UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[Mark One]
| |||||||||||||||
| |||||||||||||||
| |||||||||||||||
| |||||||||||||||
| |||||||||||||||
| |||||||||||||||
|
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
| |||||||||||||||
| |||||||||||||||
| |||||||||||||||
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
01-19826
MOHAWK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
SECURITIES EXCHANGE ACT OF 1934
|
| ||||||||||||||
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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check whether the Registrant is a shell company (as defined in Exchange Actby Rule 12b-2)12b-2 of the Act). Yes [ x ]¨ No [ ]x
The aggregate market value of the Common Stock of the Registrant held by non-affiliates (excludes beneficial owners of more than 10% of the Common Stock) of the Registrant (37,744,024(41,437,255 shares) on July 2, 2004 (The1, 2006 (the last business day of the Registrant's most recently completed fiscal second quarter) was $2,716,814,848.$2,915,110,889. 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 7, 2005: 66,810,892February 21, 2007: 67,976,792 shares of Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 20052007 Annual Meeting of Stockholders-Part III.
PART I
Item 1. | Business |
Item 1. Business
General
Mohawk Industries, Inc. ("Mohawk", (“Mohawk” or the "Company"“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 a leading producer of floor covering products for residential and commercial applications in the United States.States and Europe. The Company is the second largest carpet and rugsrug 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 20042006 in excess of $5.8$7.9 billion.
The Company has two reporting segments, the Mohawk segment Approximately 88% of this amount was generated by sales in North America and the Dal-Tile segment..approximately 12% was generated by sales outside North America. Selected financial information for the Mohawk, Dal-Tile, and Dal-TileUnilin segments is set forth in Note 16 to the Consolidated Financial Statements.
The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpet, rugs,carpets, ceramic tile, laminate, rugs, carpet pad, hardwood resilient and laminate,resilient, in a broad range of colors, textures and patterns for residential and commercial applications.applications in both new construction and remodeling. The CompanyMohawk segment markets and distributes its carpetcarpets and rugs under its soft surface floor covering brands and hardwood, laminate, resilient and ceramic tile, laminate, hardwood and resilient under its 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," "Aladdin," "Mohawk Home," "Bigelow," "Custom Weave," "Durkan," "Helios," "Horizon," "Karastan," "Lees," "Merit," "Ralph Lauren,"“Mohawk®,” “Aladdin®,” “Mohawk Home®,” “Bigelow®,” “Durkan®,” “Helios®,” “Horizon®,” “Karastan®,” “Lees®,” “MeritTM,” and "WundaWeve."“Ralph Lauren®” . The Mohawk segment markets and distributes its soft and hard surface products through over 36,00039,000 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. The Company'sMohawk segment's soft surface operations are vertically integrated from the extrusion of resin to the manufacture and shipment of finished carpetcarpets and rugs.
The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, and natural stone and other 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"“American Olean®” brand names and sold through independent distributors, home center retailers, tile and flooring retailers and contractors. The Dal-Tile segment operations are vertically integrated from the extractionproduction of raw material for body and glaze preparation to the manufacturing and distribution of ceramic and porcelain tile.
On October 31, 2005, the Company acquired all the outstanding shares of Unilin Holding NV (the “Unilin Acquisition”). The total purchase price for acquiring Unilin, net of cash, was approximately Euro 2.1 billion (approximately $2.5 billion). The results of operations for the Unilin business have been included with the Unilin 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 U.S. laminate flooring market. The Unilin segment, which is headquartered in Belgium, is a leading manufacturer, distributor and marketer of laminate 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 largest vertically-integrated laminate flooring manufacturer in the United States producing both laminate flooring and related high density fiberboard. Unilin sells its laminate flooring products brand through retailers, independent distributors private label and home centers. Unilin also produces insulated roofing and other wood-based panels.
Industry
The United States floor covering industry has grown from $12.4 billion in sales in 1992 to $20.9$24.1 billion in 2003.2005. In 2003,2005, the primary categories of the United States floor covering industry were carpet and rugs (63%rug (62%), ceramic tile (12%(13%), hardwood (11%), resilient and rubber (9%(8%), hardwood (10%) and laminate (6%). Each of these categories has been positively impacted by:
changes in average selling price per square foot;
increases in the residential builder and renovated homeowner remodeling markets;
housing starts and commercial space;
increases in average house size; and
increases in home ownership.
Compound average growth rates for all categories, except the resilient and rubber category, for the period from 19982002 through 20032005 have met or exceeded the growth rates (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 3.0%3.8% for carpetcarpets and rugs, 7.0%7.3% for ceramic tile, 1.2%6.6% for resilient and rubber, 20.9%21.1% for laminate and 7.9%8.0% for hardwood.
According to the most recent figures available from the United States Department of Commerce,Floor Covering Weekly, worldwide carpet and rug sales volume of American manufacturers and their domestic divisions was approximately 2.02.3 billion square yards in 2003.2005. This volume represents a market in excess of approximately $13$14.9 billion.
The overall level of sales in the flooringoverall floor 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 is defined as carpet over six feet by nine feet in size and has two primary markets, residential and commercial, withcommercial. In 2005, the residential market makingmade up approximately 76%75% of industry amounts shipped in 2003 and the commercial market comprisingcomprised approximately 24%25%. An estimated 50%49% of industry shipments are made in response to replacement demand, which usually involves exact yardage, or "cut“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 profitablehave higher margins for manufacturers than the new construction business.
The United States ceramic tile industry shipped 2.93.3 billion square feet, or $2.5$3.1 billion, in 2003.2005. Sales in the ceramic tile industry are influenced by the same factors that influence the carpetoverall floor covering 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'sindustry’s two primary markets, residential applications and commercial applications, represent 69.4%70.5% and 29.0%28.2% of the industry total, respectively. Of the total residential market, 61%60% of the dollar valuevalues of shipments are for new construction.
In 2005, the United States laminate industry shipped 1.3 billion square feet, representing a market of approximately $1.5 billion, and the European laminate industry shipped 5.2 billion square feet. In 2004, the laminate industry accounted for approximately 10% of the European floor covering market. Sales in the laminate industry are influenced by similar factors that influence the overall floor covering industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, and the overall strength of the economy. Sales of U.S. laminate flooring are primarily distributed through the residential replacement market. Sales to other end user markets are not significant.
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 resilient floor covering. The Mohawk segment positions its product lines in all price ranges and emphasizes quality, style, performance and service. The CompanyMohawk segment markets and distributes its soft and hard surface product lines throughto over 36,00039,000 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'sCompany’s carpet and rug sales.
The Company has positioned its premier residential carpet and rug brand names across all price ranges. "Mohawk," "Custom Weave," "WundaWeve," "Horizon," "Helios"“Mohawk®,” “Horizon®,” “Helios®” and "Karastan"“Karastan®” are positioned to sell primarily in the medium-to-high retail price channels in the residential broadloom 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 "Mohawk Home"“Mohawk Home®” brand names compete primarily in the value retail price channel. The Company markets its hard surface product lines, which include Mohawk Ceramic, Mohawk Hardwood, Mohawk Resilient“Mohawk Ceramic®”, “Mohawk Hardwood®”, “Congoleum®” and Mohawk Laminate“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 price channel.
The Company offers marketing and advertising support through dealer programs like Karastan Gallery,Mohawk Floorscapes, Mohawk ColorCenter, Mohawk FloorscapesFloorz and Mohawk Floorz.Karastan Gallery. 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: educational institutions, corporate office space, educational institutions, 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. In addition, the Company produces and sells broadloom carpet and carpet tile under the brand names “Bigelow Commercial®”, Lees®”, “Durkan®”, Karastan Contract®”, and “Merit®”.
The Company'sCompany’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 centers to regional and satellite warehouses. From there, it is shipped to retailers or to local distribution warehouses, then to retailers.
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 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. Dedicatedchannel, and dedicated sales forces support varioiusthe various channels.
The Company has six regional distribution centers. These centers help the Company deliver 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's network of over 244 sales service centers located in the United States, Canada and Puerto Rico distributes primarily the "Daltile" 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 small show rooms to assist customers with product selection.
The Company serves as a "one-stop"“one-stop” source that provides customers with one of the ceramic tile industry'sindustry’s broadest product lines‑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'sCompany’s ceramic tile business, the Company also purchases products from other manufacturers to provide a broaderenhance its product line.offering.
The independent distributor channel offers a uniquedistinct product line under the "American Olean"“American Olean®” brand. Currently, the "American Olean"“American Olean®” brand is distributed through approximately 200226 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 that it has two of the leading brand names in the U.S. ceramic tile industry-"Daltile"industry— “Dal-Tile®” and "American Olean."“American Olean®”. The "Daltile"“Dal-Tile®” and "American Olean"“American Olean®” brand names date back over fifty and seventy-five years respectively and are well recognized in the industry.
The Company'sCompany has six regional distribution centers in the Dal-Tile operations. These centers help deliver high-quality customer service by focusing on shorter lead times, increased order fill rates and improved on-time deliveries to customers.
A network of approximately 262 sales service centers distributes primarily the “Dal-Tile®” brand product, serving customers in the United States, Canada and Puerto Rico. The service centers provide distribution points for customer pick-up, local delivery and showrooms to assist customers with product selection.
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"“American 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, displays, merchandising (sample boards, chip chests), literature/catalogs and an Internet website.
Unilin Segment
The Unilin segment manufactures, licences, distributes and markets laminate flooring in Europe and the United States. It also produces insulated roofing and other wood based panels. Products are distributed through separate distribution channels consisting of retailers, independent distributors and home centers. Unilin U.S. operations also manufacture Mohawk branded laminate flooring which sells through the Mohawk channel. The majority of Unilin’s U.S. sales are for residential replacement. 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 manufacturing facilities. This integration with manufacturing sites allows for quick responses to customer needs and high inventory turns.
The Unilin segment markets and sells laminate flooring products under the “Quick-Step®” and “Mohawk®” brands, which the Company believes are some 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.
Dal-Tile Segment
Ceramic Tile Business.Over the past three years, the Dal-Tile segment has invested in capital expenditures, principally in new plant and state-of-the-art fast-fire equipment to increase manufacturing capacity, improve efficiency and develop new capabilities.
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. In addition, Dal-Tile also imports or sources a portion of its product to supplement its product offerings.
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, paper impregnation, 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
Carpet and Rugs Business.Mohawk Segment
The principal raw materials the carpet and rugsrug business uses are nylon, polypropylene, polyester and wool resins and fibers; synthetic backing materials; polyurethane latex and various dyes and chemicals. Major raw materials used in the Company's manufacturing process are available from independent sources and the Company obtains allmost of its externally purchased nylon fibers principally from threetwo major suppliers: Invista Inc., and Solutia, Inc., and Honeywell, Inc. The Although temporary disruptions of supply of carpet raw materials were experienced in 2005 as a result of hurricanes, the carpet and rugsrug 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.
Dal-Tile Segment
Ceramic Tile Business. In the Company's ceramic tile business, the Company manufactures tile primarily from clay, talc, nepheline 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 45%43% 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. In the United States, the Company has a long-term contract with a contiguously located lumber company that supplies most of its total needs for wood.
Major manufacturers supply the papers required in the laminate flooring business in both Europe and the United States. The Company manufactures most 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 located within a reasonable distance of Unilin’s facilities.
Competition
CarpetThe 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 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 industry leading design 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 investments in advanced manufacturing, data processing, the extensive diversity of equipment, 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 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 20032005 had worldwide sales in excess of $12.8$12.5 billion, and in 1998 the top 20 manufacturers in 1990 had sales in excess of $6$9.6 billion. In 2003, 2005,
the top five manufacturers had worldwide sales in excess of $9.1$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 2005 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 U.S. 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 largest vertically-integrated laminate flooring manufacturer in the United States producing both high density fiberboard and laminate flooring.
Patents and Trademarks
The principal methods of competition withinIntellectual property is important to the carpetCompany’s business, and rugs and ceramic tile industries are price, style, quality and service. In each of the Company's markets, price competition 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 rugs and ceramic tile businesses, the Company faces competition from a large number of domestic and foreign manufacturers and independent distributors of floor covering products. Some of the Company's existing and potential competitors may 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," "American Olean“Aladdin®,” “American Olean®,” “Bigelow®,” “Dal-Tile®,” “Durkan®,” “Helios®,” “Horizon®,” “Karastan®,” “Lees®,” “Mohawk®,” “Mohawk Home™,” “Portico®,” “Quick-Step®,” “UNILIN®," "Bigelow," "Custom Weave" "Dal-Tile” and “UNICLIC®," "Durkan," "Helios®," "Horizon®," "Karastan®," "Lees®," "Mohawk®," "Mohawk Home," "Portico,".”
Unilin owns a number of important patent families, totaling approximately 150 patents and "WundaWeve®."
Sales Terms and Major Customers
The Company'sCompany’s sales terms are the same as those generally available throughout the industry. The Company generally permits its customers to return carpet, rugsrug, ceramic tile, wood, vinyl and ceramic tilelaminate flooring purchased from it within specified time periods from the date of sale, if the customer is not satisfied with the quality of the product..product.
During 2004,2006, 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 7, 2005,February 15, 2007, the Company employed approximately 34,30037,100 persons consisting of which approximately 514 of its employees30,600 in the United States, approximately 3,900 in Mexico, and approximately 3,1902,600 in Europe. The majority of itsthe Company’s European and Mexican manufacturing employees in Mexico are members of unions. Other than with respect to theseMost of the Company’s U.S. employees the Company isare 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“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"(“SEC”).
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.
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. The Company’s costs for carpet raw materials and fuel-related materials are currently higher than historical averages and may remain so indefinitely. Although the Company generally attempts to pass on increases in raw material 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 experience certain risks associated with acquisitions.
The Company has typically grown its business through acquisitions. Growth through acquisitions involves risks, many of which may continue to affect the Company after the acquisition. The Company can not give assurance that an acquired company will achieve the levels of revenue, profitability and production that the Company expects. The combination of an acquired company’s business with the Company’s existing businesses involves risks. The Company can not be assured that reported earnings will meet expectations because of goodwill and intangible asset impairment, increased interest costs and issuance of additional securities or incurrence of debt. The Company may also 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 may result in:
maintaining executive offices in different locations;
manufacturing and selling different types of products through different distribution channels;
conducting business from various locations;
maintaining different operating systems and software on different computer hardware; and
providing different employment and compensation arrangements for employees.
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.
Failure to successfully manage and integrate an acquisition 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 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.
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 and integrate acquired businesses with the Company’s existing businesses; 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 and polyester and polypropylene resins and fibers, 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.
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 manufacturing facilities in Mexico and Europe represent a significant portion of the Company’s 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 either operation could have a material adverse effect on the Company. 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 agreements under World Trade Organization (“WTO”) and the North American Free Trade Agreement (“NAFTA”).
The Company is uncertain what effect reduced import duties pursuant to agreements under the WTO 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.
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 the Company 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.
In the past the Company has 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.
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.
The Company is subject to changing regulation of corporate governance and public disclosure that have increased both costs and the risk of noncompliance.
The Company’s stock is publicly traded. As a result, the Company is subject to the rules and regulations of federal and state agencies and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NYSE, have in recent years issued new requirements and regulations, most notably the Sarbanes-Oxley Act of 2002. From time to time since the adoption of the Sarbanes-Oxley Act of 2002, these authorities have continued to develop additional regulations or interpretations of existing regulations. The Company’s efforts to comply with the regulations and interpretations have resulted in, and are likely to continue to result in, increased general and administrative costs and diversion of management’s time and attention from revenue generating activities to compliance activities.
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 |
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, used by the Mohawk segment, a 1,744,072 and a 1,464,597974,900 square foot manufacturing facility located in Monterey, Mexico.Mexico and Muskogee, Oklahoma 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 Segment | Dal-Tile Segment | |||||||
Primary Purpose | Owned | Leased | Owned | Leased | ||||
Manufacturing | 19,003,198 | 1,572,886 | 4,371,135 | 22,000 | ||||
Selling and Distribution | 3,392,639 | 4,449,401 | 152,811 | 6,297,247 | ||||
Other | 1,042,215 | 222,493 | 321,312 | 36,000 | ||||
Total | 23,438,052 | 6,244,780 | 4,845,258 | 6,355,247 | ||||
Mohawk Segment | Dal-Tile Segment | Unilin Segment | ||||||||||
Primary Purpose | Owned | Leased | Owned | Leased | Owned | Leased | ||||||
Manufacturing | 20,531,930 | 1,213,292 | 5,283,368 | 22,000 | 6,422,813 | 1,292,389 | ||||||
Selling and Distribution | 4,294,843 | 6,155,506 | 152,811 | 7,236,901 | 120,000 | 68,000 | ||||||
Other | 982,825 | 5,897 | 321,312 | 36,000 | 133,704 | — | ||||||
Total | 25,809,598 | 7,374,695 | 5,757,491 | 7,294,901 | 6,676,517 | 1,360,389 | ||||||
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 |
Item 3. Legal Proceedings
The Company is involved in 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 by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
In Shirley Williams et al. v. Mohawk Industries, Inc., four plaintiffs filed a putative 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 authorized to work in the United States, have damaged them and the other members of the putative 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 District Court in April 2004. The Company then sought and obtained permission to file an immediate appeal of the District Court’s decision to the United States Court of Appeals for the Eleventh Circuit. In June 2005, the Eleventh 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 petition requesting review by the full Eleventh Circuit, which was denied in August 2005. In October 2005, the Company filed a petition for certiorari with the United States Supreme Court, which was granted in December of 2005. The case was argued before the Supreme Court on April 26, 2006. On June 5, 2006, the Supreme Court vacated the Eleventh Circuit’s ruling and ordered the Eleventh Circuit to reconsider the case in light of the Supreme Court’s decision in Anza v. Ideal Steel Supply Co., 126 S. Ct. 1991 (2006). On September 27, 2006, the Eleventh Circuit issued a second decision reversing in part and affirming in part the lower court’s decision. On October 18, 2006, the Company filed a petition requesting review of this decision by the full Eleventh Circuit, which was denied in November 2006. In December 2006, the Company filed a second petition for certiorari with the United States Supreme Court. The Company will continue to vigorously defend itself against this action.
The Company believes that adequate provisions for the resolution of all claims and pending litigation have been made for probable losses 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'sCompany’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 accruals 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.
Item 4. Submissionits operations, but may have an effect on the results of Matters tooperations for a Vote of Security Holdersgiven 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, 2004.2006.
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market for the Common Stock
The Company's common stock, $.01$0.01 par value per share (the "Common Stock"“Common Stock”) is quoted on the New York Stock Exchange ("NYSE"(“NYSE”) under the symbol "MHK."“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 | ||||
Common Stock | ||||
High | Low | |||
2003 | ||||
First quarter | $ 59.38 | 41.00 | ||
Second quarter | 63.04 | 47.65 | ||
Third quarter | 75.75 | 55.25 | ||
Fourth quarter | 75.48 | 67.07 | ||
2004 | ||||
First quarter | $ 85.79 | 68.77 | ||
Second quarter | 82.98 | 68.89 | ||
Third quarter | 81.60 | 69.07 | ||
Fourth quarter | 92.44 | 74.05 | ||
2005 | ||||
First quarter (through March 7, 2005) | $ 94.72 | 86.24 | ||
Mohawk Common Stock | |||||
High | Low | ||||
2005 | |||||
First quarter | $ | 94.72 | 82.15 | ||
Second quarter | 89.00 | 76.54 | |||
Third quarter | 92.45 | 76.19 | |||
Fourth quarter | 89.71 | 74.55 | |||
2006 | |||||
First quarter | $ | 90.88 | 80.05 | ||
Second quarter | 81.50 | 69.47 | |||
Third quarter | 77.18 | 62.80 | |||
Fourth quarter | 79.64 | 70.00 | |||
2007 | |||||
First quarter (through February 21, 2007) | $ | 94.35 | 75.15 |
As of March 5, 2005,February 21, 2007, there were approximately 388370 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 2004.2006.
