Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[Mark One]

UNITED STATES

x

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

                     [Mark One]

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

 

For the fiscal year ended December 31, 2005

¨

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission File Number

01-13697

MOHAWK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

For the transition period from        to

Commission File Number

01-19826

MOHAWK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

52-1604305

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:

 

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

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'sRegistrant’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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definition of "accelerated“large accelerated filer,” “accelerated filer” and large accelerated filer"“smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  [ x ]    Accelerated filer  [   ]¨    Non-accelerated filer  [   ]¨    Smaller reporting company  ¨

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

The aggregate market value of the Common Stock of the Registrant held by non-affiliates (excludes beneficial owners of more than 10% of the Common Stock) of the Registrant (41,675,793(41,799,782 shares) on July 2, 2005June 28, 2008 (the last business day of the Registrant'sRegistrant’s most recently completed fiscal second quarter) was$3,425,750,185. $2,709,043,871. 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 14,2006:67,621,254February 25, 2009: 68,443,318 shares of Common Stock, $.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 20062009 Annual Meeting of Stockholders-Part III.


 



Index to Financial Statements

Table of Contents

 

Table of Contents

Page
No.

Part I

Item 1.

Business

3

3

Item 1a.1A.

Risk Factors

9

10

Item 1b.1B.

Unresolved Staff Comments

14

15

Item 2.

Properties

14

15

Item 3.

Legal Proceedings

14

16

Item 4.

Submission of Matters to a Vote of Security Holders

15

17

Part II

Item 5.

Market for Registrant'sRegistrant���s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

   Purchases of Equity Securities

16

18

Item 6.

Selected Financial Data

17

19

Item 7.

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

18

20

Item 7A7A.

Quantitative and Qualitative Disclosures About Market Risk

25

32

Item 8.

Consolidated Financial Statements and Supplementary Data

27

34

Item 9.

Changes in and Disagreements with Accountants on Accounting and FiFinancial Disclosurenancial Disclosure

59

71

Item 9A9A.

Controls and Procedures

59

71

Item 9B9B.

Other Information

59

71

Part III

Item 10.

Directors, and Executive Officers of the Registrant and Related Stockholder MattersCorporate Governance

60

72

Item 11.

Executive Compensation

60

72

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   Stockholder Matters

60

72

Item 13.

Certain Relationships and Related Transactions, and Director Independence

60

72

Item 14.

Principal Accountant Fees and Services

60

72

Part IV

Item 15.

Exhibits and Financial Statement Schedules

60

73



Index to Financial Statements

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,LLC, Aladdin Manufacturing Corporation, Dal-Tile International Inc. 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 (“U.S.”) and residential applications in Europe. The Company is the second largest carpet and rug manufacturer and one of the largest manufacturers, marketers and distributors of ceramic tile, and natural stone and hardwood flooring in the United StatesU.S. as well as a leading producer of laminate flooring in the United StatesU.S. and Europe. The Company had annual net sales in 2005 in excess2008 of $6.6$6.8 billion. Approximately 98%85% of this amount was generated by sales in North America and 2%approximately 15% was generated by sales outside North America. The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. Selected financial information for the Mohawk, Dal-Tile and Unilin segments, geographic net sales and the location of long-lived assets 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, rug, carpet pad,carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, in a broad range of colors, textures and patterns for residential and commercial applications in both new construction and remodeling. The Mohawk segment markets and distributes its carpets and rugs under its soft surface floor covering brands and ceramic tile, laminate, hardwood and resilient under its hard surface floor covering brands. The Mohawk segment positions its products in all price ranges and emphasizes quality, style, performance and service. The Mohawk segment is widely recognized through its premier brand names, which include "Mohawk®“Mohawk®," "Aladdin®” “Aladdin®," "Mohawk Home®” “Mohawk Home®," "Bigelow®” “Bigelow®," "Custom Weave®” “Durkan®," "Durkan®” “Horizon®," "Helios®” “Karastan®," "Horizon®” “Lees®," "Karastan®” “Merit®," "Lees®," "MeritTM ," "Ralph Lauren®" and "WundaWeve®“Ralph Lauren®." The Mohawk segment markets and distributes soft and hard surface products through over 30,000 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 Mohawk segment'ssegment’s soft surface operations are vertically integrated from the extrusion of resin to the manufacture and shipment of finished carpets and rugs.

The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products used in the residential and commercial markets for both new construction and remodeling. Most of the Dal-Tile segment'ssegment’s ceramic tile products are marketed under the "Dal-Tile®"“Dal-Tile® and "American Olean®"“American Olean® brand names and sold through company-owned service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Dal-Tile segment operations are vertically integrated from the production of raw material for body and glaze preparation to 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 2.2 billion (approximately $2.6 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 laminate flooring market. The Unilin segment, which is headquartered in Belgium, is a leading manufacturer, licensor, distributor and marketer of laminate flooring in Europe and the United States.U.S. 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®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 onlylargest vertically-integrated laminate flooring manufacturer in the United StatesU.S. producing both laminate flooring and related high density fiberboard. Unilin sells its laminate flooring products under the Quick-Step® brandQuick-Step®, Columbia Flooring®, Century Flooring®, and Universal Flooring® brands through retailers, 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, underdistributors’ private label names.and home centers. Unilin also produces insulated roofing systems and other wood-based panels.wood products. On August 13, 2007, the Company acquired certain wood flooring assets and liabilities of Columbia Forest Products, Inc. for approximately $147 million (the “Wood Acquisition”), enabling the Company to expand its position in the wood flooring market. The results of the Wood Acquisition are included in the Unilin segment and the Company’s consolidated financial statements since the date of acquisition.

Index to Financial Statements

3




Industry

The United StatesU.S. floor covering industry has grown from $12.4 billion in sales in 1992 to $22.8$21.7 billion in 2004.2007. In 2004,2007, the primary categories of the United StatesU.S. floor covering industry were carpet and rug (62%), ceramic tile (13%), hardwood (10%(11%), resilient and rubber (9%), and laminate (6%(5%). Each of these categories has been positively impacted by:

•            increases inby the average selling price per square foot;

•            increases infoot, the residential builder and homeowner remodeling markets;

•            growth inmarkets, housing starts and housing resales;

•            increases inresales, average house size;size and

•            increases in home ownership.

     Compound average growth rates for all categories, except In addition, the resilient and rubber category, for the period from 1999 through 2004 have met or exceeded the growth rates (measured in sales dollars) for 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% for carpets and rugs, 7.0% for ceramic tile, 0.6% for resilient and rubber, 17.4% for laminate and 9.4% for hardwood.

      According to the most recent figures available from the United States Department of Commerce, worldwide carpet and rug sales volume of American manufacturers and their domestic divisions was approximately 2.3 billion square yards in 2004. This volume represents a market in excess of $14 billion. The overall level of sales in the floor covering industry, both in the U.S. and Europe, is influenced by a number of factors, including consumer confidence, spending for durable goods, interest rates and availability of credit, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy. The U.S. floor covering industry has experienced softened demand beginning in the fourth quarter of 2006 and worsening considerably during the later parts of 2008. The global economy continues in the most significant downturn in recent history. Overall economic conditions and consumer sentiment have continued to deteriorate, which has intensified the pressure on the demand for housing and flooring products.

      BroadloomThe worldwide carpet defined asand rug sales volume of U.S. manufacturers was approximately 1.7 billion square yards in 2007. This volume represents a market in excess of $14 billion in sales. The carpet over six feet by nine feet in size,and rugs category has two primary markets, residential and commercial, withcommercial. In 2007, the residential market makingmade up approximately 76%72% of industry amounts shipped in 2004 and the commercial market comprisingcomprised approximately 24%28%. An estimated 49%Of the total residential market, 67% of industrythe dollar values of shipments are made in response to residential replacement demand, which usually involves exact yardage, or "cut order," shipments that typically provide higher profit margins than sales of carpet sold in full rolls. Because the replacement business generally involves higher quality carpet cut to order by the manufacturer, rather than the dealer, this business tends to be more profitable for manufacturers than the new construction business.demand.

The United StatesU.S. ceramic tile industry shipped 3.12.7 billion square feet, or $2.9$2.7 billion, in 2004. Sales in the ceramic tile industry are influenced by the same factors that influence the carpet industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

2007. The ceramic tile industry'sindustry’s two primary markets, residential applications and commercial applications, represent 69.8%60% and 28.8%40% of the 2007 industry total, respectively. Of the total residential market, 61%48% of the dollar values of shipments are for new construction.made in response to residential replacement demand.

In 2004,2007, the United States laminateU.S. hardwood industry shipped 1.11.0 billion square feet, representing a market of approximately $1.4$2.3 billion. Sales of U.S. hardwood are primarily distributed to the residential market for both new construction and residential replacement.

In 2007, the U.S. resilient and rubber industry shipped 3.3 billion square feet, representing a market of approximately $2.0 billion. Sales of U.S. resilient are primarily distributed to the residential market for both new construction and residential replacement.

In 2007, the U.S. laminate industry shipped 0.9 billion square feet, or $1.1 billion. In 2007, the European laminate industry shipped 5.2produced 4.4 billion square feet. In 2003, the laminate industryfeet which accounted for approximately 10%12% of the European floor covering markets.market. Sales in theof U.S. laminate industryflooring are influenced by the same factors that influence the carpet industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition ofprimarily distributed through the residential and commercial construction industries and the overall strength of the economy.

4




replacement market. Sales to other end user markets are not significant.

Sales and Distribution

Mohawk Segment

Through its Mohawk segment, the Company designs, manufactures, distributes 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, hardwood, resilient floor covering, carpet pad hardwood and resilient floor covering.flooring accessories. The Mohawk segment positions product lines in all price ranges and emphasizes quality, style, performance and service. The Mohawk segment markets and distributes its soft and hard surface product lines to over 30,000 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.

Index to Financial Statements

The Company has positioned its premier residential carpet and rug brand names across all price ranges. "Mohawk®Mohawk, Horizon, “WundaWeve®," "Custom Weave®," "WundaWeve®," "Horizon®," "Helios®"” Ralph Lauren 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 Portico® and Portico Select brand names compete primarily in the builder market. 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 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: corporate office space, educational institutions, hospitality facilities, retail space, public finance, government and health care facilities. In addition, the Company produces and sells carpet for the federal government and other niche businesses. Different purchase decision makers and decision-making processes exist for each channel. 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 accomplishesProduct delivery to dealers is done predominantly on Mohawk trucks operating from strategically positioned warehouses/cross-docks which receive inbound product directly from the product distribution on a regional level. In this system, 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.source of manufacture.

Dal-Tile Segment

The Dal-Tile segment designs, manufactures and markets a broad line of ceramic tile, porcelain tile and natural stone products. 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, and dedicated sales forces support the various channels.

      The Company 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. These distribution centers also enhance the ability to plan and schedule production and manage inventory requirements.

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

The Company serves as a "one-stop"“one-stop” source that provides customers with one of the ceramic tile industry'sindustry’s broadest product lines-alines—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 enhance its product offering.

The Company has two of the leading brand names in the U.S. ceramic tile industry—Dal-Tile and American Olean. The Dal-Tile and American Olean brand names date back over fifty years and are well recognized in the industry. Both of these brands are supported by a fully integrated marketing program, displays, merchandising (sample boards and chip chests), literature/catalogs and an Internet website.

A network of approximately 250 sales service centers distributes primarily the Dal-Tile brand product with a fully integrated marketing program, emphasizing a focus on quality and fashion serving customers in the U.S., Canada and Puerto Rico. The service centers provide distribution points for customer pick-up, local delivery and showrooms to assist customers. The broad product offering satisfies the needs of its residential and commercial customers.

5




The independent distributor channel offers a distinct product line under the "American Olean®"American Olean brand. Currently, the "American Olean®"American Olean brand is distributed through approximately 20050 independent distributor locationsdistributors that

Index to Financial Statements

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 namessix regional distribution centers in the U.S. ceramic tile industry-"Dal-Tile®"Dal-Tile operations. These centers help deliver high-quality customer service by focusing on shorter lead times, increased order fill rates and "American Olean®".  The "Dal-Tile®" and "American Olean®" brand names date back over fifty and seventy-five years, respectively and are well recognized in the industry.improved on-time deliveries to customers.

     The Company's sales service centers primarily distribute the "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®" 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'ssegment manufactures, licenses, distributes and markets laminate flooring productsin Europe and the U.S. It also produces hardwood flooring, roofing systems and other wood products. Products are distributed through separate distribution channels consisting of retailers, contractors, commercial users, independent distributors and home centers. Unilin U.S. operations also manufacture Mohawk branded laminate and hardwood flooring which sells through the Mohawk channel. The majority of Unilin’s laminate sales, both in the U.S. and Europe, are for residential replacement. The business is organized to address the specific customer needs of each distribution channel.

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

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

     In theThe Unilin business, the Companysegment markets and sells laminate and hardwood flooring products under the "Quick-Step®" brand, which theQuick-Step, Columbia Flooring, Century Flooring, and Universal Flooring brands. In addition, Unilin also sells laminate and hardwood flooring products under private label. The Company believes Quick-Step is one of the leading brand names in the U.S. and European laminateflooring 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 flooring 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.samples.

Manufacturing and Operations

Mohawk Segment

The Company'sCompany’s manufacturing operations are vertically integrated and include the extrusion of resin and post-consumer plastics into polypropylene, polyester and nylon fiber, yarn processing, backing manufacturing, 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 CompanyMohawk Segment has incurred capital expenditures that have helped increase manufacturing efficiency and capacity and improve overall cost competitiveness.

Dal-Tile Segment

     Over the past three years, the Dal-Tile segment has invested in capital expenditures, principally in new plant and state-of-the-art equipment to increase manufacturing capacity, improve efficiency and develop new capabilities.

6




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'sindustry’s broadest product offerings of colors, textures and finishes, as well as the industry'sindustry’s largest offering of trim and angle pieces and its ability to utilize

Index to Financial Statements

the industry'sindustry’s newest technology. In addition, Dal-Tile also imports or sources a portion of its product to supplement its product offerings. Over the past three years, the Dal-Tile segment has invested in capital expenditures, principally in state-of-the-art equipment, to increase manufacturing capacity, improve efficiency and develop new capabilities.

Unilin Segment

The Company'sCompany’s laminate flooring manufacturing operations are vertically integrated, both in the United StatesU.S. and in Europe, and include high-density fiberboard ("HDF"(“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'sCompany’s laminate flooring plant in North Carolina is one of the largest in the United States.U.S. In addition, Unilin is one of the onlyfew fully integrated laminate manufacturermanufacturers in the United StatesU.S. with its own "HDF"HDF production facility. The acquisition of Columbia added manufacturing capability for both engineered and prefinished solid wood flooring for the U.S. and European markets. Over the past three years, the Unilin segment has invested in capital expenditures, principally in new plants and state-of-the-art equipment to increase manufacturing capacity, improve efficiency and develop new capabilities.

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

Raw Materials and Suppliers

Mohawk Segment

The principal raw materials the carpet and rug business uses are nylon, polypropylene, polyester and wool resins and fibers;fibers, synthetic backing materials;materials, latex and various dyes and chemicals. Major raw materials used in the Company'sCompany’s manufacturing process are available from independent sources and the Company obtains allmost of its externally purchased nylon fibers principally from two major suppliers: Invista Inc., and Solutia, Inc. Although temporary disruptions of supply of carpet raw materials have beenwere experienced as a result of recent hurricanes,in 2005, the carpet and rug business has not experienced significant shortages of raw materials in recent years. The Company believes that there is an adequate supply of all grades of resin and fiber, which are readily available.

Dal-Tile Segment

Dal-Tile Segment

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

The Company ownshas 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 two suppliers for its nepheline syenite requirements. If these suppliers were unable to satisfy the requirements, the Company believes that alternative supply arrangements would be available.

Glazes are used on a significant percentage of manufactured tile. Glazes consist of frit (ground glass), zircon, stains and other materials, with frit being the largest ingredient. The Company manufactures approximately 45%60% of its frit requirements.

Index to Financial Statements

Unilin Segment

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

Wood supply is a very fragmented market in Europe. The Company has long-standing relationships with approximately 2550 suppliers. These suppliers provide a wide variety of wood species, varying from fresh round wood to several kinds of by-products of sawmills and used wood recycled specifically for chipboard production, giving the Company a cost-effective and secure supply of raw material.

7




In the United States,U.S., the Company has a long-term contract with a strategic partnercontiguously located lumber company that supplies approximately 90%most of its total needs for woodHDF board production. Supply for hardwood flooring is both localized and global depending on a vendor-managed inventory program.the various species of hardwoods and hardwood veneers used in the production of engineered hardwood flooring being available.

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

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

Competition

The principal methods of competition within the floor covering industry generally are service, style, quality, price and, to a certain extent, product innovation and technology. In each of the markets, other than laminate flooring, price competition and market coverage are particularly important because there is limited differentiation among competing product lines. In the laminate flooring market, the Company believes it has a competitive advantage as a result of Unilin's high-end products and patented technologies, which allows the Company to distinguish its laminate flooring products in the areas of finish, quality, installation and assembly. In the Mohawk and Dal-Tile segments, the recent investments in modernized advanced manufacturing, and data processing equipment,computer systems, the extensive diversity of equipment, that has been invested, as well as the Company'sCompany’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 rug 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. TheIn the laminate flooring industrymarket, the Company believes it has a numbercompetitive advantage as a result of significant competitors more than eitherUnilin’s industry leading design and patented technologies, which allows the carpetCompany to distinguish its laminate and rug industry orhardwood flooring products in the ceramic tile industry.areas of finish, quality, installation and assembly. The Company faces competition in the laminate and hardwood 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 205 North American carpet and rug manufacturers (including their North American and foreign divisions) in 20042007 had worldwide carpet and rug sales in excess of $12.5$9 billion and in 1998of the top 20 manufacturers had sales in excess of $9.6 billion. In 2004, the top five manufacturers had worldwide sales in excess of $10.0 billion.over $14 billion market. The Company believes it is the second largest producer of carpets and rugs (in terms of sales volume)dollars) in the world based on its 20042007 sales.

Dal-Tile Segment

The Company estimates that over 100 tile manufacturers, more than half of which are based outside the United States,U.S., compete for sales of ceramic tile to customers located in the United States.U.S. 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 manufacturers, distributors and marketers of ceramic tile in the United StatesU.S. and the world.

Index to Financial Statements

Unilin Segment

Laminate and hardwood flooring is the fastest growing productare leading growth products in the U.S. floor covering industry andindustry. Laminate flooring 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, with a focus on high-end products. The Company is also one of the onlyfew vertically-integrated laminate flooring manufacturermanufacturers in the United StatesU.S. producing both high density fiberboard and laminate flooring. The Company estimates that there are over 100 wood manufacturers located in various countries. Following the Wood Acquisition, the Company believes it is one of the largest manufacturers and distributors of hardwood in the U.S.

8




Patents and Trademarks

Intellectual property is important to the Company'sCompany’s business, and the Company relies on a combination of patent, copyright, trademark and trade secret laws to protect its interests.

The Company uses several trademarks that it considers important in the marketing of its products, including "Aladdin®Aladdin, American Olean, Bigelow, Dal-Tile, Durkan, Horizon, Karastan, Lees, Mohawk, Mohawk Home, Portico, Quick-Step, Ralph Lauren, “UNILIN®," "American Olean®," "Bigelow®," "Custom Weave®," "Dal-Tile®," "Durkan®," "Helios®," "Horizon®," "Karastan®," "Lees®," "Mohawk®," "Mohawk Home," "PERSPECTIVE, ®" "Portico, ®" "Quick-Step®," "UNICLIC®," "UNILIN®,"” UNICLIC, Columbia Flooring, Century Flooring, Universal Flooring, and "WundaWeve®“PureBond®."

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

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, rug, ceramic tile, wood, vinyl and laminate 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.

During 2005,2008, no single customer accounted for more than 10%5% of total net sales, and the top ten customers accounted for less than 15% of the Company'sCompany’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 10, 2006,December 31, 2008, the Company employed approximately 37,700 persons. Approximately 460  United States employees,31,200 persons consisting of approximately 3,50024,900 in the U.S., approximately 3,300 in Mexico, employees,approximately 2,300 in Europe, approximately 600 in Malaysia and theapproximately 100 in Canada. The majority of the Company’s European and Mexican manufacturing employees 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.agreement. Additionally, the Company has not experienced any strikes or work stoppages in the United StatesU.S., Mexico or MexicoMalaysia for over 20 years. The Company believes that its relations with its employees are good.

Available Information

The Company'sCompany’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;

  • Index to Financial Statements

    current reports on Form 8-K; and

  • amendments to the foregoing reports.

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

Item 1A.Risk Factors

Item 1a. Risk Factors

Certain Factors affecting the Company'sCompany’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'sCompany’s business, financial condition and results of operations.

9




The current uncertainty in the credit markets, downturns in the global economy and the Company’s business could affect the overall availability and cost of credit.

The current uncertainty in the credit markets could also limit demand for our products, and affect the overall availability and cost of credit. At this time, it is unclear whether and to what extent the actions taken by the U.S. government, and other measures currently being implemented or contemplated, will mitigate the effects of the situation. While we do not anticipate any immediate need to access the credit markets, the impact of the current situation on our ability to obtain financing in the future, and the cost and terms of it, is uncertain. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results. Further, these generally negative economic and business conditions may factor into our periodic credit ratings assessment by either or both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. The rating agency’s evaluation is based on a number of factors, which include scale and diversification, brand strength, profitability, leverage, liquidity and interest coverage. On November 7, 2008, Moody’s Investors Service, Inc. announced that it placed the Company’s Baa3 long term rating on review for possible downgrade. On February 25, 2009, Moody’s Investors Service, Inc. announced that it had downgraded its ratings on the Company’s senior unsecured notes to Ba1 from Baa3 and was maintaining a negative rating outlook, following the completion of its rating review. This downgrade will increase the Company’s interest expense by approximately $3.5 million per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit rating could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future, and the Company can provide no assurances that additional downgrades will not occur. Additionally, our credit facilities require us to meet certain financial covenants, including certain debt to capitalization ratios. Failure to comply with these covenants could materially and adversely affect our ability to finance our operations or capital needs and to engage in other activities that may be in our best interest.

