnings as reported $     310,149         284,489         188,592 

Net earnings as reported.

Net earnings as reported.

 $

358,195 

368,622 

310,149 

Deduct: Stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects method for all options, net of related tax effects          (6,284)          (4,972)          (3,198)

method for all options, net of related tax effects

(8,628)

(7,519)

(6,284)

Pro forma net earnings $     303,865         279,517         185,394 

Pro forma net earnings.

 $

349,567 

361,103 

303,865 

Net earnings per common share (basic)
As reported As reported  $           4.68               4.46               3.60 

As reported

 $

5.35 

5.53 

4.68 

Pro forma  $           4.59               4.39               3.54 

 $

5.22 

5.42 

4.59 

Net earnings per common share (diluted)
As reported As reported $           4.62               4.39               3.55 

As reported

 $

5.30 

5.46 

4.62 

Pro forma  $           4.54               4.31               3.49 

Pro forma.

 $

5.18 

5.36 

4.54 

      The average fair value of options granted during 2005, 2004 and 2003 2002was $37.29, $34.39 and 2001 was $24.73, $26.72 and $15.27, respectively. This fair value was estimated using the Black-Scholes option pricing model based on a weighted-average market price at grant date of $87.19 in 2005, $74.62 in 2004 and $53.93 in 2003 $62.11 in 2002 and $31.91 in 2001 and the following weighted-average assumptions:

200320022001
        Dividend yield               -              -              -
        Risk-free interest rate2.3%3.0%4.1%
        Volatility 31.3%39.7%43.3%
        Expected life (years)                   6                    6                    6 

2005

2004

2003

        Dividend yield.

-   

        Risk-free interest rate

4.0 %

2.9 %

2.3 %

        Volatility.

37.7 %

43.1 %

44.9 %

        Expected life (years)

(o) Comprehensive Income

      Comprehensive income includes foreign currency translation of assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature and transactions and derivative financial instruments designated as cash flow hedges. The Company does not provide income taxes on currency translation adjustments, as earnings from foreign subsidiaries are considered to be indefinitely reinvested.

      Amounts recorded in Accumulated other comprehensive income on the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003 are as follows:

Translation

Hedge

Tax expense

Adjustment

Instruments

(benefit)

Total

2003

 $

47 

3,569 

(1,302)

2,314 

2004

(1,628)

(1,280)

467 

(2,441)

2005

(48,702)

1,998 

(729)

(47,433)

40




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(p) Effect of New Accounting Pronouncements

     In January 2003,December 2004, the FASB issued FASB InterpretationStaff Position 109-1, "Application of FASB Statement No. 46109, "Accounting for Income Taxes" ("FIN 46"SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"), "Consolidationenacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of Variable Interest Entities,January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an Interpretationenterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company did not elect to repatriate any foreign earnings during 2005 and accordingly, the adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 51,43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," which addresses consolidation by business enterprisesto clarify the accounting for abnormal amounts of variable interest entities ("VIEs") either: (1)idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that do not have sufficient equity investment at riskitems such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristiccosts of a controlling financial interest. In December 2003, the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective datesconversion be based on the nature as well as the creation datenormal capacity of the VIE. VIEs createdproduction facilities. SFAS 151 is effective for fiscal years beginning after January 31, 2003, but prior toJune 15, 2005. The Company will adopt SFAS 151 effective January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than the first quarter of fiscal 2004. The Company has adopted FIN 46, which did not have,2006 and the Company does not expect the Revised Interpretations toits adoption will have a material impact on the Company's consolidated financial statements.

      In April 2003,March 2005, the FASB issued SFASFASB Interpretation No. 149, "Amendment47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement 133 on Derivative Instruments and Hedging Activities." This standard amends and clarifies financial accounting and reportingNo. 143" ("FIN 47"), which requires an entity to recognize a liability for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The standardthe fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective for contracts entered into or modifiedno later than the end of fiscal years ending after June 30, 2003. TheDecember 15, 2005. Effective December 31, 2005, the Company has adopted SFAS No. 133 and it did not have a material impact on the Company's consolidated financial statements.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted SFAS No. 150 and itFIN 47 which did not have a material impact on the Company's consolidated financial statements.

(p)      In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this standard, if any, will depend upon accounting changes or errors that may occur in future periods. The Company adopted SFAS 154 effective December 31, 2005.

 (q) Fiscal Year

      The Company ends its fiscal year on December 31. Each of the first three quarters in the fiscal year ends on the Saturday nearest the calendar quarter end.

41

(q) Reclassifications


      Certain prior period financial statement balances have been reclassified to conform to the current period's presentation.

(2) Acquisitions

      On March 20, 2002, the Company acquired all of the outstanding capital stock of Dal-Tile International Inc. ("Dal-Tile"), a leading manufacturer and distributor of ceramic tile in the United States, for approximately $1,468,325, consisting of approximately 12,900 shares of the Company's common stock, options to purchase approximately 2,100 shares of the Company's common stock and approximately $717,638 in cash, including direct acquisition costs. The Company's common stock and options were valued at approximately $750,687 based on the measurement date stock price of $55.04 per share ($710,420) and the estimated fair value of the options using the Black-Scholes option-pricing model ($40,267). The acquisition was accounted for by the purchase method and, accordingly, the results of operations of Dal-Tile have been included in the Company's consolidated financial statements from March 20, 2002. The purchase price was allocated to the assets acquired and liabilities assumed based upon the estimated fair values at the date of acquisition. The trademark value was established based upon an independent appraisal. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,168,286 was recorded as goodwill. None of the goodwill is expected to be deductible for income tax purposes. The primary reason for the acquisition was to expand the Company's presence in the ceramic tile and stone markets.

      Mohawk considered whether identifiable intangible assets, such as customer relationships, patents, covenants not to compete, software, production backlog, marketing agreements, unpatented technology and trade secrets, might exist and none were identified other than trademarks, during the purchase price negotiations and during the subsequent purchase price allocation evaluation. Accordingly, the valuation resulted in the recognition of goodwill and trademarks.

      In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill recorded in the Dal-Tile acquisition will not be amortized. Additionally, the Company determined that the trademark intangible assets have indefinite useful lives because they are expected to generate cash flows indefinitely. Goodwill and the trademark intangible assets are subject to annual impairment testing.

      The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(r) Reclassifications

      Current assets  $        322,042 
        Property, plant and equipment           223,267 
        Goodwill        1,168,286 
        Intangible assets-trademarks           146,700 
        Other assets               4,930 
          Total assets acquired         1,865,225 
        Current liabilities           132,124 
        Long-term debt           181,300 
        Other liabilities              83,476 
          Total liabilities assumed           396,900 
             Net assets acquired $     1,468,325 

      The following unaudited pro formaCompany reclassified certain prior period financial information presents the combined results of operations of Mohawk and Dal-Tile as if the acquisition had occurred at the beginning of 2002, after giving effectstatement balances to certain adjustments, including increased interest expense on debt relatedconform to the acquisition, the elimination of goodwill amortization and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mohawk and Dal-Tile constituted a single entity during such periods. The following table discloses the results for the fiscal years ended December 31:

20022001
        Net sales  $      4,758,380          4,482,741 
        Net earnings             294,846             242,601 
      Basic earnings per share                  4.39                   3.63 
        Diluted earnings per share                  4.32                   3.58 

      On May 5, 2003, the Company acquired certain assets of International Marble and Granite of Colorado, Inc., a distributor of natural stone slabs and tile. The primary reason for the acquisition was to expand the Company's presence in the stone flooring and countertop slab market. The acquisition was accounted for by the purchase method and, accordingly, the results of operations are included within the Dal-Tile segment from May 5, 2003. The purchase price was not significant.current presentations.

      On June 30, 2003, the Company acquired certain assets of a manufacturer and distributor of washable bath rugs. The primary reason for the acquisition was to expand the Company's presence in the bath mat market. The acquisition was accounted for by the purchase method and, accordingly, the results of operations are included within the Mohawk segment from June 30, 2003. The purchase price was not significant.(2) Acquisitions

      On November 10, 2003, the Company acquired the assets and assumed certain liabilities of the carpet division of Burlington Industries, Inc. ("Lees Carpet") from W.L. Ross & Company for approximately $349,839$352,009 in cash. The results of Lees Carpet have been included with the Mohawk segment results in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpet market.

      The following table summarizes the preliminary estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition for Lees Carpet.Carpet:


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

        Current assets

 $

62,939 

        Property, plant and equipment

53,424 

        Goodwill

78,083 

        Intangible assets

178,340 

        Other assets

52 

          Total assets acquired

372,838 

        Current assetsliabilities

 $           62,942 

12,829 

        Property, plant and equipment

        Other liabilities

              53,469 

8,000 

        Goodwill

          Total liabilities assumed

              78,035 

20,829 

        Intangible

             Net assets acquired.

            178,340 

 $

        Other assets                     52 
          Total assets acquired            372,838 
        Current liabilities              14,999 
        Other liabilities                8,000 
          Total liabilities assumed              22,999 
             Net assets acquired $         349,839 

352,009 

      Of the approximately $178,340 of acquired intangible assets, approximately $125,580 was assigned to trade names and not subject to amortization. The remaining $52,760 was assigned to customer relationships with a weighted-average useful life of approximately 15 years. Goodwill of approximately $78,035$78,083 was assigned to the Mohawk segment. The goodwill is deductible for income tax purposes.

      On October 31, 2005 the Company acquired all the outstanding shares of Unilin Holdings NV by acquiring Unilin Flooring. BVBA, which then purchased Unilin Holdings NV. The Company simultaneously acquired all the outstanding shares of Unilin Holding Inc., and its subsidiaries. (together with Unilin Flooring BVBA. "Unilin"). Unilin, together with its subsidiaries is a leading manufacturer, distributor and marketer of laminate flooring in Europe and the United States.   The total preliminary purchase price of acquiring Unilin, net of cash of $165,709, was Euro 2,110,176 or $2,546,349 based on the prevailing exchange rate at the closing.  The acquisition was accounted for by the purchase method and, accordingly, the results of operations of Unilin have been included in the Company's consolidated financial statements from October 31, 2005.  The purchase price was allocated to the assets acquired and liabilities assumed based upon the estimated fair values at the date of acquisition. Intangibles and property plant and equipment values were established with the assistance of an independent third party. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,249,720 was recorded as goodwill. The primary reason for the acquisition was to expand the Company's presence in the laminate flooring market.