Item 6. | Selected Financial Data |
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 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"(“Dal-Tile”) in exchange for approximately $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"Carpet”) for approximately $350 million in cash. The acquisition was recorded using the purchase method of accounting. On 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 2.1 billion (approximately $2.5 billion). The consolidated financial statements include the results of all acquisitions from the date of acquisition. The selected financial data should be read in conjunction with "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations” and the Company's consolidated financial statements and notes thereto included elsewhere herein.
For the Years Ended December 31, | |||||||||
2004 (c) | 2003 | 2002 (d) | 2001 | 2000 | |||||
(In thousands, except per share data) | |||||||||
Statement of earnings data: | |||||||||
Net sales | $ 5,880,372 | 4,999,381 | 4,516,957 | 3,441,267 | 3,400,905 | ||||
Cost of sales | 4,259,531 | 3,605,579 | 3,247,865 | 2,583,669 | 2,556,772 | ||||
Gross profit | 1,620,841 | 1,393,802 | 1,269,092 | 857,598 | 844,133 | ||||
Selling, general and administrative | |||||||||
expenses | 985,251 | 851,773 | 747,027 | 530,441 | 527,018 | ||||
Class action legal settlement (a) | - | - | - | - | 7,000 | ||||
Operating income | 635,590 | 542,029 | 522,065 | 327,157 | 310,115 | ||||
Interest expense (b) | 53,392 | 55,575 | 68,972 | 29,787 | 38,044 | ||||
Other expense (income), net | 4,809 | (1,980) | 9,464 | 5,954 | 4,442 | ||||
58,201 | 53,595 | 78,436 | 35,741 | 42,486 | |||||
Earnings before income taxes | 577,389 | 488,434 | 443,629 | 291,416 | 267,629 | ||||
Income taxes | 208,767 | 178,285 | 159,140 | 102,824 | 105,030 | ||||
Net earnings | $ 368,622 | 310,149 | 284,489 | 188,592 | 162,599 | ||||
Basic earnings per share | $ 5.53 | 4.68 | 4.46 | 3.60 | 3.02 | ||||
Weighted-average common shares | |||||||||
outstanding | 66,682 | 66,251 | 63,723 | 52,418 | 53,769 | ||||
Diluted earnings per share | $ 5.46 | 4.62 | 4.39 | 3.55 | 3.00 | ||||
Weighted-average common and | |||||||||
dilutive potential common shares | |||||||||
outstanding | 67,557 | 67,121 | 64,861 | 53,141 | 54,255 | ||||
Balance sheet data: | |||||||||
Working capital | $ 968,923 | 592,310 | 640,846 | 449,361 | 427,192 | ||||
Total assets | 4,403,118 | 4,163,575 | 3,596,743 | 1,768,485 | 1,795,378 | ||||
Long-term debt (including | |||||||||
current portion) | 891,341 | 1,012,413 | 820,427 | 308,433 | 589,828 | ||||
Stockholders' equity | 2,666,337 | 2,297,801 | 1,982,879 | 948,551 | 754,360 | ||||
(a) The Company recorded a charge of $7.0 million in 2000, reflecting the settlement of two class action lawsuits.
Statement of earnings data: Net sales Cost of sales(a) Gross profit Selling, general and administrative expenses Operating income Interest expense(b) Other expense (income), net U.S. customs refund(d) Earnings before income taxes Income taxes Net earnings Basic earnings per share Weighted-average common shares outstanding Diluted earnings per share Weighted-average common and dilutive potential common shares outstanding Balance sheet data: Working capital Total assets Long-term debt (including current portion) Stockholders' equity(b) At or for the Years Ended December 31, 2006 2005 2004 2003 2002(c) (In thousands, except per share data) $ 7,905,842 6,620,099 5,880,372 4,999,381 4,516,957 5,674,531 4,851,853 4,256,129 3,605,579 3,247,865 2,231,311 1,768,246 1,624,243 1,393,802 1,269,092 1,392,251 1,095,862 985,251 851,773 747,027 839,060 672,384 638,992 542,029 522,065 173,697 66,791 53,392 55,575 68,972 8,488 3,460 4,809 (1,980 ) 9,464 (19,436 ) — — — — 162,749 70,251 58,201 53,595 78,436 676,311 602,133 580,791 488,434 443,629 220,478 214,995 209,994 178,285 159,140 $ 455,833 387,138 370,797 310,149 284,489 $ 6.74 5.78 5.56 4.68 4.46 67,674 66,932 66,682 66,251 63,723 $ 6.70 5.72 5.49 4.62 4.39 68,056 67,644 67,557 67,121 64,861 $ 783,148 1,277,087 972,325 592,310 640,846 8,178,394 8,040,037 4,406,520 4,163,575 3,596,743 2,783,681 3,308,370 891,341 1,012,413 820,427 3,715,263 3,058,238 2,668,512 2,297,801 1,982,879
(a) | In 2005, gross margin was impacted by a non-recurring $34,300 ($22,300 net of tax) 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. |
(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. |
(d) | In 2006, the Company received partial refunds from the United States government in reference to settlement of custom disputes dating back to 1982. |
(c) In 2004, the Company reclassified certain prior period financial statement balances to conform to current presentations to include sales distribution costs in selling, general and administrative costs rather than cost of sales and certain freight allowances in cost of sales.
(d) 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 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a leading producer of floor covering products for residential and commercial applications in the United States and Europe with net sales in 20042006 in excess of $5.8$7.9 billion. The Company is the second largest carpet and rugsrug manufacturer, and a leading manufacturer, marketer and distributor of ceramic tile and natural stone in the United States. States and a leading producer of laminate flooring in the United States and Europe.
The Company has twothree reporting segments, the Mohawk segment, the Dal-Tile segment and the Dal-TileUnilin segment. The Mohawk segment distributes its product lines, which include carpet, rugs, pad,carpets, ceramic tile, laminate, hardwood, rugs, carpet pad, and resilient and laminateflooring, through its network of approximately 5250 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 244262 company-operated sales service 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 retailers, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel.
The primary categories of the United States floor covering industry include carpet and rugs (63%rug (62%), ceramic tile (12%(13%), hardwood (10%(11%), resilient and rubber (9%(8%) and laminate (6%). Compound average growth rates for all categories, except the resilient and rubber category, for the period from 19982002 through 20032005 have met or exceeded the growth rates (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 3.0%3.8% for carpetcarpets and rugs, 7.0%7.3% for ceramic tile, 1.2%6.6% for resilient and rubber, 20.9%21.1% for laminate and 7.9%8.0% for hardwood.
The Company reported net earnings of $368.6$455.8 million and EPSor diluted earnings per share (“EPS”) of $5.46, for 2004, up 19%$6.70, compared to net earnings of $310.1$387.1 million and $4.62$5.72 EPS for 2003.2005. The improvementincrease in net earningsEPS is attributable to the Unilin Acquisition, strong hard surface growth, and EPS resulted from strong internal sales growth fromprice increases.
The Company believes that industry demand for the products manufactured by the Company has recently softened. The U.S. flooring industry continued slowing in the 4th quarter of 2006, with both the residential new construction and the retail remodeling channels continuing their decline. The commercial channel continues to out perform the residential channel. Both of our Mohawk and Dal-Tile segments improved manufacturing efficiencies, better leveraging of selling, general and administrative costs and the Lees Carpet acquisition, offset by higher raw material and energy costs. In addition,reflect these industry trends, although the Company has implemented multiple price increases withinbelieves both are well-positioned for industry improvement in the Mohawk segment during 2004 to offset increases in raw material and energy prices. long-term.
Material costs for the industry have remained high but could improve if commodity prices soften.
The Company has received formal notice of further cost increases to be implemented duringanticipates continued slow U.S. industry sales in the first quarter of 2005,2007 that will impact margins and believes the continuing high level of commodity costs couldearnings. The Company has reduced manufacturing, administration, and marketing expenses based on current industry conditions and will continue to impact raw material costs in the future. The Company believes these costs will stabilize over the long-term but the short-term trend of these costs is uncertain.adjust as required.
On March 20, 2002, the Company acquired all of the outstanding capital stock of Dal-Tile, a leading manufacturer and distributor of ceramic tile in the United States, for approximately $1,469 million in stock and cash. The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of Dal-Tile have been included 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 ceramic tile and stone markets.
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.
Results of Operations
Following are the results of operations for the last three years:
For the Years Ended December 31, | |||||||||
2004 | 2003 | 2002 | |||||||
(In thousands) | |||||||||
Statement of earnings data: | |||||||||
Net sales | $ 5,880,372 | 100.0% | 4,999,381 | 100.0% | 4,516,957 | 100.0% | |||
Cost of sales | 4,259,531 | 72.4% | 3,605,579 | 72.1% | 3,247,865 | 71.9% | |||
Gross profit | 1,620,841 | 27.6% | 1,393,802 | 27.9% | 1,269,092 | 28.1% | |||
Selling, general and administrative | |||||||||
expenses | 985,251 | 16.8% | 851,773 | 17.0% | 747,027 | 16.5% | |||
Operating income | 635,590 | 10.8% | 542,029 | 10.9% | 522,065 | 11.6% | |||
Interest expense | 53,392 | 0.9% | 55,575 | 1.1% | 68,972 | 1.5% | |||
Other (income) expense, net | 4,809 | 0.1% | (1,980) | 0.0% | 9,464 | 0.2% | |||
58,201 | 1.0% | 53,595 | 1.1% | 78,436 | 1.7% | ||||
Earnings before income taxes | 577,389 | 9.8% | 488,434 | 9.8% | 443,629 | 9.8% | |||
Income taxes | 208,767 | 3.6% | 178,285 | 3.6% | 159,140 | 3.5% | |||
Net earnings | $ 368,622 | 6.3% | 310,149 | 6.2% | 284,489 | 6.2% | |||
For the Years Ended December 31, | |||||||||||||||||
2006 | 2005 | 2004 | |||||||||||||||
(In thousands) | |||||||||||||||||
Statement of earnings data: | |||||||||||||||||
Net sales | $ | 7,905,842 | 100.0 | % | 6,620,099 | 100.0 | % | 5,880,372 | 100.0 | % | |||||||
Cost of sales | 5,674,531 | 71.8 | % | 4,851,853 | 73.3 | % | 4,256,129 | 72.4 | % | ||||||||
Gross profit | 2,231,311 | 28.2 | % | 1,768,246 | 26.7 | % | 1,624,243 | 27.6 | % | ||||||||
Selling, general and administrative expenses | 1,392,251 | 17.6 | % | 1,095,862 | 16.6 | % | 985,251 | 16.8 | % | ||||||||
Operating income | 839,060 | 10.6 | % | 672,384 | 10.2 | % | 638,992 | 10.9 | % | ||||||||
Interest expense | 173,697 | 2.2 | % | 66,791 | 1.0 | % | 53,392 | 0.9 | % | ||||||||
Other (income) expense, net | 8,488 | 0.1 | % | 3,460 | 0.1 | % | 4,809 | 0.1 | % | ||||||||
U.S. customs refund | (19,436 | ) | -0.2 | % | — | 0.0 | % | — | 0.0 | % | |||||||
162,749 | 2.1 | % | 70,251 | 1.1 | % | 58,201 | 1.0 | % | |||||||||
Earnings before income taxes | 676,311 | 8.6 | % | 602,133 | 9.1 | % | 580,791 | 9.9 | % | ||||||||
Income taxes | 220,478 | 2.8 | % | 214,995 | 3.2 | % | 209,994 | 3.6 | % | ||||||||
Net earnings | $ | 455,833 | 5.8 | % | 387,138 | 5.8 | % | 370,797 | 6.3 | % | |||||||
Year Ended December 31, 2004,2006, as Compared with Year Ended December 31, 20032005
Net sales for the year ended December 31, 2004,2006, were $5,880.4$7,905.8 million, reflecting an increase of $881.0$1,285.7 million, or approximately 17.6%19.4%, over the $4,999.4$6,620.1 million reported for the year ended December 31, 2003.2005. The increased net sales are primarily attributable to strongthe acquisition of Unilin in October 2005 (which represented approximately 81% of the net sales growth), internal sales growth from both the Mohawkwithin hard surfaces and Dal-Tile segments.selling price increases. The Mohawk segment recorded net sales of $4,368.8$4,742.1 million in 20042006 compared to $3,730.8$4,716.7 million in 2003,2005, representing an increase of $638.0$25.4 million or approximately 17.1%0.5%. The increase was attributable to strongselling price increases and internal growth in allwithin the commercial soft surface category and hard surface product categories offset by declines in the new construction and the Lees Carpet acquisition.residential replacement soft surface categories. The Dal-Tile segment recorded net sales of $1,511.5$1,941.8 million in 2004,2006, reflecting an increase of $243.0$207.0 million or 19.2%11.9%, over the $1,268.5$1,734.8 million reported in 2005. The increase was attributable to internal growth in all product categories, acquisitions and selling price increases. The Unilin segment recorded net sales of $1,236.9 million for twelve months of 2006 compared to $168.8 million for two months of 2005.
Quarterly net sales and the percentage changes in net sales by quarter for 2006 versus 2005 were as follows (dollars in thousands)
2006 | 2005 | Change | ||||||
First quarter | $ | 1,925,106 | 1,493,222 | 28.9 | % | |||
Second quarter | 2,058,123 | 1,624,692 | 26.7 | |||||
Third quarter | 2,024,019 | 1,697,634 | 19.2 | |||||
Fourth quarter(1) | 1,898,594 | 1,804,551 | 5.2 | |||||
Total year | $ | 7,905,842 | 6,620,099 | 19.4 | % | |||
(1) | The fourth quarter of 2005 includes two months of Unilin sales. |
Gross profit was $2,231.3 million (28.2% of net sales) for 2006 and $1,768.2 million (26.7% of net sales) for 2005. Gross profit as a percentage of net sales was favorably impacted by the Unilin Acquisition, selling price increases, internal growth and acquisitions within the Dal-Tile segment. The increase was offset by increased raw material, distribution and start up costs when compared to 2005. In addition, the 2005 gross margin was impacted
by a non-recurring $34.3 million ($22.3 million net of taxes) fair value adjustment applied to Unilin’s acquired inventory.
Selling, general and administrative expenses for 2006 were $1,392.3 million (17.6% of net sales) compared to $1,095.9 million (16.6% of net sales) for 2005. The increase in selling, general and administrative expenses as a percentage of net sales was primarily attributable to amortization of intangibles and the expensing of stock options, which was not required in 2005, during the current year when compared to 2005.
Operating income for 2006 was $839.1 million (10.6% of net sales) compared to $672.4 million (10.2% of net sales) in 2005. The increase in operating income for 2006 was favorably impacted by the Unilin Acquisition when compared to 2005. Operating income attributable to the Mohawk segment was $387.4 million (8.2% of segment net sales) in 2006 compared to $426.8 million (9.0% of segment net sales) in 2005. The percentage decrease in operating income resulted primarily from slower new construction and residential replacement demand within its soft surface product categories, an increase in raw material and energy costs, and increased selling and distribution costs, offset by selling price increases and internal growth within its commercial and hard surface product categories. Operating income attributable to the Dal-Tile segment was $270.9 million (14.0% of segment net sales) in 2006, compared to $260.2 million (15.0% of segment net sales) in 2005. The decrease in operating income as a percentage of net sales resulted primarily from higher distribution costs and start up costs at its Muskogee location offset by acquisitions and plant closing costs in the fourth quarter of 2006. Operating income attributable to the Unilin segment was $214.1 million (17.3% of segment net sales) for 2006 compared to a loss of $5.2 million for 2005.
The Company has received partial refunds from the United States government in reference to settling custom disputes dating back to 1982. Accordingly, the Company recorded a gain of $19.4 million ($12.3 million net of taxes) in other income (expense) for the twelve months ended December 31, 2006. Additional future recoveries will be recorded as realized.
Interest expense for 2006 was $173.7 million compared to $66.8 million in 2005. The increase in interest expense for 2006 as compared to 2005 was attributable to higher average debt levels as a result of the Unilin Acquisition. In addition, interest rates in 2006 were higher when compared to 2005.
Income tax expense was $220.5 million, or 32.6% of earnings before income taxes for 2006 compared to $215.0 million, or 35.7% of earnings before income taxes for 2005. The decrease in the tax rate is due to the combination of domestic and international tax rates resulting from the Unilin Acquisition when compared to 2005.
Year Ended December 31, 2005, as Compared with Year Ended December 31, 2004
Net sales for the year ended December 31, 2003.2005, 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, 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 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 20042005 versus 20032004 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.
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) | 1,804,551 | 1,475,099 | 22.3 | |||||
Total year | $ | 6,620,099 | 5,880,372 | 12.6 | % | |||
(1) | The fourth quarter of 2005 includes two months of Unilin sales. |
Gross profit was $1,620.8$1,768.2 million (26.7% of net sales) for 2005 and $1,624.2 million (27.6% of net sales) for 2004 and $1,393.8 million (27.9% of net sales) for 2003.2004. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs, a non-recurring $34.3 million ($22.3 million net of taxes) fair value adjustment applied to Unilin’s acquired inventory, and higher import costs.
Selling, general and administrative expensesOperating income for 2004 were $985.32005 was $672.4 million (16.8%(10.2% 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$639.0 million (10.9% of net sales) in 2003.2004. Operating income attributable to the Mohawk segment was $424.3$426.8 million (9.7%(9.0% of segment net sales) in 20042005 compared to $364.0$427.7 million (9.8% of segment net sales) in 2003.2004. The percentage decrease in operating income was attributable to the 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, compared to $187.2 million (14.8% of segment net sales) in 2003.2004. The decreaseincrease 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 energy costs, import costs and transportation costs.
Interest expense for 20042005 was $53.4$66.8 million compared to $55.6$53.4 million in 2003.2004. The decreaseincrease in interest expense was attributable to larger benefit from a fair value adjustment relatedthe debt raised to an interest rate swap during 2004 when compared to 2003.fund the Unilin Acquisition.
Income tax expense was $208.8$215.0 million, or 35.7% of earnings before income taxes for 2005 compared to $210.0 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 2003.2004. The improved rate was a result of the utilization of tax credits.
Year Ended December 31, 2003, as Compared with Year Ended December 31, 2002
Net sales for the year ended December 31, 2003, were $4,999.4 million, reflecting an increase of $482.4 million, or approximately 10.7%, over the $4,517.0 million reported 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 $3,730.8 million in 2003 compared to $3,618.8 million in 2002, representing an increase of $112.0 million or approximately 3.0%. 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 consolidated 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):
2003 | 2002 | Change | |||||
First quarter | $ 1,083,422 | 865,336 | 25.2 | % | |||
Second quarter | 1,245,870 | 1,226,504 | 1.6 | ||||
Third quarter | 1,301,547 | 1,222,943 | 6.4 | ||||
Fourth quarter | 1,368,542 | 1,202,174 | 13.8 | ||||
Total year | $ 4,999,381 | 4,516,957 | 10.7 | % | |||
Gross profit was $1,393.8 million (27.9% of net sales) for 2003 and $1,269.1 million (28.1% of net sales) for 2002. The reduction in percentage was primarily attributable to a change in the selling mix, increased raw material costs, higher energy costs, higher import costs and start up costs related to the new Dal-Tile manufacturing facility.