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, availability of credit and demand for housing. AThe current downturn in the U.S. and global economies, along with the housing markets in such economies, has negatively impacted the floor covering industry and the Company’s business. These difficult economic conditions may continue or deteriorate in the foreseeable future. Further, significant or prolonged declinedeclines in such economies or in spending for replacement floor covering products or new construction activity could have a material adverse effect on the Company'sCompany’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.levels, availability of credit and demand for housing. The Company derives a majority of the Company'sCompany’s sales from the

Index to Financial Statements

replacement segment of the market. Therefore, economic changes that result in a significant or prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company'sCompany’s business and results of operations.

The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature.nature and currently in a downturn. The current downturn in the U.S. and global economies, along with the housing markets in such economies, has negatively impacted the floor covering industry and the Company’s business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, athese activities have also lagged during the current downturn. The difficult economic conditions may continue or deteriorate in the foreseeable future. A significant or prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company'sCompany’s business and results of operations.

      The construction industry has experienced significant downturns inIn periods of rising costs, 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 cost 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'sCompany’s profitability.

The prices of raw materials and fuel-related costs vary with market conditions. As a result of recent hurricanes and other general economic factors, the Company's costs of carpet raw materials and fuel-related costs are currently higher than historical averages and may remain so indefinitely. Although the Company generally attempts to pass on increases in the costs of raw materialsmaterial and fuel-related costs to its customers, the Company'sCompany’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company'sCompany’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'sCompany’s profitability may be materially adversely affected.

The Company faces intense competition in the flooring industry, which could decrease demand for the Company'sCompany’s products or force it to lower prices, which could have a material adverse effect on the Company'sCompany’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'sCompany’s competitors are larger and have greater resources and access to capital than the Company does. Maintaining the Company'sCompany’s competitive position may require substantial investments in the Company'sCompany’s product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company'sCompany’s products or force the Company to lower prices. Any of these factors could have a material adverse effect on the Company'sCompany’s business.

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. For certain of such raw materials, the Company is dependent on one or a small number of suppliers. An adverse change in the Company’s relationship with such a supplier, the financial condition of such a supplier or such supplier’s ability to manufacture or deliver such raw materials to the Company could lead to an interruption of supply. 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.

Index to Financial Statements

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 operations accounts using, principally, the Company’s 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. The Company may not be able to successfully integrate Unilin or othermanage effectively the Company’s currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the Company’s consolidated financial statements and affect comparability of the Company’s results between financial periods.

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 cannot give assurance that an acquired company will achieve the levels of revenue, profitability and production that the Company may make in the future.

expects. The processcombination of combining the businesses of Unilinan acquired company’s business with the Company'sCompany’s existing businesses involves risks. The Company cannot 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'sCompany’s organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel. These challenges willmay result principally because the two companies currentlyin:

  •  maintain

    maintaining executive offices in different locations;

  • manufacture

    manufacturing and sellselling different types of products through different distribution channels;

  • conduct

    conducting business from various locations;

  • maintain

    maintaining different operating systems and software on different computer hardware; and

  • have

    providing different employment and compensation arrangements for their employees.

10




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

Failure to successfully manage and integrate Unilinan acquisition with the Company'sCompany’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'sCompany’s financial condition and results of operations. Even if integration occurs successfully, failure of the Unilin Acquisition or any future acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise not perform as expected, may adversely impact the Company'sCompany’s financial condition and results of operations. The Company has incurred, and will continue to incur, certain liabilities and expenses in connection with the Unilin Acquisition or any future acquisitions.

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

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

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

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

11




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

The Company'sCompany’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

Index to Financial Statements

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'sCompany’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'sCompany’s business.

The Company's Monterrey, Mexico manufacturing facility and the Company'sCompany’s manufacturing facilities in Mexico and Europe represent a significant portion of the Company's total manufacturingCompany’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 the Company's Mexicaneither of these operations could have a material adverse effect on the Company's tile operations as a whole.  Similarly, an event that has a material adverse impact on the Company's European operations could have a material adverse effect on the Company's laminate flooring operations, as a whole.Company. The business, regulatory and political environments in Mexico and in Europe differ from those in the United States,U.S., and the Company'sCompany’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'sCompany’s operations or upon the Company'sCompany’s financial condition and results of operations.

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

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

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

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

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

12




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

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

The Company has obtained a number of patents relating to the Company'sCompany’s products and associated methods and has filed applications for additional patents, including the UNICLIC® family of patents, which protects Unilin'sUnilin’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'sCompany’s pending patent applications will be approved. In addition, patent filings by third parties, whether made before or after the date of the Company'sCompany’s filings, could render the Company'sCompany’s intellectual property less valuable.

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

The Company has obtained and applied for numerous U.S. and foreign serviceForeign 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'sCompany’s pending or future applications will be

Index to Financial Statements

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 StatesU.S. and in other countries could limit the Company'sCompany’s ability to protect the Company'sCompany’s trademarks and impede the Company'sCompany’s marketing efforts in those jurisdictions.

The Company generally requires third parties with access to the Company'sCompany’s trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company'sCompany’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'sCompany’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'sCompany’s competitiveness could be significantly impaired, which would limit the Company'sCompany’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'sCompany’s products.

      The Company has inIn the past, had companies claimhave claimed that certain technologies incorporated in the Company'sCompany’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'sCompany’s products infringe, or may infringe, those parties'parties’ intellectual property rights. The Company cannot be certain that the Company'sCompany’s products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United StatesU.S. 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'sCompany’s products or processes. If patents are later issued on these applications, the Company may be liable for infringement.

13




Furthermore, the Company may initiate claims or litigation against parties for infringement of the Company'sCompany’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'sCompany’s technical and management personnel from operations, whether or not such litigation is resolved in the Company'sCompany’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 attorneysattorney’s 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'sCompany’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.

Index to Financial Statements

Declines in the Company’s business conditions may result in an impairment of the Company’s tangible and intangible assets which could result in a material non-cash charge.

A decrease in the Company’s market capitalization, including a short-term decline in stock price, or a negative long-term performance outlook, could result in an impairment of its tangible and intangible assets which results when the carrying value of the Company’s assets exceed their fair value. In 2008, the Company’s goodwill and other intangible assets suffered an impairment and additional impairment charges could occur in future periods.

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"“believes,” “anticipates,” “forecast,” “estimates” or similar expressions constitute "forward-looking statements"“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'sMohawk’s SEC reports and public announcements.

Item 1B.Unresolved Staff Comments

Item 1b. Unresolved Staff CommentsNone.

 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 1,773,1451,744,072 and 974,900 square foot manufacturing facilityfacilities located in Monterey, Mexico and Muskogee, Oklahoma, respectively, 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'sCompany’s facilities both owned and leased for each segment in square feet:

 

Mohawk Segment

 

Dal-Tile Segment

 

Unilin Segment

Primary Purpose

Owned

 

Leased

 

Owned

 

Leased

 

Owned

 

Leased

Manufacturing

20,059,803 

685,338 

4,589,135 

22,000 

6,676,517 

831,600 

Selling and Distribution

4,174,479 

5,996,943 

152,811 

6,961,621 

Other

910,548 

321,312 

36,000 

   Total

25,144,830 

6,682,281 

5,063,258 

7,019,621 

6,676,517 

831,600 

 

   Mohawk Segment  Dal-Tile Segment  Unilin Segment

Primary Purpose

  Owned  Leased  Owned  Leased  Owned  Leased

Manufacturing

  17,716,649  199,954  4,380,498  —    7,444,026  876,529

Selling and Distribution

  3,758,636  5,191,315  152,811  8,341,491  120,000  89,150

Other

  1,148,400  —    321,312  36,000  142,632  —  
                  

Total

  22,623,685  5,391,269  4,854,621  8,377,491  7,706,658  965,679
                  

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

Index to Financial Statements
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 or under the section "-Environmental Matters," there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

14




In Shirley Williams et al vs.al. v. Mohawk Industries, Inc., four plaintiffs filed a purportedputative class action lawsuit in January 2004 in the United States District Court for the Northern District of Georgia (Rome Division), 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 permittedauthorized to work in this country,the United States, have damaged them and the other members of the purportedputative class by suppressing the wages of the Company'sCompany’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'sattorney’s fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District Court in April 2004. Following appellate review of this decision, the case was returned to the District Court for further proceedings. On December 18, 2007, the plaintiffs filed a motion for class certification. On March 3, 2008, the District Court denied the plaintiffs motion for class certification. The Companyplaintiffs then sought and obtained permission to file an immediate appeal ofappealed the Northern District's decision to the United States Court of Appeals for the 11th Circuit. Circuit on March 17, 2008, where the matter is currently pending. Discovery has been stayed at the District Court while the appeal is pending. The Company will continue to vigorously defend itself against this action.

In Collins & Aikman Floorcoverings, Inc., et. al. v. Interface, Inc., United States District Court for the Northern District of Georgia (Rome Division), Mohawk Industries, Inc. joined Collins & Aikman Floorcoverings, Inc. (“CAF”) and Shaw Industries Group, Inc. (“Shaw”) in suing Interface, Inc. (“Interface”) for declaratory judgments that United States Patent 6,908,656 (the “Patent”), assigned to Interface and relating to certain styles of carpet tiles, is not infringed and is invalid. Also in June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (WilliamsInterface, Inc., et el. v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005,et al. United States District Court for the Company filed a motion requesting review byNorthern District of Georgia (Atlanta Division), Interface sued Mohawk Industries, Inc., Mohawk Carpet Corporation, and Mohawk Commercial, Inc. for allegedly infringing the full 11th Circuit, which was deniedPatent. Interface brought similar suits against entities affiliated with CAF and Shaw. Interface is seeking monetary damages as well as injunctive relief. The cases have been consolidated in August 2005. In October 2005, the Company filed a petition for certiorari with the United States SupremeDistrict Court which petitionfor the Northern District of Georgia (Rome Division). In January 2008, the Company joined CAF and Shaw in filing summary judgment motions seeking to establish as a matter of law before trial that the Patent was invalid, that it was not willfully infringed, and that Interface could not obtain damages for lost profits. On February 25, 2009, the District Court (i) denied the Company, CAF’s and Shaw’s motions that the patent was invalid (ii) granted their motions that should infringement be found that any such infringement would not be willful, and (iii) granted in December of 2005.part and denied in part their motions that Interface could not obtain damages for lost profits. The Company believes it has meritorious defensesis vigorously pursuing its declaratory judgment claims of invalidity and intendsnon-infringement with respect to continue vigorouslythe Patent and defending itself against this action.the claims brought by Interface for infringement of the Patent. A trial date is anticipated to be set for later in 2009.

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

Index to Financial Statements

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 its operations, but may have an effect on the results of operations for a given quarter or annual period.

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

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, 2005.2008.




PART II

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

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

Market for the Common Stock

The Company'sCompany’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

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

 $

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 (through March 13, 2006)

 $

90.88 

80.05 

 

   Mohawk
Common Stock
   High  Low

2007

    

First quarter

  $94.35  75.15

Second quarter

   108.00  81.28

Third quarter

   103.73  80.32

Fourth quarter

   87.44  73.40

2008

    

First quarter

  $83.09  63.00

Second quarter

   80.29  64.01

Third quarter

   75.26  56.55

Fourth quarter

   69.47  23.91

2009

    

First quarter (through February 25, 2009)

  $46.05  23.39

As of March 13, 2006,February 25, 2009, there were approximately 384336 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'sCompany’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'sCompany’s profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.

The Company did not repurchase any of its common stock during the fourth quarter of 2005.2008.

      On October 31, 2005, the Company entered into an agreement

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

16




Financial Statements
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 March 20, 2002, the Company acquired all the outstanding capital stock of Dal-Tile International Inc. ("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") 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.NV (“Unilin Acquisition”). The total purchase price of the Unilin Acquisition, net of cash, was approximately Euro .22.1 billion (approximately $2.6$2.5 billion). The acquisition was recorded usingOn August 13, 2007, the purchase method of accounting.Company completed the Wood Acquisition for approximately $147 million in cash. 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'sCompany’s consolidated financial statements and notes thereto included elsewhere herein.

At or for the Years Ended December 31,

2005

2004

 

2003

2002 (c)

2001

(In thousands, except per share data)

Statement of earnings data:

 

 

 

 

 

 

Net sales

 $

6,620,099 

5,880,372 

4,999,381 

4,516,957 

3,441,267 

Cost of sales (a)

4,896,965 

4,259,531 

3,605,579 

3,247,865 

2,583,669 

 Gross profit

1,723,134 

1,620,841 

1,393,802 

1,269,092 

857,598 

Selling, general and administrative

 expenses

1,095,862 

985,251 

851,773 

747,027 

530,441 

 Operating income

627,272 

635,590 

542,029 

522,065 

327,157 

Interest expense (b)

66,791 

53,392 

55,575 

68,972 

29,787 

Other expense (income), net

3,460 

4,809 

(1,980)

9,464 

5,954 

70,251 

58,201 

53,595 

78,436 

35,741 

 Earnings before income taxes

557,021 

577,389 

488,434 

443,629 

291,416 

Income taxes

198,826 

208,767 

178,285 

159,140 

102,824 

 Net earnings

 $

358,195 

368,622 

310,149 

284,489 

188,592 

Basic earnings per share

 $

5.35 

5.53 

4.68 

4.46 

3.60 

Weighted-average common shares

 outstanding

66,932 

66,682 

66,251 

63,723 

52,418 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

4.39 

3.55 

Weighted-average common and

   dilutive potential common shares

   outstanding

67,644 

67,557 

67,121 

64,861 

53,141 

Balance sheet data:

 

Working capital

 $

1,228,573 

968,923 

592,310 

640,846 

449,361 

Total assets

7,991,523 

4,403,118 

4,163,575 

3,596,743 

1,768,485 

Long-term debt (including

   current portion)

3,308,370 

891,341 

1,012,413 

820,427 

308,433 

Stockholders' equity

3,027,120 

2,666,337 

2,297,801 

1,982,879 

948,551 

(a)     In 2005, the Company recorded a non-recurring $34,300 (net of tax of $22,300)

  At or for the Years Ended December 31,
  2008  2007  2006  2005 2004
  (In thousands, except per share data)

Statement of operations data:

     

Net sales

 $6,826,348  7,586,018  7,905,842  6,620,099 5,880,372

Cost of sales(a)

  5,088,584  5,471,234  5,674,531  4,851,853 4,256,129
              

Gross profit

  1,737,764  2,114,784  2,231,311  1,768,246 1,624,243

Selling, general and administrative expenses

  1,318,501  1,364,678  1,392,251  1,095,862 985,251

Impairment of goodwill and other intangibles(b)

  1,543,397  —    —    —   —  
              

Operating (loss) income

  (1,124,134) 750,106  839,060  672,384 638,992
              

Interest expense

  127,050  154,469  173,697  66,791 53,392

Other expense, net

  26,982  674  8,488  3,460 4,809

U.S. customs refund(c )

  —    (9,154) (19,436) —   —  
              
  154,032  145,989  162,749  70,251 58,201
              

Earnings (loss) before income taxes

  (1,278,166) 604,117  676,311  602,133 580,791

Income taxes(d)

  180,062  (102,697) 220,478  214,995 209,994
              

Net (loss) earnings

 $(1,458,228) 706,814  455,833  387,138 370,797
              

Basic (loss) earnings per share(d)

 $(21.32) 10.37  6.74  5.78 5.56
              

Weighted-average common shares outstanding

  68,401  68,172  67,674  66,932 66,682
              

Diluted (loss) earnings per share(d)

 $(21.32) 10.32  6.70  5.72 5.49
              

Weighted-average common and dilutive potential common shares outstanding

  68,401  68,492  68,056  67,644 67,557
              

Balance sheet data:

     

Working capital (includes short-term debt).

 $1,369,332  1,238,220  783,148  1,277,087 972,325

Total assets (b & d)

  6,446,175  8,680,050  8,212,209  8,066,025 4,429,993

Long-term debt (including current portion)

  1,954,786  2,281,834  2,783,681  3,308,370 891,341

Stockholders’ equity

  3,153,804  4,707,357  3,715,263  3,058,238 2,668,512

(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 2008, the Company recorded an impairment of goodwill and other intangibles which included $276,807 for the Mohawk segment, $531,930 for the Dal-Tile segment and $734,660 for the Unilin segment.
(c)In 2007 and 2006, the Company received partial refunds from the U.S. government in reference to settlement of custom disputes dating back to 1982.
(d)During the fourth quarter of 2007, the Company implemented a change in residency of one of its foreign subsidiaries. This tax restructuring resulted in a step up in the subsidiary’s taxable basis, which resulted in the recognition of a deferred tax asset of approximately $245,000 and a related income tax benefit of approximately $272,000. During the third quarter of 2008, the Company recorded a valuation allowance of approximately $253,000 against the deferred tax asset described above.

Index to Unilin's acquired inventory.

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

17




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

Statements
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 StatesU.S. and Europe with net sales in 2005 in excess2008 of $6.6$6.8 billion. The Company is the second largest carpet and rug manufacturer, and a leading manufacturer, marketer and distributor of ceramic tile, and natural stone and hardwood flooring in the United StatesU.S. and a leading producer of laminate flooring in the United StatesU.S. and Europe.

The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment manufactures, markets and distributes its product lines primarily in North America, which include carpet, rug,rugs, pad, ceramic tile, hardwood, resilient and laminate, through its network of approximately 52 regional distribution centers and satellite warehouses using its fleet of company-operated trucks, common carrier or rail transportation. The segment product lines are purchased by independentsold through various selling channels, which include floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment manufactures, markets and distributes its product lines primarily in North America, which include ceramic tile, porcelain tile and stone products, distributed through its network of regional distribution centers and approximately 250 company-operated sales service centers and regional distribution centers using primarilycompany-operated trucks, common carriers andor rail transportation. The segment product lines are purchased by floor covering retailers, home centers, independent distributors, tile specialty dealers, tile contractors, floor covering retailers,and commercial end users, independent distributors and home centers.users. The Unilin segment manufactures, markets and marketsdistributes its product lines primarily in North America and Europe, which include laminate flooring, wood flooring, roofing systems and other wood products through various selling channels, which are distributed through separate distribution channels consisting ofinclude retailers, contractors, commercial users,home centers and independent distributors and home centers. The business is organized to addressdistributors.

In 2007, the specific customer needs of each distribution channel.

      The primary categories of the United StatesU.S. floor covering industry, includebased on sales dollars, were carpet and rug (62%), ceramic tile (12%(13%), hardwood (10%(11%), resilient and rubber (9%), and laminate (6%(5%). Compound average growth rates for all categories, except the resilient and rubber category, for the period from 1999 through 2004 have met or exceeded the growth rates (measured in sales dollars) for 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% for carpet and rug, 7.0% for ceramic tile, 0.6% for resilient and rubber, 17.4% for laminate and 9.4% for hardwood.

       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 of $167.5 million, was approximately Euro 2.2 billion (approximately $2.6 billion).  The results of operations for the Unilin segment 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 laminate flooring market.

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

The Company reported net earningsloss of $358.2$1,458.2 million or diluted (loss) earnings per share ("EPS"(“EPS”) of $5.30,($21.32) for 2008, compared to net earnings of $368.6$706.8 million and $5.46$10.32 EPS for 2004.2007. The decreasechange in EPS resulted primarily from a non-recurring $34.3$1,543.4 million (netpre-tax impairment charge to reduce the carrying amount of goodwill and other intangibles, a charge of $253 million to record a tax valuation allowance against the carrying amount of $22.3 million) fair value adjustment applied to Unilin's acquired inventory, continuinga deferred tax asset recognized in the fourth quarter of 2007, lower sales volumes, rising raw material and energy costs and business restructurings. During 2008, the Company paid down approximately $333 million in debt.

The Company believes that industry demand for the products manufactured by the Company will continue to be impacted by the softened demand that began in the fourth quarter of 2006 and worsened considerably during the later parts of 2008. The global economy continues in the most significant downturn in recent history. Overall economic conditions and consumer sentiment have continued to deteriorate, which has intensified the pressure on the demand for housing and, as a result, the Company’s products. As the Company slowed production and raw materials purchases in the fourth quarter to reduce inventory in response to reduced demand, the proportion of higher cost products in inventory increased. Consequently, the Company anticipates that its margins and earnings will be negatively impacted until demand for the Company’s products increases offset by sales growth and better leveragingthe portion of selling, generalhigher cost products in inventory declines as higher cost inventory flows through earnings.

Although the Company cannot determine with certainty as to when the deteriorating market conditions will stabilize and administrative costs when comparedbegin to improve, the year ended December 31, 2004.Company believes it is well-positioned in the long-term as the industry improves. The Company continues to monitor expenses and manufacturing capacity based on current industry conditions and will continue to adjust as required.




Results of Operations

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

For the Years Ended December 31,

2005

 

2004

 

2003

 

(In thousands)

Statement of earnings data:

Net sales

 $

6,620,099 

100.0 %

5,880,372 

100.0 %

4,999,381 

100.0 %

Cost of sales

4,896,965 

74.0 %

4,259,531 

72.4 %

3,605,579 

72.1 %

 Gross profit

1,723,134 

26.0 %

1,620,841 

27.6 %

1,393,802 

27.9 %

Selling, general and administrative

 expenses

1,095,862 

16.6 %

985,251 

16.8 %

851,773 

17.0 %

 Operating income

627,272 

9.5 %

635,590 

10.8 %

542,029 

10.9 %

Interest expense

66,791 

1.0 %

53,392 

0.9 %

55,575 

1.1 %

Other (income) expense, net

3,460 

0.1 %

4,809 

0.1 %

(1,980)

0.0 %

70,251 

1.1 %

58,201 

1.0 %

53,595 

1.1 %

 Earnings before income taxes

557,021 

8.4 %

577,389 

9.8 %

488,434 

9.8 %

Income taxes

198,826 

3.0 %

208,767 

3.6 %

178,285 

3.6 %

 Net earnings.