42




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The Company considered whether identifiable intangible assets existed during the purchase price negotiations and during the subsequent purchase allocation period. Accordingly the Company recognized goodwill, tradenames, patents, customer lists, contingent assets and backlogs.

      In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets"("SFAS No. 142"), goodwill recorded in the Unilin Acquisition will not be amortized. Additionally, the Company determined that the tradenames intangible assets have indefinite useful lives because they are expected to begenerate cash flows indefinitely. Goodwill and the tradenames intangible assets are subject to annual impairment testing.

      The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, excluding cash of $165,709. The Company is in the process of finalizing the valuation and accordingly, the allocation of the purchase price has not been finalized

        Current assets

 $

387,695 

        Property, plant and equipment

774,677 

        Goodwill

1,249,720 

        Intangible assets

882,886 

        Other assets

890 

          Total assets acquired

3,295,868 

        Current liabilities

275,214 

        Long-term debt

32,027 

        Other liabilities

442,278 

          Total liabilities assumed

749,519 

             Net assets acquired

 $

2,546,349 

      Of the $882,886 of acquired intangibles, $356,521 was assigned to registered tradenames that are not subject to amortization.  The remaining acquired intangibles were assigned to customer relationships for $270,709 (7 year weighted average useful life) and patents for $255,656 (12 year weighted average useful life). The $1,249,720 of goodwill is not deductible for tax purposes.

      The following unaudited pro forma financial information presents the combined results of operations of Mohawkthe Company and Lees CarpetUnilin as if the acquisition had occurred at the beginning of 2002,2004, after giving effect to certain adjustments, including increased interest expense on debt related to the acquisition, and the amortization of customer relationships, depreciation and related income tax effects.intangible assets. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mohawkthe Company and Lees CarpetUnilin constituted a single entity during such periods. The following table discloses the results for the fiscal years ended December 31:

2005 (a)

2004

        Net sales

 $

7,553,506 

6,873,858 

        Net earnings (a)

400,408 

374,755 

        Basic earnings per share

5.98 

5.62 

        Diluted earnings per share

5.92 

5.55 


(a) Excludes a non-recurring $34,300 (net of tax of $22,300) fair value adjustment applied to Unilin's acquired inventory and $6,000 (net of tax of $3,900) adjustment related to non-recurring transaction costs.

20032002
        Net sales $  5,222,159      4,782,905 
        Net earnings        316,386         290,996 
        Basic earnings per share              4.78               4.57 
        Diluted earnings per share              4.71               4.49 

43




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

     During 2005, the Company acquired certain assets of a carpet backing manufacturer and all outstanding shares of a distributor of natural stone slabs for approximately $67,642. Goodwill related to the acquisitions was approximately $10,955.

(3) Receivables

        Receivables are as follows:

2005

2004

        Customers, trade

 $

925,714 

746,233 

        Other

25,662 

9,720 

951,376 

755,953 

        Less allowance for discounts, returns, claims and

           doubtful accounts

102,710 

95,303 

                       Net receivables

 $

848,666 

660,650 

      The following table reflects the activity of allowances for discounts, returns, claims and doubtful accounts for the years ended December 31:

        Receivables are as follows:
20032002
        Customers, trade $        663,269            578,429 
        Other               4,648                7,373 
           667,917            585,802 
        Less allowance for discounts, returns, claims and
           doubtful accounts             94,417              84,673 
                       Net receivables $        573,500            501,129 
    Additions    
  

Balance at

 

charged to

  

Balance

  

beginning

 

costs and

   

at end

of  year

expenses (1)

Deductions (2)

of year

        2003

 $

84,673 

279,583 

269,839 

94,417 

        2004

94,417 

310,368 

309,482 

95,303 

        2005

95,303 

324,024 

316,617 

102,710 


(1) Includes $ 2,035 for 2005 related to the Unilin Acquisition which was not charged to costs and expenses.
(2) Represents charge-offs, net of recoveries.

(4) Inventories

        The components of inventories are as follows:

2005

 

2004

        Finished goods

 $

754,663 

665,565 

        Work in process

89,179 

86,883 

        Raw materials

323,070 

265,535 

                       Total inventories.

 $

1,166,913 

1,017,983 

      There were no LIFO liquidations in either 2005 or 2004. Inventories, included above, in the amount of $764,140 and $710,016 at December 31, 2005 and 2004, respectively, were valued at the lower of LIFO cost or market. If the LIFO method had not been used inventories would have been $48,560 and $3,402 higher than reported at December 31, 2005 and 2004, respectively, which approximates the difference between replacement and carrying value.

        The components of inventories are as follows:
20032002
        Finished goods $        535,645            436,080 
        Work in process             72,981              67,907 
        Raw materials           223,789            174,021 
                       Total inventories $        832,415            678,008 

44




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(5) Goodwill and Other Intangible Assets

      Effective January 1, 2002, theThe Company adopted SFAS No. 142,which requires the Company to evaluateevaluates its goodwill and indefinite life intangibles on an annual basis for impairment. Furthermore, any goodwill and indefinite life intangibles that was acquired in a purchase business combination completed after June 30, 2001 will not be amortized. Goodwill and indefinite life intangibles that was acquired in business combinations completed before July 1, 2001 is no longer being amortized. The Company has two operatingthree reporting segments, the Mohawk unitsegment, the Dal-Tile segment, and the Dal-Tile unit and, accordingly,Unilin segment.  Accordingly the Company has assigned the acquired goodwill and indefinite life intangibles to the respective operatingreporting segments. During the fourth quarter of 2003,2005, the Company evaluated the goodwill and indefinite life intangibles using the discounted cash flow approach and determined that there was no impairment.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The following table summarizes the components of intangible assets:

2005

2004

      Carrying amount of amortized intangible assets:

        Customer relationships

 $

326,039 

54,160 

        Patents

256,256 

600 

 Effect of translation

(9,902)

-   

 $

572,393 

54,760 

      Accumulated amortization of amortized intangible assets:

        Customer relationships

 $

13,467 

4,324 

        Patents

7,006 

70 

 Effect of translation

(83)

-   

 $

20,390 

4,394 

      Indefinite life intangible assets:

Trade names

628,801 

272,280 

Effect of translation

(6,707)

-   

 $

622,094 

272,280 

          Total other intangible assets

 $

1,174,097 

322,646 

       Aggregate amortization expense

        For the year ended December 31

 $

15,996 

3,843 

       Estimated amortization expense for years ended

          December 31, are as follows:

        2006

 $

77,103 

        2007

83,733 

        2008

65,410 

        2009

64,282 

        2010

62,640 

20032002
      Carrying amount of amortized intangible assets:
      Customer relationships  $          53,010                        - 
     Patents                  600                        - 
 $          53,610                        - 
      Accumulated amortization of amortized intangible assets:
      Customer relationships $               541                        - 
        Patents                     10                        - 
 $               551                        - 
      Unamortized intangible assets:
        Trade names  $        272,280            146,700 
       Aggregate amortization expense
        For the year ended December 31 $               551                        - 
       Estimated amortization expense for years ended
          December 31, are as follows:
        2004  $            3,619 
        2005               3,619 
        2006               3,619 
        2007               3,619 
        2008                3,619 

45




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The changes in the carrying amount of goodwill for the years ended December 31, 20032005 and 20022004 are as follows:

MohawkDal-Tile
SegmentSegmentTotal
        Balance as of January 1, 2002 $      109,167                      -          109,167 
        Goodwill acquired during the year                     -       1,168,286       1,168,286 
        Balances as of December 31, 2002         109,167       1,168,286       1,277,453 
        Goodwill acquired during the year           85,916              5,331            91,247 
        Balances as of December 31, 2003 $      195,083       1,173,617       1,368,700 


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

 

 

 

 

Mohawk

Dal-Tile

 

 Unilin

Total

        Balances as of January 1, 2004

 $

195,083 

1,173,617 

1,368,700 

        Goodwill acquired during the year

1,549 

7,100 

8,649 

        Balances as of December 31, 2004

196,632 

1,180,717 

1,377,349 

        Goodwill acquired during the year

1,500 

10,955 

1,249,720 

1,262,175 

 Effect of translation

(17,561)

(17,561)

        Balances as of December 31, 2005

 $

198,132 

1,191,672 

1,232,159 

2,621,963 

      The following table disclosesincrease in goodwill during 2005 was attributable to the Company's earnings, assumingacquisitions made within the exclusion of goodwill amortization forMohawk and Dal-Tile reporting segments and the fiscal year ended December 31:Unilin Acquisition.

2001

        Net earnings $         188,592 
        Add back: Goodwill amortization, net of income taxes                2,022 
        Adjusted net earnings. $         190,614 
        Basic earnings per share $               3.60 
        Add back: Goodwill amortization, net of income taxes                  0.04 
        Adjusted net earnings $               3.64 
        Diluted earnings per share $               3.55 
        Add back: Goodwill amortization, net of income taxes                  0.04 
        Adjusted net earnings $               3.59 

(6) Property, Plant and Equipment

Following is a summary of property, plant and equipment:
20032002

2005

2004

Land  $          59,621              56,671 

 $

155,670 

59,638 

Buildings and improvements           367,007            339,630 

559,723 

378,389 

Machinery and equipment        1,154,387         1,052,567 

1,802,370 

1,233,140 

Furniture and fixtures             45,680              42,421 

44,765 

44,371 

Leasehold improvements             19,912              16,354 

28,784 

24,120 

Construction in progress Construction in progress             88,883              77,468 

Construction in progress

233,525 

78,165 

        1,735,490         1,585,111 

2,824,837 

1,817,823 

Less accumulated depreciation and amortization Less accumulated depreciation and amortization           816,405            729,787 

Less accumulated depreciation and amortization

1,014,109 

912,491 

Net property, plant and equipment $        919,085            855,324 

 $

1,810,728 

905,332 

      Property, plant and equipment includes capitalized interest of $6,000, $3,197 and $5,634 $2,126in 2005, 2004 and $1,8552003, respectively. Depreciation expense was $133,333, $117,768 and $104,450 for 2005, 2004 and 2003, respectively.  Included in 2003, 2002the property, plant and 2001, respectively.equipment are capital leases with a cost of $135,210 and accumulated depreciation of $118 at December 31, 2005.