Selling, general and administrative expenses for 2003 were $851.8 million (17.0% of net sales) compared to $747.0 million (16.5% of net sales) for 2002. The increased percentage was primarily attributable to the acquisitionutilization of Dal-Tile, which has higher selling, general and administrative expenses than the Mohawk segment.
Operating income for 2003 was $542.0 million (10.8% of net sales) compared to $522.1 million (11.6% of net sales) in 2002. Operating income attributable to the Mohawk segment was $364.0 million (9.8% 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 raw material and energy costs 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.and the one-time effect of state tax law changes.
Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. The Company'sCompany’s capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes, the sale of trade receivables and credit terms from suppliers.
Cash flows generated by operations for 20042006 were $242.8$782.0 million compared to $309.4$561.5 million for 2003. The decrease2005. Contributing to the improved cash flow was primarily attributablehigher net earnings after adjusting for the incremental depreciation and amortization expense resulting from the Unilin Acquisition and improved working capital compared to an increase in accounts receivable, which increased from $573.5 million at the beginning of 2004 to $660.7 million at December 31, 2004 and inventories, which increased from $832.4 million at the beginning of 2004 to $1,018.0 million at December 31, 2004. The increases were primarily attributable to organic sales growth within both the Mohawk and Dal-Tile segments.prior year.
Net cash used in investing activities in 20042006 was $121.6$236.7 million compared to $498.8$2,860.8 million for 2003.2005. The decreasechange was primarily attributable to the Unilin Acquisition in 2005 and lower capital expenditures and lower expenditures relatedin 2006 compared to acquisitions. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment.2005. Capital expenditures, including $1,116.8 million$2.7 billion for acquisitions, have totaled $1,450.0 million$3.2 billion over the past three years. Capital spending during 20052007 for both the Mohawk, Dal-Tile and Dal-TileUnilin segments combined, excluding acquisitions, is expected to range from $230$250 million to $270$300 million, which includes approximately $100 million for strategic capacity expansions and the remaining capital expenditures will be used primarily to purchase equipment and to add manufacturing and distribution capacity. The Company will assess the need to make the capacity expansion additions during the year based on economic and industry conditions.
Net cash used in financing activities for 20042006 was $121.2$620.8 million compared to cash provided in 20032005 of $189.4$2,440.7 million. The primary reason for the change was a reductionan increase in debt levels in 2004, whenpayments during 2006 compared to 2003.the same period in 2005.
On September 29, 2004,October 28, 2005, the Company amended itsentered into a $1.5 billion five-year, senior, unsecured, revolving credit and term loan facility (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 the senior unsecured credit facility to finance the Unilin Acquisition and to provide for working capital requirements. The senior unsecured credit facilities consist of (i) a multi-currency $750.0 million revolving credit facility, with interest rates(ii) a $389.2 million term loan facility and (iii) a Euro 300.0 million term loan facility, all of either (i) LIBOR plus 0.4% to 1.4%, depending upon the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.5% depending upon the Company's performance measured against certain financial ratios.which mature on October 28, 2010. At December 31, 2006, $395.3 million of borrowings was outstanding under these facilities. The facility was increased from $200borrowings outstanding are comprised of $197.3 million to $300 million. The increase in the facility replaces the $100 million 364-day facility, which expired during the third quarter of 2004. 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.
facility and Euro 150.0 million or approximately $198.0 million, borrowings outstanding under the Euro term facility. The Company believes that its available credit facilities at December 31, 2004 are adequate to support its operations and working capital requirements. balance of the $389.2 million facility was repaid in 2006.
At December 31, 2004, the Company had credit facilities of $300 million under its revolving credit line and $50 million under various short-term uncommitted credit lines. All of these lines are unsecured. At December 31, 2004,2006, a total of approximately $234.1$455.6 million was available under both the revolving credit facility and uncommitted credit lines compared to $237.3 million available under both the credit facility and uncommitted credit lines at December 31, 2003.facility. The amount used under both the revolving credit facility and uncommitted credit lines at December 31, 2004, consisted of $37.7 million2006, was $294.4 million. The amount used under the Company's five-year revolving credit facility and unsecured credit lines,is composed of $197.3 million borrowings, $55.6 million standby letters of credit guaranteeing the Company's industrial revenue bonds and $22.6$41.5 million standby letters of credit related to various insurance contracts and foreign vendor commitments.
The senior unsecured 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.
The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"“Securitization Facility”). The Securitization Facility allows the Company to borrow up to $350$350.0 million based on available accounts receivable. At December 31, 2004,2006, the Company had $90$190.0 million outstanding secured by approximately $825.8 million of trade receivables compared to $182$40.0 million secured by approximately $649 million of trade receivables at December 31, 2003.2005. The Securitization Facility is secured by trade receivables. During the third quarter of 2004,2006, the Company extended the term of its Securitization Facility until AugustJuly 2007.
On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130.0 million, five-year unsecured, revolving credit facility, maturing on November 8, 2010 (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 Company guaranteed the obligations of that subsidiary under the Euro revolving credit facility and amended certain representationsof any of the Company’s other subsidiaries that become borrowers under the Euro revolving credit facility. As of December 31, 2006, the Company had borrowings outstanding of Euro 18.8 million, or approximately $24.8 million, under this facility. No borrowings were outstanding at December 31, 2005 under this facility.
The Company’s senior unsecured credit facilities and warranties.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, 2006. 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.
On January 17, 2006, the Company issued $500.0 million aggregate principal amount of 5.750% notes due 2011 and $900.0 million aggregate principal amount of 6.125% notes due 2016. The Company'snet proceeds from the issuance of these notes were used to pay off a $1.4 billion bridge credit facility entered into in connection with the Unilin Acquisition. Interest payable on each series of the notes is subject to adjustment if either Moody's Investor Service, Inc. or Standard & Poor's Ratings Services, or both, downgrades the rating they have assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be
reduced accordingly. The provision for increasing the interest rate will no longer apply if the rating of these notes from both rating agencies improves above the rating of these notes in effect at the time of the issuance of the notes. There have been no adjustments to the interest rate of these notes.
In 2002, the Company issued $300.0 million aggregate principal amount of its senior 6.5% notes due 2007 and $400.0 million aggregate principal amount of its senior 7.2% notes due 2012.
The Company believes that cash generated from operations in 2007 and availability under its existing revolving credit facility will be sufficient to meet its scheduled debt repayments in 2007.
The Company’s Board of Directors has authorized the repurchase of up to 15 million shares of the Company'sCompany’s outstanding common stock. For the year ended December 31, 2004, a total of approximately 250,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $18.4 million. Since the inception of the program in 1999, a total of approximately 11.211.5 million shares have been repurchased at an aggregate cost of approximately $311.5$334.7 million. All of these repurchases have been financed through the Company'sCompany’s operations and banking arrangements.
On 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 Unilin Management in the event that certain performance goals are satisfied. In each of the years in the five-year period ended December 31, 2010, the remaining members of Unilin Management can earn amounts, in the aggregate, equal to the average value of 30,671 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. The amount of the liability is measured each period and recognized as compensation expense in the statement of operations. As of December 31, 2006, the Company expensed approximately $2.3 million under the DSPA.
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, 20042006 (in thousands):
Payments due by period | ||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||
Long-term debt | $ 191,341 | - | 300,000 | - | - | 400,000 | 891,341 | |||||||
Estimated interest payments (1) | 55,337 | 48,300 | 34,463 | 28,800 | 28,800 | 65,964 | 261,664 | |||||||
Operating leases | 81,803 | 67,656 | 50,934 | 39,980 | 31,133 | 61,786 | 333,292 | |||||||
Purchase commitments (2) | 81,809 | 57,693 | 52,280 | 49,723 | 1,775 | - | 243,280 | |||||||
$ 410,290 | 173,649 | 437,677 | 118,503 | 61,708 | 527,750 | 1,729,577 | ||||||||
Payments due by period | |||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | |||||||||
Long-term debt | $ | 576,134 | 7,637 | 3,417 | 395,574 | 500,249 | 1,300,670 | 2,783,681 | |||||||
Estimated interest payments(1) | 150,001 | 130,381 | 130,200 | 130,064 | 99,368 | 231,079 | 871,093 | ||||||||
Operating leases | 103,333 | 90,126 | 78,361 | 58,441 | 44,846 | 98,643 | 473,750 | ||||||||
Purchase commitments(2) | 263,406 | 193,423 | 66,215 | 1,775 | — | — | 524,819 | ||||||||
Expected pension payments | 29,454 | 121 | 160 | 194 | 349 | 3,041 | 33,319 | ||||||||
$ | 1,122,328 | 421,688 | 278,353 | 586,048 | 644,812 | 1,633,433 | 4,686,662 | ||||||||
(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, 2006 to these balances. |
(2) | Includes commitments for natural gas, electricity and raw material purchases. |
(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, 2004 to these balances. The interest payments associated with the Company's interest rate swap were based on the difference between the fixed rate and the forward yield curve.
(2) Includes commitments for natural gas, foreign currency, and raw material purchases.
Critical Accounting Policies
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, the Company must make decisions which impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and analysis of the relevant circumstances and historical experience. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.
The Company's significant accounting policies are described in Note 1 to the consolidated financial statementsConsolidated 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 represent critical accounting 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 ishas been determined using the last-in, first-out method (LIFO) for approximately 80% of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in first-out method (FIFO), which(“FIFO”). Costs included in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is used to value inventory within the Dal-Tile segment and inventory not valued under the LIFO method in the Mohawk segment.replacement cost or net realizable value. 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 inventory, 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 futurethe discounted cash flows.flows and market value approaches for the fair value determination of goodwill and indefinite life intangibles. 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 definitedefinite-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.
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.
Environmental and legal accruals are estimates based on judgments made by the Company relating to ongoing environmental and legal proceedings, as disclosed in the Company's consolidated financial statements. In determining whether a liability is probable and reasonably estimable, the Company consults with its internal experts. The Company believes that the amounts recorded in the accompanying financial statements are based on the best estimates and judgments available to it.
consults with its internal experts. The Company believes that the amounts recorded in the accompanying financial statements are based on the best estimates and judgments available to it.
Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Staff Position 109-1, "Application of FASB Statement No. 109, "Accounting for Income Taxes" ("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") 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. The Company is currently evaluating the effect that the manufacturer's deduction will have on future results. FSP 109-1 is effective prospectively as of January 1, 2005.
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. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise 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 has not yet completed evaluating the impact of the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.
In November 2004, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151, "Inventory“Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("4” (“SFAS 151"151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory“Inventory Pricing,"” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items 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"“so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheadsoverhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. TheEffective January 1, 2006, the Company is currently evaluatingadopted SFAS 151 and doeswhich did not expect it to have a material impact on the Company's consolidated financial statements.
In December 2004,July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes.FIN 48 prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective as of the beginning of the Company's 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Based on its current evaluation, the Company does not believe the adoption of FIN 48 will have a material impact on the consolidated financial statements.
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"157”), which replaces“Fair Value Measurements.” SFAS No. 123, "Accounting157 defines fair value, establishes a framework for Stock-Based Compensation," ("measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 123")No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and supercedes APB Opinion No. 25, "Accountingending balances for Stock Issued to Employees."each major category of assets and liabilities. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in157 is effective for the financial statements based on their fair valuesCompany’s fiscal year beginning with the first interim or annual period after June 15, 2005. Transition may be accomplished using either the prospective or retrospective methods. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25.January 1, 2008. The Company is currently evaluating the transition methods underimpact of SFAS 123RNo. 157 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and will begin expensing stock optionsOther Post Retirement Plans- an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize the over-funded or under-funded status of a benefit plan in its statement of financial position, recognize as a component of other comprehensive income, net of tax, gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit costs pursuant to SFAS No. 87, “Employers Accounting for Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and disclose in the third quarternotes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of 2005.the gains or losses, prior service costs or credits, and transition assets or obligations. The recognition and disclosure provisions required by SFAS No. 158 are effective for the Company’s fiscal year ending December 31, 2006. The measurement date provisions are effective for fiscal years ending after December 15, 2008. The Company adopted SFAS No. 158 for its fiscal year ended December 31, 2006 which resulted in the Company recording $818 in accumulated other comprehensive income for amounts that had not been previously recorded in net periodic benefit cost.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both the balance sheet and income statement approach when quantifying a misstatement. SAB 108 is effective for the Company’s fiscal year ending December 31, 2006. Effective December 31, 2006, the Company adopted SAB 108 which did not have a material impact on the Company’s consolidated financial statements
Impact of Inflation
Inflation affects the Company's manufacturing costs, distribution costs and operating expenses. The carpet, tile and tilelaminate industry hashave 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 the beginning of 2004 the carpet and tile industry 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 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 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 construction activity or spending for replacement floor covering products could have a material adverse effect on the Company's business.
The U.S. floor covering industry is highly dependent on construction activity, including new construction, remodeling and replacement which are 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. Additionally, 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.
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 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, polyester and polypropylene resins and fibers and carpet backings, which are used exclusively in its carpet and rugs 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 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; 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 |
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 exchange raterates 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"(“MMBTU”).
The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset applied 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, 2004,2006, the Company had natural gas contracts that mature from January 20052007 to March 2005October 2007 with an aggregate notional amount of approximately 1 million1,400 MMBTU's. The fair value of these contracts was a liability of $1.3 million.$2.4 million as of December 31, 2006. At December 31, 2003,2005, the Company had natural gas contracts that matured from January 20042006 to December 2004October 2006 with an aggregate notional amount of approximately 3.9 million660 thousand MMBTU's. The fair value of these contracts was an asset of $3.6 million.$1.9 million as of December 31, 2005. 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 loss of approximately $1.3 million.$2.4 million, net of taxes.
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, 2004,2006, the Company had normal purchase commitments of approximately 1.9 million1,748 MMBTU's for periods maturing from January 20052007 through March 2006.2008. The contracted value of these commitments was approximately $9.9$15.4 million and the fair value of these commitments was approximately $11.9$12.1 million, at December 31, 2004.2006. At December 31, 2003,2005, the Company had normal purchase commitments of approximately 3.1 million MMBTU's.1,867 MMBTU's for periods maturing from January 2006 through 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 million.$20.5 million, at December 31, 2005.
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. The company had no forward contracts outstanding at December 31, 2006. The Company had forward contracts to purchase approximately 145.38 million Mexican pesos at December 31, 2003.2005. The aggregate U.S. dollar value of these contracts at December 31, 20032005 was approximately $12.7$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 at December 31, 2003 were not significant. The Company had no forward contracts outstanding at December 31, 2004.
Item 8. | Consolidated Financial Statements and Supplementary Data |
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| ||
| ||
Consolidated Balance Sheets as of December 31, |
| 33 |
| 34 | |
|
| |
| 36 | |
| 37 |
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
The Board of Directors and Stockholders
Mohawk Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Mohawk Industries, Inc. and subsidiaries as of December 31, 20042006 and 2003,2005, and the related consolidated statements of earnings, stockholders'stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(a)2.2006. These consolidated financial statements and financial statement schedule are the responsibility of the Company'sCompany’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 respective subsidiaries (Unilin Group), which financial statements reflect total assets constituting approximately 40 and 41 percent and total revenues constituting approximately 16 and 3 percent in 2006 and 2005, respectively, 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 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. 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, 20042006 and 2003,2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004,2006, in conformity with U.S. generally accepted accounting principles. Also
As discussed in our opinion, the related financial statement schedule, when considered in relationnote 11 to the basic consolidated financial statements, taken as a whole, present fairly,the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, effective January 1, 2006. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for all material respects,inventories not previously accounted for on the information set forth therein.first-in first-out (“FIFO”) method from the last-in first-out (“LIFO”) method to the FIFO method during 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company'sMohawk Industries, Inc.’s internal control over financial reporting as of December 31, 2004,2006, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005February 23, 2007 expressed an unqualified opinion on management'smanagement’s assessment of, and the effective operation of, internal control over financial reporting.
Atlanta, GeorgiaMarch 11, 2005
/s/ KPMG LLP |
KPMG LLP |
Atlanta, Georgia |
February 23, 2007 |
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 combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (the Unilin Group) as of December 31, 2006 and 2005 and the related combined consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the twelve and two month periods then ended (not presented herein). These financial statements are the responsibility of the combined Companies’ management. Our responsibility is to express an opinion on Internal Controlthese combined consolidated financial statements based on our audits.
We conducted our audits 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 Reportingfinancial reporting. Our audits 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 audits provide 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, 2006 and 2005 and the results of their operations and their cash flows for the twelve and two month periods then ended in conformity with accounting principles generally accepted in the United States of America.
February 23, 2007
BDO Atrio Bedrijfsrevisoren Burg. CVBA
Represented by
/s/ Veerle Catry
Veerle Catry
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“Management’s Report on Internal Control over Financial Reporting"Reporting” set forth in Item 9A of Mohawk Industries, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2004, 2006,that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2004,2006, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mohawk Industries, Inc.'s’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'sCompany’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'scompany’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, 2004,2006, is fairly stated, in all material respects, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2006, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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, 20042006 and 2003,2005, and the related consolidated statements of earnings, stockholders'stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004,2006, and our report dated March 11, 2005February 23, 2007 expressed an unqualified opinion on those consolidated financial statements.statements.