 $

358,195 

5.4 %

368,622 

6.3 %

310,149 

6.2 %

   For the Years Ended December 31, 
   2008  2007  2006 
   (In thousands) 

Statement of operations data:

       

Net sales

  $6,826,348  100.0% 7,586,018  100.0% 7,905,842  100.0%

Cost of sales

   5,088,584  74.5% 5,471,234  72.1% 5,674,531  71.8%
              

Gross profit

   1,737,764  25.5% 2,114,784  27.9% 2,231,311  28.2%

Selling, general and administrative expenses

   1,318,501  19.3% 1,364,678  18.0% 1,392,251  17.6%

Impairment of goodwill and other intangibles

   1,543,397  22.6% —    0.0% —    0.0%
              

Operating (loss) income

   (1,124,134) -16.5% 750,106  9.9% 839,060  10.6%
              

Interest expense

   127,050  1.9% 154,469  2.0% 173,697  2.2%

Other expense, net

   26,982  0.4% 674  0.0% 8,488  0.1%

U.S. customs refund

   —    0.0% (9,154) -0.1% (19,436) -0.2%
              
   154,032  2.3% 145,989  1.9% 162,749  2.1%
              

Earnings (loss) before income taxes

   (1,278,166) -18.7% 604,117  8.0% 676,311  8.6%

Income taxes

   180,062  2.6% (102,697) -1.4% 220,478  2.8%
              

Net (loss) earnings

  $(1,458,228) -21.4% 706,814  9.3% 455,833  5.8%
              

Year Ended December 31, 2005,2008, as Compared with Year Ended December 31, 20042007

Net Sales

Net sales for the year ended December 31, 2005,2008, were $6,620.1$6,826.3 million, reflecting an increasea decrease of $739.7$759.7 million, or approximately 12.6%10.0%, overfrom the $5,880.4$7,586.0 million reported for the year ended December 31, 2004.2007. The increaseddecrease was primarily driven by a decline in sales volumes of approximately $973 million due to the continued decline in the U.S. residential markets, softening commercial demand and slowing European demand, partially offset by a benefit of approximately $131 million due to the net sales are primarily attributable toeffect of price increases and internalproduct mix, and a benefit of approximately $79 million due to favorable foreign exchange rates.

Mohawk Segment—Net sales growth and the Unilin Acquisition. The Mohawk segment recorded net sales of $4,716.7decreased $577.5 million, or 13.7%, to $3,628.2 million in 20052008, compared to $4,368.8$4,205.7 million in 2004, representing an increase2007. The decrease was primarily driven by a decline in sales volumes of $347.9approximately $639 million ordue to the continued decline in the U.S. residential market and softening commercial demand, partially offset by a benefit of approximately 8.0%. The increase was attributable$83 million due to the net effect of 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 product mix.

Dal-Tile segment recorded netSegment—Net sales of $1,734.8decreased $122.3 million, or 6.3%, to $1,815.4 million in 2005, reflecting an increase of $223.3 million or 14.8%, over the $1,511.52008, compared to $1,937.7 million reported in 2007. This decrease was primarily driven by a decline in sales volumes of approximately $146 million due to the year ended December 31, 2004.continued decline in the U.S. residential market, partially offset by a benefit of approximately $24 million due to the net effect of price increases and product mix.

Unilin Segment—Net sales decreased $22.4 million, or 1.5%, to $1,465.2 million in 2008, compared to $1,487.6 million in 2007. The increasedecrease in net sales was mostly attributabledriven by a decline in sales volume of approximately $188 million due to strong internal growththe continued decline in allthe U.S. residential market and slowing European demand, partially offset by a benefit of approximately $63 million due to the Wood Acquisition, a benefit of approximately $79 million due to favorable foreign exchange rates and a benefit of approximately $23 million due to the net effect of price increases and product categories with stone and floor tile reflecting the strongest growth.mix.

Index to Financial Statements

Quarterly net sales and the percentage changes in net sales by quarter for 20052008 versus 20042007 were as follows (dollars in thousands)

2005

2004

Change

        First quarter

 $

1,493,222 

1,389,725 

7.4 

%

        Second quarter

1,624,692 

1,485,897 

9.3 

        Third quarter

1,697,634 

1,529,651 

11.0 

        Fourth quarter

1,804,551 

1,475,099 

22.3 

               Total year

 $

6,620,099 

5,880,372 

12.6 

%

 

   2008  2007  Change 

First quarter

  $1,738,097  1,863,863  -6.7%

Second quarter

   1,840,045  1,977,210  -6.9 

Third quarter

   1,763,034  1,937,677  -9.0 

Fourth quarter

   1,485,172  1,807,268  -17.8 
           

Total year

  $6,826,348  7,586,018  -10.0%
           

Gross Profit

Gross profit was $1,723.1$1,737.8 million (26.0%(25.5% of net sales) for 20052008 and $1,620.8represented a decrease of $377.0 million, (27.6%or 17.8%, compared to gross profit of $2,114.8 million (27.9% of net sales) for 2004. The reduction2007. Gross profit was unfavorably impacted by increasing costs for raw materials and energy of approximately $172 million, net of cost savings initiatives, and a decline in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs, an increase involumes of approximately $279 million, partially offset by the LIFO reserve requirement, a non-recurring fair value adjustment applied to Unilin's acquired inventory,net effect of price increases and higher import costs.product mix of approximately $97 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for 20052008 were $1,095.9$1,318.5 million (16.6%(19.3% of net sales), reflecting a decrease of $46.2 million, or 3.4%, compared to $985.3$1,364.7 million (16.8%(18.0% of net sales) for 2004.2007. The reductiondecrease in percentage wasSG&A is attributable to better leveragingvarious cost savings initiatives implemented by the Company, offset by approximately $25 million of selling, generalunfavorable foreign exchange rates.

Impairment of goodwill and administrative expenses.intangibles

During 2008, the Company recorded a $1,543.4 million impairment charge to reduce the carrying amount of the Company’s goodwill and intangible assets to their estimated fair value based upon the results of two interim impairment tests conducted in the third and fourth quarters of 2008. The Company performed interim impairment tests because of a prolonged decline in the Company’s market capitalization during the third and fourth quarters of 2008, which the Company believes is primarily a result of the weakness in the U.S. residential housing market and the slowing European economy. In both the third and fourth quarters of 2008, the Company concluded that the weakness in the U.S. residential housing market is likely to persist based on its review of, among other things, sequential quarterly housing starts, recent turmoil surrounding the nation’s largest mortgage lenders, the potential negative impact on the availability of mortgage financing and housing start forecasts published by national home builder associations pushing recovery in the U.S. residential housing market beyond 2009. The total impairment included $276.8 million in the Mohawk segment, $531.9 million in the Dal-Tile segment and $734.7 million in the Unilin segment. If, in the future, the Company’s market capitalization and/or the estimated fair value of the Company’s reporting units were to decline further, it may be necessary to record further impairment charges.

19




Operating (loss) income

Operating loss for 20052008 was $627.3$1,124.1 million (9.5%reflecting a decrease of net sales)$1,874.2 million compared to $635.6operating income of $750.1 million (10.8%(9.9% of net sales) in 2004. Operating income attributable2007. The decrease was primarily driven by the recognition of impairment of goodwill and other intangibles of $1,543.4 million, a decline in sales volumes of approximately $285 million and rising costs for raw materials and energy of approximately $116 million, net of cost savings initiatives, partially offset by a benefit of approximately $130 million due to the net effect of price increases and product mix.

Index to Financial Statements

Mohawk segmentSegment—Operating loss was $381.7$216.2 million (8.1%in 2008 reflecting a decrease of $471.1 million compared to operating income of $254.9 million (6.1% of segment net sales) in 20052007. The decrease was primarily due to the impairment of goodwill and other intangibles of $276.8 million, a decline in sales volumes of approximately $142 million and rising costs for raw materials and energy of approximately $82 million, net of cost savings initiatives, partially offset by a benefit of approximately $82 million due to the net effect of price increases and product mix.

Dal-Tile Segment—Operating loss was $323.4 million in 2008 reflecting a decrease of $582.1 million, compared to $424.3operating income of $258.7 million (9.7%(13.4% of segment net sales) in 2004.2007. The percentage decrease was primarily due to the impairment of goodwill of $531.9 million, rising costs for raw materials and energy of approximately $31 million, net of cost savings initiatives, and a decline in sales volumes of approximately $56 million, partially offset by a benefit of approximately $41 million due to the net effect of price increases and product mix.

Unilin Segment—Operating loss was $564.9 million in 2008, reflecting a decrease of $837.2 million compared to operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $260.2of $272.3 million (15.0%(18.3% of segment net sales) in 2005, compared2007. The decrease was primarily due to $219.8the impairment of goodwill and other intangibles of $734.7 million, (14.5%a decline in sales volumes of segmentapproximately $88 million and rising costs for raw materials and energy of approximately $19 million, net sales) in 2004. The increase in operating income asof cost savings initiatives, partially offset by a percentagebenefit of approximately $7 million due to the net sales is primarily attributable toeffect of price increases and product mix shift and implementing increased pricing to help offset increased raw material, energy, transportation, and higher import costs.mix.

Interest expense

Interest expense for 20052008 was $66.8$127.1 million compared to $53.4$154.5 million in 2004.2007. The increasedecrease in interest expense for 2008 as compared to 2007 was attributable to thelower average debt raised to fund the Unilin Acquisition.and lower average interest rates on outstanding revolving debt.

Income tax (benefit) expense

The 2008 provision for income tax was $198.8$180.1 million, or 35.7% of earnings before income taxes for 2005as compared to $208.8an income tax benefit of $102.7 million or 36.2%for 2007. The effective tax rate for 2008 was (14.1%) as compared to an effective tax rate benefit of earnings before income taxes17.0% for 2004.2007. The improvedchange in the tax rate was primarily attributabledue to the utilizationimpact on pre-tax earnings of tax creditsthe impairment charge on non-deductible goodwill, the 2008 business restructurings, and the one-time effectrecognition of statea valuation allowance of $253 million, which is described below, against certain deferred tax law changes.assets that the Company believes is no longer more likely than not to be realized. Without the impact of these three items, the Company would have reflected a 2008 provision for income tax of $70.5 million, as compared to a provision of $168.9 million for 2007, which excludes a tax benefit of approximately $272 million from the European restructuring described below.

In the fourth quarter of 2007, the Company moved the intellectual property and treasury operations of an indirectly owned European entity to a new office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin, and the move allowed for the consolidation of the historical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized at December 31, 2007 was approximately $245 million and the related income tax benefit recognized in the financial statements was approximately $272 million.

Index to Financial Statements

During the third quarter of 2008, the Company reassessed the need for a valuation allowance against its deferred tax assets. Actual cash flows have been less than those projected as of December 31, 2007, primarily due to the slowing worldwide economy and declining sales volume. The Company determined that, given the current and expected economic conditions and the corresponding reductions in cash flows, its ability to realize the benefit of the deferred tax asset related to the European restructuring transaction described above, as well as tax losses generated in the same jurisdiction was not more likely than not. Accordingly during the third quarter of 2008, the Company recorded a $253 million valuation allowance against the deferred tax asset created as a result of the European restructuring.

Year Ended December 31, 2004,2007, as Compared with Year Ended December 31, 20032006

Net sales for the year ended December 31, 2004,2007, were $5,880.4$7,586.0 million, reflecting an increasea decrease of $881.0$319.8 million, or approximately 17.6%4.0%, overfrom the $4,999.4$7,905.8 million reported for the year ended December 31, 2003.2006. The increased netdecrease primarily occurred in the Company’s U.S. residential new construction and replacement channels, which the Company believes was caused by the slowing U.S. housing industry offset by stronger sales are primarily attributable to strong internal sales growth from bothwithin the Mohawk and Dal-Tile segments. The Mohawk segment recorded net sales of $4,368.8 million in 2004 compared to $3,730.8 million in 2003, representing an increase of $638.0 million or approximately 17.1%. The increase was attributable to strong internal growth in allEuropean product categories and the Lees Carpet acquisition. The Dal-Tile segment recorded netimpact of the Wood Acquisition.

Mohawk Segment—Net sales of $1,511.5decreased $536.4 million, or 11.3%, to $4,205.7 million in 2004, reflecting an increase of $243.02007 compared to $4,742.1 million in 2006. The decrease was due to lower demand in its residential new construction and replacement channels, which the Company believes resulted primarily from the slowing U.S. housing industry.

Dal-Tile Segment—Net sales decreased $4.1 million, or 19.2%0.2%, over the $1,268.5to $1,937.7 million in 2007 compared to $1,941.8 million reported in 2006. The decrease was primarily attributable to lower sales within its residential channel, which the year ended December 31, 2003.Company believes was due to the slowing U.S. housing industry.

Unilin Segment—Net sales increased $250.7 million, or 20.3%, to $1,487.6 million in 2007 compared to $1,236.9 million in 2006. The increase in sales was mostly attributable to strong internal growthdriven by an increase in all product categories with stoneselling prices, higher demand in Europe, favorable Euro exchange rates, the Wood Acquisition and floor tile reflecting the strongest growth.an increase in patent revenues.

Quarterly net sales and the percentage changes in net sales by quarter for 20042007 versus 20032006 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.

 

   2007  2006  Change 

First quarter

  $1,863,863  1,925,106  -3.2 %

Second quarter

   1,977,210  2,058,123  -3.9 

Third quarter

   1,937,677  2,024,019  -4.3 

Fourth quarter

   1,807,268  1,898,594  -4.8 
           

Total year

  $7,586,018  7,905,842  -4.0 %
           

Gross Profit

Gross profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8$2,114.8 million (27.9% of net sales) for 2003. The reduction2007 and represented a decrease of $116.5 million, or 5.2%, compared to gross profit of $2,231.3 million (28.2% of net sales) for 2006. Gross profit as a percentage of net sales for 2007 was unfavorably impacted by lower sales volume in percentage was primarily attributable to increasedthe U.S., higher raw material costs energy costs, transportation costsand plant shutdowns in the U.S. offset by price increases and higher import costs.demand in Europe.

Selling, general and administrative expenses

Selling, general and administrative expenses for 20042007 were $985.3$1,364.7 million (16.8%(18.0% of net sales), reflecting a decrease of $27.6 million, or 2.0%, compared to $1,392.3 million (17.6% of net sales) for 2006. The increase in the selling, general and administrative expenses as a percentage of net sales was primarily attributable to lower sales in proportion to selling, general and administrative expenses.

Index to Financial Statements

Operating (loss) income

Operating income for 2007 was $750.1 million (9.9% of net sales) compared to $851.8$839.1 million (17.0% of net sales) for 2003. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

      Operating income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0 million (10.9%(10.6% of net sales) in 2003.2006. Operating income attributable to the Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared to $364.0 million (9.8% of segment net sales) in 2003. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $219.8 million (14.5% of segment net sales) in 2004, compared to $187.2 million (14.8% of segment net sales) in 2003. The decrease in operating income as a percentage of net sales isin 2007 was unfavorably impacted by lower sales volume, which the Company believes was primarily attributable to the slowing U.S. housing industry, and plant shutdowns partially offset by higher energysales in Europe.

Mohawk Segment—Operating income was $254.9 million (6.1% of segment net sales) in 2007 reflecting a decrease of $132.5 million compared to $387.4 million (8.2% of segment net sales) in 2006. Operating income as a percentage of the Mohawk segment net sales was unfavorably impacted by its residential new construction and replacement channels, which the Company believes resulted from the slowing U.S. housing industry, increased manufacturing costs importresulting from lower production volume, higher raw material costs and transportation costs.plant shutdowns.

Dal-Tile Segment—Operating income was $258.7 million (13.4% of segment net sales) in 2007 reflecting a decrease of $12.2 million compared to $270.9 million (14.0% of segment net sales) in 2006. Operating income as a percentage of the Dal-Tile segment net sales was unfavorably impacted by its residential channel, which the Company believes resulted from the slowing U.S. housing industry and a plant shutdown.

Unilin Segment—Operating income was $272.3 million (18.3% of segment net sales) in 2007 reflecting an increase of $58.2 million compared to $214.1 million (17.3% of segment net sales) in 2006. Operating income as a percentage of the Unilin segment was favorably impacted by an increase in selling prices and higher demand.

Interest Expense

20




Interest expense for 20042007 was $53.4$154.5 million compared to $55.6$173.7 million in 2003.2006. The decrease in interest expense for 2007 as compared to 2006 was attributable to a larger benefit from a fair value adjustment related to anlower average debt, partially offset by higher interest rate swap during 2004rates in 2007 when compared to 2003.2006.

Income tax (benefit) expense was $208.8

The Company had an income tax benefit of $102.7 million, or 36.2%(17.0)% of earnings before income taxes for 20042007, compared to $178.3an income tax expense of $220.5 million, or 36.5%32.6% of earnings before income taxes for 2003.2006. During the fourth quarter of 2007, the Company implemented a change in residency of one of its foreign subsidiaries. The improved rate wasCompany moved the intellectual property and treasury operations of an indirectly owned European entity to a resultnew office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin and the move allowed for the consolidation of the utilizationhistorical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax credits.and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized at December 31, 2007 was approximately $245 million and the related income tax benefit recognized in the financial statements was approximately $272 million. The recognition of the deferred tax asset resulted in a reduction in the Company’s effective tax rate for the year. In addition the tax rate also decreased due to a greater percentage of income in lower taxed jurisdictions and changes implemented in the third quarter of 2007, which resulted in higher interest deductions outside the U.S.

Liquidity and Capital Resources

The Company'sCompany’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.

Index to Financial Statements

Cash flows generated by operations for 20052008 were $561.5$570.0 million compared to $242.8$875.1 million for 2004.2007. The increase wasdecrease in operating cash flows for 2008 as compared to 2007 is primarily attributable to an increaselower earnings as a result of declining business conditions, the timing of receipts due to a calendar shift in the fourth quarter of 2007 as compared to 2006, a change in customer mix and lower accounts payable and accrued expenses, which increased from $623.1 million at the beginning of 2005accruals due to $998.1 million at December 31, 2005.  In addition,lower volumes, partially offset by lower inventory turnover increased during 2005. The increases were primarily attributable to sales growth within both the Mohawk and Dal-Tile segments and the Unilin Acquisition.levels.

Net cash used in investing activities in 20052008 was $2.9 billion$226.1 million compared to $121.6$310.2 million for 2004.2007. The increase was primarily attributabledecrease is due to the Unilin Acquisition andlower acquisition investments during 2008 as compared to 2007 partially offset by higher capital expenditures. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment.spending. Capital expenditures, including $3.0 billion$226.3 million for acquisitions, have totaled $3.5 billion$772.9 million over the past three years. Capital spending during 20052009 for the Mohawk, Dal-Tile and Unilin segments combined,Company, excluding acquisitions, is expectedestimated to range from $290$120 million to $310$130 million, andwhich will be used primarily to purchase equipment and maintenance capital expenditures to add manufacturingimprove efficiency and distribution capacity.reduce costs.

Net cash provided byused in financing activities for 20052008 was $2,440.7$342.9 million compared to cash provided$540.0 million in 2004 of $121.2 million.2007. The primary reason for the change was an increaselower repayment of certain indebtedness of approximately $333 million due to declining business conditions, and lower borrowings in debt levels2008 as a result of the Unilin Acquisition in 2005 when compared to 2004.repayments of approximately $534 million in 2007.

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

      The senior multi-currency unsecured credit facility consistsconsist of (i) a $750multi-currency $750.0 million revolving credit facility, which matures on October 28, 2010, (ii) a $389.2 million term loan facility, which was repaid in 2006, and (iii) a Euro 300300.0 million term loan facility, allwhich was repaid in 2008. During the third quarter of which mature on October 28, 2010. Availability2008 the $750 million revolving credit facility was impacted by the bankruptcy of Lehman Brothers Holdings Inc. (“Lehman”). On December 31, 2008, the Company reduced the $750 million revolving credit facility to $650 million by eliminating the credit commitment of Lehman under the defaulting lender provision of the senior unsecured credit facilities. The Company believes the remaining banks in its revolving credit facility are stable and that the remaining availability is adequate to meet its liquidity requirements.

At December 31, 2008, the amount used under the revolving credit facility of the senior unsecured credit facilities was $171.7 million leaving a total of approximately $478.3 million available under the revolving credit facility. The amount used under the revolving credit facility is reduced by the amountcomposed of $55.3 million borrowings, $55.6 million standby letters of credit issuedguaranteeing the Company’s industrial revenue bonds and $60.8 million standby letters of credit related to various insurance contracts and foreign vendor commitments.

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 thisthe Euro revolving credit facility and any of the Company’s other subsidiaries that become borrowers under the Euro revolving credit facility. At December 31, 2005,2008, the amount of these letters of credit was $78.3 million.  At the Company's election, both the creditCompany had no borrowings outstanding under this facility and a total of $183 million (USD equivalent) was available to its European operations under the newCompany’s €130 million Euro revolving credit facility.

Borrowings outstanding under the senior unsecured credit facilities bearbears interest, at the Company’s option, 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'sCompany’s senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130 million , or approximately $156 million (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred

Index to as the Euro revolving credit facility. This revolving credit facility bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. Financial Statements

The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

21




      The Company's newCompany’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, 2005.2008. 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'sCompany’s senior, unsecured long-term debt rating as determined by certain credit rating agencies.rating.