(7) Long-Term Debt

      On September 30, 2003,October 28, 2005, the Company entered into a $1,500,000 364-day senior, unsecured, bridge term loan facility, which is referred to herein as the bridge credit facility, and a $1,500,000 five-year, senior, unsecured, revolving credit and term loan facility, which is referred to herein as the senior unsecured credit facilities.  The senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines.  The Company entered into both the bridge credit facility and the senior unsecured credit facilities to finance the Unilin Acquisition and to provide for working capital requirements.

46




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The new senior multi-currency unsecured credit facilities consist of (i) a multi-currency $750,000 revolving linecredit facility, (ii) a $389,200 term loan facility and (iii) a Euro 300,000 (based on the then prevailing exchange rate) term loan facility, all of which mature on October 28, 2010. Availability under the revolving credit facility is reduced by the amount of letters of credit agreement providing up to $300,000 withissued under this facility. At December 31, 2005, the amount of these letters of credit was $78,338.  At the Company's election, both the bridge credit facility and the new senior credit facilities bear interest ratesat (i) the greater of either (i)(x) prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus 0.4% to 1.5%, depending uponan indexed amount based on the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.6% depending uponsenior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's performance measured against certain financial ratios.subsidiaries entered into a Euro 130,000, or approximately $156,000 (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred to as the Euro revolving credit facility. This agreement bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The newCompany guaranteed the obligations of that subsidiary under this revolving credit facility replaces a $450,000 facility that was due to expire in January 2004. The facility is comprisedand of two tranches, a $200,000 tranche expiring in September 2008 and a $100,000 tranche expiring in September 2004. The $100,000 trancheany of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

      The Company's new senior unsecured credit facilities and the Euro revolving credit facility is renewable annually. The credit agreement contains customary financialboth contain debt to capital ratio requirements and other customary covenants.  The Company was in compliance with these covenants at December 31, 2005. Under both of these credit facilities, the Company must pay an annual facility fee ranging from .15%0.060% to .50% of the total credit commitment,0.25% depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line. Additionally, at December 31, 2003, the Company had credit facilities of $300,000 under its revolving credit facility and $50,000 under various short-term uncommitted credit lines.senior unsecured long-term debt rating as determined by certain rating agencies.

      At December 31, 2003,2005, a total of $237,344approximately $507,918 was unusedavailable under the combined revolvingnew senior unsecured credit facilities, and the Euro 130,000 credit agreement, compared to $234,130 available under both the then-existing credit facility and uncommitted credit lines.lines at December 31, 2004. The revolvingamount used under the senior unsecured credit facilities at December 31, 2005, was $1,140,379. The amount used under the unsecured credit facilities is composed of $1,062,041 borrowings, $55,599 standby letters of credit guaranteeing the Company's industrial revenue bonds and $22,739 standby letters of credit related to various insurance contracts and foreign vendor commitments.

      On January 17, 2006, the Company issued $500,000 aggregate principal amount of 5.750% notes due 2011 and $900,000 aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the bridge credit facility, and uncommitted lines of credit are unsecured.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      In connection with the Dal-Tile acquisition during 2002,accordingly the Company entered into a 364-day term loanreclassified the bridge credit facility (the "Bridge Facility") to finance a portion of the acquisition. On April 2, 2002, the Company sold $300,000 of its 6.50% senior notes due 2007, Series A and $400,000 of its 7.20% senior notes due 2012, Series B through institutional private placements and used the proceeds to repay outstanding indebtedness of approximately $601,000 under the Bridge Facility and approximately $90,000 under the Company's revolving credit facility. On June 13, 2002, the Company exchanged $294,965 of its registered 6.50% senior notes due 2007, Series C for an equal amount of its Series A senior notes and $397,800 of its registered 7.20% senior notes due 2012, Series D for an equal amount of its Series B senior notes.as long-term debt. Interest payable on each series of notes will be increased in the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum increase in the event of a downgrade is payable semiannually.2%. If the Company's debt rating subsequently improves, then the interest rates would be reduced accordingly.

      On August 4, 2003, theThe Company entered intohas an on-balance sheet trade accounts receivable securitization agreement ("Securitization(the "Securitization Facility") replacing two previous facilities were due to expire in October 2003.. The Securitization Facility allows the Company to borrow up to $350,000 based on available accounts receivable. TheAt December 31, 2005, the Company sells, on a non-recourse revolving basis, its accounts receivablehad $40,000 outstanding compared to a special purpose entity, which in turn obtains loan advances that are secured by the receivable pool from a third-party commercial paper conduit sponsored by financial institutions.$90,000 at December 31, 2004. The Securitization Facility is subject to annual renewal. At December 31, 2003,secured by trade receivables. During the third quarter of 2005, the Company had approximately $182,000 outstanding secured by approximately $649,018extended the term of trade receivables.its Securitization Facility until August 2006.

47




      The Company guarantees its industrial revenue bonds with various standby letters of credit, which were in aggregate $55,599 at December 31, 2003 and 2002.


MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      Long-term debt consists of the following:
20032002
       364-Day Credit Agreement, due September 29, 2004 $          41,701                        - 
        Revolving line of credit, due January 28, 2004                       -                4,402 
        Securitization Facility, due August 4, 2004            182,000                        - 
        6.50% senior notes, payable April 15, 2007
          interest payable semiannually           300,000            300,000 
        7.20% senior notes, payable April 15, 2012
          interest payable semiannually           400,000            400,000 
        8.46% senior notes, payable in annual principal
          installments beginning in 1998, due September 16, 2004,
          interest payable quarterly              14,286              28,571 
        7.14%-7.23% senior notes, payable in annual principal
          installments beginning in 1997, due September 1, 2005,
          interest payable semiannually             18,889              28,333 
        7.58% senior notes, payable in annual principal installments
          beginning in 1997, due July 30, 2003, interest payable
          semiannually                       -                1,428 
        6% term note, payable in annual principal and interest
          installments beginning in 1998, due July 23, 2004                1,336                2,671 
        Industrial revenue bonds and other              54,201              55,022 
                        Total long-term debt        1,012,413            820,427 
        Less current portion           248,795              27,427 
                        Long-term debt, excluding current portion $        763,618            793,000 
       The aggregate maturities of long-term debt as of:
          December 31, 2003 are as follows:
        2004  $        248,795 
        2005               9,445 
        2006               6,500 
        2007           300,000 
        2008                       - 
        Thereafter           447,673 
 $     1,012,413 


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

      Long-term debt consists of the following:

2005

2004

        Short term uncommitted credit lines

 $

37,721 

        Five year unsecured credit facility, due October 28, 2010

1,062,041 

        Securitization Facility, due August 1, 2006

40,000 

90,000 

       6.50% senior notes, payable April 15, 2007

          interest payable semiannually

300,000 

300,000 

        7.20% senior notes, payable April 15, 2012

          interest payable semiannually

400,000 

400,000 

        364-day senior, unsecured bridge term credit facility,

          due October 27, 2006

1,400,000 

        7.14%-7.23% senior notes, payable in annual principal

          installments beginning in 1997, due September 1, 2005,

          interest payable semiannually

9,447 

        Industrial revenue bonds, capital leases and other

106,329 

54,173 

                        Total long-term debt

3,308,370 

891,341 

        Less current portion

113,809 

191,341 

                        Long-term debt, excluding current portion

 $

3,194,561 

700,000 

       The aggregate maturities of long-term debt as of

          December 31, 2005 are as follows:

        2006

 $

113,809 

        2007

314,277 

        2008

11,259 

        2009

4,275 

        2010

1,063,178 

        Thereafter

1,801,572 

 $

3,308,370 

(8) Accounts Payable and Accrued Expenses

        Accounts payable and accrued expenses are as follows:

2005

2004

        Outstanding checks in excess of cash

 $

97,389 

33,719 

        Accounts payable, trade

401,543 

277,851 

        Accrued expenses

325,856 

180,978 

        Income taxes payable

36,504 

16,143 

        Accrued compensation

136,813 

114,370 

                      Total accounts payable and accrued expenses

 $

998,105 

623,061 

        Accounts payable and accrued expenses are as follows:
20032002
        Outstanding checks in excess of cash  $          30,429              23,504 
        Accounts payable, trade            245,746            236,272 
        Accrued expenses           262,012            263,891 
        Accrued compensation              99,753            106,639 
                      Total accounts payable and accrued expenses $        637,940            630,306 

48




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(9) Derivative Financial Instruments

Natural Gas Risk Management

      The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU").

      The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset goingapplied to other comprehensive income, net of applicable income taxes and any hedge ineffectiveness.

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2003,2005, the Company had natural gas contracts that mature from January 20042006 to December 2004October 2006 with an aggregate notional amount of approximately 3,950660 MMBTU's. The fair value of these contracts was an asset of $3,565.$1,941. At December 31, 2002,2004, the Company had natural gas contracts outstandingthat mature from January 2005 to March 2005 with an aggregate notional amount of approximately 1,4501,010 MMBTU's. The fair value of these contracts was an asseta liability of $1,911.$1,280.  The offset to these assets is recorded in other comprehensive income, net of applicable income taxes, respectively.taxes. The ineffective portion of the derivative is recognized in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates that will be reclassified out of accumulated other comprehensive income in the next twelve months is a gain of approximately $1,941.