/S/ KPMG LLP |
KPMG LLP
Atlanta, GeorgiaMarch 11, 2005
February 23, 2007
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 20042006 and 20032005
(In thousands, except per share data)
2006 | 2005 | |||||||||
ASSETS | 2004 | 2003 | ||||||||
Current assets: | ||||||||||
Receivables | $ 660,650 | 573,500 | ||||||||
Cash and cash equivalents | $ | 63,492 | 134,585 | |||||||
Receivables, net | 851,428 | 848,666 | ||||||||
Inventories | 1,017,983 | 832,415 | 1,225,874 | 1,215,427 | ||||||
Prepaid expenses | 49,381 | 43,043 | ||||||||
Prepaid expenses and other assets | 138,866 | 140,789 | ||||||||
Deferred income taxes | 55,311 | 84,260 | 99,251 | 49,534 | ||||||
Total current assets | 1,783,325 | 1,533,218 | 2,378,911 | 2,389,001 | ||||||
Property, plant and equipment, net | 905,332 | 919,085 | 1,888,088 | 1,810,728 | ||||||
Goodwill | 1,377,349 | 1,368,700 | 2,699,639 | 2,621,963 | ||||||
Other intangible assets | 322,646 | 325,339 | ||||||||
Tradenames | 662,314 | 622,094 | ||||||||
Other intangible assets, net | 517,780 | 552,003 | ||||||||
Other assets | 14,466 | 17,233 | 31,662 | 44,248 | ||||||
$ 4,403,118 | 4,163,575 | $ | 8,178,394 | 8,040,037 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Current liabilities: | ||||||||||
Current portion of long-term debt | $ 191,341 | 302,968 | $ | 576,134 | 113,809 | |||||
Accounts payable and accrued expenses | 623,061 | 637,940 | 1,019,629 | 998,105 | ||||||
Total current liabilities | 814,402 | 940,908 | 1,595,763 | 1,111,914 | ||||||
Deferred income taxes | 191,761 | 183,669 | 628,311 | 643,283 | ||||||
Long-term debt, less current portion | 700,000 | 709,445 | 2,207,547 | 3,194,561 | ||||||
Other long-term liabilities | 30,618 | 31,752 | 31,510 | 32,041 | ||||||
Total liabilities | 1,736,781 | 1,865,774 | 4,463,131 | 4,981,799 | ||||||
Stockholders' equity: | ||||||||||
Preferred stock, $.01 par value; 60 shares authorized; | ||||||||||
no shares issued | - | - | ||||||||
Common stock, $.01 par value; 150,000 shares authorized; 77,514 | ||||||||||
and 77,050 shares issued in 2004 and 2003, respectively | 775 | 770 | ||||||||
Preferred stock, $.01 par value; 60 shares authorized; no shares issued | — | — | ||||||||
Common stock, $.01 par value; 150,000 shares authorized; 78,816 and 78,478 shares issued in 2006 and 2005, respectively | 788 | 785 | ||||||||
Additional paid-in capital | 1,058,537 | 1,035,733 | 1,152,420 | 1,123,991 | ||||||
Retained earnings | 1,910,383 | 1,541,761 | 2,755,529 | 2,299,696 | ||||||
Accumulated other comprehensive (loss) income | (2,441) | 2,313 | ||||||||
Accumulated other comprehensive gain (loss) | 130,372 | (47,433 | ) | |||||||
2,967,254 | 2,580,577 | |||||||||
Less treasury stock at cost; 10,755 and 10,515 shares in 2004 | ||||||||||
and 2003, respectively | 300,917 | 282,776 | ||||||||
4,039,109 | 3,377,039 | |||||||||
Less treasury stock at cost; 11,051 and 10,981 shares in 2006 and 2005, respectively | 323,846 | 318,801 | ||||||||
Total stockholders' equity | 2,666,337 | 2,297,801 | 3,715,263 | 3,058,238 | ||||||
$ 4,403,118 | 4,163,575 | |||||||||
$ | 8,178,394 | 8,040,037 | ||||||||
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
2006 | 2005 | 2004 | ||||||||
Net sales | $ | 7,905,842 | 6,620,099 | 5,880,372 | ||||||
Cost of sales | 5,674,531 | 4,851,853 | 4,256,129 | |||||||
Gross profit | 2,231,311 | 1,768,246 | 1,624,243 | |||||||
Selling, general and administrative expenses | 1,392,251 | 1,095,862 | 985,251 | |||||||
Operating income | 839,060 | 672,384 | 638,992 | |||||||
Other expense (income): | ||||||||||
Interest expense | 173,697 | 66,791 | 53,392 | |||||||
Other expense | 17,515 | 11,714 | 9,731 | |||||||
Other income | (9,027 | ) | (8,254 | ) | (4,922 | ) | ||||
U.S. customs refund | (19,436 | ) | — | — | ||||||
162,749 | 70,251 | 58,201 | ||||||||
Earnings before income taxes | 676,311 | 602,133 | 580,791 | |||||||
Income taxes | 220,478 | 214,995 | 209,994 | |||||||
Net earnings | $ | 455,833 | 387,138 | 370,797 | ||||||
Basic earnings per share | $ | 6.74 | 5.78 | 5.56 | ||||||
Weighted-average common shares outstanding | 67,674 | 66,932 | 66,682 | |||||||
Diluted earnings per share | $ | 6.70 | 5.72 | 5.49 | ||||||
Weighted-average common and dilutive potential common shares outstanding | 68,056 | 67,644 | 67,557 | |||||||
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(In thousands, except per share data)thousands)
2004 | 2003 | 2002 | ||||
Net sales | $ 5,880,372 | 4,999,381 | 4,516,957 | |||
Cost of sales | 4,259,531 | 3,605,579 | 3,247,865 | |||
Gross profit | 1,620,841 | 1,393,802 | 1,269,092 | |||
Selling, general and administrative expenses | 985,251 | 851,773 | 747,027 | |||
Operating income | 635,590 | 542,029 | 522,065 | |||
Other expense (income): | ||||||
Interest expense | 53,392 | 55,575 | 68,972 | |||
Other expense | 9,731 | 6,252 | 13,455 | |||
Other income | (4,922) | (8,232) | (3,991) | |||
58,201 | 53,595 | 78,436 | ||||
Earnings before income taxes | 577,389 | 488,434 | 443,629 | |||
Income taxes | 208,767 | 178,285 | 159,140 | |||
Net earnings | $ 368,622 | 310,149 | 284,489 | |||
Basic earnings per share | $ 5.53 | 4.68 | 4.46 | |||
Weighted-average common shares outstanding | 66,682 | 66,251 | 63,723 | |||
Diluted earnings per share | $ 5.46 | 4.62 | 4.39 | |||
Weighted-average common and dilutive potential | ||||||
common shares outstanding | 67,557 | 67,121 | 64,861 | |||
Common stock | Additional capital | Retained earnings | Accumulated Income (loss) | Treasury stock | Total equity | |||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
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 | 5 | 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 | — | — | — | 370,797 | — | — | — | 370,797 | ||||||||||||||||||
Total Comprehensive Income | 366,043 | |||||||||||||||||||||||||
Balances at December 31, 2004 | 77,514 | 775 | 1,058,537 | 1,912,558 | (2,441 | ) | (10,755 | ) | (300,917 | ) | 2,668,512 | |||||||||||||||
Stock options exercised | 378 | 4 | 10,070 | — | — | — | — | 10,074 | ||||||||||||||||||
Stock issuance | 586 | 6 | 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 | — | — | — | 387,138 | — | — | — | 387,138 | ||||||||||||||||||
Total Comprehensive Income | 342,146 | |||||||||||||||||||||||||
Balances at December 31, 2005 | 78,478 | 785 | 1,123,991 | 2,299,696 | (47,433 | ) | (10,981 | ) | (318,801 | ) | 3,058,238 | |||||||||||||||
Stock options exercised | 338 | 3 | 12,666 | — | — | — | — | 12,669 | ||||||||||||||||||
Stock based compensation expense | — | — | 11,925 | — | — | — | — | 11,925 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (74 | ) | (5,180 | ) | (5,180 | ) | |||||||||||||||
Grant to executive incentive plan and other | — | — | 260 | — | — | 4 | 135 | 395 | ||||||||||||||||||
Tax benefit from exercise of stock options | — | — | 3,578 | — | — | — | — | 3,578 | ||||||||||||||||||
Adoption of SFAS 158 | (818 | ) | (818 | ) | ||||||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | 181,425 | — | — | 181,425 | ||||||||||||||||||
Unrealized loss on hedge instruments net of taxes | — | — | — | — | (2,802 | ) | — | — | (2,802 | ) | ||||||||||||||||
Net earnings | — | — | — | 455,833 | — | — | — | 455,833 | ||||||||||||||||||
Total Comprehensive Income | 634,456 | |||||||||||||||||||||||||
Balances at December 31, 2006 | 78,816 | $ | 788 | $ | 1,152,420 | $ | 2,755,529 | $ | 130,372 | (11,051 | ) | $ | (323,846 | ) | $ | 3,715,263 | ||||||||||
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Cash Flows
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(In thousands)thousands, except per share data)
Accumulated | |||||||||||||||
Additional | other | Total | |||||||||||||
Common stock | paid-in | Retained | comprehensive | Treasury stock | shareholders' | ||||||||||
Shares | Amount | capital | Earnings | income (loss) | Shares | Amount | equity | ||||||||
Balances at December 31, 2001 | 61,408 | $ 614 | $ 197,247 | $ 947,123 | $ (2,837) | (8,715) | $ (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 | - | - | - | - | - | (1,371) | (64,034) | (64,034) | |||||||
Grant to employee profit sharing plan | - | - | 3,040 | - | - | 72 | 282 | 3,322 | |||||||
Grant to executive incentive plan | - | - | 77 | - | - | 8 | 176 | 253 | |||||||
Tax benefit from exercise of stock | |||||||||||||||
options | - | - | 5,463 | - | - | - | - | 5,463 | |||||||
Comprehensive Income: | |||||||||||||||
Discontinued hedge on | |||||||||||||||
nterest 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 | (10,006) | (257,172) | 1,982,879 | |||||||
Stock options exercised | 679 | 7 | 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 | 5 | 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 | |||||||
2006 | 2005 | 2004 | ||||||||
Cash flows from operating activities: | ||||||||||
Net earnings | $ | 455,833 | 387,138 | 370,797 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 274,952 | 150,657 | 123,088 | |||||||
Deferred income taxes | (68,956 | ) | 9,304 | 39,927 | ||||||
Loss on sale of property, plant and equipment | 5,625 | 4,676 | 3,037 | |||||||
Tax benefit on exercise of stock awards | — | 5,238 | 7,545 | |||||||
Excess tax benefit from stock-based compensation | (3,578 | ) | — | — | ||||||
Stock based compensation expense | 11,925 | — | — | |||||||
Changes in assets and liabilities, net of effects of acquisitions: | ||||||||||
Receivables | 11,623 | 3,574 | (85,417 | ) | ||||||
Inventories | 4,823 | (33,570 | ) | (183,167 | ) | |||||
Accounts payable and accrued expenses | 79,063 | 91,960 | (25,241 | ) | ||||||
Other assets and prepaid expenses | 1,910 | (62,205 | ) | (6,598 | ) | |||||
Other liabilities | 8,825 | 4,772 | (1,134 | ) | ||||||
Net cash provided by operating activities | 782,045 | 561,544 | 242,837 | |||||||
Cash flows from investing activities: | ||||||||||
Additions to property, plant and equipment | (165,769 | ) | (247,306 | ) | (106,601 | ) | ||||
Acquisitions, net of cash | (70,907 | ) | (2,613,529 | ) | (14,998 | ) | ||||
Net cash used in investing activities | (236,676 | ) | (2,860,835 | ) | (121,599 | ) | ||||
Cash flows from financing activities: | ||||||||||
Net change in short term credit lines | — | (37,721 | ) | (3,981 | ) | |||||
Payments on revolving line of credit | (1,546,679 | ) | (539,294 | ) | — | |||||
Proceeds from revolving line of credit | 1,409,611 | 856,940 | — | |||||||
(Repayment) proceeds on bridge loan | (1,400,000 | ) | 1,400,000 | — | ||||||
Proceeds from issuance of senior notes | 1,386,841 | — | — | |||||||
Net change in asset securitization borrowings | 150,000 | (50,000 | ) | (92,000 | ) | |||||
Payments on term loans | (589,052 | ) | (15,055 | ) | (25,034 | ) | ||||
Proceeds on term loans | — | 750,000 | — | |||||||
Payments of other debt | (13,380 | ) | (30,861 | ) | (57 | ) | ||||
Excess tax benefit from stock-based compensation | 3,578 | — | — | |||||||
Change in outstanding checks in excess of cash | (29,250 | ) | 63,670 | 3,290 | ||||||
Acquisition of treasury stock | (5,180 | ) | (14,521 | ) | (18,413 | ) | ||||
Common stock transactions | 12,669 | 57,509 | 14,957 | |||||||
Net cash provided by (used in) financing activities | (620,842 | ) | 2,440,667 | (121,238 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 4,380 | (6,791 | ) | — | ||||||
Net change in cash and cash equivalents | (71,093 | ) | 134,585 | — | ||||||
Cash and cash equivalents, beginning of year | 134,585 | — | — | |||||||
Cash and cash equivalents, end of year | $ | 63,492 | 134,585 | — | ||||||
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsYears Ended December 31, 2004, 2003 and 2002
(In thousands)
2004 | 2003 | 2002 | ||||
Cash flows from operating activities: | ||||||
Net earnings | $ 368,622 | 310,149 | 284,489 | |||
Adjustments to reconcile net earnings to net cash | ||||||
provided by operating activities: | ||||||
Depreciation and amortization | 123,088 | 106,615 | 101,942 | |||
Deferred income taxes | 38,700 | 34,775 | 22,137 | |||
Tax benefit on stock options exercised | 7,545 | 8,757 | 5,463 | |||
Loss on sale of property, plant and equipment | 3,037 | 3,267 | 2,762 | |||
Changes in assets and liabilities, net of | ||||||
effects of acquisitions: | ||||||
Receivables | (85,417) | (47,443) | 34,657 | |||
Inventories | (179,765) | (104,964) | (15,215) | |||
Accounts payable and accrued expenses | (25,241) | (2,769) | 117,039 | |||
Other assets and prepaid expenses | (6,598) | (5,592) | (13,111) | |||
Other liabilities | (1,134) | 6,595 | 9,347 | |||
Net cash provided by operating activities | 242,837 | 309,390 | 549,510 | |||
Cash flows from investing activities: | ||||||
Additions to property, plant and equipment | (106,601) | (114,631) | (111,934) | |||
Acquisitions | (14,998) | (384,121) | (717,638) | |||
Net cash used in investing activities | (121,599) | (498,752) | (829,572) | |||
Cash flows from financing activities: | ||||||
Net change in revolving line of credit | (3,981) | 37,299 | (29,491) | |||
Proceeds from issuance of senior notes | - | - | 700,000 | |||
Proceeds from bridge credit facility | - | - | 600,000 | |||
Repayment of bridge credit facility | - | - | (600,000) | |||
Net borrowing change in asset securitizations | (92,000) | 182,000 | (125,000) | |||
Payments on term loans | (25,034) | (26,492) | (32,208) | |||
Redemption of acquisition indebtedness | - | - | (202,564) | |||
Payments of other debt | (57) | (821) | (1,307) | |||
Change in outstanding checks in excess of cash | 3,290 | 6,925 | (15,519) | |||
Acquisition of treasury stock | (18,413) | (27,839) | (64,034) | |||
Common stock transactions | 14,957 | 18,290 | 50,185 | |||
Net cash (used in) provided by financing activities | (121,238) | 189,362 | 280,062 | |||
Net change in cash | - | - | - | |||
Cash, beginning of year | - | - | - | |||
Cash, end of year | $ - | - | - | |||
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(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"“Company” or "Mohawk"“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.
(b)(c) Accounts Receivable and Revenue Recognition
The Company is principally a carpet, rugrugs, ceramic tile and ceramic tilelaminate manufacturer and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and laminate flooring products throughoutin 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 accounts. Royalty revenues received from third parties for patents are recognized based on contractual agreements.
(c)(d) Inventories
Effective April 2, 2006, the Company changed the method of accounting for all inventories not previously accounted for on the first-in, first-out (“FIFO”) method from the last-in, first-out (“LIFO”) method to the FIFO method. Inventories are stated at the lower of cost or market (net realizable value). Cost ishas been determined using the last-in, first-out (LIFO) method,FIFO. Costs included in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is replacement cost or net realizable value. Inventories on hand are compared against anticipated future usage, which matches current costs with current revenues,is a function of historical usage, anticipated future selling price, expected sales below cost, excessive quantities and an evaluation for approximately 80% of the inventories within the Mohawk segmentobsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost and the first-in, first-out (FIFO) methodadditional reserves may be required. See Note 4 for the Dal-Tile segment and the remaining inventories within the Mohawk segment.further discussion.
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 25-35 years for buildings and improvements, 5-15 years for machinery and equipment, the shorter of the estimated useful life or life of the lease term for leasehold improvements and 3-7 years for furniture and fixtures.
(e)(f) Goodwill and Other Intangible Assets
In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 142, "Goodwill“Goodwill and Other Intangible Assets"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 average lives.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIESlives, which range from 7-16 years.
Notes to Consolidated Statements (Continued)
(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, 20042006 and 20032005 was $961,120$2,796,668 and $1,095,590,$3,282,715, compared to a carrying amount of $891,341$2,783,681 and $1,012,413,$3,308,370, respectively.
(h)(i) Derivative Instruments
Accounting for Derivative Instrumentsderivative instruments and Hedging Activitieshedging activities 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 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.
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)(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 $55,254 in 2006, $41,339 in 2005 and $31,474 in 2004, $26,990 in 2003 and $31,829 in 2002.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES2004.
Notes to Consolidated Statements (Continued)
Vendor consideration, generally cash, is 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 $13,352 in 2006, $14,408 in 2005 and $10,389 in 2004, $9,355 in 2003 and $14,090 in 2002.2004.
(j)(k) Impairment of Long-Lived Assets
Long-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.
(k)(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 stockholders' equity, within other comprehensive income. 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 operationsearnings when incurred.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(l)(m) Earnings per Share ("EPS"(“EPS”)
Basic net earnings per share ("EPS"(“EPS”) is calculated using net earnings available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the year. Diluted EPS is similar to basic EPS except that the weighted-average number of shares is increased to include the 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 were 1,271, 351, and 21 605for 2006, 2005 and 571 for 2004, 2003 and 2002, respectively.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
Computations of basic and diluted earnings per share are presented in the following table:
Years Ended December 31, | ||||||
2004 | 2003 | 2002 | ||||
Net earnings | $ 368,622 | 310,149 | 284,489 | |||
Weighted-average common and dilutive potential | ||||||
common shares outstanding: | ||||||
Weighted-average common shares outstanding | 66,682 | 66,251 | 63,723 | |||
Add weighted-average dilutive potential common | ||||||
shares - options to purchase common shares, net | 875 | 870 | 1,138 | |||
Weighted-average common and dilutive potential | ||||||
common shares outstanding | 67,557 | 67,121 | 64,861 | |||
Basic earnings per share | $ 5.53 | 4.68 | 4.46 | |||
Diluted earnings per share | $ 5.46 | 4.62 | 4.39 | |||
Years Ended December 31, | |||||||
2006 | 2005 | 2004 | |||||
Net earnings | $ | 455,833 | 387,138 | 370,797 | |||
Weighted-average common and dilutive potential common shares outstanding: | |||||||
Weighted-average common shares outstanding | 67,674 | 66,932 | 66,682 | ||||
Add weighted-average dilutive potential common shares—options to purchase common shares, net | 382 | 712 | 875 | ||||
Weighted-average common and dilutive potential common shares outstanding | 68,056 | 67,644 | 67,557 | ||||
Basic earnings per share | $ | 6.74 | 5.78 | 5.56 | |||
Diluted earnings per share | $ | 6.70 | 5.72 | 5.49 | |||
(m)(n) Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock compensation plans under the recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB No. 123,Accounting for Stock-Based Compensation. Accordingly, no stock-based employee compensation cost related to stock options was recognized in the Consolidated Statement of Earnings as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003,2006, the Company adopted the disclosurefair value recognition provisions of SFASFASB No. 148, "Accounting123(R),Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost for Stock-Based Compensation-Transition and Disclosure." This statement amends SFAS2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB No. 123, "Accountingand (b) compensation cost for Stock-Based Compensation,"all share-based payments granted subsequent to provide alternative methods of transition for a voluntary change toJanuary 1, 2006, based on the grant-date fair value based methodestimated in accordance with the provisions of accountingFASB No. 123(R). Compensation expense is recognized on a straight-line basis over the options estimated lives 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. 123, the Company accountsfixed awards with ratable vesting provisions. Results 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.prior periods have not been restated.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
IfThe following table illustrates the effect on net income and earnings per share if the Company had elected to recognize compensation expense based uponapplied the fair value atrecognition provisions of FASB No. 123(R) to options granted under the grant datesPlan in the period presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ vesting periods.