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

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

The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"(“Securitization Facility”). At December 31, 2008, the Company had $47 million outstanding secured by trade receivables. The Securitization Facility allows the Company to borrow up to $350$250.0 million based on available accounts receivable. At December 31, 2005,On July 28, 2008, the Company had $40 million outstanding compared to $90 million at December 31, 2004. Theamended and restated the Securitization Facility, is secured with trade receivables. During the third quarter of 2005, the Companyreduced total availability from $350.0 million to $250.0 million due to its adequate liquidity position and extended the term until July 27, 2009.

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. Interest payable on each series of the notes is subject to adjustment if either Moody’s Investors 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. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $3.5 million per year. On November 7, 2008, Moody’s Investors Service, Inc. announced that it placed the Company’s Baa3 long term rating on review for possible downgrade. On February 25, 2009, Moody’s Investors Service, Inc. announced that it had downgraded its ratings on the Company’s senior unsecured notes to Ba1 from Baa3 and was maintaining a negative rating outlook, following the completion of its Securitization Facility until August 2006.rating review. This downgrade will increase the Company’s interest expense by approximately $3.5 million per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit rating could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.

In 2002, the Company issued $400.0 million aggregate principal amount of its senior 7.2% notes due 2012.

The Company'sCompany believes that cash generated from operations in 2009 and availability under its existing revolving credit facility will be sufficient to meet its capital expenditures and working capital requirements in 2009.

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, 2005, a total of approximately 186,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $14.5 million. Since the inception of the program in 1999, a total of approximately 11.411.5 million shares have been repurchased at an aggregate cost of approximately $326.1$334.7 million. All of these repurchases have been financed through the Company'sCompany’s operations and banking arrangements. The Company has not repurchased any of its shares since the third quarter of 2006.

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. The Company did not recognize any expense under the DSPA for the fiscal year ended December 31, 2008.

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.

Index to Financial Statements

The following is a summary of the Company'sCompany’s future minimum payments under contractual obligations as of December 31, 20052008 (in thousands):

Payments due by period

2006

2007

2008

2009

2010

Thereafter

Total

Long-term debt

 $

113,809 

314,277 

11,259 

4,275 

1,063,178 

1,801,572 

3,308,370 

Estimated interest payments (1)

174,731 

160,205 

154,393 

153,885 

146,479 

316,354 

1,106,047 

Operating leases

93,553 

75,247 

61,973 

51,558 

37,064 

103,116 

422,511 

Purchase commitments (2)

168,235 

163,995 

161,545 

72,497 

566,272 

 $

550,328 

713,724 

389,170 

282,215 

1,246,721 

2,221,042 

5,403,200 


(1)    

  Total 2009 2010 2011 2012 2013 Thereafter

Recorded Contractual Obligations:

       

Long-term debt, including current maturities and capital leases

 $1,954,786 94,785 56,796 500,881 400,451 515 901,358

Unrecorded Contractual Obligations:

       

Interest payments on long-term debt and capital leases(1)

  488,261 114,376 112,740 85,145 63,430 55,148 57,422

Operating leases

  433,928 106,932 86,277 68,017 52,516 39,814 80,372

Purchase commitments(2)

  357,447 225,296 125,113 7,038 —   —   —  

Expected pension contributions(3)

  1,884 1,884 —   —   —   —   —  

Guarantees

  85,640 85,640 —   —   —   —   —  
               
  1,367,160 534,128 324,130 160,200 115,946 94,962 137,794
               

Total

 $3,321,946 628,913 380,926 661,081 516,397 95,477 1,039,152
               

(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, 2008 to these balances.
(2)Includes commitments for natural gas, electricity and raw material purchases.
(3)Includes the estimated pension contributions for 2009 only, as the Company is unable to estimate the pension contributions beyond 2009. The Company’s projected benefit obligation at December 31, 2008 was $20.1 million. These liabilities have not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.

As of December 31, 2008, the Company calculated interest based onhas accrued income tax liabilities for uncertain tax positions of $91.9 million, of which $51.9 million is current. These liabilities have not been presented in the applicable ratestable above due to uncertainty as to amounts and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2005 to these balances.
(2)     Includes commitments for natural gas, foreign currency, and raw material purchases.
timing regarding future payments.

22




Critical Accounting Policies

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America,U.S., 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'sCompany’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included elsewhere in this report. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting policies are defined as those that are both most important to the portrayal of a company'scompany’s financial condition and results and require management'smanagement’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.

Index to Financial Statements

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 there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectibilitycollectability 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'sCompany’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 86% (69% of total consolidated inventory) of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in first-out method (FIFO), which(“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 both the Dal-Tile and Unilin segments 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, expected sales below cost, excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

  • Goodwill and indefinite life intangible assets are subject to annualother intangibles. Goodwill is tested annually for impairment testing.during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The Company considers the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The goodwill 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 the discounted cash flows and comparable company market valuation approaches. The Company has identified Mohawk, Dal-Tile, Unilin Flooring, Unilin Chipboard and Melamine, and Unilin Roofing as its reporting units for the purposes of allocating goodwill and intangibles as well as assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital (“WACC”), and comparable company market multiples. When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur, such as continued declines in spending for new construction, remodeling and replacement activities; the inability to pass increases in the costs of raw materials and fuel on to customers; or a decline in comparable company market multiples, then key judgments and assumptions could be impacted. Generally, a moderate decline in estimated operating income or a small increase in WACC or a decline in market capitalization could result in an additional indication of impairment.

    The impairment test for intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. These judgments and assumptions could materiallyare subject to the variability discussed above. The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted during the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable to ownership of the trademarks. Significant

    Index to Financial Statements

    judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the specified reporting unitstrademarks. Estimated cash flows are sensitive to changes in the economy among other things.

    The Company reviews long-lived assets, including its intangible assets subject to amortization which, for the Company are its patents and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated by these assets. If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets.

    The Company conducted its annual assessment of goodwill and indefinite life intangible assetslived intangibles in the fourth quarter and therefore, could materially impactno impairment was indicated. During the Company's consolidated financial statements. Intangible assets with definite lives are amortized over their useful lives. third and fourth quarters of 2008, the Company conducted interim impairment tests and recorded impairment of goodwill and other intangibles of $1,418.9 million and $124.5 million, respectively.

    The useful life of a definite-lived intangible assetCompany’s effective tax rate is based on assumptionsits income, statutory tax rates and judgments made by management at the time of acquisition. Changes in these judgments and assumptions that could include a loss of customers, a changetax planning opportunities available in the assessment of future operations or a prolonged economic downturn could materially changejurisdictions in which it operates. Tax laws are complex and subject to different interpretations by the value oftaxpayer and respective governmental taxing authorities. Significant judgment is required in determining the definite-lived intangible assetsCompany’s tax expense and therefore, could materially impactin evaluating the Company's financial statements.

23




  • Company’s tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributablerepresent amounts available 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 toreduce income taxes payable on taxable income in a future period. The Company evaluates the years in whichrecoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, are expectedforecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that the Company does not expect to be recoveredrealize all or settled. The effect ona portion of its deferred tax assets and liabilities of a change in the tax ratesfuture, a valuation allowance is recognized in earningsprovided. The Company would recognize such amounts through a charge to income in the period in which that includesdetermination is made or when tax law changes are enacted.

    In the enactment date. Additionally, taxing jurisdictions could retroactively disagree withordinary course of business there is inherent uncertainty in quantifying the Company's tax treatment of certain items, and some historical transactions haveCompany’s income tax effects going forward.positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information, as required by the provisions of the Financial Accounting rules require these future effects toStandards Board (“FASB”) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.”For those income tax positions where it is not more likely than not that a tax benefit will be evaluated using current laws, rules and regulations, each of which can change at any time andsustained, no tax benefit has been recognized in an unpredictable manner.the consolidated financial statements.

  • 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'sCompany’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.

Index to Financial Statements

Recent Accounting Pronouncements

In December 2004,September 2006, the FASB issued FASB Staff Position 109-1, ApplicationStatement of FASB StatementFinancial Accounting Standards (“SFAS”) No. 109, "Accounting for Income Taxes" ("157,“Fair Value Measurements” (“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"), enacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an 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 adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"157”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting157 defines fair value, establishes a framework for abnormal amounts of idle facility expense, freight, handling costsmeasuring fair value 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" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead 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. The Company will adopt SFAS 151 effective January 1, 2006 and does not expect its adoption will have a material impact on the Company's consolidated financial statements.

      In December 2004, the FASB issuedenhanced disclosures about fair value measurements. SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued157 requires companies to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the prospective or retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability fordisclose the fair value of financial instruments according to a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. SFAS No. 157 is effective no later thanfor the endCompany’s fiscal year beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The adoption of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 whichSFAS No. 157 for financial assets and liabilities on January 1, 2008 did not have a material impact on the Company'sCompany’s consolidated financial statements. The Company does not expect the adoption of SFAS No. 157 for non-financial assets and liabilities to have a material impact on its consolidated financial statements, but its adoption may impact future acquisitions and impairment assessments.

24




In May 2005,September 2006, the FASB issued SFAS No. 154, "Accounting Changes158,“Employers’ Accounting for Defined Benefit Pension and Error Corrections-a replacementOther Post Retirement Plans-an amendment of APB OpinionFASB Statements No. 2087, 88, 106 and 132(R)” (“SFAS No. 158”). The Company adopted all provisions of SFAS No. 158 as of December 31, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The adoption of the measurement provisions of SFAS No. 158 on January 1, 2008 did not have any impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 3" ("115” (“SFAS 154"No. 159”). This Statement replaces APB OpinionSFAS No. 20, "Accounting Changes,"159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS No. 159, a company may elect to use fair value to measure eligible items at a specified election date and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and firm commitments. The Company adopted SFAS No. 159 effective January 1, 2008, but did not elect to adjust any of the eligible assets or liabilities to fair value. Therefore, the adoption did not have any impact on its consolidated financial statements.

In December 2007, the FASB Statementissued SFAS No. 3, "Reporting Accounting Changes141 (revised 2007),“Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods'its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Once adopted, SFAS 141R will impact the recognition and measurement of future business combinations and certain income tax benefits recognized from prior business combinations.

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in accounting principle, unless ita parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is impracticable to determine eitherdeconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the period-specific effects or the cumulative effectinterests of the change.parent and the interests of the noncontrolling owners. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154No. 160 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.2008. The impactadoption of this standard if any, will depend uponis not expected to have a material impact on the Company’s consolidated financial statements.

Index to Financial Statements

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for the first quarter of 2009. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting changes or errorsprinciples and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,“The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In October 2008, the FASB issued Staff Position No. 157-3“Determining Fair Value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 as it relates to the valuation of financial assets in a market that may occur in future periods.is not active for those financial assets. This FSP is effective immediately and includes those periods for which financial statements have not been issued. The Company adopted SFAS 154 effective December 31, 2005.currently does not have any financial assets that are valued using inactive markets, and as such is not impacted by the issuance of FSP 157-3.

Impact of Inflation

Inflation affects the Company'sCompany’s manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry have experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004.2004, and the prices increased dramatically during the latter part of 2008, peaking in the late third and early fourth quarters. For the period from 1999 through 2005the 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 been 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 its operations. However, the spike in these prices during 2008 was rapid and relatively brief, which will likely limit the Company’s ability to fully recoup these added costs through price increases.

Seasonality

The Company is a calendar year-end company. 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 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. 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 weakest due to the European holiday in late summer,summer. In light of the current extraordinary economic climate, the Company believes that seasonality in 2009 may not be typical as compared to prior years as more consumers delay purchases.

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'sCompany’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.

Index to Financial Statements

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, 2005,2008, the Company had natural gas contracts that mature from January 20062009 to October 2006December 2009 with an aggregate notional amount of approximately 660,000 MMBTU's. The fair value of these contracts was an asset of $1.9 million. At December 31, 2004, the Company had natural gas contracts that matured from January 2005 to March 2005 with an aggregate notional amount of approximately 1 million MMBTU's.2,650 thousand MMBTU’s. The fair value of these contracts was a liability of $1.3 million.$5.9 million at December 31, 2008. At December 31, 2007, the Company had natural gas contracts that mature from January 2008 to March 2008 with an aggregate notional amount of approximately 310 thousand MMBTU’s. The fair value of these contracts was a liability of $0.3 million at December 31, 2007. The offset to these assetsliabilities 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 earningsoperations and was not significant for the periods reported. The amount that the Company anticipates will be reclassified out of accumulated other comprehensive income (loss) in the next twelve months is a gainloss of approximately $1.9 million.$3.8 million, net of taxes.

25




The Company'sCompany’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, 2005,2008, the Company had normal purchase commitments of approximately 1.8 million MMBTU's2,026 thousand MMBTU’s for periods maturing from January 20062009 through October 2006.December 2009. The contracted value of these commitments was approximately $17.2 million and the fair value of these commitments was approximately $20.5 million, at December 31, 2005.2008. At December 31, 2004,2007, the Company had normal purchase commitments of approximately 1.9 million MMBTU's303 thousand MMBTU’s for periods maturing from January 20052008 through March 2006.2008. The contracted value of these commitments was approximately $9.9 million and the fair value of these commitments was approximately $11.9$2.8 million at December 31, 2004.2007.

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 forward contracts to purchase approximately 8269.1 million Mexican pesos at December 31, 2005.2008. The aggregate U.S. dollar value of these contracts at December 31, 20052008 was approximately $0.7$23.9 million and the fair value of these contracts was a liability of approximately $5.2 million. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstandingto purchase approximately 244.0 million Mexican pesos at December 31, 2004.

2007. The Company also had forward exchangeaggregate U.S. dollar value of these contracts to sell the British Pound and Canadian Dollar for a notional amount of $5.6 million at December 31, 2005. The contracts do not qualify for hedge accounting2007 was approximately $21.8 million and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and theof these contracts do not qualify for hedge accounting. The impactwas an asset of the change in fair value on the statements of operations was not significant for the period ended December 31, 2005.approximately $0.2 million.

26




Index to Financial Statements
Item 8.Consolidated Financial Statements and Supplementary Data

Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

28

35

Consolidated Balance Sheets as of December 31, 20052008 and 20042007

32

38

Consolidated Statements of EarningsOperations for the Years ended December 31, 2005, 20042008, 2007 and 20032006

33

39

Consolidated Statements of Stockholders'Stockholders’ Equity and Comprehensive Income for the Years ended December  31, 2008, 2007 and 2006

     December 31, 2005, 2004 and 2003

34

40

Consolidated Statements of Cash Flows for the Years ended December 31, 2005, 20042008, 2007 and 20032006

35

41

Notes to Consolidated Financial Statements

36

42



Report of Independent Registered Public Accounting Firm

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, 20052008 and 2004,2007, and the related consolidated statements of earnings, stockholders'operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005.2008. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 41 percent and total revenues constituting approximately 316 percent in 2005, of the related consolidated totals.total for the year ended December 31, 2006. 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, 20052008 and 2004,2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005,2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 13 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, effective January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Mohawk Industries, Inc.'s’s internal control over financial reporting as of December 31, 2005,2008, 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 15, 20062, 2009 expressed an unqualified opinion on management's assessmentthe effectiveness of and the effective operation of,Company’s internal control over financial reporting.

/s/: KPMG
      KPMG

Atlanta, Georgia
March 15, 2006

28/s/    KPMG LLP        

Atlanta, Georgia

March 2, 2009




Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Shareholders and the Board of Directors

Unilin Flooring BVBA and Unilin Holding Inc.

Ooigem, Belgium

We have audited the accompanying combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (the Unilin Group) as of December 31, 20052006 and the related combined consolidated statements of operations, stockholders'stockholders’ equity and comprehensive income (loss), and cash flows for the two month periodyear then ended.ended (not presented herein). These financial statements are the responsibility of the combined Companies'Companies’ management. Our responsibility is to express an opinion on these combined consolidated financial statements based on our audit.audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The combined Companies are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our auditaudits 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'Companies’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits 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, 20052006 and the results of their operations and their cash flows for the two month periodyear then ended in conformity with accounting principles generally accepted in the United States of America.

February 17, 200623, 2007

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

Represented by

29/s/    Veerle Catry

Veerle Catry



Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Mohawk Industries, Inc.:

We have audited management's assessment, included in the "Management's Report on Internal Control over Financial Reporting" set forth in Item 9A of Mohawk Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005, that Mohawk Industries, Inc. maintained effective’s internal control over financial reporting as of December 31, 2005,2008, 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.reporting, as set forth in Item 9A of Mohawk Industries, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008. 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,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control andbased on the assessed risk. Our audit also included 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'scompany’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'scompany’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, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2008, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.

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

30




We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mohawk Industries Inc., and subsidiaries as of December 31, 20052008 and 2004,2007, and the related consolidated statements of earnings, stockholders'operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005,2008, and our report dated March 15, 20062, 2009 expressed an unqualified opinion on those consolidated financial statements.statements.

/s/: KPMG
      KPMG

/s/    KPMG LLP

Atlanta, Georgia

March 2, 2009

Atlanta, Georgia
March 15, 2006

Index to Financial Statements

31




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 20052008 and 2004

2007

(In thousands, except per share data)

ASSETS

2005

2004

Current assets:

       Cash and cash equivalents

 $

134,585 

-   

       Receivables

848,666 

  

660,650 

       Inventories

1,166,913 

  

1,017,983 

       Prepaid expenses and other assets

140,789 

  

49,381 

       Deferred income taxes

49,534 

  

55,311 

                      Total current assets

2,340,487 

  

1,783,325 

Property, plant and equipment, net

1,810,728 

  

905,332 

Goodwill

2,621,963 

1,377,349 

Tradenames

622,094 

272,280 

Other intangible assets

552,003 

50,366 

Other assets

44,248 

  

14,466 

 $

7,991,523 

  

4,403,118 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

       Current portion of long-term debt

 $

113,809 

191,341 

       Accounts payable and accrued expenses

998,105 

  

623,061 

                      Total current liabilities

1,111,914 

814,402 

Deferred income taxes

625,887 

  

191,761 

Long-term debt, less current portion

3,194,561 

  

700,000 

Other long-term liabilities.

32,041 

  

30,618 

                       Total liabilities

4,964,403 

1,736,781 

  

Stockholders' equity:

  

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

        no shares issued

-   

-   

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

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

785 

775 

       Additional paid-in capital

1,123,991 

1,058,537 

       Retained earnings.

2,268,578 

1,910,383 

       Accumulated other comprehensive loss

(47,433)

(2,441)

3,345,921 

2,967,254 

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

         and 2004, respectively

318,801 

300,917 

                       Total stockholders' equity

3,027,120 

2,666,337 

 $

7,991,523 

  

4,403,118 

   2008  2007
ASSETS    

Current assets:

    

Cash and cash equivalents

  $93,519  89,604

Receivables, net

   696,284  821,113

Inventories

   1,168,272  1,276,568

Prepaid expenses

   125,603  123,395

Deferred income taxes and other assets

   162,571  139,040
       

Total current assets

   2,246,249  2,449,720

Property, plant and equipment, net

   1,925,742  1,975,721

Goodwill

   1,399,434  2,797,339

Tradenames

   472,399  707,086

Other intangible assets, net

   375,451  464,783

Deferred income taxes and other assets

   26,900  285,401
       
  $6,446,175  8,680,050
       
LIABILITIES AND STOCKHOLDERS’ EQUITY    

Current liabilities:

    

Current portion of long-term debt

  $94,785  260,439

Accounts payable and accrued expenses

   782,131  951,061
       

Total current liabilities

   876,916  1,211,500

Deferred income taxes

   419,985  614,619

Long-term debt, less current portion

   1,860,001  2,021,395

Other long-term liabilities

   135,470  125,179
       

Total liabilities

   3,292,372  3,972,693
       

Stockholders’ equity:

    

Preferred stock, $.01 par value; 60 shares authorized; no shares issued

   —    —  

Common stock, $.01 par value; 150,000 shares authorized; 79,461 and 79,404 shares issued in 2008 and 2007, respectively

   795  794

Additional paid-in capital

   1,217,903  1,203,957

Retained earnings

   2,004,115  3,462,343

Accumulated other comprehensive income

   254,535  363,981
       
   3,477,348  5,031,075

Less treasury stock at cost; 11,040 and 11,046 shares in 2008 and 2007, respectively

   323,545  323,718
       

Total stockholders’ equity

   3,153,803  4,707,357
       
  $6,446,175  8,680,050
       

See accompanying notes to consolidated financial statements.

32

Index to Financial Statements




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings
Operations

Years Ended December 31, 2005, 20042008, 2007 and 2003

2006

(In thousands, except per share data)

2005

2004

2003

Net sales

 $

6,620,099 

5,880,372 

4,999,381 

Cost of sales

4,896,965 

4,259,531 

3,605,579 

       Gross profit

1,723,134 

1,620,841 

1,393,802 

Selling, general and administrative expenses

1,095,862 

985,251 

851,773 

       Operating income

627,272 

635,590 

542,029 

Other expense (income):

   Interest expense

66,791 

53,392 

55,575 

   Other expense

11,714 

9,731 

6,252 

   Other income

(8,254)

(4,922)

(8,232)

70,251 

58,201 

53,595 

       Earnings before income taxes

557,021 

577,389 

488,434 

Income taxes

198,826 

208,767 

178,285 

       Net earnings

 $

358,195 

368,622 

310,149 

Basic earnings per share

 $

5.35 

5.53 

4.68 

Weighted-average common shares outstanding

66,932 

66,682 

66,251 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

Weighted-average common and dilutive potential

    common shares outstanding

67,644 

67,557 

67,121 

   2008  2007  2006 

Net sales

  $6,826,348  7,586,018  7,905,842 

Cost of sales

   5,088,584  5,471,234  5,674,531 
           

Gross profit

   1,737,764  2,114,784  2,231,311 

Selling, general and administrative expenses

   1,318,501  1,364,678  1,392,251 

Impairment of goodwill and other intangibles

   1,543,397  —    —   
           

Operating (loss) income

   (1,124,134) 750,106  839,060 
           

Other expense (income):

    

Interest expense

   127,050  154,469  173,697 

Other expense

   36,833  22,997  17,515 

Other income

   (9,851) (22,323) (9,027)

U.S. customs refund

   —    (9,154) (19,436)
           
   154,032  145,989  162,749 
           

Earnings (loss) before income taxes

   (1,278,166) 604,117  676,311 

Income taxes

   180,062  (102,697) 220,478 
           

Net (loss) earnings

  $(1,458,228) 706,814  455,833 
           

Basic (loss) earnings per share

  $(21.32) 10.37  6.74 
           

Weighted-average common shares outstanding

   68,401  68,172  67,674 
           

Diluted (loss) earnings per share

  $(21.32) 10.32  6.70 
           

Weighted-average common and dilutive potential common shares outstanding

   68,401  68,492  68,056 
           

See accompanying notes to consolidated financial statements.