      The Company's long-term natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2003,2005, the Company hashad normal purchase commitments of approximately 3,0951,867 MMBTU's for periods maturing from January 20042006 through September 2005.October 2006. The contracted value of these commitments was approximately $13,774$17,219 and the fair value of these commitments was approximately $17,018,$20,488, at December 31, 2003.2005.  At December 31, 2002,2004, the Company had normal purchase commitments of approximately 4,560 MMBTU's.1,892 MMBTU's for periods maturing from January 2005 through March 2006. The contracted value of these commitments was approximately $17,441$9,879 and the fair value of these commitments was approximately $19,694.$11,941, at December 31, 2004.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in U.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. Accordingly, these contracts have been designated as cash flow hedges. The Company had forward contracts to purchase approximately 145,284 and 357,5228,000 Mexican pesos at December 31, 2003 and 2002, respectively.2005. The aggregate U.S. Dollardollar value of these contracts at December 31, 2003 and 20022005 was approximately $12,665 and $34,581, respectively.$697. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstanding at December 31, 2003 and 2002, respectively, were not significant.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES2004.

Notes to Consolidated Financial Statements (Continued)

Interest Rate Management

      In 2002, the Company determined that its $100,000 interest rate swap was ineffective. Consequently, the $10,700 unrealized loss associated with the swap was recorded as a realized loss in interest expense during the fourth quarter of 2002.      The Company continuesalso had forward exchange contracts to carrysell the liability on its consolidated balance sheetsBritish Pound and the interest rate swap isCanadian Dollar for a notional amount of $5,555 at December 31, 2005. The contracts do not qualify for hedge accounting and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and the contracts do not qualify for hedge accounting. The impact of the change in fair value on the statements of operations was not significant for the yearperiod ended December 31, 2003 was not significant.2005.

49




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(10) Product warranties

      The Company warrants certain qualitative attributes of its products for up to 20 years. The Company records a provision for estimated warranty and related costs, based on historical experience and periodically adjusts these provisions to reflect actual experience.

Product warranties are as follows:
200320022001

2005

2004

2003

Balance at beginning of year Balance at beginning of year $          7,184              7,021              6,506 

 $

23,473 

24,063 

28,919 

Warranty claims         (52,237)         (61,718)         (52,125)

(46,850)

(45,553)

(50,040)

Warranty expense Warranty expense           50,243            61,881            52,640 

49,365 

44,963 

45,184 

Balance at end of year Balance at end of year $          5,190              7,184              7,021 

 $

25,988 

23,473 

24,063 

(11) Stock Options, Stock Compensation and Treasury Stock

      Under the 2002 Long-Term Incentive Plan, options may be granted to directors and key employees through 2012 to purchase a maximum of 3,200 shares of common stock. Under the 2002 plan, options that were not issued from the 1992, 1993 and 1997 plans were cancelled.  During 2003, 2002,2005, 2004 and 20012003, options to purchase 565, 731,460, 411 and 704565 shares, respectively, were granted under the 1992, 1993, 1997 and 2002 plans.plan. Options granted under each of these plans expire 10 years from the date of grant and become exercisable at such dates and at prices as determined by the Compensation Committee of the Company's Board of Directors. In connection with the acquisition of Dal-Tile in 2002, the Company issued 2,096 options to employees of Dal-Tile in exchange for their respective options.

      During 1996, the Company adopted the 1997 Non-Employee Director Stock Compensation Plan.  The plan provides for awards of common stock of the Company for non-employee directors to receive in lieu of cash for their annual retainers.  During 2003, 2002,2005, 2004 and 20012003, a total of one, two,1, 1 and two1 shares, respectively, were awarded to the non-employee directors under the plan.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      Additional information relating to the Company's stock option plans follows:

2005

2004

2003

Options outstanding at beginning of year

2,281 

2,413 

2,624 

Options granted

460 

411 

565 

Options exercised

(378)

(464)

(679)

Options canceled

(87)

(79)

(97)

Options outstanding at end of year

2,276 

2,281 

2,413 

Options exercisable at end of year

857 

791 

765 

Option prices per share:

Options granted during the year

$

76.73-89.46 

61.33-90.97 

48.50-74.93 

Options exercised during the year

$

9.33-82.50 

9.33-65.02 

6.67-63.14 

Options canceled during the year

$

30.53-90.97 

11.17-82.50 

9.33-63.90 

Options outstanding at end of year

$

11.33-90.97 

9.33-90.97 

9.33-74.93 

Options exercisable at end of year

$

11.33-90.97 

9.33-74.93 

9.33-65.02 

200320022001
Options outstanding at beginning of year              2,624             1,916             1,868 
Options granted for Dal-Tile acquisition                      -             2,096                    - 
Options granted                  565                731                704 
Options exercised               (679)          (2,056)             (570)
Options canceled                  (97)               (63)               (86)
Options outstanding at end of year              2,413             2,624             1,916 
Options exercisable at end of year                 765             1,017                599 
Option prices per share: 
Options granted during the year $ 48.50-74.93  38.73-65.02  23.33-53.01 
Options exercised during the year$ 6.67-63.14  5.67-49.09  5.67-35.13 
Options canceled during the year $ 9.33-63.90  9.58-63.14  5.67-42.86 
Options outstanding at end of year$ 9.33-74.93  6.67-65.02  5.61-53.01 
Options exercisable at end of year$ 9.33-65.02  6.67-53.01  5.61-35.13 

50




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

  Summarized information about stock options outstanding and exercisable at December 31, 2003,2005, is as follows:

Outstanding

Exercisable

Exercise price range

Number of Shares
Average Life (1)
Average Price (2)
Number of Shares
Average Price (2)
Under $20.16               411               3.80  $   15.49                348  $   14.72 
$20.20-30.50               111               5.87       22.95                  69       22.59 
$30.53-30.53               407               7.16       30.53                  91       30.53 
$30.69-48.50               651               7.89       42.95                142       34.05 
$49.09-58.00               151               8.83       55.24                  18       53.55 
$63.14-74.93                682               8.49       64.56                  97       63.41 
   Total            2,413                765 

Outstanding

Exercisable

Exercise price range

Number of Shares

 

Average Life (1)

 

Average Price (2)

 

Number of Shares

 

Average Price (2)

Under $30.53

392 

4.15 

 $

24.79 

303 

 $

23.15 

$30.69-48.50

437 

6.34 

44.93 

169 

39.87 

$49.09-63.14

408 

6.40 

60.79 

216 

60.48 

$63.90-73.45

519 

7.61 

70.31 

156 

68.11 

$73.54-88.33

510 

9.20 

86.51 

12 

83.21 

$89.46-90.97

10 

9.17 

90.42 

90.97 

   Total

2,276 

6.91 

59.60 

857 

44.96 

         
1)       Weighted average(1)     Weighted-average contractual life remaining in years.
2)       Weighted average(2)     Weighted-average exercise price.

      The Company's Board of Directors has authorized the repurchase of up to 15,000 shares of its outstanding common stock. For the year ended December 31, 2003,2005, a total of approximately 593186 shares of the Company's common stock were purchased at an aggregate cost of approximately $27,839.$14,521. Since the inception of the program, a total of approximately 10,95711,393 shares have been repurchased at an aggregate cost of approximately $293,129.$326,063. All of these repurchases have been financed through the Company's operations and banking arrangements.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes On October 31, 2005, the Company entered into an agreement to Consolidated Financial Statements (Continued)
issue approximately 585 shares to certain Unilin officers at $81.00 per share for an aggregate purchase price of $47,429. These shares were issued in November 2005. The securities were issued in reliance on the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.

(12) Employee Benefit Plans

      The Company has a 401(k) retirement savings plan (the "Mohawk Plan") open to substantially all of its employees within the Mohawk and Dal-Tile segments who have completed 90 days of eligible service. Effective January 1, 2003, the Dal-Tile International Inc. Employees' Retirement Savings Plan was merged into the Mohawk Plan. For the Mohawk segment, the Company contributes $0.50 for every $1.00 of employee contributions up to a maximum of 4% of the employee's salary and an additional $0.25 for every $1.00 of employee contributioncontributions in excess of 4% of the employee's salary up to a maximum of 6%. For the Dal-Tile segment, the Company contributes $.50 for every $1.00 of employee contributions up to a maximum of 6% of the employee's salary. Employee and employer contributions to the Mohawk Plan were $38,322 and $15,118 in 2005, $35,440 and $13,896 in 2004, and $28,807 and $10,995 in 2003, $20,237 and $7,359 in 2002, and $18,322 and $6,521 in 2001, respectively. The Company also made a discretionary contribution to the Mohawk Plan of approximately $5,710, $5,214 and $4,595 $3,797in 2005, 2004 and $2,5002003, respectively. The Unilin segment also has a defined contribution plan that covers certain employees in 2003, 2002the United States of America.  Eligible employees may elect to contribute a portion of their annual salary subject to a certain maximum each year. The Company's matching of employee contributions is discretionary and 2001, respectively.is set each year by the Company. The Company's match was approximately $40 for the two-month period ended December 31, 2005.

     Unilin has various pension plans covering most of its employees in Belgium, France and The Netherlands. Benefits under those plans typically depend on compensation and years of service. Unilin does not provide other postretirement benefits. The pension plans are funded in accordance with local regulations. In The Netherlands, some plans participate in multi-employer pension plans which have been treated as defined contribution plans. The Company uses a December 31 measurement date for its plans.

51




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

     The plan assets for the defined benefit plans are invested 100% in insurance contracts. Since the insurance companies primarily invest in bonds, the long term expected rate of return reflects the yield of the bonds. A discount rate of 4.18% has been established by reference to the return on AA corporate bonds, an expected rate of return has been set equal to the discount rate and a rate of compensation increase of 3.45% is based on the Company's experience.

     The accumulated benefit obligation for Unilin's defined benefit plans was $14,345 at December 31, 2005. The assets, projected benefit obligation and accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of the plans' assets were $12,115, $15,194 and $13,468 respectively, as of December 31, 2005.

(13) Income Taxes

      Following is a summary of income from continuing operations before income taxes for United States and foreign operations:

2005

2004

2003

               United States

 $

545,427 

568,824 

483,997 

               Foreign

11,594 

8,565 

4,437 

Income before income taxes.