2005 | 2004 | ||||||
Net earnings as reported | $ | 387,138 | 370,797 | ||||
Deduct: Stock-based employee compensation expense determined under fair value based method for all options, net of related tax effects | (8,628 | ) | (7,519 | ) | |||
Pro forma net earnings | $ | 378,510 | 363,278 | ||||
Net earnings per common share (basic) | |||||||
As reported | $ | 5.78 | 5.56 | ||||
Pro forma | $ | 5.66 | 5.45 | ||||
Net earnings per common share (diluted) | |||||||
As reported | $ | 5.72 | 5.49 | ||||
Pro forma | $ | 5.60 | 5.38 |
(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 awards under its plans, the Company's net earnings per share would have been reducedyears ended December 31, 2006, 2005 and 2004 are as follows:
2004 | 2003 | 2002 | ||||
Net earnings as reported | $ 368,622 | 310,149 | 284,489 | |||
Deduct: Stock-based employee compensation | ||||||
expense determined under fair value based | ||||||
method for all options, net of related tax effects | (7,519) | (6,284) | (4,972) | |||
Pro forma net earnings | $ 361,103 | 303,865 | 279,517 | |||
Net earnings per common share (basic) | ||||||
As reported | $ 5.53 | 4.68 | 4.46 | |||
Pro forma | $ 5.42 | 4.59 | 4.39 | |||
Net earnings per common share (diluted) | ||||||
As reported | $ 5.46 | 4.62 | 4.39 | |||
Pro forma | $ 5.36 | 4.54 | 4.31 | |||
The average fair value of options granted during 2004, 2003 and 2002 was $34.39, $24.73 and $26.72, respectively. This fair value was estimated using the Black-Scholes option pricing model based on a weighted-average market price at grant date of $74.62 in 2004, $53.93 in 2003 and $62.11 in 2002 and the following weighted-average assumptions:
2004 | 2003 | 2002 | |||||
Dividend yield | - | - | - | ||||
Risk-free interest rate | 2.9% | 2.3% | 3.0% | ||||
Volatility | 43.1% | 44.9% | 39.7% | ||||
Expected life (years) | 6 | 6 | 6 | ||||
Translation Adjustment | Hedge Instruments | SFAS 158 | Tax expense (benefit) (1) | Total | ||||||||||||
December 31, 2004 | $ | (1,628 | ) | (1,280 | ) | — | 467 | (2,441 | ) | |||||||
2005 Activity | (47,074 | ) | 3,278 | — | (1,196 | ) | (44,992 | ) | ||||||||
December 31, 2005 | (48,702 | ) | 1,998 | — | (729 | ) | (47,433 | ) | ||||||||
2006 Activity | 181,425 | (4,412 | ) | (818 | ) | 1,610 | 177,805 | |||||||||
December 31, 2006 | $ | 132,723 | (2,414 | ) | (818 | ) | 881 | 130,372 | ||||||||
(n) Effect of New(p) Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Staff Position 109-1, "Application of FASB Statement No. 109, "Accounting for Income Taxes" ("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") 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. The Company is currently evaluating the effect that the manufacturer's deduction will have on future results. FSP 109-1 is effective prospectively as of January 1, 2005.
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. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise 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 has not yet completed evaluating the impact of the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.
In November 2004, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151, "Inventory“Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("4” (“SFAS 151"151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory“Inventory Pricing,"” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items 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"“so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheadsoverhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. TheEffective January 1, 2006, the Company is currently evaluatingadopted SFAS 151 and doeswhich did not expect it to have a material impact on the Company's consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
In December 2004,July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes.FIN 48 prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective as of the beginning of the Company's 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Based on its current evaluation, the Company does not believe the adoption of FIN 48 will have a material impact on the consolidated financial statements.
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"157”), which replaces“Fair Value Measurements.” SFAS No. 123, "Accounting157 defines fair value, establishes a framework for Stock-Based Compensation" ("measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 123")No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and supercedes APB Opinion No. 25, "Accountingending balances for Stock Issued to Employees."each major category of assets and liabilities. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in157 is effective for the financial statements based on their fair valuesCompany’s fiscal year beginning with the first interim or annual period after June 15, 2005. Transition may be accomplished using either the prospective or retrospective methods. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25.January 1, 2008. The Company is currently evaluating the transition methods underimpact of SFAS 123RNo. 157 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and will begin expensing stock optionsOther Post Retirement Plans- an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize the over-funded or under-funded status of a benefit plan in its statement of financial position, recognize as a component of other comprehensive income, net of tax, gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit costs pursuant to SFAS No. 87, “Employers Accounting for Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and disclose in the third quarternotes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of 2005.the gains or losses, prior service costs or credits, and transition assets or obligations. The recognition and disclosure provisions required by SFAS No. 158 are effective for the Company’s fiscal year ending December 31, 2006. The measurement date provisions are effective for fiscal years ending after December 15, 2008. The Company adopted SFAS No. 158 for its fiscal year ended December 31, 2006 which resulted in the Company recording $818 in accumulated other comprehensive income for amounts that had not been previously recorded in net periodic benefit cost.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both the balance sheet and income statement approach when quantifying a misstatement. SAB 108 is effective for the Company’s fiscal year ending December 31, 2006. Effective December 31, 2006, the Company adopted SAB 108 which did not have a material impact on the Company’s consolidated financial statements
(o)(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.
(p) ReclassificationsMOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
In 2004, the
(r) Reclassifications
The Company reclassified certain prior period financial statement balances to conform to current presentations.
(2) Acquisitions
On March 20, 2002,October 31, 2005 the Company acquired all of the outstanding capital stockshares of Dal-Tile InternationalUnilin Holding NV by acquiring Unilin Flooring, BVBA, which then purchased Unilin Holdings NV. The Company simultaneously acquired all the outstanding shares of Unilin Holding Inc. ("Dal-Tile", and its subsidiaries (together with Unilin Flooring BVBA, “Unilin”),. Unilin, together with its subsidiaries, is a leading manufacturer, distributor and distributormarketer of ceramic tilelaminate flooring in Europe and the United States, for approximately $1,468,325, consistingStates. The total purchase price of approximately 12,900 sharesacquiring Unilin, net of the Company's common stock, options to purchase approximately 2,100 sharescash 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$165,709, was Euro 2,105,918 or $2,540,949 based on the measurement date stock price of $55.04 per share ($710,420) andprevailing exchange rate at the estimated fair value of the options using the Black-Scholes option-pricing model ($40,267).closing. The acquisition was accounted for by the purchase method and, accordingly, the results of operations of Dal-TileUnilin have been included in the Company'sCompany’s consolidated financial statements from March 20, 2002.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. The trademark value wasIntangibles and property plant and equipment values were established based uponwith the assistance of an independent appraisal.third party. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,168,286$1,230,511 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.laminate flooring market.
MohawkThe Company 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,existed during the purchase price negotiations and during the subsequent purchase price allocation evaluation.period. Accordingly the valuation resulted in the recognition ofCompany recognized goodwill, tradenames, patents, customer lists, contingent assets and trademarks.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIESbacklogs.
Notes to Consolidated Statements (Continued)
In accordance with SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets" ("SFAS No. 142")Assets”, goodwill recorded in the Dal-Tile acquisitionUnilin Acquisition will not be amortized. Additionally, the Company determined that the trademarktradenames intangible assets have indefinite useful lives because they are expected to generate cash flows indefinitely. Goodwill and the trademarktradenames 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.acquisition, excluding cash of $165,709. During October 2006, the Company finalized the allocation of the purchase price related to the Unilin Acquisition.
Current assets | $ | 389,923 | |
Property, plant and equipment | 752,892 | ||
Goodwill | 1,230,511 | ||
Intangible assets | 882,886 | ||
Other assets | 890 | ||
Total assets acquired | 3,257,102 | ||
Current liabilities | 261,921 | ||
Long-term debt | 32,027 | ||
Other liabilities | 422,205 | ||
Total liabilities assumed | 716,153 | ||
Net assets acquired | $ | 2,540,949 | |
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
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(7 year weighted average useful life) and patents for $255,656 (12 year weighted average useful life). The $1,230,511 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 Dal-TileUnilin 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 eliminationamortization of goodwill amortization and related income tax effects.intangible assets. 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 year ended December 31:
| |||
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.
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.
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 $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.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition for Lees Carpet.
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 $78,083 was assigned to the Mohawk segment. The goodwill is deductible for income tax purposes.
The following unaudited pro forma financial information presents the combined results of operations of Mohawk and Lees Carpet as if the acquisition had occurred at the beginning of 2002, after giving effect to certain adjustments, including increased interest expense on debt related to the acquisition, the amortization of customer relationships, depreciation and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mohawk and Lees CarpetUnilin constituted a single entity during such periods. The following table discloses the results for the fiscal years ended December 31:
2003 | 2002 | |||
Net sales | $ 5,216,312 | 4,777,526 | ||
Net earnings | 316,386 | 290,996 | ||
Basic earnings per share | 4.78 | 4.57 | ||
Diluted earnings per share | 4.71 | 4.49 | ||
2005 (a) | 2004 | ||||
Net sales | $ | 7,553,506 | 6,873,858 | ||
Net earnings (a) | 414,421 | 376,930 | |||
Basic earnings per share | 6.19 | 5.65 | |||
Diluted earnings per share | 6.13 | 5.58 |
(a) | Excludes a non-recurring $34,300 ($22,300 net of tax) 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. |
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 in cash. Goodwill related to the acquisitions was approximately $10,955.
During 2006, the Company acquired certain assets of a carpet backing manufacturer for approximately $73,242, which was paid for in cash.
(3) Receivables
Receivables are as follows:
2006 | 2005 | ||||
Customers, trade | $ | 907,244 | 925,714 | ||
Other | 47,798 | 25,662 | |||
955,042 | 951,376 | ||||
Less allowance for discounts, returns, claims and doubtful accounts | 103,614 | 102,710 | |||
Net receivables | $ | 851,428 | 848,666 | ||
The following table reflects the activity of allowances for discounts, returns, claims and doubtful accounts for the years ended December 31:
Balance at beginning of year | Additions charged to costs and expenses(1) | Deductions(2) | Balance of year | ||||||
2004 | $ | 94,417 | 310,368 | 309,482 | 95,303 | ||||
2005 | 95,303 | 324,024 | 316,617 | 102,710 | |||||
2006 | 102,710 | 347,051 | 346,147 | 103,614 |
(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. |
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
(3) Receivables
Receivables are as follows: | ||||
2004 | 2003 | |||
Customers, trade | $ 746,233 | 663,269 | ||
Other | 9,720 | 4,648 | ||
755,953 | 667,917 | |||
Less allowance for discounts, returns, claims and | ||||
doubtful accounts | 95,303 | 94,417 | ||
Net receivables | $ 660,650 | 573,500 | ||
(4) Inventories
The components of inventories are as follows: | ||||
2004 | 2003 | |||
Finished goods | $ 665,565 | 535,645 | ||
Work in process | 86,883 | 72,981 | ||
Raw materials | 265,535 | 223,789 | ||
Total inventories | $ 1,017,983 | 832,415 | ||
The components of inventories are as follows:
2006 | 2005 | ||||
Finished goods | $ | 806,463 | 788,037 | ||
Work in process | 95,746 | 93,266 | |||
Raw materials | 323,665 | 334,124 | |||
Total inventories | $ | 1,225,874 | 1,215,427 | ||
Effective April 2, 2006, the Company changed the method of accounting for all inventories not previously accounted for on the first-in, first-out (“FIFO”) method from the last-in, first-out (“LIFO”) method to the FIFO method. The carryingCompany believes the FIFO method of accounting for inventory costs is preferable because it provides a better measure of the current value of its inventory and provides a better matching of manufacturing costs with revenues. The change resulted in the application of a single costing method to all of the Company's inventories. As a result, all inventories are stated at the lower of cost, determined on a FIFO basis, or market. In accordance with FASB No. 154, “Accounting Changes and Error Corrections,” the Company has retrospectively applied this change in method of inventory costing. The impact of the change in method on certain financial statement line items is as follows:
As of December 31, 2005 | |||
Balance sheet: | |||
As originally reported | |||
Inventory | $ | 1,166,913 | |
Total Assets | 7,991,523 | ||
Deferred income taxes | 625,887 | ||
Total Liabilities | 4,964,403 | ||
Retained earnings | 2,268,578 | ||
Total liabilities and Shareholders’ equity | 7,991,523 | ||
Effect of Change | |||
Inventory | 48,514 | ||
Deferred income taxes | 17,396 | ||
Retained earnings | 31,118 | ||
As adjusted | |||
Inventory | 1,215,427 | ||
Total Assets | 8,040,037 | ||
Deferred income taxes | 643,283 | ||
Total Liabilities | 4,981,799 | ||
Retained earnings | 2,299,696 | ||
Total liabilities and Shareholders’ equity | $ | 8,040,037 |
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Years Ended December 31, | |||||||
2005 | 2004 | ||||||
Statement of earnings: As originally reported | |||||||
Cost of sales | $ | 4,896,965 | 4,259,531 | ||||
Operating income | 627,272 | 635,590 | |||||
Income taxes | 198,826 | 208,767 | |||||
Net earnings | 358,195 | 368,622 | |||||
Basic earnings per share | $ | 5.35 | 5.53 | ||||
Diluted earnings per share | $ | 5.30 | 5.46 | ||||
Effect of Change-Increase (decrease) | |||||||
Cost of sales | $ | (45,112 | ) | (3,402 | ) | ||
Operating income | 45,112 | 3,402 | |||||
Income taxes | 16,169 | 1,227 | |||||
Net earnings | 28,943 | 2,175 | |||||
Basic earnings per share | $ | 0.43 | 0.03 | ||||
Diluted earnings per share | $ | 0.43 | 0.03 | ||||
As adjusted | |||||||
Cost of sales | $ | 4,851,853 | 4,256,129 | ||||
Operating income | 672,384 | 638,992 | |||||
Income taxes | 214,995 | 209,994 | |||||
Net earnings | 387,138 | 370,797 | |||||
Basic earnings per share | $ | 5.78 | 5.56 | ||||
Diluted earnings per share | $ | 5.72 | 5.49 | ||||
Statement of Cash Flows: As originally reported | |||||||
Net earnings | $ | 358,195 | 368,622 | ||||
Deferred taxes | (6,866 | ) | 38,700 | ||||
Change in inventories | 11,542 | (179,765 | ) | ||||
Net cash provided by operating activities | $ | 561,544 | 242,837 | ||||
Effect of Change | |||||||
Net earnings | $ | 28,943 | 2,175 | ||||
Deferred taxes | 16,170 | 1,227 | |||||
Change in inventories | (45,112 | ) | (3,402 | ) | |||
Net cash provided by operating activities | $ | — | — | ||||
As adjusted | |||||||
Net earnings | $ | 387,138 | 370,797 | ||||
Deferred taxes | 9,304 | 39,927 | |||||
Change in inventories | (33,570 | ) | (183,167 | ) | |||
Net cash provided by operating activities | $ | 561,544 | 242,837 |
The amount of the accounting change prior to 2004 was not significant because FIFO approximated the inventory carrying value. Had the Company continued to apply the LIFO inventory approximates replacement value atmethod of accounting, the impact on the statement of earnings during 2006 would have experienced a decrease in operating income of $10,285 ($6,065 net of tax) and a decrease in basic and diluted earnings per share of approximately $0.09 per share for the year ended December 31, 2006. Had the Company continued to apply LIFO for the twelve months ended December 31, 2005 and December 31, 2004, it would have experienced a decrease to operating income of $45,112 (28,943, net of tax) and 2003, respectively. There were no LIFO liquidations$3,402 ($2,175) for the twelve month period ended December 31, 2005 and
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
2004, respectively and decreased basic and diluted earnings per share of approximately $0.43, $0.43, $0.03 and $0.03 for the twelve month periods ended December 31, 2005 and 2004, respectively as compared to amounts included in either 2004 or 2003.the consolidated financial statements.
(5) Goodwill and Other Intangible Assets
The Company evaluates its goodwill and indefinite life intangibles on an annual basis for impairment. The Company has twothree reporting segments, the Mohawk segment, and the Dal-Tile segment, and accordingly,the Unilin segment. Accordingly the Company has assigned the acquired goodwill and indefinite life intangibles to the respective reporting segments. During the fourth quarter of 2004,2006, the Company evaluated the goodwill and indefinite life intangibles using the discounted cash flow approachand market approaches and determined that there was no impairment.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
The following table summarizes the components of intangible assets:
2004 | 2003 | |||
Carrying amount of amortized intangible assets: | ||||
Customer relationships | $ 54,160 | 53,010 | ||
Patents | 600 | 600 | ||
$ 54,760 | 53,610 | |||
Accumulated amortization of amortized intangible assets: | ||||
Customer relationships | $ 4,324 | 541 | ||
Patents | 70 | 10 | ||
$ 4,394 | 551 | |||
Indefinite life intangible assets: | ||||
Trade names | $ 272,280 | 272,280 | ||
Total other intangible assets | $ 322,646 | 325,339 | ||
Aggregate amortization expense | ||||
For the year ended December 31. | $ 3,843 | 551 | ||
Estimated amortization expense for years ended | ||||
December 31, are as follows: | ||||
2005 | $ 4,002 | |||
2006 | 4,002 | |||
2007 | 3,779 | |||
2008 | 3,619 | |||
2009 | 3,591 | |||
Goodwill:
Mohawk | Dal-Tile | Unilin | Total | |||||||||
Balance as of January 1, 2005 | $ | 196,632 | 1,180,717 | — | 1,377,349 | |||||||
Goodwill recognized during the period | 1,500 | 10,955 | 1,249,720 | 1,262,175 | ||||||||
Effect of translation | — | — | (17,561 | ) | (17,561 | ) | ||||||
Balance as of December 31, 2005 | 198,132 | 1,191,672 | 1,232,159 | 2,621,963 | ||||||||
Goodwill recognized during the period | 1,000 | (8,882 | ) | (19,209 | ) | (27,091 | ) | |||||
Effect of translation | — | — | 104,767 | 104,767 | ||||||||
Balance as of December 31, 2006 | $ | 199,132 | 1,182,790 | 1,317,717 | 2,699,639 | |||||||
The changeschange in goodwill during 2005 was attributable to the acquisitions made within the Mohawk and Dal-Tile reporting segments and the Unilin Acquisition. The change in goodwill during 2006 within the Unilin segment resulted from adjustments to the opening balance sheet including the reversal of pre acquisition tax liabilities of $16,644. In addition, the Company recognized additional goodwill of $1,000 related to an earn-out agreement entered into in 2003 in the carrying amount of goodwillMohawk segment and reversed certain pre-acquisition tax liabilities in the Dal-Tile segment in 2006.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Intangible Assets:
Mohawk | Dal-Tile | Unilin | Total | ||||||||||
Indefinite Life Assets not subject to amortization: | |||||||||||||
Balance as of January 1, 2005 | $ | 125,580 | 146,700 | — | 272,280 | ||||||||
Additions | — | — | 356,521 | 356,521 | |||||||||
Effect of translation | — | — | (6,707 | ) | (6,707 | ) | |||||||
Balance as of December 31, 2005 | 125,580 | 146,700 | 349,814 | 622,094 | |||||||||
Effect of translation | — | — | 40,220 | 40,220 | |||||||||
Balance as of December 31, 2006 | $ | 125,580 | 146,700 | 390,034 | 662,314 | ||||||||
Intangible Assets Subject to Amortization: | |||||||||||||
Balance as of December 31, 2004 | $ | 53,360 | 1,400 | — | 54,760 | ||||||||
Less: Accumulated Amortization | (4,100 | ) | (294 | ) | (4,394 | ) | |||||||
Balance as of January 1, 2005, net | 49,260 | 1,106 | — | 50,366 | |||||||||
Additions | — | 1,170 | 526,365 | 527,535 | |||||||||
Amortization during period | (3,610 | ) | (457 | ) | (13,257 | ) | (17,324 | ) | |||||
Effect of translation | — | — | (8,574 | ) | (8,574 | ) | |||||||
Balance as of January 1, 2006 | 45,650 | 1,819 | 504,534 | 552,003 | |||||||||
Additions | — | — | — | — | |||||||||
Amortization during period | (3,578 | ) | (815 | ) | (76,736 | ) | (81,129 | ) | |||||
Effect of translation | — | — | 46,906 | 46,906 | |||||||||
Balance as of December 31, 2006 | $ | 42,072 | 1,004 | 474,704 | 517,780 | ||||||||
December 31, 2006 | December 31, 2005 | December 31, 2004 | |||||
Amortization Expense: | |||||||
Aggregate Amortization Expense | $ | 81,129 | 17,324 | 3,843 | |||
Estimated amortization expense for the years ended December 31, 2004 and 2003 are as follows:
Mohawk | Dal-Tile | Total | ||||
Balance as of January 1, 2003 | $ 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 | |||
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 | |||
The increase in goodwill during 2004 was attributable to an acquisition made within the Dal-Tile reporting segment and an earn-out payment related to an acquisition made within the Mohawk reporting segment during 2003.