33

Index to Financial Statements




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders'Stockholders’ Equity and Comprehensive Income

Years Ended December 31, 2005, 20042008, 2007 and 2003

2006

(In thousands)

Accumulated

Additional

other

Total

Common stock

paid-in

Retained

comprehensive

Treasury stock

stockholders'

Shares

Amount

capital

earnings

income (loss)

Shares

Amount

equity

Balances at December 31, 2002

76,371 

 $

763 

 $

1,006,550 

 $

1,231,612 

 $

1,126 

(10,006)

 $

(257,172)

 $

1,982,879 

Stock options exercised

679 

18,283 

18,290 

Purchase of treasury stock

(593)

(27,839)

(27,839)

Grant to employee profit sharing plan

2,080 

72 

1,929 

4,009 

Grant to executive incentive plan

63 

12 

306 

369 

Tax benefit from exercise of stock

 options

8,757 

8,757 

Comprehensive Income:

 Currency translation adjustment

47 

47 

 Unrealized gain on hedge instruments

 net of taxes

1,140 

1,140 

 Net earnings

310,149 

310,149 

Total Comprehensive Income

311,336 

Balances at December 31, 2003

77,050 

770 

1,035,733 

1,541,761 

2,313 

(10,515)

(282,776)

2,297,801 

Stock options exercised

464 

14,952 

14,957 

Purchase of treasury stock

(250)

(18,413)

(18,413)

Grant to executive incentive plan

 and other

307 

10 

272 

579 

Tax benefit from exercise of stock

 options

7,545 

7,545 

Comprehensive Income:

 Currency translation adjustment

(1,675)

(1,675)

 Unrealized loss on hedge instruments

 net of taxes

(3,079)

(3,079)

 Net earnings

368,622 

368,622 

Total Comprehensive Income

363,868 

Balances at December 31, 2004

77,514 

775 

1,058,537 

1,910,383 

(2,441)

(10,755)

(300,917)

2,666,337 

Stock options exercised

378 

10,070 

10,074 

Stock issuance

586 

47,429 

47,435 

Purchase of treasury stock . ..

(186)

(14,521)

(14,521)

Grant to executive incentive plan

 

 

 and other

2,717 

(40)

(3,363)

(646)

Tax benefit from exercise of stock

    

 options

5,238 

5,238 

Comprehensive Income:

 Currency translation adjustment

(47,074)

(47,074)

 Unrealized gain on hedge instruments

 net of taxes

2,082 

2,082 

 Net earnings

358,195 

358,195 

Total Comprehensive Income

313,203 

Balances at December 31, 2005

78,478 

 $

785 

 $

1,123,991 

 $

2,268,578 

 $

(47,433)

(10,981)

 $

(318,801)

 $

3,027,120 

  Common stock Additional
paid-in
capital
 Retained
earnings
  Accumulated
other
comprehensive
income (loss)
  Treasury stock  Total
stockholders’
equity
 
  Shares Amount    Shares  Amount  

Balances at December 31, 2005

 78,478  785  1,123,991  2,299,696   (47,433) (10,981)  (318,801)  3,058,238 

Shares issued under employee and director stock plans

 338  3  12,926  —     —    4   135   13,064 

Stock based compensation expense

 —    —    11,925  —     —    —     —     11,925 

Purchase of treasury stock

 —    —    —    —     —    (74)  (5,180)  (5,180)

Tax benefit from exercise of stock options

 —    —    3,578  —     —    —     —     3,578 

Adoption of SFAS 158

      818     818 

Comprehensive income:

        

Currency translation adjustment

 —    —    —    —     179,789  —     —     179,789 

Unrealized loss on hedge instruments net of taxes

 —    —    —    —     (2,802) —     —     (2,802)

Net earnings

 —    —    —    455,833   —    —     —     455,833 
           

Total comprehensive income

         632,820 
                           

Balances at December 31, 2006

 78,816  788  1,152,420  2,755,529   130,372  (11,051)  (323,846)  3,715,263 

Shares issued under employee and director stock plans

 588  6  31,115  —     —    5   128   31,249 

Stock based compensation expense

 —    —    13,594  —     —    —     —     13,594 

Tax benefit from exercise of stock options

 —    —    6,828  —     —    —     —     6,828 

Comprehensive income:

        

Currency translation adjustment

 —    —    —    —     230,941  —     —     230,941 

Unrealized gain on hedge instruments net of taxes

 —    —    —    —     1,453  —     —     1,453 

Pension prior service cost and actuarial gain or loss

 —    —    —    —     1,215  —     —     1,215 

Net earnings

 —    —    —    706,814   —    —     —     706,814 
           

Total comprehensive income

         940,423 
                           

Balances at December 31, 2007

 79,404  794  1,203,957  3,462,343   363,981  (11,046)  (323,718)  4,707,357 

Shares issued under employee and director stock plans

 57  1  1,621  —     —    6   173   1,795 

Stock based compensation expense

 —    —    11,991  —     —    —     —     11,991 

Tax benefit from exercise of stock options

 —    —    334  —     —    —     —     334 

Comprehensive income:

        

Currency translation adjustment

 —    —    —    —     (101,935) —     —     (101,935)

Unrealized gain on hedge instruments net of taxes

 —    —    —    —     (7,127) —     —     (7,127)

Pension prior service cost and actuarial gain or loss

 —    —    —    —     (384) —     —     (384)

Net loss

 —    —    —    (1,458,228)  —    —     —     (1,458,228)
           

Total comprehensive income

         (1,567,674)
                           

Balances at December 31, 2008

 79,461 $795 $1,217,903 $2,004,115  $254,535  (11,040) $(323,545) $3,153,803 
                           

See accompanying notes to consolidated financial statements.

34

Index to Financial Statements




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 20042008, 2007 and 2003

2006

(In thousands)thousands, except per share data)

2005

2004

2003

Cash flows from operating activities:

     Net earnings

 $

358,195 

368,622 

310,149 

     Adjustments to reconcile net earnings to net cash

       provided  by operating activities:

          Depreciation and amortization

149,329 

123,088 

106,615 

          Deferred income taxes

(6,866)

38,700 

34,775 

          Tax benefit on stock options exercised

5,238 

7,545 

8,757 

          Loss on sale of property, plant and equipment

4,676 

3,037 

3,267 

          Changes in assets and liabilities, net of

           effects of acquisitions:

             Receivables

3,574 

(85,417)

(47,443)

             Inventories

11,542 

(179,765)

(104,964)

             Accounts payable and accrued expenses

91,960 

(25,241)

(2,769)

             Other assets and prepaid expenses

(60,877)

(6,598)

(5,592)

             Other liabilities

4,773 

(1,134)

6,595 

               Net cash provided by operating activities

561,544 

242,837 

309,390 

Cash flows from investing activities:

      Additions to property, plant and equipment

(247,306)

(106,601)

(114,631)

      Acquisitions, net of cash

(2,613,529)

(14,998)

(384,121)

               Net cash used in investing activities

(2,860,835)

(121,599)

(498,752)

Cash flows from financing activities:

     Net change in short term credit lines

(37,721)

(3,981)

37,299 

     Payments on revolving line of credit

(539,294)

     Proceeds from revolving line of credit

856,940 

     Proceeds from bridge credit facility

1,400,000 

     Net change in asset securitization borrowings

(50,000)

(92,000)

182,000 

     Payments on term loans

(15,055)

(25,034)

(26,492)

     Proceeds on term loans

750,000 

     Payments of other debt

(30,861)

(57)

(821)

     Change in outstanding checks in excess of cash

63,670 

3,290 

6,925 

     Acquisition of treasury stock

(14,521)

(18,413)

(27,839)

     Common stock transactions

57,509 

14,957 

18,290 

                Net cash provided by (used in) financing activities

2,440,667 

(121,238)

189,362 

                Effect of exchange rate changes on cash and cash equivalents

(6,791)

                Net change in cash.

134,585 

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

 $

134,585 

   2008  2007  2006 

Cash flows from operating activities:

    

Net (loss) earnings

  $(1,458,228) 706,814  455,833 

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

    

Impairment of goodwill and other intangibles

   1,543,397  —    —   

Depreciation and amortization

   295,054  306,437  274,952 

Deferred income taxes

   69,842  (289,902) (68,956)

Loss on disposal of property, plant and equipment

   28,016  7,689  5,625 

Excess tax benefit from stock-based compensation

   (334) (6,828) (3,578)

Stock based compensation expense

   11,991  13,594  11,925 

Changes in assets and liabilities, net of effects of acquisitions:

    

Receivables

   118,199  127,475  (20,982)

Inventories

   103,293  20,976  4,823 

Accounts payable and accrued expenses

   (124,618) (58,776) 86,890 

Other assets and prepaid expenses

   (23,774) 31,007  26,688 

Other liabilities

   7,196  16,591  8,825 
           

Net cash provided by operating activities

   570,034  875,077  782,045 
           

Cash flows from investing activities:

    

Additions to property, plant and equipment

   (217,824) (163,076) (165,769)

Acquisitions, net of cash acquired

   (8,276) (147,097) (70,907)
           

Net cash used in investing activities

   (226,100) (310,173) (236,676)
           

Cash flows from financing activities:

    

Payments on revolving line of credit

   (1,448,742) (1,813,731) (1,546,679)

Proceeds from revolving line of credit

   1,270,449  1,652,993  1,409,611 

Repayment on bridge loan

   —    —    (1,400,000)

Proceeds from issuance of senior notes

   —    —  �� 1,386,841 

Net change in asset securitization borrowings

   (143,000) —    150,000 

Payments on term loans

   (11,325) (373,153) (589,052)

Payments of other debt

   (494) (310) (13,380)

Excess tax benefit from stock-based compensation

   334  6,828  3,578 

Change in outstanding checks in excess of cash

   (12,007) (43,520) (29,250)

Acquisition of treasury stock

   —    —    (5,180)

Common stock transactions

   1,915  30,875  12,669 
           

Net cash used in financing activities

   (342,870) (540,018) (620,842)
           

Effect of exchange rate changes on cash and cash equivalents

   2,851  1,226  4,380 
           

Net change in cash and cash equivalents

   3,915  26,112  (71,093)

Cash and cash equivalents, beginning of year

   89,604  63,492  134,585 
           

Cash and cash equivalents, end of year

  $93,519  89,604  63,492 
           

See accompanying notes to consolidated financial statements.

35

Index to Financial Statements




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2005, 20042008, 2007 and 2003

2006

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

(b) Cash and Cash Equivalents

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

(c) Accounts Receivable and Revenue Recognition

The Company is principally a carpet, rugs, ceramic tile and laminate manufacturer and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and laminate flooring products in the United States. 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, which are recorded net of taxes collected from customers, are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectibilitycollectability 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. RoyaltyLicensing revenues received from third parties for patents are recognized based on contractual agreements. The amount of patent revenue for the year ended December 31, 2005 was $10,461 and is recorded in net sales.

(d) Inventories

The Company accounts for all inventories on the first-in, first-out (“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 method (LIFO) for approximately 86% (69%FIFO method. Costs in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of total inventory) of the inventory within the Mohawk segment, which matches current costsmanufacturing. Market, with current revenues, and the first-in, first-out method (FIFO), whichrespect to all inventories, is used to value inventory within the Dal-Tile and Unilin segments 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, anticipated future selling price, expected sales below cost, excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

36




Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

(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 lease term for leasehold improvements and 3-7 years for furniture and fixtures.

(f) Goodwill and Other Intangible Assets

In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets,”(“SFAS No. 142”) the Company tests goodwill and other intangible assets with indefinite lives for impairment on an annual basis in the fourth quarter (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 testingconsiders the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified Mohawk, Dal-Tile, Unilin Flooring, Unilin Chipboard and Melamine, and Unilin Roofing as its reporting units for the purposes of allocating goodwill and intangibles as well as assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital (“WACC”), and comparable company market multiples.

When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur, such as continued declines in spending for new construction, remodeling and replacement activities; the inability to pass increases in the costs of raw materials and fuel on to customers; or a decline in comparable company market multiples, then key judgments and assumptions could be impacted.

The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted during the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable to ownership of the trademarks. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the trademarks. Estimated cash flows are sensitive to changes in the economy among other things. The impairment test for indefinite lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its fiscal year. carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite lived intangible assets are determined using a discounted cash flows valuation. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. These judgments and assumptions are subject to the variability discussed above.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Intangible assets that do not have indefinite lives are amortized based on average lives, which range from 7-16 years.

(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.

(h) Financial Instruments

The Company'sCompany’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 its fair value because of the short-term maturity of such instruments. The carrying amount of the Company'sCompany’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'sCompany’s long-term debt. The estimated fair value of the Company'sCompany’s long-term debt at December 31, 20052008 and 20042007 was $3,282,715$1,628,786 and $961,120,$2,314,445, compared to a carrying amount of $3,308,370$1,954,786 and $891,341,$2,281,834, respectively.

(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 itstheir 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'sCompany’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 engage in speculative transactions, nor does it hold or issue financial instruments for trading purposes.

37




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The Company formally documents 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 firm 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. Regression analysis is used to assess effectiveness of the hedging relationship and the dollar offset method is used to measure any ineffectiveness associated with the hedges. 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.

Index to Financial Statements

(MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

j)(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,general, and generaladministrative expenses were $41,339$53,643 in 2005, $31,4742008, $56,168 in 20042007 and $26,990$55,254 in 2003.2006.

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 in accordance with EITF 01-09.the FASB, Emerging Issues Task Force (“EITF”) 01-09,“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Co-op advertising expenses, a component of advertising and promotion expenses, were $14,408$7,359 in 2005, $10,3892008, $5,686 in 20042007 and $9,355$13,352 in 2003.2006.

(k) Impairment of Long-Lived Assets

      Long-livedThe Company reviews long-lived assets, and intangiblesincluding its intangible assets subject to amortization which, for the Company, are reviewedits patents and customer relationships, for impairment whenwhenever events or changes in circumstances indicate that the carrying amount of the assetsuch assets may not be recoverable. IfRecoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset exceeds the expectedlong-lived assets to future undiscounted net cash flows ofexpected to be generated by these assets. If such assets are considered to be impaired, the asset, an impairment chargerecognized is recognized equal to the amount by which the carrying amount of the assets exceeds the expected undiscounted cash flows.fair value of the assets. Assets to be disposed ofheld for sale are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.

(l) Foreign Currency Translation

The Company'sCompany’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 principally average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders'stockholders’ equity, within other comprehensive income, net of tax where applicable.income. Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of earnings.operations. The assets and liabilities of the Company'sCompany’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 principally an average monthly rate for the period, except for expenses related to those balance sheet accounts that are re-measured using historical exchange rates. The resulting re-measurement adjustment is reported in the consolidated statements of operations when incurred.

38




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(m) Earnings (loss) per Share ("EPS"share (“EPS”)

Basic net(loss) 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.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

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'options’ exercise price was greater than the average market price of the common shares for the periods presented were 351, 211,560, 775 and 6051,271 for 2005, 20042008, 2007 and 2003,2006, respectively. For 2008 all outstanding common stock options to purchase common shares and unvested restricted shares (units) were excluded from the calculation of diluted loss per share because their effect on net loss per common share was anti-dilutive.

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

Years Ended December 31,

2005

2004

2003

Net earnings.

 $

358,195 

368,622 

310,149 

Weighted-average common and dilutive potential

      common shares outstanding:

      Weighted-average common shares outstanding.

66,932 

66,682 

66,251 

      Add weighted-average dilutive potential common

        shares - options to purchase common

        shares, net.

712 

875 

870 

Weighted-average common and dilutive potential

        common shares outstanding

67,644 

67,557 

67,121 

Basic earnings per share

 $

5.35 

5.53 

4.68 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

  Years Ended December 31,
  2008  2007 2006

Net (loss) earnings

 $(1,458,228) 706,814 455,833
        

Weighted-average common and dilutive potential common shares outstanding:

   

Weighted-average common shares outstanding

  68,401  68,172 67,674

Add weighted-average dilutive potential common shares—options to purchase common shares, net

  —    320 382
        

Weighted-average common and dilutive potential common shares outstanding.

  68,401  68,492 68,056
        

Basic (loss) earnings per share

 $(21.32) 10.37 6.74
        

Diluted (loss) earnings per share

 $(21.32) 10.32 6.70
        

(n) Stock-Based Compensation

Effective January 1, 2003,2006, the Company adopted the disclosurefair value recognition provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement amends 123(R),“Share-Based Payment”(“SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"123(R)”) to provide alternative methods of, using the modified-prospective-transition method. Under that transition for a voluntary change to the fair value based method, of accounting for stock-based compensation and requires prominent disclosure in both the annual and interim financial statements of the method of accounting used and the financial impact of stock-based compensation. As permitted by SFAS. 123, the Company accounts for stock options granted as prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based upon the intrinsic value of the award.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123, and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires2006 includes: (a) compensation cost for all share-based payments granted prior to, employees, including grantsbut not yet vested as of, employee stock options, to be recognized in the financial statementsJanuary 1, 2006, based on theirthe grant date fair values. Transition may be accomplished using eithervalue estimated in accordance with the modified prospective or modified retrospective method. The Company currently measuresoriginal provisions of SFAS No. 123,“Accounting for Stock-Based Compensation”, and (b) compensation costs related tocost for all share-based payments under APB Opinion No. 25. In April 2005,granted subsequent to January 1, 2006, based on the Securities and Exchange Commission announced thatgrant-date fair value estimated in accordance with the effective dateprovisions of SFAS 123R should be no later thanNo. 123(R). Compensation expense is recognized on a straight-line basis over the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

39




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

2005

2004

2003

         Net earnings as reported.

 $

358,195 

368,622 

310,149 

         Deduct: Stock-based employee compensation

           expense determined under fair value based

           method for all options, net of related tax effects

(8,628)

(7,519)

(6,284)

         Pro forma net earnings.

 $

349,567 

361,103 

303,865 

        Net earnings per common share (basic)

         As reported

 $

5.35 

5.53 

4.68 

         Pro forma

 $

5.22 

5.42 

4.59 

        Net earnings per common share (diluted)

         As reported

 $

5.30 

5.46 

4.62 

         Pro forma.

 $

5.18 

5.36 

4.54 

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

2005

2004

2003

        Dividend yield.

-   

        Risk-free interest rate

4.0 %

2.9 %

2.3 %

        Volatility.

37.7 %

43.1 %

44.9 %

        Expected life (years)

with ratable vesting provisions.

(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 Accumulatedaccumulated other comprehensive income on the Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended December 31, 2005, 20042008, 2007 and 20032006 are as follows:

Translation

Hedge

Tax expense

Adjustment

Instruments

(benefit)

Total

2003

 $

47 

3,569 

(1,302)

2,314 

2004

(1,628)

(1,280)

467 

(2,441)

2005

(48,702)

1,998 

(729)

(47,433)

40




   Translation
adjustment
  Hedge
instruments
  SFAS
158
  Tax expense
(benefit)
  Total 

December 31, 2006

  $131,087  (2,414) 818  881  130,372 

2007 activity

 �� 230,941  2,288  1,215  (835) 233,609 
                 

December 31, 2007

   362,028  (126) 2,033  46  363,981 

2008 activity

   (101,935) (11,024) (384) 3,897  (109,446)
                 

December 31, 2008

  $260,093  (11,150) 1,649  3,943  254,535 
                 

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

(p) Effect of NewRecent 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"), enacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

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

      In November 2004,September 2006, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB157,“Fair Value Measurements” (“SFAS No. 43, Chapter 4" ("SFAS 151"157”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing,"157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies 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" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead 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. The Company will adopt SFAS 151 effective January 1, 2006 and does not expect its adoption will have a material impact on the Company's consolidated financial statements.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability fordisclose the fair value of financial instruments according to a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. SFAS No. 157 is effective no later thanfor the endCompany’s fiscal year beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The adoption of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 whichSFAS No. 157 for financial assets and liabilities on January 1, 2008 did not have a material impact on the Company'sCompany’s consolidated financial statements. The Company does not expect the adoption of SFAS No. 157 for non-financial assets and liabilities to have a material impact on its consolidated financial statements, but its adoption may impact future acquisitions and impairment assessments.

In May 2005,September 2006, the FASB issued StatementSFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans-an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). The Company adopted all provisions of SFAS No. 158 as of December 31, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The adoption of the measurement provisions of SFAS No. 158 on January 1, 2008 did not have any impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Accounting Standards No. 154, "Accounting ChangesAssets and Error Corrections-a replacementFinancial Liabilities-including an amendment of APB Opinion No. 20 and FASB Statement No. 3" ("115” (“SFAS 154"No. 159”). This Statement replaces APB OpinionSFAS No. 20, "Accounting Changes,"159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS No. 159, a company may elect to use fair value to measure eligible items at a specified election date and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and firm commitments. The Company adopted SFAS No. 159 effective January 1, 2008, but did not elect to adjust any of the eligible assets or liabilities to fair value. Therefore, the adoption did not have any impact on its consolidated financial statements.