 $

557,021 

577,389 

488,434 

      Income tax expense attributable to earnings before income taxes(benefit) for the years ended December 31, 2003, 20022005, 2004 and 2001,2003, consists of the following:

Current

Deferred

Total

        2005:

               U.S. federal

 $

183,807 

3,320 

187,127 

               State and local

15,147 

(1,395)

13,752 

               Foreign

11,555 

(13,608)

(2,053)

 $

210,509 

(11,683)

198,826 

        2004:

               U.S. federal

 $

158,704 

32,541 

191,245 

               State, local and other

11,363 

6,159 

17,522 

 $

170,067 

38,700 

208,767 

        2003:

               U.S. federal

 $

132,849 

38,696 

171,545 

               State, local and other

10,661 

(3,921)

6,740 

 $

143,510 

34,775 

178,285 

CurrentDeferredTotal
        2003:
               U.S. federal $     132,849           38,696         171,545 
               State, local and other          10,661           (3,921)            6,740 
 $     143,510           34,775         178,285 
        2002:
               U.S. federal  $     133,914             9,859         143,773 
               State, local and other            3,089           12,278           15,367 
 $     137,003           22,137         159,140 
        2001:
               U.S. federal  $       82,246             5,728           87,974 
               State, local and other           15,015              (165)          14,850 
 $       97,261             5,563         102,824 

52




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      Income tax expense attributable to earnings before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings before income taxes as follows:

200320022001
        Computed "expected" tax expense $     170,952         155,270         101,996 
        State and local income taxes, net of federal
           income tax benefit            5,071             8,741             9,652 
        Foreign income taxes            2,495             1,248                    - 
        Amortization of goodwill                    -                    -                709 
        Tax credits          (2,312)          (5,000)          (5,000)
        Other, net             2,079           (1,119)          (4,533)
 $     178,285         159,140         102,824 

MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

2005

2004

2003

        Computed "expected" tax expense

 $

194,958 

202,087 

170,952 

        State and local income taxes, net of federal

           income tax benefit

4,367 

11,675 

5,071 

        Foreign income taxes

(589)

(892)

2,495 

        Change in valuation allowance

(1,351)

(1,821)

(2,312)

        Other, net

1,441 

(2,282)

2,079 

 $

198,826 

208,767 

178,285 

      The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 20032005 and 2002,2004, are presented below:

20032002

2005

2004

Deferred tax assets:
Accounts receivable $         3,940              3,627 

 $

20,147 

32,008 

Inventories          25,312           18,138 

(4,969)

9,641 

Prepaid expenses                   -                 655 

Federal and state net operating losses and credits

44,620 

40,551 

Accrued expenses          61,003            67,706 

99,836 

62,767 

Other             1,147              7,735 

Valuation allowance.

Valuation allowance.

(32,180)

(33,531)

Gross deferred tax assets          91,402            97,861 

127,454 

111,436 

Deferred tax liabilities:
Plant and equipment       (117,857)       (103,831)

(302,552)

(129,287)

Intangibles        (72,954)         (57,929)

(325,183)

(83,545)

Other liabilities

(56,069)

(35,054)

Gross deferred tax liabilities      (190,811)       (161,760)

(683,804)

(247,886)

Net deferred tax liability $     (99,409)        (63,899)

Net deferred tax liability (1)

 $

(556,350)

(136,450)


(1) This amount includes $25,114 of non-current deferred tax assets which are in other assets and $5,111 current deferred tax liabilities which are included in other accrued expenses in the consolidated balance sheet.

      Based upon the expected reversal of deferred tax liabilities and the level of historical and projected taxable income over periods in which the deferred tax assets are deductible, the Company's management believes it is more likely than not the Company will realize the benefits of these deductible differences atdifferences.

      The Company does not provide for U.S. federal and state income taxes on the cumulative undistributed earnings of its foreign subsidiaries because such earnings are reinvested and will continue to be reinvested indefinitely.  At December 31, 2003.2005 and 2004, the Company had not provided federal income taxes on earnings of approximately $56,763 and $48,172 from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in various international jurisdictions.  These taxes would be partially offset by U.S. foreign tax credits.

53




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The American Jobs Act of 2004 ("The Jobs Act") was enacted on October 22, 2004.  The new law made numerous and substantive changes in the taxation of foreign and domestic-sourced income, including provisions for a lower tax rate on repatriated foreign earnings.   The Company has completed its analysis of the relevant provisions of The Jobs Act and has determined that there is no impact on the Company's consolidated financial statements.

      As of December 31, 2005 and 2004, the Company had state net operating loss carryforwards, state tax credits and Mexican asset tax credits with potential tax benefits of approximately $44,600 and $40,600, respectively, net of federal income tax benefit. Because the Company generates more state tax credits on an annual basis in certain jurisdications than the related state taxable income, it is the Company's opinion that it is more likely than not that the benefit of these deferred tax assets related to state tax credits and certain state net operating losses will not be realized. Accordingly, a valuation allowance of approximately $32,180 and $33,531 has been recorded for the years ended December 31, 2005 and 2004, respectively. For 2005, the valuation allowance decreased by $1,351 primarily as a result of a Mexican tax credit benefit recognized in the current year, net of an increase in the state valuation allowance in various state jurisdictions. The Company has determined that these credits and losses may not be utilized before they expire.

      In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities.  Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company has accrued a liability when it believes it is probable that it will be assessed.  Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company's consolidated financial position but could possibly be material to the Company's consolidated results of operations or cash flow of any one period.

(14) Commitments and Contingencies

      The Company is obligated under various operating leases for office and manufacturing space, machinery, and equipment.

      Future minimum lease payments under non-cancelable capital and operating leases (with initial or remaining lease terms in excess of one year) as of December 31:

        2004  $       72,857 
        2005          57,202 
        2006           44,517 
        2007           31,183 
        2008           22,602 
        Thereafter           45,363 
        Total payments  $     273,724 

Capital

Operating

Total Future Payments

        2006

 $

18,382 

93,553 

111,935 

        2007

14,381 

75,247 

89,628 

        2008

11,670 

61,973 

73,643 

        2009

4,597 

51,558 

56,155 

        2010

1,223 

37,064 

38,287 

        Thereafter

1,687 

103,116 

104,803 

        Total payments

51,940 

422,511 

474,451 

        Less amount representing interest

(3,636)

        Present value of capitalized lease payments

 $

48,304 

      Rental expense under operating leases was $99,697, $87,659 and $78,007 $62,066in 2005, 2004 and $39,072 in 2003, 2002 and 2001, respectively.

54




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The Company has approximately $23,433$40,958 and $19,600$36,693 as of December 31, 20032005 and 20022004 in standby letters of credit for various insurance contracts and commitments to foreign vendors that expire within two years. In addition, at December 31, 2005, the Company guaranteed approximately $72,040 for VAT and building leases related to its operating facilities in France.

      The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known to be contemplated to which the Company is a party or to which any of its property is subject.


MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES      In Shirley Williams, et al vs. Mohawk Industries, Inc, four plaintiffs filed a purported class action lawsuit in January 2004, in the United States District Court for the Northern District of Georgia, alleging that they are former and current employees of the Company and that the actions and conduct of the Company, including the employment of persons who are not permitted to work in this country, have damaged them and the other members of the purported class by suppressing the wages of our hourly employees in Georgia. The plaintiffs seek a variety of relief, including (a) treble damages; (b) return of any allegedly unlawful profits; and (c) attorney's fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District in April 2004. The Company then sought and obtained permission to file an immediate appeal of the Northern District's decision to the United States Court of Appeals for the 11th Circuit. In June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (Williams v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005, the Company filed a motion requesting review by the full 11th Circuit, which was denied in August 2005. In October 2005, the Company filed a petition for certiorari with the United States Supreme Court, which petition was granted in December of 2005. The Company believes it has meritorious defenses and intends to continue vigorously defending itself against this action.

Notes     The Company believes that adequate provisions have been made for all pending litigation for probable losses with respect to Consolidated Financial Statements (Continued)
the resolution of all claims and pending litigation and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material effect on its results of operations in a given quarter or year.

      The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment and disposal of solid and hazardous materials, and the cleanup of contamination associated therewith. Because of the nature of the Company's business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations. The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided reservesaccruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities will have a material adverse effect on it.its operations, but may have an effect on a given quarter or annual period.

      Three sites near Mohawk's Dallas facility in its Dal-Tile segment are involved in environmental cleanup projects relating principallyOn October 31, 2005, the Company entered into a Discounted Stock Purchase Agreement (the "DSPA") with certain members of the Unilin management team (the "Unilin Management"). Under the terms of the DSPA the Company will be obligated to make cash payments to the disposal or alleged disposal by Dal-Tile of waste materials containing lead compounds. Dal-Tile's approved closure plans have been implemented and each site is now undergoing post-closure care.  Dal-Tile has been named as a potentially responsible party under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state statutes for the disposal of certain hazardous substances at various other sitesUnilin Management in the United States.  Theevent that certain performance goals are satisfied. In each of the years in the five-year period ended December 31, 2010, the Unilin Management can earn amounts, in the aggregate, equal to the average value of 35,133 shares of the Company's common stock over the 20 trading day period ending on December 31 of the prior year.  Any failure in a given year to reach the performance goals may be rectified, and consequently the amounts payable with respect to achieving such criteria may be made, in any of the other years.

     In the normal course of business, the Company does not believe that any future costs for these sites willhas entered into various European collective bargaining agreements with its workforce, either locally or within its industry sector. Historically, the Company and its industry have a material adverse effect on it.maintained favorable relationships with its workforce and expect to do so in the future.