2007 | $ | 88,126 | |
2008 | 69,635 | ||
2009 | 66,956 | ||
2010 | 65,198 | ||
2011 | 63,087 |
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
(6) Property, Plant and Equipment
Following is a summary of property, plant and equipment: | ||||
2004 | 2003 | |||
Land | $ 59,638 | 59,621 | ||
Buildings and improvements | 378,389 | 367,007 | ||
Machinery and equipment | 1,233,140 | 1,154,387 | ||
Furniture and fixtures | 44,371 | 45,680 | ||
Leasehold improvements | 24,120 | 19,912 | ||
Construction in progress | 78,165 | 88,883 | ||
1,817,823 | 1,735,490 | |||
Less accumulated depreciation and amortization | 912,491 | 816,405 | ||
Net property, plant and equipment | $ 905,332 | 919,085 | ||
Following is a summary of property, plant and equipment:
2006 | 2005 | ||||
Land | $ | 178,553 | 155,670 | ||
Buildings and improvements | 698,878 | 559,723 | |||
Machinery and equipment | 2,006,849 | 1,802,370 | |||
Furniture and fixtures | 53,961 | 44,765 | |||
Leasehold improvements | 33,702 | 28,784 | |||
Construction in progress | 96,579 | 233,525 | |||
3,068,522 | 2,824,837 | ||||
Less accumulated depreciation and amortization | 1,180,434 | 1,014,109 | |||
Net property, plant and equipment | $ | 1,888,088 | 1,810,728 | ||
Property, plant and equipment includesincluded capitalized interest of $7,477, $6,000 and $3,197 $5,634in 2006, 2005 and $2,126 in 2004, 2003 and 2002, respectively. Depreciation expense was $189,388, $133,333 and $117,768 $104,450for 2006, 2005 and $96,819 for 2004, 2003respectively. Included in the property, plant and 2002,equipment are capital leases with a cost of $29,945 and $135,210 accumulated depreciation and amortization of $2,060 and $118 at December 31, 2006 and 2005, respectively.
(7) Long-Term Debt
On September 29, 2004,October 28, 2005, the Company amended itsentered into a $1,500,000 five-year, senior, unsecured, revolving credit and term loan facility (the “senior unsecured credit facilities”). The senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines. The senior unsecured credit facilities consist of (i) a multi-currency $750,000 revolving credit facility, with interest rates(ii) a $389,200 term loan facility and (iii) a Euro 300,000 term loan facility, all of either (i) LIBOR plus 0.4% to 1.4%, depending upon the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.5%, depending upon the Company's performance measured against certain financial ratios. The facility was increased from $200,000 to $300,000. The increase in the facility replaces the $100,000 364-day facility, which expired during the third quarter of 2004. The credit agreement contains customary financial and other covenants.mature on October 28, 2010. The Company must pay an annualentered into the senior unsecured credit facility fee ranging from .15% to .50% offinance the total credit commitment, depending upon the Company's performance measured against specific coverage ratios.Unilin Acquisition and to provide for working capital requirements. At December 31, 2004,2006, $395,321 of borrowings was outstanding under these facilities. The borrowings outstanding are comprised of $197,301 under the revolving credit facility and Euro 150,000, or approximately $198,020, borrowings outstanding under the Euro term facility. The balance of the $389,200 facility was repaid in 2006.
At December 31, 2006, a total of approximately $234,130$455,581 was available under both the revolving credit facility and uncommitted credit lines compared to $237,344 available under both the credit facility and uncommitted credit lines at December 31, 2003.facility. The amount used under both the revolving credit facility and uncommitted credit lines at December 31, 2004, consisted of $37,7212006, was $294,419. The amount used under the Company's revolving credit facility and unsecured credit lines,is composed of $197,301 borrowings, $55,599 standby letters of credit guaranteeing the Company's industrial revenue bonds and $22,550$41,519 standby letters of credit related to various insurance contracts and foreign vendor commitments.
The revolvingsenior unsecured credit facility and uncommitted credit lines are unsecured.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.
The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"“Securitization Facility”). The Securitization Facility allows the Company to borrow up to $350,000 based on available accounts receivable. At December 31, 2004,2006, the Company had $90,000$190,000 outstanding secured by approximately $825,799 million of trade receivables compared to $182,000 secured by approximately $649,018 of trade receivables$40,000 at December 31, 2003.2005. The Securitization Facility is secured by trade receivables. During the third quarter of 2004,2006, the Company extended the term of its Securitization Facility until AugustJuly 2007.
On November 8, 2005, and amended certain representations and warranties.one of the Company's subsidiaries entered into a Euro 130,000 five-year unsecured, revolving credit facility, maturing on November 8, 2010 (the “Euro revolving credit facility”). This agreement
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
Long-term debt consists of the following: | ||||
2004 | 2003 | |||
Short term uncommitted credit lines | $ 37,721 | - | ||
364-Day Credit Agreement, due September 29, 2004 | - | 41,701 | ||
Securitization Facility, due August 1, 2005 | 90,000 | 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 | ||
7.14%-7.23% senior notes, payable in annual principal | ||||
installments beginning in 1997, due September 1, 2005, | ||||
interest payable semiannually | 9,447 | 18,889 | ||
6% term note, payable in annual principal and interest | ||||
installments beginning in 1998, due July 23, 2004 | - | 1,336 | ||
Industrial revenue bonds and other | 54,173 | 54,201 | ||
Total long-term debt | 891,341 | 1,012,413 | ||
Less current portion | 191,341 | 302,968 | ||
Long-term debt, excluding current portion | $ 700,000 | 709,445 | ||
The aggregate maturities of long-term debt as of | ||||
December 31, 2004 are as follows: | ||||
2005 | $ 191,341 | |||
2006 | - | |||
2007 | 300,000 | |||
2008 | - | |||
2009 | - | |||
Thereafter | 400,000 | |||
$ 891,341 | ||||
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 the Euro revolving credit facility and of any of the Company's other subsidiaries that become borrowers under the Euro revolving credit facility. As of December 31, 2006, the Company had borrowings outstanding of Euro 18,810 or approximately $24,831 under this facility. No borrowings were outstanding at December 31, 2005 under this facility.
The Company's 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, 2006. 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.
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 a $1,400,000 bridge credit facility entered into in connection with the Unilin Acquisition. Interest payable on each series of the notes is subject to adjustment if either Moody's Investor Service, Inc. or Standard & Poor's Ratings Services, or both, downgrades the rating they have assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. The provision for increasing the interest rate will no longer apply if the rating of these notes from both rating agencies improves above the rating of these notes in effect at the time of the issuance of the notes. There have been no adjustments to the interest rate of the notes.
In 2002, the Company issued $300,000 aggregate principal amount of its senior 6.5% notes due 2007 and $400,000 aggregate principal amount of its senior 7.2% notes due 2012.
Long-term debt consists of the following:
2006 | 2005 | ||||
364-day senior, unsecured bridge term credit facility, due October 27, 2006 | $ | — | 1,400,000 | ||
6.50% senior notes, payable April 15, 2007 interest payable semiannually | 300,000 | 300,000 | |||
Securitization Facility, due July 30, 2007 | 190,000 | 40,000 | |||
Five year unsecured credit facility, due October 28, 2010 | 395,321 | 1,062,041 | |||
5.75% note, payable in January 15, 2011 interest payable semiannually | 500,000 | — | |||
7.20% senior notes, payable April 15, 2012 interest payable semiannually | 400,000 | 400,000 | |||
6.125% note, payable January 15, 2016 interest payable semiannually | 900,000 | — | |||
Euro five year unsecured revolving credit facility due November 8, 2010 | 24,831 | — | |||
Industrial revenue bonds, capital leases and other | 73,529 | 106,329 | |||
Total long-term debt | 2,783,681 | 3,308,370 | |||
Less current portion | 576,134 | 113,809 | |||
Long-term debt, excluding current portion | $ | 2,207,547 | 3,194,561 | ||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
The aggregate maturities of long-term debt as of December 31, 2006 are as follows:
2007 | $ | 576,134 | |
2008 | 7,637 | ||
2009 | 3,417 | ||
2010 | 395,574 | ||
2011 | 500,249 | ||
Thereafter | 1,300,670 | ||
$ | 2,783,681 | ||
(8) Accounts Payable, and Accrued Expenses and Deferred Tax Liability
Accounts payable and accrued expenses are as follows: | ||||
2004 | 2003 | |||
Outstanding checks in excess of cash | $ 33,719 | 30,429 | ||
Accounts payable, trade | 277,851 | 245,746 | ||
Accrued expenses | 180,978 | 185,099 | ||
Income taxes payable | 16,143 | 76,913 | ||
Accrued compensation | 114,370 | 99,753 | ||
Total accounts payable and accrued expenses | $ 623,061 | 637,940 | ||
Accounts payable and accrued expenses are as follows:
2006 | 2005 | ||||
Outstanding checks in excess of cash | $ | 68,139 | 97,389 | ||
Accounts payable, trade | 371,538 | 401,543 | |||
Accrued expenses | 297,511 | 235,716 | |||
Income taxes payable | 125,046 | 121,533 | |||
Deferred tax liability | 4,565 | 5,111 | |||
Accrued compensation | 152,830 | 136,813 | |||
Total accounts payable and accrued expenses | $ | 1,019,629 | 998,105 | ||
(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"(“MMBTU”).
The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset applied 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, 2004,2006, the Company had natural gas contracts that mature from January 20052007 to March 2005October 2007 with an aggregate notional amount of approximately 1,0101,400 MMBTU's. The fair value of these contracts was a liability of $1,280.$2,414 as of December 31, 2006. At December 31, 2003,2005, the Company had natural gas contracts outstandingthat mature from January 2006 to October 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 as of December 31, 2005. The offset to these assets is recorded in other comprehensive income, net of applicable income 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 loss of approximately $1,280.$2,414, net of taxes.
The Company's natural gas long-term supply agreements are accounted for under the normal purchasespurchase provision within SFAS No. 133 and its amendments. At December 31, 2004,2006, the Company had normal purchase
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
commitments of approximately 1,748 MMBTU's for periods maturing from January 2007 through March 2008. The contracted value of these commitments was approximately $15,357 and the fair value of these commitments was approximately $12,071, at December 31, 2006. At December 31, 2005, the Company had normal purchase commitments of approximately 1,8921,867 MMBTU's for periods maturing from January 20052006 through MarchOctober 2006. The contracted value of these commitments was approximately $9,879$17,219 and the fair value of these commitments was approximately $11,941,$20,488, at December 31, 2004. At December 31, 2003, the Company had normal purchase commitments of approximately 3,095 MMBTU's. The contracted value of these commitments was approximately $13,774 and the fair value of these commitments was approximately $17,018.2005.
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. The company had no forward contracts outstanding at December 31, 2006. The Company had forward contracts to purchase approximately 145,2848,000 Mexican pesos at December 31, 2003.2005. The aggregate U.S. dollar value of these contracts at December 31, 20032005 was approximately $12,665. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses at December 31, 2003 were not significant. The Company had no forward contracts outstanding at December 31, 2004.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES$697.
Notes to Consolidated 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: | ||||||
2004 | 2003 | 2002 | ||||
Balance at beginning of year | $ 24,063 | 28,919 | 32,406 | |||
Warranty claims. | (45,553) | (50,040) | (55,999) | |||
Warranty expense | 44,963 | 45,184 | 52,512 | |||
Balance at end of year | $ 23,473 | 24,063 | 28,919 | |||
Product warranties are as follows:
2006 | 2005 | 2004 | ||||||||
Balance at beginning of year | $ | 25,988 | 23,473 | 24,063 | ||||||
Warranty claims | (48,308 | ) | (46,850 | ) | (45,553 | ) | ||||
Warranty expense | 48,755 | 49,365 | 44,963 | |||||||
Balance at end of year | $ | 26,435 | 25,988 | 23,473 | ||||||
(11) Stock Options, Stock Compensation and Treasury Stock
Prior to January 1, 2006, the Company accounted for its stock compensation plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB No. 123, Accounting for Stock-Based Compensation. Accordingly, no stock-based employee compensation cost related to stock options was recognized in the Consolidated Statement of Earnings as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FASB No. 123(R). Results for prior periods have not been restated.
Prior to the adoption of FASB No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. FASB
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Accordingly, the Company has classified the excess tax benefit as a financing cash inflow.
Under the Company's 2002 Long-Term Incentive Plan (“Plan”), the Company's principal stock compensation plan, stock options may be granted to directors and key employees through 2012 to purchase a maximum of 3,200 shares of common stock. UnderOption awards are generally granted with an exercise price equal to the 2002 plan, options that were not issued frommarket price of the 1992, 1993 and 1997 plans were cancelled. During 2004, 2003 and 2002, options to purchase 411, 565 and 731 shares, respectively, were granted under the 1992, 1993, 1997 and 2002 plans. Options granted under each of these plans expire 10 years fromCompany's common stock on the date of grantthe grant. Those option awards generally vest between three and become exercisable at such datesfive years and at prices as determined by the Compensation Committee of the Company's Board of Directors.have a 10-year contractual term. In connection with the acquisition of Dal-Tile in 2002,addition, the Company issued 2,096 optionsmaintains an employee incentive program that awards restricted stock on the attainment of certain service criteria. The outstanding awards related to employees of Dal-Tile in exchangethese programs and related compensation expense was not significant for their respective options.the years ended December 31, 2006, 2005 and 2004, respectively.
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 2004, 20032006, 2005 and 2002,2004, a total of 1, 1 and 21 shares, respectively, were awarded to the non-employee directors under the plan.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
Additional information relating to the Company's stock option plans follows:
2004 | 2003 | 2002 | |||||
Options outstanding at beginning of year | 2,413 | 2,624 | 1,916 | ||||
Options granted for Dal-Tile acquisition | - | - | 2,096 | ||||
Options granted | 411 | 565 | 731 | ||||
Options exercised | (464) | (679) | (2,056) | ||||
Options canceled | (79) | (97) | (63) | ||||
Options outstanding at end of year | 2,281 | 2,413 | 2,624 | ||||
Options exercisable at end of year | 791 | 765 | 1,017 | ||||
Option prices per share: | |||||||
Options granted during the year | $ | 61.33-90.97 | 48.50-74.93 | 38.73-65.02 | |||
Options exercised during the year | $ | 9.33-65.02 | 6.67-63.14 | 5.67-49.09 | |||
Options canceled during the year | $ | 11.17-82.50 | 9.33-63.90 | 9.58-63.14 | |||
Options outstanding at end of year | $ | 9.33-90.97 | 9.33-74.93 | 6.67-65.02 | |||
Options exercisable at end of year | $ | 9.33-74.93 | 9.33-65.02 | 6.67-53.01 | |||
Summarized information about stock options outstanding and exercisable at December 31, 2004, is as follows:
Outstanding | Exercisable | |||||||||
Exercise price range | Number of Shares | Average Life (1) | Average Price (2) | Number of Shares | Average Price (2) | |||||
Under $30.53 | 650 | 4.56 | $ 23.09 | 446 | $ 20.08 | |||||
$30.69-48.50 | 509 | 7.24 | 44.40 | 159 | 37.39 | |||||
$49.09-63.14 | 493 | 7.39 | 60.93 | 119 | 60.87 | |||||
$63.90-73.45 | 555 | 8.60 | 70.27 | 66 | 65.54 | |||||
$73.54-84.85 | 67 | 9.48 | 81.42 | 1 | 74.93 | |||||
$90.97-90.97 | 7 | 9.96 | 90.97 | - | - | |||||
Total | 2,281 | 6.91 | 49.41 | 791 | 33.55 | |||||
2006 | 2005 | 2004 | ||||||||
Options outstanding at beginning of year | 2,276 | 2,281 | 2,413 | |||||||
Options granted | 146 | 460 | 411 | |||||||
Options exercised | (338 | ) | (378 | ) | (464 | ) | ||||
Options canceled | (50 | ) | (87 | ) | (79 | ) | ||||
Options outstanding at end of year | 2,034 | 2,276 | 2,281 | |||||||
Options exercisable at end of year | 1,066 | 857 | 791 | |||||||
Option prices per share: | ||||||||||
Options granted during the year | $ | 75.82-86.51 | 76.73-89.46 | 61.33-90.97 | ||||||
Options exercised during the year | $ | 11.33-73.45 | 9.33-82.50 | 9.33-65.02 | ||||||
Options canceled during the year | $ | 24.63-89.46 | 30.53-90.97 | 11.17-82.50 | ||||||
Options outstanding at end of year | $ | 16.60-90.97 | 11.33-90.97 | 9.33-90.97 | ||||||
Options exercisable at end of year | $ | 16.60-90.97 | 11.33-90.97 | 9.33-74.93 | ||||||
(1) Weighted-average contractual life remaining in years.(2) Weighted-average exercise price.
The Company'sCompany’s Board of Directors has authorized the repurchase of up to 15,000 shares of itsthe Company’s outstanding common stock. For the year ended December 31, 2004,2006, a total of approximately 25074 shares of the Company's common stock waswere purchased at an aggregate cost of approximately $18,413.$5,180. Since the inception of the program, a total of approximately 11,20711,512 shares hashave been repurchased at an aggregate cost of approximately $311,543.$334,747. All of these repurchases have been financed through the Company'sCompany’s operations and banking arrangements.
On 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 is obligated to make cash payments to the Unilin Management in the event that certain performance goals are satisfied. In each of the years in the five-year period ended December 31, 2010, the remaining members Unilin Management can earn amounts, in the aggregate, equal to the average value of 30,671
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
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. The amount of the liability is measured each period and recognized as compensation expense in the statement of earnings. As of December 31, 2006, the Company expensed approximately $2,300 under the DSPA.
The fair value of the option award is estimated on the date of grant using the Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company's common stock and other factors. The Company uses historical data to estimate option exercise and forfeiture rates within the valuation model. Optionees that exhibit similar option exercise behavior are segregated into separate groups within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on U.S. Treasury yields in effect at the time of the grant for the expected term of the award.