In December 2007, the FASB Statementissued SFAS No. 3, "Reporting Accounting Changes141 (revised 2007),“Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods'its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Once adopted, SFAS 141R will impact the recognition and measurement of future business combinations and certain income tax benefits recognized from prior business combinations.

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in accounting principle, unless ita parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

subsidiary is impracticable to determine eitherdeconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the period-specific effects or the cumulative effectinterests of the change.parent and the interests of the noncontrolling owners. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154No. 160 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.2008. The impactadoption of this standard if any, will depend uponis not expected to have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for the first quarter of 2009. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting changes or errorsprinciples and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,“The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In October 2008, the FASB issued Staff Position No. 157-3“Determining Fair Value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 as it relates to the valuation of financial assets in a market that may occur in future periods.is not active for those financial assets. This FSP is effective immediately and includes those periods for which financial statements have not been issued. The Company adopted SFAS 154 effective December 31, 2005.currently does not have any financial assets that are valued using inactive markets, and as such is not impacted by the issuance of this FSP.

(q) Fiscal Year

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

41




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(r) Reclassifications

      The Company reclassified certain prior period financial statement balances to conform to current presentations.

(2) Acquisitions

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

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

        Current assets

 $

62,939 

        Property, plant and equipment

53,424 

        Goodwill

78,083 

        Intangible assets

178,340 

        Other assets

52 

          Total assets acquired

372,838 

        Current liabilities

12,829 

        Other liabilities

8,000 

          Total liabilities assumed

20,829 

             Net assets acquired.

 $

352,009 

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

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

42




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

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

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

        Current assets

 $

387,695 

        Property, plant and equipment

774,677 

        Goodwill

1,249,720 

        Intangible assets

882,886 

        Other assets

890 

          Total assets acquired

3,295,868 

        Current liabilities

275,214 

        Long-term debt

32,027 

        Other liabilities

442,278 

          Total liabilities assumed

749,519 

             Net assets acquired

 $

2,546,349 

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

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

2005 (a)

2004

        Net sales

 $

7,553,506 

6,873,858 

        Net earnings (a)

400,408 

374,755 

        Basic earnings per share

5.98 

5.62 

        Diluted earnings per share

5.92 

5.55 


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

43




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

During 2005,2006, the Company acquired certain assets of a carpet backing manufacturer and all outstanding shares of a distributor of natural stone slabs for approximately $67,642. Goodwill related$73,000 which was paid for in cash.

During 2007, the Company acquired certain wood flooring assets and liabilities of Columbia Forest Products, Inc. (“Columbia”) for approximately $147,153. The acquisition included the assets of two pre-finished solid plants and one engineered wood plant in the United States and an engineered wood plant in Malaysia. In connection with the acquisition, the Company recorded $13,069 in goodwill. The results of operations from the date of acquisition are included in the Company’s consolidated results. Net sales were approximately $65,000 and operating income was not significant to the acquisitions was approximately $10,955.consolidated results for the year ending December 31, 2007.

During 2008, the Company acquired certain stone center assets in the Dal-Tile segment for $8,276.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(3) Receivables

        Receivables are as follows:

2005

2004

        Customers, trade

 $

925,714 

746,233 

        Other

25,662 

9,720 

951,376 

755,953 

        Less allowance for discounts, returns, claims and

           doubtful accounts

102,710 

95,303 

                       Net receivables

 $

848,666 

660,650 

 

   2008  2007

Customers, trade

  $722,669  845,446

Other

   35,993  31,977
       
   758,662  877,423

Less allowance for discounts, returns, claims and doubtful accounts

   62,378  56,310
       

Net receivables

  $696,284  821,113
       

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

    Additions    
  

Balance at

 

charged to

  

Balance

  

beginning

 

costs and

   

at end

of  year

expenses (1)

Deductions (2)

of year

        2003

 $

84,673 

279,583 

269,839 

94,417 

        2004

94,417 

310,368 

309,482 

95,303 

        2005

95,303 

324,024 

316,617 

102,710 


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

   Balance at
beginning
of year
  Additions
charged to
costs and
expenses(1)
  Deductions(2)  Balance
at end
of year

2006

  $76,722  293,029  299,952  69,799

2007

   69,799  270,993  284,482  56,310

2008

   56,310  274,337  268,269  62,378

(1)Includes $1,500 in 2007 related to the Columbia acquisition which was not charged to costs and expenses.
(2)Represents charge-offs, net of recoveries.

(4) Inventories

        The components of inventories are as follows:

2005

 

2004

        Finished goods

 $

754,663 

665,565 

        Work in process

89,179 

86,883 

        Raw materials

323,070 

265,535 

                       Total inventories.

 $

1,166,913 

1,017,983 

The components of inventories are as follows:

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

   2008  2007

Finished goods

  $767,138  804,408

Work in process

   104,394  100,582

Raw materials

   296,740  371,578
       

Total inventories

  $1,168,272  1,276,568
       

44




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(5) Goodwill and Other Intangible Assets

The Company evaluatesconsiders the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The Company believes that the weakness in the U.S. residential housing market and the slowing European economy are principal factors in the prolonged decline in its market capitalization as compared to its book value. During the third quarter and again in the fourth quarter of 2008, the Company concluded that the weakness in the U.S. residential housing market is likely to persist based on its review of, among other things, sequential quarterly housing starts, recent turmoil surrounding the nation’s largest mortgage lenders, the potential negative impact on the availability of mortgage financing and housing start forecasts published by national home builder associations pushing recovery in the U.S. residential housing market beyond 2009.

As a result of these impairment indicators, in the third quarter the Company performed an interim first step of its goodwill impairment test and determined that the carrying values of certain reporting units exceeded their fair values, indicating that goodwill was impaired. During the third quarter of 2008, the Company estimated that

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

the implied fair value of its goodwill was less than its carrying value by approximately $1,262,255, which the Company recognized in the third quarter of 2008. The $1,262,255 impairment of goodwill was an estimate based on the results of the determination of and preliminary allocation of fair value. The Company finalized the allocation of fair value in the fourth quarter of 2008 and recorded an additional $65,170, which the Company has recognized as an impairment of goodwill and other intangibles in the accompanying consolidated results of operations. The Company conducted its annual assessment and an additional interim test in the fourth quarter of 2008 and determined the fair values of its reporting units exceeded their carrying values. As a result no impairment was indicated.

As a result of the impairment indicators described above, during the third quarter, and again in the fourth quarter of 2008, the Company evaluated its intangible assets with indefinite life intangibles on an annual basislives for impairment. The Company has three reporting segments,compared the Mohawk segment, the Dal-Tile segment, and the Unilin segment.  Accordingly the Company has assigned the acquired goodwill and indefinite life intangiblesestimated fair value of its trademarks to the respective reporting segments. During the fourth quarter of 2005, the Company evaluated the goodwill and indefinite life intangibles using the discounted cash flow approachits carrying value and determined that there was a trademark impairment of approximately $54,455 in the Mohawk segment and a trademark impairment of approximately $102,202 in the Unilin segment, which the Company recognized as a preliminary impairment of intangibles in the third quarter of 2008. In the fourth quarter, the Company finalized its analysis and no impairment.adjustment to the preliminary impairment of intangibles was necessary. The Company conducted its annual assessment and determined the fair values of its trademarks exceeded their carrying values. As a result, no additional impairment was indicated.

In the fourth quarter the Company conducted an additional interim test and compared the estimated fair value of its trademarks to its carrying value and, as a result, recognized an impairment of intangibles in the fourth quarter of 2008 of approximately $23,220 in the Mohawk segment and approximately $36,095 in the Unilin segment.

The following table summarizes the components of intangible assets:

2005

2004

      Carrying amount of amortized intangible assets:

        Customer relationships

 $

326,039 

54,160 

        Patents

256,256 

600 

 Effect of translation

(9,902)

-   

 $

572,393 

54,760 

      Accumulated amortization of amortized intangible assets:

        Customer relationships

 $

13,467 

4,324 

        Patents

7,006 

70 

 Effect of translation

(83)

-   

 $

20,390 

4,394 

      Indefinite life intangible assets:

Trade names

628,801 

272,280 

Effect of translation

(6,707)

-   

 $

622,094 

272,280 

          Total other intangible assets

 $

1,174,097 

322,646 

       Aggregate amortization expense

        For the year ended December 31

 $

15,996 

3,843 

       Estimated amortization expense for years ended

          December 31, are as follows:

        2006

 $

77,103 

        2007

83,733 

        2008

65,410 

        2009

64,282 

        2010

62,640 

45




Goodwill:

   Mohawk  Dal-Tile  Unilin  Total 

Balances as of January 1, 2007

  $199,132  1,182,790  1,317,717  2,699,639 

Goodwill acquired during the year

   —    3,223  (19,379) (16,156)

Effect of translation

   —    —    113,856  113,856 
              

Balances as of December 31, 2007

   199,132  1,186,013  1,412,194  2,797,339 

Goodwill acquired during the year

   —    900  (40,691) (39,791)

Impairment charge

   (199,132) (531,930) (596,363) (1,327,425)

Effect of translation

   —    —    (30,689) (30,689)
              

Balances as of December 31, 2008

  $—    654,983  744,451  1,399,434 
              

During 2008, the Company recorded additional goodwill of $1,742 in the Dal-Tile segment for the acquisition of certain stone center assets. In addition, during 2008 the Company reversed $842 and $40,691 of pre-acquisition tax liabilities in the Dal-Tile and Unilin segments, respectively. During 2007, the Company recorded additional goodwill of $13,069 in the Unilin segment for the acquisition of certain wood flooring assets and liabilities of Columbia Forest Products, Inc. Additionally in 2007, changes in the Unilin reporting segment relate to adjustments to the opening balance sheet including the reversal of pre-acquisition tax liabilities of $32,448. During 2007, changes in the Dal-Tile segment relate to adjustments to the opening balance sheet including the adjustment of pre-acquisition liabilities of $3,223.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

 The changes in the carrying amount of goodwill

Intangible assets:

    Tradenames       

Indefinite life assets not subject to amortization:

    

Balance as of January 1, 2007

  $662,314   

Effect of translation

   44,772   
       

Balance as of December 31, 2007

   707,086   

Impairment charge

   (215,972)  

Effect of translation

   (18,715)  
       

Balance as of December 31, 2008

  $472,399   
       
   Customer
relationships
  Patents  Total 

Intangible assets subject to amortization:

    

Balance as of January 1, 2007

  $284,113  233,667  517,780 

Amortization during period

   (46,751) (48,202) (94,953)

Effect of translation

   18,730  23,226  41,956 
           

Balance as of January 1, 2008

   256,092  208,691  464,783 

Intangible assets recognized during the period

   2,980  —    2,980 

Amortization during period

   (49,092) (29,475) (78,567)

Effect of translation

   (5,916) (7,829) (13,745)
           

Balance as of December 31, 2008

  $204,064  171,387  375,451 
           
   Years Ended December 31, 
   2008  2007  2006 

Amortization expense:

    

Aggregation amortization expense

  $78,567  94,953  81,129 

Estimated amortization expense for the years ended December 31, 2005 and 2004 are as follows:

 

 

 

 

 

Mohawk

Dal-Tile

 

 Unilin

Total

        Balances as of January 1, 2004

 $

195,083 

1,173,617 

1,368,700 

        Goodwill acquired during the year

1,549 

7,100 

8,649 

        Balances as of December 31, 2004

196,632 

1,180,717 

1,377,349 

        Goodwill acquired during the year

1,500 

10,955 

1,249,720 

1,262,175 

 Effect of translation

(17,561)

(17,561)

        Balances as of December 31, 2005

 $

198,132 

1,191,672 

1,232,159 

2,621,963 

 The increase in goodwill during 2005 was attributable

2009

  $ 79,173

2010

   77,240

2011

   75,122

2012

   64,576

2013

   22,791

Index to the acquisitions made within the Mohawk and Dal-Tile reporting segments and the Unilin Acquisition.Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(6) Property, Plant and Equipment

        Following is a summary of property, plant and equipment:

2005

2004

        Land

 $

155,670 

59,638 

        Buildings and improvements

559,723 

378,389 

        Machinery and equipment

1,802,370 

1,233,140 

        Furniture and fixtures

44,765 

44,371 

        Leasehold improvements

28,784 

24,120 

        Construction in progress

233,525 

78,165 

2,824,837 

1,817,823 

        Less accumulated depreciation and amortization

1,014,109 

912,491 

                       Net property, plant and equipment

 $

1,810,728 

905,332 

Following is a summary of property, plant and equipment:

 

   2008  2007

Land

  $191,523  193,867

Buildings and improvements

   719,806  747,542

Machinery and equipment

   2,245,075  2,123,351

Furniture and fixtures

   60,744  54,826

Leasehold improvements

   47,523  42,308

Construction in progress

   148,886  151,741
       
   3,413,557  3,313,635

Less accumulated depreciation and amortization

   1,487,815  1,337,914
       

Net property, plant and equipment

  $1,925,742  1,975,721
       

Property, plant and equipment includesincluded capitalized interest of $6,000, $3,197$6,419, $4,446 and $5,634$7,477 in 2005, 20042008, 2007 and 2003,2006, respectively. Depreciation expense was $133,333, $117,768$212,281, $207,613 and $104,450$189,388 for 2005, 20042008, 2007 and 2003,2006, respectively. Included in the property, plant and equipment are capital leases with a cost of $135,210$36,208 and $33,220 and accumulated depreciation of $118$5,248 and $3,402 at December 31, 2005.2008 and 2007, respectively.

As a result of the impairment indicators described above in Note 5, Goodwill and Other Intangible Assets, during the third quarter, and again in the fourth quarter of 2008, the Company tested its long-lived assets for impairment by comparing the estimated future undiscounted net cash flows expected to be generated by these assets to their carrying value and determined that there was no impairment.

(7) Long-Term Debt

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

46




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The new senior multi-currency unsecured credit facilities consist of (i) a multi-currency $750,000 revolving credit facility, which matures on October 28, 2010, (ii) a $389,200 term loan facility, which was repaid in 2006, and (iii) a Euro 300,000 (based on the then prevailing exchange rate) term loan facility, allwhich we repaid in 2008. During the third quarter of which mature on October 28, 2010. Availability2008, the $750,000 revolving credit facility was impacted by the bankruptcy of Lehman Brothers Holdings Inc (“Lehman”). On December 31, 2008, the Company reduced the $750,000 revolving credit facility to $650,000 by eliminating the credit commitment of Lehman under the defaulting lender provision of the senior unsecured credit facilities.

At December 31, 2008, the amount used under the revolving credit facility of the senior unsecured credit facilities was $171,683 leaving a total of approximately $478,317 available under the revolving credit facility. The amount used under the revolving credit facility is reduced by the amountcomposed of $55,300 borrowings, $55,599 standby letters of credit issuedguaranteeing the Company’s industrial revenue bonds and $60,784 standby letters of credit related to various insurance contracts and foreign vendor commitments. The balance of the $389,200 term loan facility under thisthe senior unsecured credit facilities was repaid in 2006 and the balance of the Euro 300,000 term loan facility was repaid in 2008. At December 31, 2008, nothing was outstanding under the Euro revolving credit facility.

On November 8, 2005, 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 bears interest at EURIBOR plus an indexed amount based on the Company’s senior, unsecured, long-term debt

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

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. At December 31, 2005,2008, the amount of these letters of credit was $78,338.  At the Company's election, both the bridge creditCompany had no borrowings outstanding under this facility and a total of $182,970 was available under the newCompany’s Euro 130,000 revolving credit facility.

Borrowings outstanding under the senior unsecured credit facilities bear interest, at the Company’s option, 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'sCompany’s senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130,000, or approximately $156,000 (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred to as the Euro revolving credit facility. This agreement bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

      The Company's newCompany’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, 2005. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.060%0.06% to 0.25% depending upon the Company'sCompany’s senior, unsecured long-term debt rating as determined by certain rating agencies.rating.

The Company has an on-balance sheet trade accounts receivable securitization agreement (“Securitization Facility”). The Securitization Facility allows the Company to borrow up to $250,000 based on available accounts receivable. At December 31, 2005, a2008, the Company had $47,000 outstanding secured by trade receivables. On July 28, 2008, the Company amended and restated the Securitization Facility, reduced total of approximately $507,918 was available underavailability from $350,000 to $250,000, and extended the new senior unsecured credit facilities, and the Euro 130,000 credit agreement, compared to $234,130 available under both the then-existing credit facility and uncommitted credit lines at December 31, 2004. The amount used under the senior unsecured credit facilities at December 31, 2005, was $1,140,379. The amount used under the unsecured credit facilities is composed of $1,062,041 borrowings, $55,599 standby letters of credit guaranteeing the Company's industrial revenue bonds and $22,739 standby letters of credit related to various insurance contracts and foreign vendor commitments.term until July 27, 2009.

On January 17, 2006, the Company issued $500,000 aggregate principal amount of 5.750%5.75% notes due 2011 and $900,000 aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the bridge credit facility, and accordingly the Company reclassified the bridge credit facility as long-term debt. Interest payable on each series of the notes will be increasedis 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 the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum0.25% increase in the eventinterest rate, subject to a maximum increase of a downgrade is 2%.1% per rating agency. If later the Company's debt rating subsequentlyof these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $3,500 per year. On November 7, 2008, Moody’s Investors Service, Inc. announced that it placed the Company’s Baa3 long term rating on review for possible downgrade. On February 25, 2009, Moody’s Investors Service, Inc. announced that it had downgraded its ratings on the Company’s senior unsecured notes to Ba1 from Baa3 and was maintaining a negative rating outlook, following the completion of its rating review. This downgrade will increase the Company’s interest expense by approximately $3,500 per year and could adversely affect the cost of and ability to obtain additional credit in the future.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allowsIn 2002, the Company to borrow up to $350,000 based on available accounts receivable. At December 31, 2005, the Company had $40,000 outstanding compared to $90,000 at December 31, 2004. The Securitization Facility is secured by trade receivables. During the third quarter of 2005, the Company extended the termissued $400,000 aggregate principal amount of its Securitization Facility until August 2006.

47




senior 7.2% notes due 2012.

Long-term debt consists of the following:

   2008  2007

Securitization facility, due July 28, 2009

  $47,000  190,000

Five year senior unsecured credit facility, due October 28, 2010

   55,300  215,495

5.75% notes, payable January 15, 2011 interest payable semiannually

   500,000  500,000

7.20% senior notes, payable April 15, 2012 interest payable semiannually

   400,000  400,000

6.125% notes, payable January 15, 2016 interest payable semiannually

   900,000  900,000

Euro five year unsecured revolving credit facility due November 8, 2010

   —    —  

Industrial revenue bonds, capital leases and other

   52,486  76,339
       

Total long-term debt

   1,954,786  2,281,834

Less current portion

   94,785  260,439
       

Long-term debt, excluding current portion

  $1,860,001  2,021,395
       

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

      Long-term debt consists of the following:

2005

2004

        Short term uncommitted credit lines

 $

37,721 

        Five year unsecured credit facility, due October 28, 2010

1,062,041 

        Securitization Facility, due August 1, 2006

40,000 

90,000 

       6.50% senior notes, payable April 15, 2007

          interest payable semiannually

300,000 

300,000 

        7.20% senior notes, payable April 15, 2012

          interest payable semiannually

400,000 

400,000 

        364-day senior, unsecured bridge term credit facility,

          due October 27, 2006

1,400,000 

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

          installments beginning in 1997, due September 1, 2005,

          interest payable semiannually

9,447 

        Industrial revenue bonds, capital leases and other

106,329 

54,173 

                        Total long-term debt

3,308,370 

891,341 

        Less current portion

113,809 

191,341 

                        Long-term debt, excluding current portion

 $

3,194,561 

700,000 

       The aggregate maturities of long-term debt as of

          December 31, 2005 are as follows:

        2006

 $

113,809 

        2007

314,277 

        2008

11,259 

        2009

4,275 

        2010

1,063,178 

        Thereafter

1,801,572 

 $

3,308,370 

The aggregate maturities of long-term debt as of December 31, 2008 are as follows:

2009

  $94,785

2010

   56,796

2011

   500,881

2012

   400,451

2013

   515

Thereafter

   901,358
    
  $1,954,786
    

(8) Accounts Payable, and Accrued Expenses

        Accounts payable and accrued expenses are as follows:

2005

2004

        Outstanding checks in excess of cash

 $

97,389 

33,719 

        Accounts payable, trade

401,543 

277,851 

        Accrued expenses

325,856 

180,978 

        Income taxes payable

36,504 

16,143 

        Accrued compensation

136,813 

114,370 

                      Total accounts payable and accrued expenses

 $

998,105 

623,061 

48




and Deferred Tax Liability

Accounts payable and accrued expenses are as follows:

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

   2008  2007

Outstanding checks in excess of cash

  $12,612  24,619

Accounts payable, trade

   315,053  399,141

Accrued expenses

   267,051  274,465

Accrued interest

   45,493  47,082

Income taxes payable

   40,798  42,090

Deferred tax liability

   3,030  11,890

Accrued compensation

   98,094  151,774
       

Total accounts payable and accrued expenses

  $782,131  951,061
       

Notes to Consolidated Financial Statements (Continued)

(9) Derivative Financial Instruments

Natural Gas Risk Management

The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU"(“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, 2005,2008, the Company had natural gas contracts that mature from January 20062009 to October 2006December 2009 with an aggregate notional amount of approximately 660 MMBTU's.2,650 MMBTU’s. The fair value of these contracts was an asseta liability of $1,941.$5,913 at December 31, 2008. At December 31, 2004,2007, the Company had natural gas contracts that mature from January 20052008 to March 20052008 with an aggregate notional amount of approximately 1,010 MMBTU's.310 MMBTU’s. The fair value of these contracts was a liability of $1,280.$279 at December 31, 2007. The offset to these assetsliabilities 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 earningsoperations and was not significant for the periods reported. The amount that the Company anticipates that will be reclassified out of accumulated other comprehensive income (loss) in the next twelve months is a gainloss of approximately $1,941.$3,755, net of taxes.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

The Company'sCompany’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, 2005,2008, the Company had normal purchase commitments of approximately 1,867 MMBTU's2,026 MMBTU’s for periods maturing from January 20062009 through October 2006.December 2009. The contracted value of these commitments was approximately $17,219 and the fair value of these commitments was approximately $20,488,$17,151 at December 31, 2005.2008. At December 31, 2004,2007, the Company had normal purchase commitments of approximately 1,892 MMBTU's303 MMBTU’s for periods maturing from January 20052008 through March 2006.2008. The contracted value of these commitments was approximately $9,879 and the fair value of these commitments was approximately $11,941,$2,842 at December 31, 2004.2007.