55




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(15) Consolidated Statements of Cash Flows Information

Supplemental disclosures of cash flow information are as follows:

200320022001

2005

2004

2003

Net cash paid during the year for:
Interest $        61,424            43,866            31,789 

Interest

 $

61,468 

60,744 

61,424 

Income taxes $      139,914            59,931            73,498 

 $

191,601 

226,227 

139,914 

Supplemental schedule of non-cash
investing and financing activities:
Fair value of assets acquired in acquisition $      407,320       1,865,225                      - 
Liabilities assumed in acquisition          (23,199)       (396,900)                     - 
Issuance of common stock and options in acquisition                     -        (750,687)                     - 

Fair value of assets acquired in acquisitions

Fair value of assets acquired in acquisitions

 $

3,375,605 

16,236 

407,320 

Liabilities assumed in acquisitions

Liabilities assumed in acquisitions

(762,076)

(1,238)

(23,199)

 $      384,121          717,638                      - 

 $

2,613,529 

14,998 

384,121 

(16) Other Income and Expense

        Other income and expense are as follows:
200320022001
                Miscellaneous  income $          8,232              3,991              1,826 
                Miscellaneous expense             6,252            13,455              3,966 
                Amortization expense                     -                      -              3,814 
 $          6,252            13,455              7,780 

MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(17) Segment Reporting

      The Company has two operatingthree reporting segments, the Mohawk segment, the Dal-Tile segment, and the Dal-TileUnilin segment.  The Mohawk segment sells(an aggregation of the Mohawk Flooring reporting unit and the Mohawk Home reporting unit) manufactures, sources, markets and distributes its product lines, which include broadloom carpet, rugs, pad, ceramic tile, hardwood, vinylresilient and laminate thoughthrough independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products sold through company-operated sales service centers,tile and flooring retailers, contractors, independent distributors and home centers.  The Unilin segment, which is headquartered in Belgium, is a leading manufacturer, distributor and marketer of laminate flooring, insulated roofing and other wood panels in Europe and the United States. Unilin sells its laminate flooring products through independent distributors and specialty stores in Europe and the United States, as well as through traditional retailers in France, Belgium and The Netherlands and, in some circumstances, under private label names.

      Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses amounts attributable to each segment are estimated and allocated accordingly. ExportSegment performance is evaluated based on operating income. No single customer accounted for more than 5% of net sales arefor the years ended December 31, 2005, 2004 and 2003. In addition, inter-segment net sales were not significant and long-lived assets located outsideduring these periods. The increase from 2005 compared to 2004 is primarily a result of the United Statesacquisition of America, principally Mexico, were $85,001 and $83,842 at December 31, 2003 and 2002, respectively.Unilin.

        Segment information is as follows:
200320022001
              Net sales:
                Mohawk $   3,736,517       3,624,156       3,445,945 
                Dal-Tile      1,268,536          898,180                      - 
 $   5,005,053       4,522,336       3,445,945 
              Operating income:
                Mohawk $      364,040          390,936          336,672 
                Dal-Tile         187,245          139,888                      - 
                Corporate and eliminations           (9,256)           (8,759)           (9,515)
 $      542,029          522,065          327,157 
              Depreciation and amortization:
                Mohawk $        81,977            83,676            84,167 
                Dal-Tile           24,638            18,266                      - 
 $      106,615          101,942            84,167 
              Capital expenditures (excluding acquisitions):
                Mohawk $        56,775            80,623            52,913 
                Dal-Tile           57,856            31,311                      - 
 $      114,631          111,934            52,913 
              Assets:
                Mohawk $   2,086,716       1,638,336       1,656,813 
                Dal-Tile      1,967,206       1,832,701              ��       - 
                Corporate and eliminations         109,653          125,706          111,672 
 $   4,163,575       3,596,743       1,768,485 

56




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

        Segment information is as follows:

2005

2004

2003

              Net sales:

                Mohawk

 $

4,716,659 

4,368,831 

3,730,845 

                Dal-Tile

1,734,781 

1,511,541 

1,268,536 

                Unilin

168,814 

                Corporate and eliminations

(155)

 $

6,620,099 

5,880,372 

4,999,381 

              Operating income:

                Mohawk

 $

381,699 

424,256 

364,040 

                Dal-Tile

260,194 

219,831 

187,245 

                Unilin

(5,162)

                Corporate and eliminations

(9,459)

(8,497)

(9,256)

 $

627,272 

635,590 

542,029 

              Depreciation and amortization:

                Mohawk

 $

91,452 

89,479 

78,450 

                Dal-Tile

31,731 

29,210 

24,638 

                Unilin

22,367 

                Corporate and eliminations

3,779 

4,399 

3,527 

 $

149,329 

123,088 

106,615 

              Capital expenditures (excluding acquisitions):

                Mohawk

 $

153,238 

66,563 

55,587 

                Dal-Tile

84,363 

38,720 

57,856 

                Unilin

6,207 

               Corporate and eliminations

3,498 

1,318 

1,188 

 $

247,306 

106,601 

114,631 

              Assets:

                Mohawk

 $

2,424,983 

2,285,025 

                Dal-Tile

2,207,514 

2,063,195 

                Unilin

3,263,248 

                Corporate and eliminations

95,778 

54,898 

 $

7,991,523 

4,403,118 

57




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

2005

2004

2003

              Geographic net sales:

                North America

 $

6,489,511 

5,880,372 

4,999,381 

                Europe

130,588 

-   

-   

 $

6,620,099 

5,880,372 

4,999,381 

              Long-lived assets (1):

                North America

 $

2,951,681 

2,282,681 

                Europe

1,481,010 

-   

 $

4,432,691 

2,282,681 


(1) Long-lived assets are composed of net property plant and equipment and goodwill.

(18)(17) Quarterly Financial Data (Unaudited)

      The supplemental quarterly financial data are as follows:

 

       Quarters

Ended

April 2,

July 2,

October 1,

December 31,

2005

2005

2005

2005

        Net sales

 $

1,493,222 

1,624,692 

1,697,634 

1,804,551 

        Gross profit

384,702 

431,509 

451,868 

455,055 

        Net earnings

70,020 

93,811 

108,652 

85,712 

        Basic earnings per share

1.05 

1.40 

1.62 

1.27 

        Diluted earnings per share

1.03 

1.39 

1.61 

1.26 

 

       Quarters

Ended

April 3,

July 3,

October 2,

December 31,

2004

2004

2004

2004

        Net sales

 $

1,389,725 

1,485,897 

1,529,651 

1,475,099 

        Gross profit

365,546 

403,319 

436,053 

415,923 

        Net earnings

66,307 

87,158 

112,687 

102,470 

        Basic earnings per share

1.00 

1.31 

1.69 

1.54 

        Diluted earnings per share

0.98 

1.29 

1.67 

1.52 

       Quarters Ended

March 29,June 28,September 27,December 31,
2003200320032003
        Net sales $ 1,084,715     1,247,181           1,303,166         1,369,991 
        Gross profit       274,796        340,103              364,886            379,591 
        Net earnings         41,640          74,985                91,382            102,142 
        Basic earnings per share             0.63              1.14                    1.38                  1.54 
        Diluted earnings per share             0.62              1.12                    1.36                  1.51 

       Quarters Ended

March 30,June 29,September 28,December 31,
2002200220022002
        Net sales. $    866,710     1,227,747           1,224,403         1,203,476 
        Gross profit       215,377        339,906              341,403            343,381 
        Net earnings         43,210          75,518                81,560              84,201 
        Basic earnings per share             0.80              1.12                    1.22                  1.27 
        Diluted earnings per share             0.77              1.10                    1.21                  1.25 

58





Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure

      None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      Based on an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective for the period covered by this report.

Management's Report on Internal Control over Financial Reporting

      The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company's management assessed the effectiveness of its internal control over financial reporting as of December 31, 2005. In connection with such evaluation, no changemaking this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. The Company has excluded from the scope of its assessment of internal control over financial reporting as of December 31, 2005, Unilin Flooring BVBA, Unilin Holding Inc., and their subsidiaries (the Unilin Group), which businesses were acquired on October 31, 2005 and whose financial statements reflect total assets constituting approximately 14% (excluding goodwill and identified intangible assets of approximately 27%) and revenues of approximately 3% of the company's related consolidated financial statements as of and for the year ended December 31, 2005. The Company's management has concluded that, as of December 31, 2005, its internal control over financial reporting is effective based on these criteria. The Company's independent registered public accounting firm, KPMG LLP, has issued an attestation report on management's assessment of the Company's internal control over financial reporting, occurredwhich is included herein.

Changes in Internal Control Over Financial Reporting

      Except for the implementation of a financial consolidation system designed to facilitate the production of consolidated financial statements, including the recently acquired Unilin operations, there were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or isare reasonably likely to materially affect, the Company's internal control over financial reporting.

Limitations on the Effectiveness of Controls

      The Company's management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures or the Company's internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Item 9B. Other Information

      None.

59




PART III

Item 10. Directors and Executive Officers of the Registrant

      The information required by this item is incorporated by reference to information contained in the Company's Proxy Statement for the 20042006 Annual Meeting of Stockholders under the following headings: "Election of Directors-Director, Director Nominee and Executive Officer Information"; "-Nominees for Director"; "-Continuing Directors"; "-Executive Officers"; "-Section 16(a) Beneficial Ownership Reporting Compliance" and "-Audit Committee". The Company has adopted the Mohawk Industries, Inc. Standards of Conduct and Ethics, which applies to all of its directors, officers and employees. The standards of conduct and ethics are publicly available on our website at http://mohawkind.com.mohawkind.com and will be made available in print to any stockholder who requests them. If the Company makes any substantive amendments to the standards of conduct and ethics, or grants any waiver, including any implicit waiver, from a provision of the standards that appliesrequired by regulations of the Commission to apply to the Company's chief executive officer, chief financial officer or chief accounting officer, the Company will disclose the nature of the amendment or waiver on its website. The Company may elect to also disclose the amendment or waiver in a report on Form 8-K filed with the SEC. The Company has adopted the Mohawk Industries, Inc. Board of Directors Corporate Governance Guidelines, which are publicly available on the Company's website and will be made available to any stockholder who requests it.

Item 11. Executive Compensation

      The information required by this item is incorporated by reference to information contained in the Company's Proxy Statement for the 20042006 Annual Meeting of Stockholders under the following headings: "Executive Compensation and Other Information-Summary of Cash and Certain Other Compensation";Compensation," "-Option Grants";Grants," "-Option Exercises and Holdings";Holdings," "-Pension Plans";Plans," "-Certain Relationships and Related Transactions",Transactions," and "Election of Directors-Meetings and Committees of the Board of Directors."

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The information required by this item is incorporated by reference to information contained in the Company's Proxy Statement for the 20042006 Annual Meeting of Stockholders under the following headings: "Executive Compensation and Other Information," "-Equity Compensation Plan Information."Information" and - -Principal"-Principal Stockholders of the Company."