2006 | 2005 | 2004 | |||||||
Dividend yield | — | — | — | ||||||
Risk-free interest rate | 4.6 | % | 4.0 | % | 2.9 | % | |||
Volatility | 35.3 | % | 37.7 | % | 43.1 | % | |||
Expected life (years) | 6 | 6 | 6 |
The summary of the Company’s Plan as of December 31, 2006, and changes during the period then ended is presented as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Average Intrinsic Value | ||||||||
Options outstanding January 1, 2006 | 2,276 | $ | 59.60 | ||||||||
Granted | 146 | 83.63 | |||||||||
Exercised | (338 | ) | 38.44 | ||||||||
Forfeited and expired | (50 | ) | 71.89 | ||||||||
Options outstanding, end of period | 2,034 | 64.43 | 6.3 | $ | 28,349 | ||||||
Vested and expected to vest at December 31, 2006 | 1,928 | $ | 63.62 | 6.2 | $ | 28,006 | |||||
Exercisable at December 31, 2006 | 1,066 | $ | 53.17 | 5.2 | $ | 24,141 | |||||
The weighted-average grant-date fair value of an option granted during 2006, 2005 and 2004, was $33.80, $37.29 and $34.39, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005, and 2004 was $14,032, $20,241, and $22,355, respectively. Total compensation expense recognized for the period ended December 31, 2006 was $11,925 ($7,537, net of tax) which was allocated to selling, general and administrative expenses. The remaining unamortized expense for non-vested compensation expense at December 31, 2006, was $18,591 with a weighted average remaining life of 2.1 years. If the Company had continued to account for share-based compensation under APB Opinion No. 25, basic and diluted net earnings per share for the year ended December 31, 2006 would have been $6.85 and $6.80, respectively.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes information about the Company’s stock options outstanding at December 31, 2006:
Outstanding | Exercisable | |||||||||||
Exercise price range | Number of Shares | Average Life | Average Price | Number of Shares | Average Price | |||||||
Under $48.5 | 566 | 4.46 | $ | 37.22 | 484 | $ | 35.36 | |||||
$49.09-63.90 | 453 | 5.18 | 61.43 | 336 | 61.34 | |||||||
$65.02-73.45 | 371 | 6.72 | 72.29 | 149 | 71.65 | |||||||
$73.54-88.33 | 634 | 8.35 | 85.84 | 94 | 85.39 | |||||||
$89.46-89.46 | 3 | 8.54 | 89.46 | 1 | 89.46 | |||||||
$90.97-90.97 | 7 | 7.96 | 90.97 | 2 | 90.97 | |||||||
Total | 2,034 | 6.27 | 64.43 | 1,066 | 53.17 | |||||||
(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. 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'semployee’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 $40,369 and $15,713 in 2006, $38,322 and $15,118 in 2005, and $35,440 and $13,896 in 2004, $28,807 and $10,995 in 2003, and $20,237 and $7,359 in 2002, respectively. The Company also made a discretionary contribution to the Mohawk Plan of approximately $5,900, $5,710 and $5,214 $4,595in 2006, 2005 and $3,7972004, respectively. The Unilin segment also has a defined contribution plan that covers certain employees in 2004,the 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 is set each year by the Company. The Company’s match was approximately $676 for 2006 and $40 for the two-month period ended December 31, 2005.
The Company has a non-contributory defined benefit plan (the “U.S. Plan”) assumed in the acquisition of Lees Carpet from Burlington Industries, Inc., in November 2003. The U.S. Plan was frozen in September 2003 and 2002, respectively.accordingly the participants became 100% vested. In October 2006, the Company made the decision to terminate the U.S. Plan. The Company used December 31 as the measurement date for its U.S. Plan.
The Company also has various pension plans covering employees in Belgium, France and The Netherlands (the “Non-U.S. Plans”) that it acquired with the acquisition of Unilin. Benefits under the Non-U.S. Plans depend on compensation and years of service. The Non-U.S. Plans are funded in accordance with local regulations. The Company uses December 31 as the measurement date for its Non-U.S. Plans.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Components of the net periodic benefit cost of the Company’s pension benefit plans were as follows:
U.S. Plan:
2006 | 2005 | 2004 | ||||||||
Service cost of benefits earned | $ | — | 26 | 26 | ||||||
Interest cost on projected benefit obligation | 1,285 | 1,213 | 1,299 | |||||||
Settlement and curtailment | — | (65 | ) | (672 | ) | |||||
Expected return on plan assets | (1,439 | ) | (1,542 | ) | (1,433 | ) | ||||
Recognized acturial (gain) or loss | 3,092 | — | — | |||||||
Net amortization and deferral | — | (391 | ) | (238 | ) | |||||
Net pension expense/(income) | $ | 2,938 | (759 | ) | (1,018 | ) | ||||
Assumptions used to determine net periodic pension expense for U.S. Plan:
2006 | 2005 | 2004 | |||||||
Discount rate | 5.50 | % | 5.50 | % | 5.25 | % | |||
Expected rate of return on plan assets | 8.00 | % | 8.00 | % | 7.00 | % |
Non-U.S. Plans:
2006 | 2005 | ||||||
Service cost of benefits earned | $ | 1,607 | 283 | ||||
Interest cost on projected benefit obligation | 833 | 113 | |||||
Expected return on plan assets | (633 | ) | (92 | ) | |||
Net pension expense/(income) | $ | 1,807 | 304 | ||||
Assumptions used to determine net periodic pension expense for Non-U.S. Plans:
2006 | 2005 | |||||
Discount rate | 4.90%-4.50 | % | 4.18 | % | ||
Expected rate of return on plan assets | 4.90%-4.50 | % | 4.17 | % | ||
Rate of compensation increase | 2.50%-7.00 | % | 3.45 | % | ||
Underlying inflation rate | 2.00 | % | 2.15 | % |
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The obligations, plan assets and funding status of the plans were as follows:
U.S. Plan | Non-U.S. Plans | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Change in benefit obligation: | |||||||||||||
Projected benefit obligation at end of prior year | $ | 25,128 | 23,116 | 16,158 | 16,318 | ||||||||
Cumulative foreign exchange effect | — | — | 1,858 | — | |||||||||
Service cost | — | 26 | 1,607 | 283 | |||||||||
Interest cost | 1,285 | 1,213 | 833 | 113 | |||||||||
Plan participants contributions | — | — | 530 | 70 | |||||||||
Actuarial (gain) loss | 4,124 | 2,807 | (1,214 | ) | (447 | ) | |||||||
Settlement and curtailment | (2,065 | ) | (1,944 | ) | — | — | |||||||
Benefits paid | — | (90 | ) | (1,327 | ) | (179 | ) | ||||||
Projected benefit obligation at end of year | $ | 28,472 | 25,128 | 18,445 | 16,158 | ||||||||
Change in plan assets: | |||||||||||||
Fair value of plan assets at end of prior year | $ | 19,747 | 20,341 | 13,050 | 12,907 | ||||||||
Cumulative foreign exchange effect | — | — | 1,501 | — | |||||||||
Actual return on plan assets | 1,629 | 1,440 | 633 | 92 | |||||||||
Employer contributions | — | — | 1,426 | 99 | |||||||||
Benefits paid | — | (90 | ) | (1,327 | ) | (178 | ) | ||||||
Plan participant contributions | — | — | 530 | 70 | |||||||||
Actuarial (loss) gain | — | — | (961 | ) | 60 | ||||||||
Settlement and curtailment | (2,065 | ) | (1,944 | ) | — | — | |||||||
Fair value of plan assets at end of year | $ | 19,311 | 19,747 | 14,852 | 13,050 | ||||||||
Funded status of the plans: | |||||||||||||
Ending funded status | $ | 9,161 | (5,381 | ) | 3,593 | (3,108 | ) | ||||||
Unrecognized net actuarial (gain) loss | (842 | ) | (507 | ) | |||||||||
(Accrued) prepaid benefit cost | (6,223 | ) | (3,615 | ) | |||||||||
Net Amount recognized in consolidated balance sheets: | |||||||||||||
Accrued expenses (current liability) | $ | 9,161 | — | — | — | ||||||||
Accrued benefit liability (non-current liability) | — | (6,982 | ) | 3,593 | (3,615 | ) | |||||||
Net periodic benefit cost | — | 694 | — | — | |||||||||
Settlement | — | 65 | — | — | |||||||||
Net amount recognized | $ | 9,161 | (6,223 | ) | 3,593 | (3,615 | ) | ||||||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Assumptions used to determine the projected benefit obligation for the Company’s pension benefit plans were as follows:
Projected Benefit Obligation U.S. Plan:
2006 | 2005 | |||||
U.S. Plan: | ||||||
Discount rate | 5.16 | % | 5.50 | % | ||
Non-U.S. Plans: | ||||||
Discount rate | 4.90%-4.50 | % | 4.26 | % | ||
Rate of compensation increase | 2.50%-7.00 | % | 3.43 | % | ||
Underlying inflation rate | 2.00 | % | 2.15 | % |
The discount rate assumptions used to account for pension obligations reflect the rates at which the Company believes these obligations will be effectively settled. In developing the discount rate, the Company evaluated input from its actuaries, including estimated timing of obligation payments and yield on investments. The rate of compensation increase for the Non-U.S. Plans is based upon the Company’s annual reviews.
U.S. Plan | Non-U.S. Plans | ||||||||
2006 | 2005 | 2006 | 2005 | ||||||
Plans with accumulated benefit obligations in excess of plan assets: | |||||||||
Projected benefit obligation | $ | 28,472 | 25,128 | 18,445 | 16,158 | ||||
Accumulated benefit obligation | 28,472 | 25,128 | 16,115 | 14,345 | |||||
Fair value of plan assets | 19,311 | 19,747 | 14,852 | 13,050 |
Estimated future benefit payments for the U.S. Plan are $28,472 in 2007. Estimated future benefit payments for the Non-U.S. Plans are $982 in 2007, $121 in 2008, $160 in 2009, $194 in 2010, $349 in 2011 and $3,041 in total for 2012-2016.
The Company expects to make cash contributions of $1,485 to its Non-U.S. Plans and $9,161 for its U.S. Plan in 2007.
The percentage of each asset category of the total assets held by the plans follows:
2006 | 2005 | ||||
Plan asset allocation by category U.S. Plan: | |||||
Equity | $ | — | 11,986 | ||
Debt security | 8,999 | 4,858 | |||
Cash fund | 10,312 | 2,903 | |||
Total plan assets | $ | 19,311 | 19,747 | ||
Plan asset allocation by category Non-U.S. Plans: | |||||
Insurance contracts | $ | 14,852 | 13,050 | ||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The Company’s investment policy:
2006 | 2005 | |||||
Company's investment policy: | ||||||
U.S. Plan: | ||||||
Equity | 0.0 | % | 60.0 | % | ||
Debt securities | 50.0 | % | 25.0 | % | ||
Cash fund | 50.0 | % | 15.0 | % | ||
100.0 | % | 100.0 | % | |||
Company's investment policy: | ||||||
Non-U.S. Plans: | ||||||
Insurance contracts | 100.0 | % | 100.0 | % | ||
The Company’s investment policy is to optimize the return on plan assets at an acceptable level of risk and to maintain careful control of the risk level within each asset class.
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. SFAS 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its benefit plans in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The Company recorded an increase to its pension liability of $818 and an adjustment to accumulated other comprehensive income of $818 which represents the net unrecognized prior service costs.
(13) Income Taxes
Following is a summary of income from continuing operations before income taxes for United States and foreign operations:
2006 | 2005 | 2004 | |||||
United States | $ | 494,190 | 590,539 | 572,226 | |||
Foreign | 182,121 | 11,594 | 8,565 | ||||
Income before income taxes | $ | 676,311 | 602,133 | 580,791 | |||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Income tax expense (benefit) for the years ended December 31, 2004, 20032006, 2005 and 2002,2004, consists of the following:
Current | Deferred | Total | ||||
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 | ||||
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 | ||||
Current | Deferred | Total | |||||||
2006: | |||||||||
U.S. federal | $ | 206,435 | (35,313 | ) | 171,122 | ||||
State and local | 20,320 | (4,932 | ) | 15,388 | |||||
Foreign | 62,322 | (28,354 | ) | 33,968 | |||||
$ | 289,077 | (68,599 | ) | 220,478 | |||||
2005: | |||||||||
U.S. federal | $ | 183,807 | 17,795 | 201,602 | |||||
State and local | 15,147 | 300 | 15,447 | ||||||
Foreign | 11,555 | (13,609 | ) | (2,054 | ) | ||||
$ | 210,509 | 4,486 | 214,995 | ||||||
2004: | |||||||||
U.S. federal | $ | 158,704 | 33,639 | 192,343 | |||||
State, local and other | 11,363 | 6,288 | 17,651 | ||||||
$ | 170,067 | 39,927 | 209,994 | ||||||
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:
2004 | 2003 | 2002 | ||||
Computed "expected" tax expense | $ 202,087 | 170,952 | 155,270 | |||
State and local income taxes, net of federal | ||||||
income tax benefit | 11,675 | 5,071 | 8,741 | |||
Foreign income taxes | (892) | 2,495 | 1,248 | |||
Tax credits | (1,821) | (2,312) | (5,000) | |||
Other, net | (2,282) | 2,079 | (1,119) | |||
$ 208,767 | 178,285 | 159,140 | ||||
2006 | 2005 | 2004 | ||||||||
Computed “expected” tax expense | $ | 236,709 | 210,747 | 203,277 | ||||||
State and local income taxes, net of federal income tax benefit | 4,522 | 4,748 | 11,711 | |||||||
Foreign income taxes | (26,280 | ) | (589 | ) | (892 | ) | ||||
Change in valuation allowance | 28,608 | (1,351 | ) | (1,821 | ) | |||||
Change in statutory tax rate | (1,528 | ) | — | — | ||||||
Belgium Notional interest | (22,510 | ) | — | — | ||||||
Other, net | 957 | 1,440 | (2,281 | ) | ||||||
$ | 220,478 | 214,995 | 209,994 | |||||||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 20042006 and 2003,2005, are presented below:
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
2004 | 2003 | 2006 | 2005 | ||||||||
Deferred tax assets: | |||||||||||
Accounts receivable | $ 32,008 | 41,582 | $ | 21,756 | 20,147 | ||||||
Inventories | 9,641 | 25,312 | 47,507 | (22,365 | ) | ||||||
State net operating loss | 7,020 | 7,142 | |||||||||
Accrued expenses | 62,767 | 61,003 | 112,639 | 99,836 | |||||||
Foreign and State net operating losses and credits | 81,589 | 44,620 | |||||||||
Valuation allowance | (68,773 | ) | (32,180 | ) | |||||||
Gross deferred tax assets | 111,436 | 135,039 | 194,718 | 110,058 | |||||||
Deferred tax liabilities: | |||||||||||
Plant and equipment | (129,287) | (117,857) | (291,233 | ) | (302,552 | ) | |||||
Intangibles | (83,545) | (72,954) | (336,636 | ) | (325,183 | ) | |||||
LIFO change in accounting method | (50,424 | ) | — | ||||||||
Other liabilities | (35,054) | (43,637) | (47,356 | ) | (56,069 | ) | |||||
Gross deferred tax liabilities | (247,886) | (234,448) | (725,649 | ) | (683,804 | ) | |||||
Net deferred tax liability | $ (136,450) | (99,409) | |||||||||
Net deferred tax liability(1) | $ | (530,931 | ) | (573,746 | ) | ||||||
(1) | This amount includes $2,693 and $25,114 of non-current deferred tax assets which are in other assets and $4,565 and $5,111 current deferred tax liabilities which are included in accounts payable and accrued expenses in the consolidated balance sheet as of December 31, 2006 and 2005, respectively. |
BasedManagement believes it is more likely than not the Company will realize the benefits of these deductible differences, with the exception of certain carryforward deferred tax assets discussed below, 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,deductible.
As of December 31, 2006, the Company's management believesCompany had state net operating loss carryforwards and state tax credits with potential tax benefits of approximately $45,163, net of federal income tax benefit; these carryforwards expire over various periods based on jurisdiction. Because the Company generates more state tax credits on an annual basis in certain jurisdictions than the related state taxable income, it is the Company’s opinion that it is more likely than not that the benefit of the deferred tax assets related to state tax credits and certain state net operating losses will not be realized. Accordingly, a valuation allowance of approximately $44,324 has been recorded for the year ended December 31, 2006. Of this balance, approximately $4,000 of the future tax benefit, if realized, from the reversal of the valuation allowance would be allocable as a reduction of goodwill. In addition, the Company will realize the benefitshas tax credit and net operating loss carryforwards in various foreign jurisdictions of these deductible differences.
Income tax expense of $1,659 was recorded in other comprehensive income related to the Company's hedge instrumentsapproximately $36,426 as of December 31, 2004.2006. The credit carryforwards begin to expire in 2011; the net operating loss carryforwards have an indefinite life. Based on historical and future income projections, it is the Company’s opinion that it is more likely than not that the benefit of net operating loss carryforwards in certain foreign jurisdictions will not be realized; therefore, a valuation allowance totaling $24,449 as of December 31, 2006 has been recorded against these deferred tax assets. The valuation allowance of $32,180 consists principally of state net operating losses as of December 31, 2005. For 2006, the total change in the valuation allowance was an increase of $36,593. An increase of $28,608 was primarily as a result of a generating additional net operating losses and credit carryforwards in the current period in foreign and state jurisdictions for which no benefit is expected to be realized. The remaining difference of $7,985 is an adjustment to reflect additional net operating loss carryforwards and credits reported in the 2005 tax returns as filed.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
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, 2004,2006 and 2005, the Company had not provided federal income taxes on earnings of approximately $48,172$257,000 and $56,763 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 willwould be partially offset by U.S. foreign tax credits.
The American Jobs Creation Act of 2004 was enacted on October 22, 2004. This new law made numerous and substantive changes in the taxation of foreign-sourced and domestic income. As of this date, the U.S. Treasury Department has not issued regulations providing implementation guidance for this new law. Due to the lack of guidance and the complex calculations involved, the Company has not completed its analysis Determination of the effectamount of unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this legislation may have on it.hypothetical calculation.
In the normal course of business, the Company'sCompany’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 that 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'sCompany’s consolidated financial position but could possibly be material to the Company'sCompany’s consolidated results of operations or cash flow in a given quarter or annual period. The Company reversed pre acquisition tax liabilities of any one period.$25,526 with a corresponding reduction to goodwill for the year ended December 31, 2006.
(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:
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
2005 | $ 81,803 | ||
2006 | 67,656 | ||
2007 | 50,934 | ||
2008 | 39,980 | ||
2009 | 31,133 | ||
Thereafter | 61,786 | ||
Total payments | $ 333,292 | ||
Capital | Operating | Total Future Payments | ||||||
2007 | $ | 7,139 | 103,333 | 110,472 | ||||
2008 | 7,057 | 90,126 | 97,183 | |||||
2009 | 3,419 | 78,361 | 81,780 | |||||
2010 | 254 | 58,441 | 58,695 | |||||
2011 | 249 | 44,846 | 45,095 | |||||
Thereafter | 1,577 | 98,643 | 100,220 | |||||
Total payments | 19,695 | 473,750 | 493,445 | |||||
Less amount representing interest | (941 | ) | ||||||
Present value of capitalized lease payments | $ | 18,754 | ||||||
Rental expense under operating leases was $118,280, $99,697 and $87,659 $78,007in 2006, 2005 and $62,066 in 2004, 2003 and 2002, respectively.
The Company has approximately $36,693$57,080 and $23,433$40,958 as of December 31, 20042006 and 20032005 in standby letters of credit for various insurance contracts and commitments to foreign vendors that expire within two years. In addition, at December 31, 2006 and 2005, the Company guaranteed approximately $80,324 and $72,040 for VAT and building leases, respectively, 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.