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 forward contracts to purchase approximately 8,000269,129 Mexican pesos at December 31, 2005.2008. The fair value of these contracts was a liability of $5,237 at December 31, 2008. The aggregate U.S. dollar value of these contracts at December 31, 20052008 was approximately $697.$23,923. The contracts are markedoffset to marketthese liabilities is recorded in other current liabilities withcomprehensive income (loss), net of applicable income taxes. The ineffective portion of the derivative is recognized in the cost of goods sold within the consolidated statements of operations 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 $3,326, net of taxes. The Company had forward contracts to purchase approximately 244,009 Mexican pesos at December 31, 2007. The fair value of these contracts was an asset of $153 at December 31, 2007. The aggregate U.S. dollar value of these contracts at December 31, 2007 was approximately $21,844. The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstanding at December 31, 2004.

      The Company also had forward exchange contracts to sell the British Pound and Canadian Dollar for a notional amount of $5,555 at December 31, 2005. The contracts do not qualify for hedge accounting and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and the contracts do not qualify for hedge accounting. The impactineffective portion of the changederivative is recognized in fair value on the cost of goods sold within the consolidated statements of operations and was not significant for the period ended December 31, 2005.

49




periods reported.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(10) Product warranties

The Company warrants certain qualitative attributes of its products for up to 2033 years. The Company records a provision for estimated warranty and related costs in accrued expenses, based on historical experience and periodically adjusts these provisions to reflect actual experience. Product warranties are as follows:

        Product warranties are as follows:

2005

2004

2003

               Balance at beginning of year

 $

23,473 

24,063 

28,919 

                Warranty claims

(46,850)

(45,553)

(50,040)

                Warranty expense

49,365 

44,963 

45,184 

                Balance at end of year

 $

25,988 

23,473 

24,063 

   2008  2007  2006 

Balance at beginning of year

  $46,187  30,712  27,775 

Warranty claims

   (81,586) (54,685) (48,472)

Warranty expense(1)

   91,859  67,301  51,409 

Other(2)

   —    2,859  —   
           

Balance at end of year

  $56,460  46,187  30,712 
           

(1)The increase in warranty expense in 2008 principally relates to increased claims on new product launches in the Mohawk segment.
(2)Includes $2,859 in 2007 related to the Columbia acquisition. This amount was not charged to expense.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(11) Stock Options, Stock Compensation and Treasury Stock

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) 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 at January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 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 SFAS No. 123(R).

Under the 2002 Long-TermCompany’s 2007 Incentive Plan options may be granted(“2007 Plan”), which was approved by the Company’s stockholders on May 16, 2007, the Company reserved up to directors and key employees through 2012 to purchase a maximum of 3,200 shares of common stock. Understock for issuance upon the 2002 plan,grant or exercise of stock options, that were not issued fromrestricted stock, restricted stock units (“RSU’s”) and other types of awards, to directors and key employees through 2017. Option awards are generally granted with an exercise price equal to the 1992, 1993 and 1997 plans were cancelled.  During 2005, 2004 and 2003, options to purchase 460, 411 and 565 shares, respectively, were granted undermarket price of the 2002 plan. Options granted under each of these plans expire 10 years fromCompany’s common stock on the date of the grant and become exercisable at such datesgenerally vest between three and at prices as determined byfive years with a 10-year contractual term. Restricted stock and RSU’s are generally granted with a price equal to the Compensation Committeemarket price of the Company's BoardCompany’s common stock on the date of Directors.the grant and generally vest between three and five years.

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

 

   2008  2007  2006 

Options outstanding at beginning of year

   1,455  2,034  2,276 

Options granted

   146  64  146 

Options exercised

   (46) (588) (338)

Options canceled

   (49) (55) (50)
           

Options outstanding at end of year

   1,506  1,455  2,034 
           

Options exercisable at end of year

   1,035  821  1,066 
           

Option prices per share:

    

Options granted during the year

  $74.47  75.10-93.65  75.82-86.51 
           

Options exercised during the year

  $35.73-82.68  16.66-88.33  11.33-73.45 
           

Options canceled during the year

  $16.66-93.65  22.63-93.65  24.63-89.46 
           

Options outstanding at end of year

  $16.66-93.65  16.66-93.65  16.60-90.97 
           

Options exercisable at end of year

  $16.66-93.65  16.66-90.97  16.60-90.97 
           

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 2005, 20042008, 2007 and 2003,2006, a total of 1, 1 and 1 shares, respectively, were awarded to the non-employee directors under the plan.

      Additional information relatingIn addition, the Company maintains an employee incentive program that awards restricted stock on the attainment of certain service criteria. The outstanding awards related to these programs and related compensation expense was not significant for any of the Company's stock option plans follows:

2005

2004

2003

Options outstanding at beginning of year

2,281 

2,413 

2,624 

Options granted

460 

411 

565 

Options exercised

(378)

(464)

(679)

Options canceled

(87)

(79)

(97)

Options outstanding at end of year

2,276 

2,281 

2,413 

Options exercisable at end of year

857 

791 

765 

Option prices per share:

Options granted during the year

$

76.73-89.46 

61.33-90.97 

48.50-74.93 

Options exercised during the year

$

9.33-82.50 

9.33-65.02 

6.67-63.14 

Options canceled during the year

$

30.53-90.97 

11.17-82.50 

9.33-63.90 

Options outstanding at end of year

$

11.33-90.97 

9.33-90.97 

9.33-74.93 

Options exercisable at end of year

$

11.33-90.97 

9.33-74.93 

9.33-65.02 

50




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Outstanding

Exercisable

Exercise price range

Number of Shares

 

Average Life (1)

 

Average Price (2)

 

Number of Shares

 

Average Price (2)

Under $30.53

392 

4.15 

 $

24.79 

303 

 $

23.15 

$30.69-48.50

437 

6.34 

44.93 

169 

39.87 

$49.09-63.14

408 

6.40 

60.79 

216 

60.48 

$63.90-73.45

519 

7.61 

70.31 

156 

68.11 

$73.54-88.33

510 

9.20 

86.51 

12 

83.21 

$89.46-90.97

10 

9.17 

90.42 

90.97 

   Total

2,276 

6.91 

59.60 

857 

44.96 


(1)     Weighted-average contractual life remaining in years.
(2)     Weighted-average exercise price.
2008, 2007 and 2006.

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, 2005, a total of approximately 1862008, no shares of the Company'sCompany’s common stock

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

were purchased at an aggregate cost of approximately $14,521.purchased. Since the inception of the program, a total of approximately 11,39311,512 shares have been repurchased at an aggregate cost of approximately $326,063.$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 an agreementa 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 issuemake 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 the 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. The Company expensed approximately 585 shares to certain Unilin officers at $81.00 per share$0, $2,300 and $2,300 under the DSPA for an aggregate purchase priceeach of $47,429. These shares were issued in November 2005. the years ended December 31, 2008, 2007 and 2006, respectively.

The securities were issued in reliancefair value of option awards is estimated on the exemption from registration provided under Section 4(2)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 Securities ActCompany’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 1933,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.

   2008  2007  2006 

Dividend yield

  —    —    —   

Risk-free interest rate

  2.9% 4.8% 4.6%

Volatility

  24.0% 29.0% 35.3%

Expected life (years)

  5  6  6 

A summary of the Company’s options under the 2007 Plan at December 31, 2008, and changes during the period then ended is presented as amended.follows:

   Shares  Weighted
average
exercise price
  Weighted
average
remaining
contractual
term (years)
  Aggregate
intrinsic
value

Options outstanding January 1, 2008

  1,455  $69.89    

Granted

  146   74.47    

Exercised

  (46)  41.65    

Forfeited and expired

  (49)  76.57    
           

Options outstanding, end of period

  1,506   70.98  5.3  $1,785
         

Vested and expected to vest at December 31, 2008

  1,479  $70.83  5.2  $1,785
         

Exercisable at December 31, 2008

  1,035  $66.37  4.4  $1,785
         

The weighted-average grant-date fair value of an option granted during 2008, 2007 and 2006, was $20.26, $33.68 and $33.80, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007, and 2006 was $1,169, $22,943 and $14,032, respectively. Total compensation expense

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

recognized for the periods ended December 31, 2008, 2007 and 2006 was $6,646 ($4,210, net of tax), $8,827 ($6,359, net of tax) and $11,925 ($7,537, net of tax), respectively, which was allocated to selling, general and administrative expenses. The remaining unamortized expense for non-vested compensation expense at December 31, 2008, was $7,320 with a weighted average remaining life of 2.1 years.

The following table summarizes information about the Company’s stock options outstanding at December 31, 2008:

   Outstanding  Exercisable

Exercise price range

  Number of
shares
  Average
life
  Average
price
  Number of
shares
  Average
price

Under $49.09

  257  2.8  $38.93  257  $38.93

$53.01-$69.46

  283  3.5   62.78  280   62.80

$69.95-$74.47

  342  6.6   73.87  149   73.42

$74.93-$86.51

  258  6.6   82.58  119   82.52

$87.87-$88.00

  35  6.8   87.96  21   87.96

$88.33-$93.65

  331  6.2   89.09  209   88.57
                 

Total

  1,506  5.3  $70.98  1,035  $66.37
                 

A summary of the Company’s RSUs under the 2007 Plan at December 31, 2008, and changes during the period then ended is presented as follows:

   Shares  Weighted
average price
  Weighted
average
remaining
contractual
term (years)
  Aggregate
intrinsic
value

Restricted Stock Units outstanding January 1, 2008.

  137  $93.61    

Granted

  72   75.80    

Released

  (15)  93.51    

Forfeited

  (7)  91.56    
           

Restricted Stock Units outstanding, end of period

  187   92.94  1.7  $8,046
         

Vested and expected to vest at December 31, 2008

  175  $92.94  1.6  $7,534
         

The Company recognized stock based compensation costs related to the issuance of RSU’s of $4,977 ($3,153) net of taxes) and $4,446 ($3,203 net of taxes) for the periods ended December 31, 2008 and 2007, respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense for unvested RSU’s granted to employees, net of estimated forfeitures, was $7,457 at December 31, 2008, and will be recognized as expense over a weighted-average period of approximately 2.4 years.

(12) Employee Benefit Plans

The Company has a 401(k) retirement savings plan (the "Mohawk Plan"“Mohawk Plan”) open to substantially all of its employees within the Mohawk andsegment, Dal-Tile segments and at January 1, 2007, certain U.S. employees of the Unilin segment, 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'semployee’s salary

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

and an additional $0.25 for every $1.00 of employee contributions in excess of 4% of the employee'semployee’s salary up to a maximum of 6%. For the Dal-Tile segment,and Unilin segments, the Company contributes $.50 for every $1.00 of employee contributions up to a maximum of 6% of the employee'semployee’s salary. Employee and employer contributions to the Mohawk Plan were $38,322$40,393 and $15,118$16,024 in 2005, $35,4402008, $43,187 and $13,896$16,946 in 2004,2007, and $28,807$40,369 and $10,995$15,713 in 2003,2006, respectively. The Company also made a discretionary contribution to the Mohawk Plan of approximately $5,710, $5,214$4,211, $5,500 and $4,595$5,900 in 2005, 20042008, 2007 and 2003,2006, respectively.

The Unilin segmentCompany also has a defined contribution plan that covers certain employees in 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 $40 for the two-month period ended December 31, 2005.

     Unilin has various pension plans covering most of its employees in Belgium, France, and The Netherlands.Netherlands (the “Non-U.S. Plans”) that it acquired with the acquisition of Unilin. Benefits under those plans typicallythe Non-U.S. Plans depend on compensation and years of service. Unilin does not provide other postretirement benefits. The pension plansNon-U.S. Plans are funded in accordance with local regulations. In The Netherlands, some plans participate in multi-employer pension plans which have been treated as defined contribution plans. The Company uses a December 31 as the measurement date for its plans.

51




Non-U.S. Plans.

Components of the net periodic benefit cost of the Company’s Non-U.S. pension benefit plans are as follows:

   2008  2007 

Service cost of benefits earned

  $1,881  1,927 

Interest cost on projected benefit obligation

   1,245  968 

Expected return on plan assets

   (993) (738)

Amortization of actuarial gain

   (29) (12)
        

Net pension expense

  $2,104  2,145 
        

Assumptions used to determine net periodic pension expense for Non-U.S. Plans:

   2008  2007

Discount rate

  5.00%-5.55%  4.50%-5.06%

Expected rate of return on plan assets

  4.50%-5.55%  4.50%-4.90%

Rate of compensation increase

  1.00%-5.00%  2.50%-7.00%

Underlying inflation rate

  2.00%  2.00%

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

 

The obligations, plan assets and funding status of the plans were as follows:

   Non-U.S. Plans 
   2008  2007 

Change in benefit obligation:

   

Projected benefit obligation at end of prior year

  $22,045  18,445 

Cumulative foreign exchange effect

   (962) 2,118 

Service cost

   1,809  2,072 

Interest cost

   1,198  1,041 

Plan participants contributions

   729  603 

Actuarial gain

   (3,681) (802)

Benefits paid

   (1,048) (1,432)
        

Projected benefit obligation at end of year

  $20,090  22,045 
        

Change in plan assets:

   

Fair value of plan assets at end of prior year

  $18,728  14,852 

Fair value adjustment

   —    299 

Cumulative foreign exchange effect

   (817) 1,704 

Actual return on plan assets

   955  794 

Employer contributions

   1,861  1,816 

Benefits paid

   (1,048) (1,432)

Plan participant contributions

   729  603 

Actual (loss) gain

   (4,037) 92 
        

Fair value of plan assets at end of year

  $16,371  18,728 
        

Funded status of the plans:

   

Ending funded status

  $(3,719) (3,317)
        

Net amount recognized in consolidated balance sheets:

   

Accrued expenses (Current liability)

  $—    —   

Accrued benefit liability (Non-current liability)

   (3,719) (3,317)

Accumulated other comprehensive gain

   (1,649) (2,033)
        

Net amount recognized

  $(5,368) (5,350)
        

The Company’s net amount recognized in accumulated other comprehensive income related to actuarial (losses) gains was $(384) and $1,215 for the definedperiods ended December 31, 2008 and 2007, respectively.

Assumptions used to determine the projected benefit obligation for the Company’s Non-U.S. pension benefit plans are invested 100% in insurance contracts. Since the insurance companies primarily invest in bonds, the long term expected rate of return reflects the yield of the bonds. Awere as follows:

   2008  2007

Discount rate

  6.00%-6.60%  5.00%-5.55%

Rate of compensation increase

  1.25%-5.25%  1.00%-7.00%

Underlying inflation rate

  2.25%  2.00%

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The discount rate of 4.18% has been established by referenceassumptions used to account for pension obligations reflect the return on AA corporate bonds, an expected rate of return has been set equal torates 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 ayield on investments. The rate of compensation increase of 3.45%for the Non-U.S. Plans is based onupon the Company's experience.Company’s annual reviews.

 

   Non-U.S. Plans
   2008  2007

Plans with accumulated benefit obligations in excess of plan assets:

    

Projected benefit obligation

  $1,118  1,317

Accumulated benefit obligation

   889  899

Fair value of plan assets

   470  532

Plans with plan assets in excess of accumulated benefit obligations:

    

Projected benefit obligation

  $18,972  20,728

Accumulated benefit obligation

   15,286  17,186

Fair value of plan assets

   15,901  18,196

Estimated future benefit payments for the Non-U.S. Plans are $644 in 2009, $1,066 in 2010, $863 in 2011, $1,093 in 2012, $1,436 in 2013 and $9,402 in total for 2014-2018.

The accumulatedCompany expects to make cash contributions of $1,884 to its Non-U.S. Plans in 2009.

The percentage of each asset category of the total assets held by the plans follows:

   2008  2007

Non-U.S. Plans:

    

Insurance contracts

  $16,371  18,728
       

The Company’s investment policy:

   2008  2007 

Non-U.S. Plans:

   

Insurance contracts

  100.0% 100.0%

The Company’s approach to developing its expected long-term rate of return on pension plan assets combines an analysis of historical investment performance by asset class, the Company’s investment guidelines and current and expected economic fundamentals.

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 obligation for Unilin's definedobligations) of its benefit plans was $14,345 atin the December 31, 2005.2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The assets, projected benefit obligationCompany recorded a decrease to its pension liability of $818 and an adjustment to accumulated benefit obligation forother comprehensive income of $818 which represents the pension plans with accumulated benefit obligations in excess of the plans' assets were $12,115, $15,194 and $13,468 respectively, as of December 31, 2005.net unrecognized prior service costs.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(13) Income Taxes

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

2005

2004

2003

               United States

 $

545,427 

568,824 

483,997 

               Foreign

11,594 

8,565 

4,437 

Income before income taxes.

 $

557,021 

577,389 

488,434 

 

   2008  2007  2006

United States

  $(853,318) 349,922  494,190

Foreign

   (424,848) 254,195  182,121
          

Income before income taxes

  $(1,278,166) 604,117  676,311
          

Income tax expense (benefit) for the years ended December 31, 2005, 20042008, 2007 and 2003,2006 consists of the following:

Current

Deferred

Total

        2005:

               U.S. federal

 $

183,807 

3,320 

187,127 

               State and local

15,147 

(1,395)

13,752 

               Foreign

11,555 

(13,608)

(2,053)

 $

210,509 

(11,683)

198,826 

        2004:

               U.S. federal

 $

158,704 

32,541 

191,245 

               State, local and other

11,363 

6,159 

17,522 

 $

170,067 

38,700 

208,767 

        2003:

               U.S. federal

 $

132,849 

38,696 

171,545 

               State, local and other

10,661 

(3,921)

6,740 

 $

143,510 

34,775 

178,285 

52




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

   2008  2007  2006 

Current income taxes:

    

U.S. federal

  $61,186  109,810  206,435 

State and local

   8,248  8,636  20,320 

Foreign

   41,232  71,047  62,322 
           

Total current

  $110,666  189,493  289,077 
           

Deferred income taxes

    

U.S. federal

   (91,813) 25,185  (35,313)

State and local

   (7,511) (26,535) (4,932)

Foreign

   168,720  (290,840) (28,354)
           

Total deferred

  $69,396  (292,190) (68,599)
           

Total

  $180,062  (102,697) 220,478 
           

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:

2005

2004

2003

        Computed "expected" tax expense

 $

194,958 

202,087 

170,952 

        State and local income taxes, net of federal

           income tax benefit

4,367 

11,675 

5,071 

        Foreign income taxes

(589)

(892)

2,495 

        Change in valuation allowance

(1,351)

(1,821)

(2,312)

        Other, net

1,441 

(2,282)

2,079 

 $

198,826 

208,767 

178,285 

 

   2008  2007  2006 

Income taxes at statutory rate

  $(447,358) 211,441  236,709 

State and local income taxes, net of federal income tax benefit

   (4,113) 10,610  4,522 

Foreign income taxes

   (380) (25,925) (26,280)

Change in valuation allowance

   276,801  630  28,608 

Intellectual property migration to Luxembourg .

   —    (271,607) —   

Goodwill impairment

   406,577  —    —   

Notional interest

   (63,694) (36,446) (22,510)

Tax contingencies & audit settlements

   4,990  4,406  —   

Change in statutory tax rate

   (254) —    (1,528)

Other, net

   7,493  4,194  957 
           
  $180,062  (102,697) 220,478 
           

SFAS 142 and EITF Issue No. 02-13 require companies to test goodwill and indefinite-lived assets for impairment annually, or more often if an event or circumstance indicates that an impairment loss may have been incurred. As stated, the Company recorded a non-cash pretax impairment charge of $1,543,397 to reduce the carrying value of goodwill and other intangibles. The tax effect of the non-deductible portion of the goodwill impairment was $406,577.

Index to Financial Statements

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, 20052008 and 2004,2007 are presented below:

2005

2004

        Deferred tax assets:

               Accounts receivable

 $

20,147 

32,008 

               Inventories

(4,969)

9,641 

               Federal and state net operating losses and credits

44,620 

40,551 

               Accrued expenses

99,836 

62,767 

               Valuation allowance.

(32,180)

(33,531)

                       Gross deferred tax assets

127,454 

111,436 

        Deferred tax liabilities:

               Plant and equipment

(302,552)

(129,287)

               Intangibles

(325,183)

(83,545)

               Other liabilities

(56,069)

(35,054)

                       Gross deferred tax liabilities

(683,804)

(247,886)

                       Net deferred tax liability (1)

 $

(556,350)

(136,450)


(1) This amount includes $25,114

   2008  2007 

Deferred tax assets:

   

Accounts receivable

  $21,368  21,346 

Inventories

   50,998  44,354 

Accrued expenses and other

   98,284  92,672 

Deductible state tax and interest benefit

   22,579  20,747 

Intangibles

   216,047  249,057 

Foreign and state net operating losses and credits

   158,685  99,858 

Valuation allowance

   (343,572) (75,028)
        

Gross deferred tax assets

   224,389  453,006 
        

Deferred tax liabilities:

   

Plant and equipment

   (273,076) (277,013)

Intangibles

   (167,271) (324,284)

LIFO change in accounting method

   (25,700) (38,682)

Other liabilities

   (32,125) (39,856)
        

Gross deferred tax liabilities

   (498,172) (679,835)
        

Net deferred tax liability(1)

  $(273,783) (226,829)
        

(1)This amount includes $28 and $260,644 of non-current deferred tax assets which are in other assets and $3,030 and $11,890 current deferred tax liabilities which are included in accounts payable and accrued expenses in the consolidated balance sheet as of 2008 and 2007, respectively.