Item 13. Certain Relationships and Related Transactions

      The information required by this item is incorporated by reference to information contained in the Company's Proxy Statement for the 20042006 Annual Meeting of Stockholders under the following heading: "Executive Compensation and Other Information-Certain Relationships and Related Transactions."


Item 14. Principal Accountant Fees and Services

      The information required by this item is incorporated by reference to information contained in the Company's Proxy Statement for the 20042006 Annual Meeting of Stockholders under the following heading: "Principal Accountant Fees and Services."

PART IV

Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8‑K

      (a) 1. Consolidated Financial Statements

      The Consolidated Financial Statements of Mohawk Industries, Inc. and subsidiaries listed in Item 8 of Part II are incorporated by reference into this item.

60




           2. Consolidated Financial Statement Schedules

            Schedule II‑Consolidated Valuation and Qualifying Accounts                                                 56

      Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

           3. Exhibits

      The exhibit number for the exhibit as originally filed is included in parentheses at the end of the description.

Mohawk
Exhibit
Number   
                                                                             Description                                                                  &nbs p;                                           

*2.1

     Agreement and Plan of Merger dated as of December 3, 1993 and amended as of January 17, 1994 among Mohawk, AMI Acquisition Corp., Aladdin and certain Shareholders of Aladdin. (Incorporated herein by reference to Exhibit 2.1(a) in Mohawk's Registration Statement on Form S-4, Registration No. 333-74220.)

*2.2

     Agreement and Plan of Merger by and between Mohawk, Maverick Merger Sub, Inc. and Dal-Tile International Inc., dated as of November 19, 2001. (Incorporated herein by reference to Exhibit 2.1 of the Mohawk Registration Statement on Form S-4, Registration No. 333-74806, as filed December 7, 2001.)

*2.3

     Amendment No. 1, to the Agreement and Plan of Merger by and between Mohawk, Maverick Merger Sub, Inc. and Dal-Tile International Inc., dated as of January 16, 2002. (Incorporated herein by reference to Exhibit 2.2 of the Mohawk Registration Statement on Form S-4, Registration No. 333-74806, as filed January 17, 2002.)

*3.1

     Restated Certificate of Incorporation of Mohawk, as amended. (Incorporated herein by reference to Exhibit 3.1 in Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.)

*3.2

    Restated Bylaws of Mohawk, as amended. (Incorporated herein by reference to Exhibit 3.23.1 in Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.8-K dated February 23, 2006.)

*4.1

     See Article 4 of the Restated Certificate of Incorporation of Mohawk. (Incorporated herein by reference to Exhibit 3.1 in Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.)

*4.2

     See Articles 2, 6, and 9 of the Restated Bylaws of Mohawk, as amended. (Incorporated herein by reference to Exhibit 3.23.1 in Mohawk's AnnualCurrent Report on Form 10-K for the fiscal year ended December 31, 2002.8-K dated February 23, 2006.)

*4.3

     Indenture, dated as of April 2, 2002 between Mohawk Industries, Inc. and Wachovia Bank, National Association, as Trustee (Incorporated herein by reference to Exhibit 4.1 in Mohawk's Registration Statement on Form S-4, Registration No. 333-86734, as filed April 22, 2002.)


*4.4

    Indenture dated as of January 9, 2006, between Mohawk Industries, Inc. and SunTrust Bank, as trustee. (Incorporated herein by reference to Exhibit 4.4 in Mohawk's Registration Statement on Form S-3, Registration Statement No. 333-130910.)

*4.5

    First Supplemental Indenture, dated as of January 17, 2006, by and between Mohawk Industries, Inc., and SunTrust Bank, as trustee. (Incorporated by reference to Exhibit 4.1 in Mohawk's Current Report on form 8-K dated January 17, 2006.)

*10.1

    Five Year Credit Agreement dated as of September 30, 2003,October 28, 2005, by and among Mohawk Industries, Inc., SunTrust Bankeach of the Banks party thereto from time to time, and Wachovia Bank, National Association.Assocation, as Administrative Agent.  (Incorporated herein by reference to Exhibit 10.3 of Mohawk's QuarterlyCurrent Report on Form 10-Q for the period ended September 27, 2003.form 8-K dated as of October 28, 2005.)

*10.2

     364-Day

     Five Year Credit Agreement dated as of September 30, 2003,November 8, 2005, by and among Mohawk Industries, Inc.International Holdings S.a.r.l, each of the Banks party thereto from time to time, and KBC Bank, N.V., SunTrust Bank and Wachovia Bank, National Association.as Administrative Agent. (Incorporated herein by reference to Exhibit 10.3 of10.1 in Mohawk's QuarterlyCurrent Report on Form 10-Q for the period ended September 27, 2003.form 8-K dated as of November 9, 2005.)

*10.3

     Amended and Restated Series Note Agreement dated as of August 31, 1999 for $85 million of senior notes due September 1, 2005 among Mohawk, John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, Investors Partner Life Insurance Company, Principal Life Insurance Company, The Franklin Life Insurance Company and The Prudential Insurance Company of America. (Incorporated herein by reference to Exhibit 10.2 of Mohawk's Quarterly Report on Form 10‑Q for the quarter ended October 2, 1999.)

*10.4

     Registration Rights Agreement by and among Mohawk, Citicorp Investments, Inc., ML‑Lee Acquisition Fund, L.P. and Certain Management Investors. (Incorporated herein by reference to Exhibit 10.14 of Mohawk's Registration Statement on Form S‑1, Registration No. 33‑45418.)

*10.510.4

     Voting Agreement, Consent of Stockholders and Amendment to 1992 Registration Rights Agreement dated December 3, 1993 by and among Aladdin, Mohawk, Citicorp Investments, Inc., ML‑Lee Acquisition Fund, L.P., David L. Kolb, Donald G. Mercer, Frank A. Procopio and John D. Swift. (Incorporated herein by reference to Exhibit 10(b) of Mohawk's Registration Statement on Form S‑4, Registration No. 33‑74220.)

61




*10.610.5

     Registration Rights Agreement by and among Mohawk and the former shareholders of Aladdin. (Incorporated herein by reference to Exhibit 10.32 of Mohawk's Annual Report on Form 10‑K for the fiscal year ended December 31, 1993.)

*10.710.6

     Waiver Agreement between Alan S. Lorberbaum and Mohawk dated as of March 23, 1994 to the Registration Rights Agreement dated as of February 25, 1994 between Mohawk and those other persons who are signatories thereto. (Incorporated herein by reference to Exhibit 10.3 of Mohawk's Quarterly Report on Form 10‑Q for the quarter ended July 2, 1994.)

*10.810.7

     Receivables Purchase and Sale Agreement dated as of October 25, 2000 by and among Mohawk Carpet Corporation, Mohawk Commercial, Inc., and Durkan Patterned Carpets, Inc. and Mohawk Factoring, Inc. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2000)

*10.9

     Amendment No. 1 to the Receivables Purchase and Sale Agreement dated as of December 28, 2001, by and among Mohawk Carpet Corporation, Mohawk Commercial, Inc., and Durkan Patterned Carpets, Inc. and Mohawk Factoring, Inc., as of October 25, 2000.

*10.10

     Amendment No. 2 to the Receivables Purchase and Sale Agreement dated as of July 19, 2002, by and among Mohawk Carpet Corporation, Mohawk Commercial, Inc., and Durkan Patterned Carpets, Inc. and Mohawk Factoring, Inc., as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.11

     Amendment No. 3 and Joinder to the Receivables Purchase and Sale Agreement dated as of December 31, 2002, by and among Mohawk Carpet Corporation, Mohawk Commercial, Inc., and Durkan Patterned Carpets, Inc. and Mohawk Factoring, Inc., as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.12

Amended and Restated Receivables Purchase and Sale Agreement, dated as of August 4, 2003, among Mohawk Carpet Distribution, L.P. and Dal-Tile Corporation, as originators, and Mohawk Factoring, Inc. (Incorporated herein by reference to Exhibit 10.3 of Mohawk's Quarterly Report on Form 10-Q for the period ended September 27, 2003.)

*10.1310.8

     Credit and Security Agreement dated as of October 25, 2000 by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent. (Incorporated herein by reference to Exhibit 10.29 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2000)

*10.14

     Amendment No. 1 dated as of October 24, 2001, to the Credit and Security Agreement by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent dated as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.15

     Amendment No. 2 dated as of July 19, 2002, to the Credit and Security Agreement by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent dated as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.16

     Amendment No. 3 dated as of October 23, 2002, to the Credit and Security Agreement by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent dated as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.17

     Amendment No. 4 dated as of December 31, 2002, to the Credit and Security Agreement by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent dated as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.18

Amended and Restated Credit and Security Agreement, dated as of August 4, 2003, Among Mohawk Factoring, Inc., Mohawk Servicing, Inc., Blue Ridge Asset Funding Corporation, Three Pillars Funding Corporation, SunTrust Capital Markets, Inc., as a co-agent, and Wachovia Bank, National Association, as a co-agent and administrative agent. (Incorporated herein by reference to Exhibit 10.3 of Mohawk's Quarterly Report on Form 10-Q for the period ended September 27, 2003.)

*10.1910.9

     First Amendment to Amended and Restated Credit and Security Agreement dated September 29, 2004, among Mohawk Factoring, Inc., Blue Ridge Asset Funding Corporation, Wachovia Bank, National Association, Three Pillars Funding LLC, and SunTrust Capital Markets, Inc. (Incorporated herein by reference to Exhibit 10.4 of Mohawk's Quarterly Report on Form 10-Q for the period ended October 2, 2004.)

*10.10

     Second Amendment to the Liquidity Asset Purchase Agreement dated as of October 23, 2002 by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent dated as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended December 31, 2002)

*10.2010.11

     Interest Rate Swap

     Amendment to Second Amended and Restated Liquidity Asset Purchase Agreement dated August 31 2000 by2, 2004, among Mohawk Industries, Inc,Factoring, Inc., Blue Ridge Asset Funding Corporation and First UnionWachovia Bank, National Bank.Association. (Incorporated herein by reference to Exhibit 10.3010.2 of Mohawk's AnnualQuarterly Report on Form 10‑K10-Q for the yearperiod ended December 31, 2000)October 2, 2003.)