In Shirley Williams et al. v. Mohawk Industries, Inc., four plaintiffs filed a putative class action lawsuit in January 2004 in the United States District Court for the Northern District of Georgia, alleging that they are
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
former and current employees of the Company and that the actions and conduct of the Company, including the employment of persons who are not authorized to work in the United States, have damaged them and the other members of the putative 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 District Court in April 2004. The Company then sought and obtained permission to file an immediate appeal of the District Court’s decision to the United States Court of Appeals for the Eleventh Circuit. In June 2005, the Eleventh 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 petition requesting review by the full Eleventh Circuit, which was denied in August 2005. In October 2005, the Company filed a petition for certiorari with the United States Supreme Court, which was granted in December of 2005. The case was argued before the Supreme Court on April 26, 2006. On June 5, 2006, the Supreme Court vacated the Eleventh Circuit’s ruling and ordered the Eleventh Circuit to reconsider the case in light of the Supreme Court’s decision in Anza v. Ideal Steel Supply Co., 126 S. Ct. 1991 (2006). On September 27, 2006, the Eleventh Circuit issued a second decision reversing in part and affirming in part the lower court’s decision. On October 18, 2006, the Company filed a petition requesting review of this decision by the full Eleventh Circuit, which was denied in November 2006. In December 2006, the Company filed a second petition for certiorari with the United States Supreme Court. The Company will continue to vigorously defend itself against this action.
The Company believes that adequate provisions for resolution of all claims and pending litigation have been made for probable losses 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.
The Company has received partial refunds from the United States government in reference to settling custom disputes dating back to 1982. Accordingly, the Company recorded a net gain of $19,436 ($12,288 net of taxes) in other income (expense) for the twelve months ended December 31, 2006. Additional future recoveries will be recorded as realized.
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'sCompany’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 accruals 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.
In the normal course of business, the Company has entered into various European collective bargaining agreements with its workforce, either locally or within its industry sector. Historically, the Company and its industry have maintained favorable relationships with its workforce and expect to do so in the future.
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:
2004 | 2003 | 2002 | ||||
Net cash paid during the year for: | ||||||
Interest | $ 60,744 | 61,424 | 43,866 | |||
Income taxes | $ 226,227 | 139,914 | 59,931 | |||
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) | |||
$ - | 384,121 | 717,638 | ||||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements (Continued)
2006 | 2005 | 2004 | ||||||||
Net cash paid during the year for: | ||||||||||
Interest | $ | 113,426 | 61,468 | 60,744 | ||||||
Income taxes | $ | 267,075 | 191,601 | 226,227 | ||||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||||
Fair value of assets acquired in acquisitions | $ | 113,008 | 3,375,605 | 16,236 | ||||||
Liabilities assumed in acquisitions | (33,366 | ) | (762,076 | ) | (1,238 | ) | ||||
$ | 79,642 | 2,613,529 | 14,998 | |||||||
(16) Segment Reporting
The Company has twothree reporting segments, the Mohawk segment, the Dal-Tile segment, and the Dal-TileUnilin segment. The Mohawk segment (an aggregation of the Mohawk Flooring reporting unit and the Mohawk Home reporting unit) manufactures, sources, markets and distributes its product lines, which include carpet, rugs, pad, ceramic tile, hardwood, resilient 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 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. Segment performance is evaluated based on operating income. ExportNo single customer accounted for more than 5% of net sales are not significant and long-lived assets located outsidefor the United States of America, principally Mexico, were $97,425 and $85,339 atyears ended December 31, 20042006, 2005 and 2003, respectively.2004. In addition, inter-segment net sales were approximately $15,200 between the Unilin and Mohawk segments for the year ended December 31, 2006. There were no significant inter-segment sales for the year ended December 31, 2005.
Segment information is as follows: | ||||||
2004 | 2003 | 2002 | ||||
Net sales: | ||||||
Mohawk | $ 4,368,831 | 3,730,845 | 3,618,777 | |||
Dal-Tile | 1,511,541 | 1,268,536 | 898,180 | |||
$ 5,880,372 | 4,999,381 | 4,516,957 | ||||
Operating income: | ||||||
Mohawk | $ 424,256 | 364,040 | 390,936 | |||
Dal-Tile | 219,831 | 187,245 | 139,888 | |||
Corporate and eliminations | (8,497) | (9,256) | (8,759) | |||
$ 635,590 | 542,029 | 522,065 | ||||
Depreciation and amortization: | ||||||
Mohawk | $ 89,479 | 78,450 | 77,416 | |||
Dal-Tile | 29,210 | 24,638 | 18,266 | |||
Corporate and eliminations | 4,399 | 3,527 | 6,260 | |||
$ 123,088 | 106,615 | 101,942 | ||||
Capital expenditures (excluding acquisitions): | ||||||
Mohawk | $ 66,563 | 55,587 | 79,235 | |||
Dal-Tile | 38,720 | 57,856 | 31,311 | |||
Corporate and eliminations | 1,318 | 1,188 | 1,388 | |||
$ 106,601 | 114,631 | 111,934 | ||||
Assets: | ||||||
Mohawk | $ 2,257,153 | 2,086,716 | ||||
Dal-Tile | 2,063,195 | 1,967,206 | ||||
Corporate and eliminations | 82,770 | 109,653 | ||||
$ 4,403,118 | 4,163,575 | |||||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements Financial Statements—(Continued)
Segment information is as follows:
2006 | 2005 | 2004 | ||||||||
Net sales: | ||||||||||
Mohawk. | $ | 4,742,060 | 4,716,659 | 4,368,831 | ||||||
Dal-Tile | 1,941,819 | 1,734,781 | 1,511,541 | |||||||
Unilin | 1,236,918 | 168,814 | — | |||||||
Corporate and eliminations | (14,955 | ) | (155 | ) | — | |||||
$ | 7,905,842 | 6,620,099 | 5,880,372 | |||||||
Operating income: | ||||||||||
Mohawk | $ | 387,386 | 426,811 | 427,658 | ||||||
Dal-Tile | 270,901 | 260,194 | 219,831 | |||||||
Unilin | 214,093 | (5,162 | ) | — | ||||||
Corporate and eliminations | (33,320 | ) | (9,459 | ) | (8,497 | ) | ||||
$ | 839,060 | 672,384 | 638,992 | |||||||
Depreciation and amortization: | ||||||||||
Mohawk | $ | 95,089 | 91,452 | 89,479 | ||||||
Dal-Tile | 37,576 | 31,731 | 29,210 | |||||||
Unilin | 135,337 | 23,695 | — | |||||||
Corporate | 6,950 | 3,779 | 4,399 | |||||||
$ | 274,952 | 150,657 | 123,088 | |||||||
Capital expenditures (excluding acquisitions): | ||||||||||
Mohawk | $ | 71,793 | 153,238 | 66,563 | ||||||
Dal-Tile | 63,177 | 84,363 | 38,720 | |||||||
Unilin | 28,688 | 6,207 | — | |||||||
Corporate | 2,111 | 3,498 | 1,318 | |||||||
$ | 165,769 | 247,306 | 106,601 | |||||||
Assets: | ||||||||||
Mohawk | $ | 2,462,420 | 2,473,497 | 2,288,427 | ||||||
Dal-Tile | 2,257,107 | 2,207,514 | 2,063,195 | |||||||
Unilin | 3,302,195 | 3,263,248 | — | |||||||
Corporate and eliminations | 156,672 | 95,778 | 54,898 | |||||||
$ | 8,178,394 | 8,040,037 | 4,406,520 | |||||||
Geographic net sales: | ||||||||||
North America | $ | 6,974,488 | 6,489,511 | 5,880,372 | ||||||
Rest of world | 931,354 | 130,588 | — | |||||||
$ | 7,905,842 | 6,620,099 | 5,880,372 | |||||||
Long-lived assets(1): | ||||||||||
North America | $ | 2,995,968 | 2,951,681 | |||||||
Rest of world | 1,591,759 | 1,481,010 | ||||||||
$ | 4,587,727 | 4,432,691 | ||||||||
(1) | Long-lived assets are composed of net property, plant and equipment, goodwill, trademarks and other intangibles. |
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(17) Quarterly Financial Data (Unaudited)
The supplemental quarterly financial data are as follows:
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, | ||||
2003 | 2003 | 2003 | 2003 | ||||
Net sales | $ 1,083,422 | 1,245,870 | 1,301,547 | 1,368,542 | |||
Gross profit | 282,726 | 348,407 | 373,734 | 388,935 | |||
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 | |||||||||
April 1, 2006 | July 1, 2006 | September 30, 2006 | December 31, 2006 | ||||||
Net sales | $ | 1,925,106 | 2,058,123 | 2,024,019 | 1,898,594 | ||||
Gross profit | 516,344 | 592,378 | 568,511 | 554,078 | |||||
Net earnings | 79,121 | 119,513 | 127,708 | 129,491 | |||||
Basic earnings per share | 1.17 | 1.77 | 1.89 | 1.91 | |||||
Diluted earnings per share | 1.16 | 1.76 | 1.88 | 1.90 | |||||
Quarters Ended | |||||||||
April 2, 2005 | July 2, 2005 | October 1, 2005 | December 31, 2005 | ||||||
Net sales | $ | 1,493,222 | 1,624,692 | 1,697,634 | 1,804,551 | ||||
Gross profit | 390,369 | 438,165 | 462,954 | 476,758 | |||||
Net earnings | 73,662 | 98,080 | 115,763 | 99,633 | |||||
Basic earnings per share | 1.10 | 1.47 | 1.73 | 1.48 | |||||
Diluted earnings per share | 1.09 | 1.45 | 1.71 | 1.47 |
2005 includes a non-recurring $34,300 ($22,300 net of tax) fair value adjustment applied to Unilin’s acquired inventory related to the Unilin acquisition.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial |
None
None.
Item 9A. | Controls and Procedures |
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of the effectiveness of the Company'sCompany’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'sCompany’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'sManagement’s Report on Internal Control over Financial Reporting
The Company'sCompany’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'sCompany’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2004.2006. In making this assessment, the Company'sCompany’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) in Internal Control-Integrated Framework. The Company'sCompany’s management has concluded that, as of December 31, 2004,2006, its internal control over financial reporting is effective based on these criteria. The Company'sCompany’s independent registered public accounting firm, KPMG LLP, has issued an attestation report on management'smanagement’s assessment of the Company'sCompany’s internal control over financial reporting, which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in ourthe Company’s internal controlscontrol over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal controlscontrol over financial reporting.
Limitations on the Effectiveness of Controls
The Company'sCompany’s management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the Company'sCompany’s disclosure controls and procedures or the Company'sCompany’s internal controlscontrol 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.
Item 9B. Other InformationPART III
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 10. | Directors and Executive Officers and Corporate Governance |
The information required by this item is incorporated by reference to information contained in the Company'sCompany’s Proxy Statement for the 20052007 Annual Meeting of Stockholders under the following headings: "Election“Election of Directors-Director,Directors—Director, Director Nominee and Executive Officer Information"; "-NomineesInformation,” “—Nominees for Director"; "-Continuing Directors"; "-Executive Officers"; "-SectionDirector,” “—Continuing Directors,” “—Executive Officers,” “—Meetings and Committees of the Board of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance"Compliance” and "-Audit Committee".“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 athttp://mohawkind.comand will be made available in print to any stockholder who requests them.them without charge. 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 required by regulations of the Commission to apply to the Company'sCompany’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'sCompany’s website and will be made available to any stockholder who requests it.
Item 11. | Executive Compensation |
Item 11. Executive Compensation
The information required by this item is incorporated by reference to information contained in the Company'sCompany’s Proxy Statement for the 20052007 Annual Meeting of Stockholders under the following headings: "Executive“Executive Compensation and Other Information-SummaryInformation—Summary Compensation Table,” “—Compensation, Discussion and Analysis,” “—Grants of Cash and Certain Other Compensation," "-Option Grants," "-OptionPlan Based Awards,” “—Outstanding Equity Awards at Fiscal Year End,” “—Option Exercises and Holdings," "-Pension Plans," "-CertainStock Vested,” “—Pension Benefits,” “—Nonqualified Deferred Compensation,” “—Certain Relationships and Related Transactions,"” “—Compensation Committee Interlocks and "Election of Directors-MeetingsInsider Participation” and Committees of the Board of Directors."“—Compensation Committee Report.”
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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'sCompany’s Proxy Statement for the 20052007 Annual Meeting of Stockholders under the following headings: "Executive“Executive Compensation and Other Information," "-EquityInformation—Equity Compensation Plan Information"Information” and "-Principal“—Principal Stockholders of the Company."
Item 13. Certain Relationships and Related Transactions”
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is incorporated by reference to information contained in the Company'sCompany’s Proxy Statement for the 20052007 Annual Meeting of Stockholders under the following heading: "Executiveheading; “Election of Directors—Meetings and Committees of the Board of Directors,” and “Executive Compensation and Other Information-CertainInformation—Certain Relationships and Related Transactions."”
Item 14. | Principal Accountant Fees and Services |
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to information contained in the Company'sCompany’s Proxy Statement for the 20052007 Annual Meeting of Stockholders under the following heading: "Principal“Audit Committee—Principal Accountant Fees and Services."”
Item 15. | Exhibits and Financial Statement Schedules |
Item 15. Exhibits and Financial Statement Schedules
(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.
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.
MohawkExhibitNumber Description
Exhibit Number | Description | |
*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 | |
| ||
* | | |
| Restated Certificate of Incorporation of Mohawk, as amended. (Incorporated herein by reference to Exhibit 3.1 in | |
*3.2 | Restated Bylaws of Mohawk, as amended. (Incorporated herein by reference to Exhibit | |
*4.1 | See Article 4 of the Restated Certificate of Incorporation of Mohawk. (Incorporated herein by reference to Exhibit 3.1 in | |
*4.2 | See Articles 2, 6, and 9 of the Restated Bylaws of Mohawk, as amended. (Incorporated herein by reference to Exhibit | |
*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 | |
* | 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 | |
*10.2 | | Five Year |
|
Exhibit Number | Description | |
*10.3 | Registration Rights Agreement by and among Mohawk, Citicorp Investments, Inc., | |
* | Voting Agreement, Consent of Stockholders and Amendment to 1992 Registration Rights Agreement dated December 3, 1993 by and among Aladdin, Mohawk, Citicorp Investments, Inc., |
* | Registration Rights Agreement by and among Mohawk and the former shareholders of Aladdin. (Incorporated herein by reference to Exhibit 10.32 of | |
* | 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 | |
* | 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 | |
* | 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 | |
* | 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 | |
* | 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 | |
* | Amendment to Second Amended and Restated Liquidity Asset Purchase Agreement dated August 2, 2004, among Mohawk Factoring, Inc., Blue Ridge Asset Funding Corporation and Wachovia Bank, National Association. (Incorporated herein by reference to Exhibit 10.2 of | |
* | 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 | |
* | | Discounted Stock Purchase Agreement dated |
Mohawk Exhibit Number | Description | |
10.14 | Amendment to Third Amended and Restated Liquidity Asset Purchase Agreement dated July 31, 2006, among Mohawk Factoring, Inc., Variable Funding Capital Company LLC, and Wachovia Bank, National Association. | |
10.15 | Amendment to Third Amended and Restated Liquidity Asset Purchase Agreement dated July 31, 2006 among Mohawk Factoring, Inc., Suntrust Bank, Three Pillars Funding Corporation, and SunTrust Capital Markets, Inc. | |
Exhibits Related to Executive Compensation Plans, Contracts and other | ||
* | 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.) | |
*10.17 | Employment Agreement dated November 15, 2005, by and between Mohawk Industries, Inc. and W. Christopher Wellborn. (Incorporated herein by reference to Exhibit 10.1 of Mohawk’s Quarterly Report on form 10-Q for the period ended April 1, 2006.) | |
*10.18 | Mohawk Carpet Corporation Retirement Savings Plan, as amended. (Incorporated herein by reference to Exhibit 10.1 of | |
* | Mohawk Carpet Corporation Supplemental Executive Retirement Plan, as amended. (Incorporated herein by reference to Exhibit 10.2 of | |
| ||
* | Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.8 of | |
* | Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.2 in | |
* | 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 Industries, Inc. 1992 | |
* | Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 | |
* | 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 Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.39 of | |
* | First Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.40 of |
Exhibit Number | Description | |
*10.28 | The Mohawk Industries, Inc. Executive Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.65 of | |
* | The Mohawk Industries, Inc. Management Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.66 of | |
* | Mohawk Industries, Inc. 1997 Non-Employee Director Stock Compensation Plan (Amended and Restated as of March 31, 2003). (Incorporated herein by reference to Exhibit 10.38 of | |
* | 1997 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.80 of | |
* | 2002 Long-Term Incentive Plan. (Incorporated herein by reference to Appendix A in the 2002 Mohawk Industries, Inc. Proxy Statement dated March 29, 2002.) | |
| ||
* | | |
| 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 (File No. 033-64140) for fiscal year 1999.) |
21 Subsidiaries of the Registrant. 23.1 Consent of Independent Registered Public Accounting Firm. 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
* | Indicates exhibit incorporated by reference. |
* Indicates exhibit incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Mohawk Industries, Inc.
MOHAWK INDUSTRIES, INC. | ||||
Dated: | By: |
| ||
Jeffrey S. Lorberbaum, | ||||
Chairman 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 registrant and in the capacities and on the dates indicated.
Dated: | /s/: | |
Jeffrey S. Lorberbaum, | ||
Chairman and Chief Executive Officer (principal executive officer) | ||
Dated: February 23, 2007 |
| |
| ||
| ||
Chief Financial Officer and Vice (principal financial officer) | ||
Dated: February 23, 2007 |
| |
| ||
| ||
Vice President and Corporate Controller (principal accounting officer) | ||
Dated: February 23, 2007 |
| |
Leo Benatar, | ||
Director | ||
Dated: | / | |
Phyllis O. Bonanno, | ||
Director | ||
Dated: February 23, 2007 |
| |
Bruce C. Bruckmann, | ||
Director | ||
Dated: | ||
Frans De Cock, | ||
Director | ||
Dated: February 23, 2007 |
| |
John F. Fiedler, | ||
Director |
Dated: | /s/: | |
David L. Kolb, | ||
Director | ||
Dated: February 23, 2007 |
| |
Larry W. McCurdy, | ||
Director | ||
Dated: February 23, 2007 |
| |
Robert N. Pokelwaldt, | ||
Director | ||
Dated: | / | |
| W. Christopher Wellborn, | |
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
| |
| |
| |
| |
| |
| |
| |
| |
|
SCHEDULE II | ||||||||
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES | ||||||||
Consolidated Valuation and Qualifying Accounts | ||||||||
Years Ended December 31, 2004, 2003 and 2002 | ||||||||
(In thousands) | ||||||||
Additions | ||||||||
Balance at | charged to | Balance | ||||||
beginning | costs and | at end | ||||||
Description | of year | expenses | Deductions(1) | of year | ||||
Year ended December 31, 2002: | ||||||||
Allowance for discounts, returns, claims | ||||||||
and doubtful accounts | $ 79,381 | 274,754 | 269,462 | 84,673 | ||||
Year ended December 31, 2003: | ||||||||
Allowance for discounts, returns, claims | ||||||||
and doubtful accounts | $ 84,673 | 279,583 | 269,839 | 94,417 | ||||
Year ended December 31, 2004: | ||||||||
Allowance for discounts, returns, claims | ||||||||
and doubtful accounts | $ 94,417 | 310,368 | 309,482 | 95,303 | ||||
74
(1) Represents charge offs, net of recoveries, to the valuation account
56