*10.12

     Amendment to Second Amended and Restated Liquidity Asset Purchase Agreement dated August 2, 2004, among Mohawk Factoring, Inc., Three Pillars Funding Corporation, and SunTrust Capital Markets, Inc. (Incorporated herein by reference to Exhibit 10.2 of Mohawk's Quarterly Report on Form 10-Q for the period ended October 2, 2003.)

*10.13

     Discounted Stock Purchase Agreement dated October 31, 2005, by and between Mohawk Industries, Inc. and Paul De Cock, Bernard Thiers, Marc Van Canneyt and Paul De Fraeye. (Incorporated herein by reference to Mohawk's Current Report on form 8-K dated October 28, 2005.)

Exhibits Related to Executive Compensation Plans, Contracts and other Arrangements:

*10.2110.14

     Management Agreement dated October 31, 2005, by and between Unilin Flooring BVBA and Frans De Cock. (Incorporated herein by reference to Exhibit 10.1 of Mohawk's Current Report on form 8-K dated October 28, 2005.)

*10.15

     Employment Agreement dated November 15, 2005, by and between Mohawk Industries, Inc. and W. Christopher Wellborn. (Incorporated herein by reference to Exhibit 99.1 of Mohawk's Current Report on form 8-K dated November 14, 2005.)

*10.16

     Mohawk Carpet Corporation Retirement Savings Plan, as amended. (Incorporated herein by reference to Exhibit 10.1 of Mohawk's Registration Statement on Form S‑1, Registration No. 33‑45418.)

*10.2210.17

     Mohawk Carpet Corporation Supplemental Executive Retirement Plan, as amended. (Incorporated herein by reference to Exhibit 10.2 of Mohawk's Registration Statement on Form S‑1, Registration No. 33‑45418.)

*10.2310.18

     Mohawk Industries, Inc. Employee Stock Purchase Plan together with forms of related Management Investment Agreement, Non‑Qualified Stock Option Agreement, and amendments thereto. (Incorporated herein by reference to Exhibit 10.3 of Mohawk's Registration Statement on Form S‑1, Registration No. 33‑45418.)

*10.24

     Securities Purchase and Holders Agreement dated as of December 31, 1988, as amended and restated March 30, 1989, together with amendments thereto and forms of related Non‑Qualified Stock Option Agreement and amendments thereto. (Incorporated herein by reference to Exhibit 10.5 of Mohawk's Registration Statement on Form S‑1, Registration No. 33‑45418.)

*10.25

     Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.8 of Mohawk's Registration Statement on Form S‑1, Registration No. 33‑45418.)

*10.2610.19

     Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.2 in Mohawk's quarterly report on Form 10‑Q for the quarter ended July 3, 1993.)

62




*10.2710.20

     Second Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.35 of Mohawk's Annual Report on Form 10‑K for the fiscal year ended December 31, 1999.)


*10.2810.21

     Mohawk Industries, Inc. 1992 Mohawk‑Horizon Stock Option Plan. (Incorporated herein by reference to Exhibit 10.15 of Mohawk's Registration Statement on Form S‑1, Registration Number 33‑53932.)

*10.2910.22

     Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 Mohawk‑Horizon Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of Mohawk's quarterly report on Form 10‑Q for the quarter ended July 3, 1993.)

*10.3010.23

     Second Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1992 Mohawk-Horizon Stock Option Plan. (Incorporated herein by reference to Exhibit 10.38 of Mohawk's Annual Report on Form 10‑K for the fiscal year ended December 31, 1999.)

*10.3110.24

     Mohawk Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.39 of Mohawk's Annual Report on Form 10‑K for the fiscal year ended December 31, 1992.)

*10.3210.25

First Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.40 of Mohawk's Annual Report on Form 10‑K for the fiscal year ended December 31, 1999.)

*10.3310.26

     The Mohawk Industries, Inc. Executive Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.65 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)

*10.3410.27

     The Mohawk Industries, Inc. Management Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.66 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)

*10.3510.28

     Mohawk Industries, Inc. 1997 Non-Employee Director Stock Compensation Plan.Plan (Amended and  Restated as of March 31, 2003). (Incorporated herein by reference to Exhibit 10.7910.38 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.2003.)

*10.3610.29

     1997 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.80 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.)

*10.3710.30

     Amendment No. 1 to 1997 Non-Employee Director Stock Compensation

     2002 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.74 of Mohawk's Annual Report on Form 10-K forAppendix A in the fiscal year ended December 31, 1997.)

10.38

2002 Mohawk Industries, Inc., 1997 Non-Employee  Stock Compensation Plan (Amended and Restated as of Proxy Statement dated March 31, 2003).29, 2002.)

*10.3910.31

     Amendment and Restated Consulting Agreement between Mohawk Industries, Inc. and David L. Kolb dated January 17, 2001. (Incorporated herein by reference to Exhibit 10.55 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)

*10.40

     Employment Agreement between Mohawk Industries, Inc., Dal-Tile International Inc., and W. Christopher Wellborn dated March 20, 2002. (Incorporated herein by reference to Exhibit 10.56 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.)

*10.41

     Dal-Tile International Inc. 1990 Stock Option Plan, as amended and restated (also known as the 2000 Amended and Restated Stock Option Plan) (Incorporated herein by reference to Appendix B in Dal-Tile International Inc.'s Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, as filed with the Securities and Exchange Commission on March 27, 2001)

*10.42

     Supply Agreement dated as of December 29, 1999, between Dal-Tile Corporation and Wold Talc Company. (Incorporated herein by reference to Exhibit 10.18 of the Dal-Tile International Inc., Form 10-K for fiscal year 1999.)

14.1

Code of ethics

       21          Subsidiaries of the Registrant.
       23.1       Consent of Independent Auditors'Registered Public Accounting Firm (KPMG)
       23.2       Consent - KPMG LLP.of Independent Registered Public Accounting Firm (BDO).
       31.1       Certification Pursuant to Rule 13a-14(a).
       31.2       Certification Pursuant to Rule 13a-14(a).
       32.1       Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       32.2       Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                   
*  Indicates exhibit incorporated by reference.


63

(b) Reports on Form 8‑K.

1.        Current Report on Form 8-K: Third quarter earnings press release, dated October 16, 2003.
2.        Current Report on Form 8-K: Press release announcing the acquisition of Lees Carpet, dated November 11, 2003.
3.        Current Report on Form 8-K: Press release announcing incremental depreciation and amortization related to the acquisition of Lees Carpet, dated November 24, 2003.



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                                                                                                  Mohawk Industries, Inc.

Dated: March 3, 200415, 2006

By: /s/: JEFFREY S. LORBERBAUM

Jeffrey S. Lorberbaum,

PresidentChairman and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated.

Dated: March 3, 200415, 2006

/s/: JEFFREY S. LORBERBAUM

Jeffrey S. Lorberbaum,

PresidentChairman and Chief Executive Officer

(principal executive officer)

Dated: March 3, 200415, 2006

/s/: JOHN D. SWIFTFRANK H. BOYKIN

John D. Swift,Frank H. Boykin,

Chief Financial Officer and Vice President‑Finance

and Assistant Secretary

(principal financial officer)

Dated: March 15, 2006

/s/: MICHEL S. VERMETTE

Michel S. Vermette,

Vice President and Corporate Controller

(principal accounting officer)

Dated: March 3, 2004

/s/: DAVID L. KOLB15, 2006

David L. Kolb,

Chairman of the Board

Dated: March 3, 2004

/s/: LEO BENATAR

Leo Benatar,

Director

Dated: March 3, 200415, 2006

/s/: PHYLLISPhyllis O. BONANNO

Phyllis O. Bonanno,

Director

Dated: March 3, 200415, 2006

/s/: BRUCE C. BRUCKMANN

Bruce C. Bruckmann,

Director

Dated: March 3, 200415, 2006

/s/: JOHN F. FIEDLERFRANS DE COCK

Frans De Cock,

Director

Dated: March 15, 2006

/s/:                                 

John F. Fiedler,

Director

Dated: March 3, 200415, 2006

/s/: DAVID L. KOLB

David L. Kolb,

Director

64




Dated: March 15, 2006

/s/: LARRY W. MCCURDY

Larry W. McCurdy,

Director

Dated: March 15, 2006

/s/: ROBERT N. POKELWALDT

Robert N. Pokelwaldt,

Director

Dated: March 15, 2006

/s/: S. H. SHARPE

S. H. Sharpe,

Director

Dated: March 3, 2004

/s/: LARRY W. MCCURDY15, 2006

Larry W. McCurdy,

Director

Dated: March 3, 2004

/s/: ROBERT N. POKELWALDT

Robert N. Pokelwaldt,

Director

Dated: March 3, 2004

/s/: W. CHRISTOPHER WELLBORN

W. Christopher Wellborn,

Director


65

SCHEDULE II

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Valuation and Qualifying Accounts

Years Ended December 31, 2003, 2002 and 2001

(In thousands)

Additions
Balance atcharged toBalance
beginningcosts andat end

Description

of yearexpensesDeductions(1)of year
Year ended December 31, 2001:
     Allowance for doubtful accounts-trade  $       38,853           12,048                 9,608           41,293 
     Provision for cash discounts            12,193           80,145               80,264           12,074 
     Provision for claims and allowances           27,312         147,188             148,486           26,014 
          Total   $       78,358         239,381             238,358           79,381 
Year ended December 31, 2002:
     Allowance for doubtful accounts-trade  $       41,293           17,667                 7,892           51,068 
     Provision for cash discounts            12,074           82,559               86,598             8,035 
     Provision for claims and allowances           26,014         174,528             174,972           25,570 
          Total   $       79,381         274,754             269,462           84,673 
Year ended December 31, 2003:
     Allowance for doubtful accounts - trade  $       51,068           10,374               10,365           51,077 
     Provision for cash discounts             8,035           93,270               87,752           13,553 
     Provision for claims and allowances           25,570         175,939             171,722           29,787 
          Total   $       84,673         279,583             269,839           94,417 

56