Management believes it is more likely than not the Company will realize the benefits of these deductible differences, with the exception of certain deferred tax assets which are in other assets and $5,111 current deferred tax liabilities which are included in other accrued expenses in the consolidated balance sheet.

      Baseddiscussed 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.

The Company evaluates its ability to realize the Company's management believes ittax benefits associated with deferred tax assets by analyzing its forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. The valuation allowance as of December 31, 2008 and December 31, 2007 is $343,572 and $75,028, respectively. The December 31, 2008 valuation allowance relates to net operating losses and tax credits of $127,525 and deferred tax assets related to intangibles of $216,047. The December 31, 2007 valuation allowance related entirely to net operating losses and tax credits. For 2008, the total change in the valuation allowance was an increase of $268,544, which includes a change of $(8,257) primarily related to foreign currency translation. The increase was the result of the valuation allowance of $252,751, which is described below, that the Company recorded against its deferred tax assets during the quarter ended September 27, 2008, $18,989 for certain current year foreign net operating losses, and $5,061 of state net operating losses and tax credits.

As of December 31, 2008, the Company has state net operating loss carryforwards and state tax credits with potential tax benefits of $45,698, net of federal income tax benefit; these carryforwards expire over various periods based on jurisdiction. A valuation allowance totaling $29,203 has been recorded against these deferred tax assets as of December 31, 2008. In addition, as of December 31, 2008, the Company has net operating loss carryforwards in various foreign jurisdictions of $112,987. A valuation allowance totaling $98,322 has been recorded against these deferred tax assets as of December 31, 2008.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

In the fourth quarter of 2007, the Company moved the intellectual property and treasury operations of an indirectly owned European entity to a new office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin, and the move allowed for the consolidation of the historical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized at December 31, 2007 was approximately $245,000 and the related income tax benefit recognized in the financial statements was approximately $272,000.

During the third quarter of 2008, the Company willreassessed the need for a valuation allowance against its deferred tax assets. Actual cash flows have been less than those projected as of December 31, 2007, primarily due to the slowing worldwide economy and declining sales volume. The Company determined that, given the current and expected economic conditions and the corresponding reductions in cash flows, its ability to realize the benefitsbenefit of these deductible differences.the deferred tax asset related to the European restructuring transaction described above, as well as tax losses generated in the same jurisdiction was not more likely than not. Accordingly during the third quarter of 2008, the Company recorded a $252,751 valuation allowance against the deferred tax asset created as a result of the European restructuring.

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 continueconsidered to be reinvested indefinitely.indefinitely reinvested. At December 31, 20052008 and 2004,2007, the Company had not provided federal income taxes on earnings of approximately $56,763$654,000 and $48,172$630,000, respectively, from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in various international jurisdictions. These taxes would be partially offset by U.S. foreign tax credits. Determination of the amount of the unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this hypothetical calculation.

53




Tax Uncertainties

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The American Jobs Act of 2004 ("The Jobs Act") was enacted on October 22, 2004.  The new law made numerous and substantive changes in the taxation of foreign and domestic-sourced income, including provisions for a lower tax rate on repatriated foreign earnings.   The Company has completed its analysis ofadopted the relevant provisions of The Jobs Act and has determined that there is no impactFASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No 109,”(“FIN 48”) on the Company's consolidated financial statements.

      As of December 31, 2005 and 2004,January 1, 2007. Upon adoption, the Company had state net operating loss carryforwards, state tax credits and Mexican asset tax credits with potential tax benefits of approximately $44,600 and $40,600, respectively, net of federal income tax benefit. Because the Company generates more state tax credits on an annual basis in certain jurisdications than the related state taxable income, it is the Company's opinion that it is more likely than not that the benefit of these deferred tax assets relatedrecognized no change to state tax credits and certain state net operating losses will not be realized. Accordingly, a valuation allowance of approximately $32,180 and $33,531 has been recorded for the years ended December 31, 2005 and 2004, respectively. For 2005, the valuation allowance decreased by $1,351 primarily as a result of a Mexican tax credit benefit recognized in the current year, net of an increase in the state valuation allowance in various state jurisdictions. The Company has determined that these credits and losses may not be utilized before they expire.opening retained earnings.

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, andauthorities. Accordingly, the Company has accrued a liability when it believes that it is probablenot more likely than not that it will be assessed.realize the benefits of tax positions that it has taken in its tax returns or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with FIN 48. 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 any given quarter or annual period. The Company reversed pre-acquisition tax liabilities of $41,533 with a corresponding reduction to goodwill for the year ended December 31, 2008.

The Company’s total balance of unrecognized tax benefits as of December 31, 2008 and 2007, is $91,887 and $116,857, respectively, excluding any one period.accruals for interest and penalties.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

   2008  2007 

Balance at January 1

  $116,857  156,018 

Additions based on tax positions related to the current year

   5,610  2,012 

Additions for tax positions of prior years

   12,167  4,459 

Effects of foreign currency translation

   (1,592) 5,484 

Reductions for tax positions of prior years

   (842) (23,179)

Reductions resulting from the lapse of the statute of limitations

   (36,436) (17,239)

Settlements with taxing authorities

   (3,877) (10,698)
        

Balance at December 31

  $91,887  116,857 
        

Included in the balance as of December 31, 2008 and 2007, is $39,588 and $29,373, respectively, of uncertain tax positions that, if recognized, would affect the Company’s overall effective tax rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of its income tax provision. As of December 31, 2008 and 2007, the Company has $39,641 and $43,540, respectively, accrued for the payment of interest and penalties, which does not include the federal tax benefit of interest deductions, where applicable. During the period ending December 31, 2008 and 2007, the Company accrued interest and penalties through income tax expense of $3,657 and $1,115, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Company is protesting through the IRS Appeals division the timing and deductibility of certain contingent liabilities related to the audit of its 1999 – 2003 tax years. In connection with its protest, the Company paid a $35,844 cash bond to the IRS. Within the next twelve months, it is reasonably possible that an additional payment of approximately $5,000 will be made. In addition, the Company believes it is reasonably possible that the balance of unrecognized tax benefits could decrease by $31,211 (which includes accrued penalties and interest expense) within the next twelve months for individual matters of lesser amounts due to settlements or statutory expirations in various tax jurisdictions.

The Company is also under examination for tax years 2004-2006 with the IRS and in various state and foreign jurisdictions for which the anticipated adjustments would not result in a significant change to the total amount of unrecognized tax benefits.

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(14) Commitments and Contingencies and Other

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 ofat December 31:

Capital

Operating

Total Future Payments

        2006

 $

18,382 

93,553 

111,935 

        2007

14,381 

75,247 

89,628 

        2008

11,670 

61,973 

73,643 

        2009

4,597 

51,558 

56,155 

        2010

1,223 

37,064 

38,287 

        Thereafter

1,687 

103,116 

104,803 

        Total payments

51,940 

422,511 

474,451 

        Less amount representing interest

(3,636)

        Present value of capitalized lease payments

 $

48,304 

 

   Capital  Operating  Total Future
Payments

2009

  $5,169  106,932  112,101

2010

   1,496  86,277  87,773

2011

   881  68,017  68,898

2012

   451  52,516  52,967

2013

   515  39,814  40,329

Thereafter

   1,269  80,372  81,640
          

Total payments

   9,781  433,928  443,709
          

Less amount representing interest

   (795)   
        

Present value of capitalized lease payments

  $8,986    
        

Rental expense under operating leases was $99,697, $87,659$139,103, $123,095 and $78,007$118,280 in 2005, 20042008, 2007 and 2003,2006, respectively.

54




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The Company hashad approximately $40,958$73,928 and $36,693 as of$62,402 at December 31, 20052008 and 20042007 in standby letters of credit for various insurance contracts and commitments to foreign vendors that expire within two years. In addition, at December 31, 2005,2008 and 2007, the Company guaranteed approximately $72,040$85,640 and $89,546 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 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 vs.al. v. Mohawk Industries, IncInc., four plaintiffs filed a purportedputative class action lawsuit in January 2004 in the United States District Court for the Northern District of Georgia (Rome Division), 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 permittedauthorized to work in this country,the United States, have damaged them and the other members of the purportedputative class by suppressing the wages of ourthe 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'sattorney’s fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District Court in April 2004. Following appellate review of this decision, the case was returned to the District Court for further proceedings. On December 18, 2007, the plaintiffs filed a motion for class certification. On March 3, 2008, the District Court denied the plaintiffs motion for class certification. The Companyplaintiffs then sought and obtained permission to file an immediate appeal ofappealed the Northern District's decision to the United States Court of Appeals for the 11th Circuit. Circuit on March 17, 2008, where the matter is currently pending. Discovery has been stayed at the District Court while the appeal is pending. The Company will continue to vigorously defend itself against this action.

In Collins & Aikman Floorcoverings, Inc., et. al. v. Interface, Inc., United States District Court for the Northern District of Georgia (Rome Division), Mohawk Industries, Inc. joined Collins & Aikman Floorcoverings, Inc. (“CAF”) and Shaw Industries Group, Inc. (“Shaw”) in suing Interface, Inc. (“Interface”) for

Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

declaratory judgments that United States Patent 6,908,656 (the “Patent”), assigned to Interface and relating to certain styles of carpet tiles, is not infringed and is invalid. Also in June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (WilliamsInterface, Inc., et el. v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005,et al. United States District Court for the Company filed a motion requesting review byNorthern District of Georgia (Atlanta Division), Interface sued Mohawk Industries, Inc., Mohawk Carpet Corporation, and Mohawk Commercial, Inc. for allegedly infringing the full 11th Circuit, which was deniedPatent. Interface brought similar suits against entities affiliated with CAF and Shaw. Interface is seeking monetary damages as well as injunctive relief. The cases have been consolidated in August 2005. In October 2005, the Company filed a petition for certiorari with the United States SupremeDistrict Court which petitionfor the Northern District of Georgia (Rome Division). In January 2008, the Company joined CAF and Shaw in filing summary judgement motions seeking to establish as a matter of law before trial that the Patent was invalid, that it was not willfully infringed, and that Interface could not obtain damages for lost profits. On February 25, 2009, the District Court (i) denied the Company, CAF’s and Shaw’s motions that the patent was invalid (ii) granted their motions that should infringement be found that any such infringement would not be willful, and (iii) granted in December of 2005.part and denied in part their motions that Interface could not obtain damages for lost profits. The Company believes it has meritorious defensesis vigorously pursuing its declaratory judgment claims of invalidity and intendsnon-infringement with respect to continue vigorouslythe Patent and defending itself against this action.the claims brought by Interface for infringement of the Patent. A trial date is anticipated to be set for later in 2009.

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for all pending litigation for probable losses with respect to the resolution of all claims and pending litigation and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or year.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 $9,154 ($5,799 net of taxes) in other income (expense) for the year ended December 31, 2007. No refunds were received in 2008. 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 its operations, but may have an effect on a given quarter or annual period.

      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 Unilin Management can earn amounts, in the aggregate, equal to the average value of 35,133 shares of the Company's common stock over the 20 trading day period ending on December 31 of the prior year.  Any failure in a given year to reach the performance goals may be rectified, and consequently the amounts payable with respect to achieving such criteria may be made, in any of the other years.

In the normal course of business, the Company 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.

55

During the fourth quarter of 2008, the Company recorded pre-tax business restructuring charges of $29,670, which included $22,239 in the Mohawk segment, $5,343 in the Dal-Tile segment and $2,088 in the Unilin segment. The charge included $13,065 for lease impairments, $12,449 for asset write-downs, $3,340 for employee severance costs and $816 for other restructuring costs, of which $15,687 was recorded in cost of sales and $13,983 in selling, general and administrative expenses. At December 31, 2008, the Company had accrued liabilities relating to the restructuring of $12,711 related to lease impairments that will be paid over the next six years and $2,070 for employee severance costs that will be paid during 2009.




Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

(15) Consolidated Statements of Cash Flows Information

Supplemental disclosures of cash flow information are as follows:

2005

2004

2003

        Net cash paid during the year for:

         Interest

 $

61,468 

60,744 

61,424 

         Income taxes

 $

191,601 

226,227 

139,914 

        Supplemental schedule of non-cash

         investing and financing activities:

         Fair value of assets acquired in acquisitions

 $

3,375,605 

16,236 

407,320 

         Liabilities assumed in acquisitions

(762,076)

(1,238)

(23,199)

 $

2,613,529 

14,998 

384,121 

   2008  2007  2006 

Net cash paid during the year for:

    

Interest

  $129,465  157,296  154,897 
           

Income taxes

  $107,638  201,851  267,075 
           

Supplemental schedule of non-cash investing and financing activities:

    

Fair value of assets acquired in acquisition

  $9,745  165,463  113,008 

Liabilities assumed in acquisition

   (1,469) (18,310) (33,366)
           
  $8,276  147,153  79,642 
           

(16) Segment Reporting

The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin 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 primarily in North America, which include carpet, rugs, pad, ceramic tile, hardwood, resilient and laminate, through independentits network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment product lines are sold through various selling channels, which include floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment manufactures, markets and distributes its product lines primarily in North America, which include ceramic tile, porcelain tile and stone products, sold through tileits network of regional distribution centers and flooringapproximately 250 company-operated sales service centers using company-operated trucks, common carriers or rail transportation. The segment product lines are purchased by floor covering retailers, contractors,home centers, independent distributors, tile specialty dealers, tile contractors, and home centers.commercial end users. The Unilin segment manufactures, markets and distributes its product lines primarily in North America and Europe, which is headquartered in Belgium, is a leading manufacturer, distributor and marketer ofinclude laminate flooring, insulatedwood flooring, roofing systems and other wood panels in Europe and the United States. Unilin sells its laminate flooring products through various selling channels, which include retailers, home centers and 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.distributors.

Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses attributable to each segment are estimated and allocated accordingly. Segment performance is evaluated based on operating income. No single customer accounted for more than 5% of net sales for the years ended December 31, 2005, 20042008, 2007 and 2003.2006. In addition, inter-segment net sales, which are accounted for on the same basis as revenues in the accompanying consolidated financial statements, were not significant during these periods. The increase from 2005 comparedapproximately $82,000, $45,000 and $15,000 between the Unilin and Mohawk segments for the years ended December 31, 2008, 2007 and 2006, respectively.

Index to 2004 is primarily a result of the acquisition of Unilin.

Financial Statements

56




MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

 

        Segment information is as follows:

2005

2004

2003

              Net sales:

                Mohawk

 $

4,716,659 

4,368,831 

3,730,845 

                Dal-Tile

1,734,781 

1,511,541 

1,268,536 

                Unilin

168,814 

                Corporate and eliminations

(155)

 $

6,620,099 

5,880,372 

4,999,381 

              Operating income:

                Mohawk

 $

381,699 

424,256 

364,040 

                Dal-Tile

260,194 

219,831 

187,245 

                Unilin

(5,162)

                Corporate and eliminations

(9,459)

(8,497)

(9,256)

 $

627,272 

635,590 

542,029 

              Depreciation and amortization:

                Mohawk

 $

91,452 

89,479 

78,450 

                Dal-Tile

31,731 

29,210 

24,638 

                Unilin

22,367 

                Corporate and eliminations

3,779 

4,399 

3,527 

 $

149,329 

123,088 

106,615 

              Capital expenditures (excluding acquisitions):

                Mohawk

 $

153,238 

66,563 

55,587 

                Dal-Tile

84,363 

38,720 

57,856 

                Unilin

6,207 

               Corporate and eliminations

3,498 

1,318 

1,188 

 $

247,306 

106,601 

114,631 

              Assets:

                Mohawk

 $

2,424,983 

2,285,025 

                Dal-Tile

2,207,514 

2,063,195 

                Unilin

3,263,248 

                Corporate and eliminations

95,778 

54,898 

 $

7,991,523 

4,403,118 

Segment information is as follows:

   2008  2007  2006 

Net sales:

    

Mohawk.

  $ 3,628,183  4,205,740  4,742,060 

Dal-Tile

   1,815,373  1,937,733  1,941,819 

Unilin

   1,465,208  1,487,645  1,236,918 

Corporate and eliminations

   (82,416) (45,100) (14,955)
           
  $6,826,348  7,586,018  7,905,842 
           

Operating income(1):

    

Mohawk

  $(216,152) 254,924  387,386 

Dal-Tile

   (323,370) 258,706  270,901 

Unilin

   (564,911) 272,260  214,093 

Corporate and eliminations

   (19,701) (35,784) (33,320)
           
  $(1,124,134) 750,106  839,060 
           

Depreciation and amortization:

    

Mohawk

  $92,130  95,933  95,089 

Dal-Tile

   46,093  44,216  37,576 

Unilin

   149,543  159,859  135,337 

Corporate

   7,288  6,429  6,950 
           
  $295,054  306,437  274,952 
           

Capital expenditures (excluding acquisitions):

    

Mohawk

  $78,239  65,842  71,793 

Dal-Tile

   41,616  33,134  63,177 

Unilin

   90,500  58,711  28,688 

Corporate

   7,469  5,389  2,111 
           
  $217,824  163,076  165,769 
           

Assets:

    

Mohawk

  $1,876,696  2,302,527  2,488,856 

Dal-Tile

   1,693,765  2,259,811  2,257,107 

Unilin

   2,663,599  3,916,739  3,309,574 

Corporate and eliminations

   212,115  200,973  156,672 
           
  $6,446,175  8,680,050  8,212,209 
           

Geographic net sales:

    

North America

  $5,776,701  6,477,277  6,974,488 

Rest of world

   1,049,647  1,108,741  931,354 
           
  $6,826,348  7,586,018  7,905,842 
           

Long-lived assets(2):

    

North America

  $2,120,067  3,028,571  2,995,968 

Rest of world

   1,205,109  1,744,489  1,591,759 
           
  $3,325,176  4,773,060  4,587,727 
           

Net Sales by Product Categories(3):

    

Soft surface

  $3,337,073  3,797,584  4,225,514 

Tile

   1,919,070  2,110,705  2,200,918 

Wood

   1,570,205  1,677,729  1,479,410 
           
  $6,826,348  7,586,018  7,905,842 
           

57

(1)
Operating income includes the impact of the impairment of goodwill and other intangibles recognized in the third and fourth quarters of 2008 of $276,807 for the Mohawk segment, $531,930 for the Dal-Tile segment and $734,660 for the Unilin segment.




Index to Financial Statements

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements Statements—(Continued)

2005

2004

2003

              Geographic net sales:

                North America

 $

6,489,511 

5,880,372 

4,999,381 

                Europe

130,588 

-   

-   

 $

6,620,099 

5,880,372 

4,999,381 

              Long-lived assets (1):

                North America

 $

2,951,681 

2,282,681 

                Europe

1,481,010 

-   

 $

4,432,691 

2,282,681 


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

(2)Long-lived assets are composed of net property, plant and equipment and goodwill.
(3)The Soft surface product category includes carpets, rugs, carpet pad and resilient. The Tile product category includes ceramic tile, porcelain tile and natural stone. The Wood product category includes laminate, hardwood, roofing panels and wood-based panels.

(17) Fair Value of Financial Instruments

As noted above in Note 1, the Company has only adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities that are measured at fair value within the consolidated financial statements. At December 31, 2008, these provisions only apply to derivative contracts, which include natural gas futures contracts and foreign exchange forward contracts. The income approach is used which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using observable market inputs such as natural gas and foreign exchange spot and forward rates, interest rates, the Company’s credit risk and its counterparties’ credit risks. As of December 31, 2008, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to its own credit risk.

The following table provides a summary of the fair values of financial assets and liabilities subject to SFAS No. 157:

      Fair Value Measurements at December 31, 2008 Using
    December 31, 2008  Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
  Significant
Other Observable
Inputs

(Level 2)
  Significant
Unobservable
Inputs

(Level 3)

Derivative assets (liabilities)

  $(11,150) —    (11,150) —  
             

(18) Quarterly Financial Data (Unaudited)

The supplemental quarterly financial data are as follows:

 

       Quarters

Ended

April 2,

July 2,

October 1,

December 31,

2005

2005

2005

2005

        Net sales

 $

1,493,222 

1,624,692 

1,697,634 

1,804,551 

        Gross profit

384,702 

431,509 

451,868 

455,055 

        Net earnings

70,020 

93,811 

108,652 

85,712 

        Basic earnings per share

1.05 

1.40 

1.62 

1.27 

        Diluted earnings per share

1.03 

1.39 

1.61 

1.26 

 

       Quarters

Ended

April 3,

July 3,

October 2,

December 31,

2004

2004

2004

2004

        Net sales

 $

1,389,725 

1,485,897 

1,529,651 

1,475,099 

        Gross profit

365,546 

403,319 

436,053 

415,923 

        Net earnings

66,307 

87,158 

112,687 

102,470 

        Basic earnings per share

1.00 

1.31 

1.69 

1.54 

        Diluted earnings per share

0.98 

1.29 

1.67 

1.52 

   Quarters Ended 
   March 29,
2008
  June 28,
2008
  September 27,
2008
  December 31,
2008
 

Net sales

  $1,738,097  1,840,045  1,763,034  1,485,172 

Gross profit

   459,839  482,892  439,071  355,962 

Net earnings

   65,390  88,778  (1,484,781) (127,615)(1)

Basic earnings per share

   0.96  1.30  (21.70) (1.87)

Diluted earnings per share

   0.95  1.29  (21.70) (1.87)
   Quarters Ended 
   March 31,
2007
  June 30,
2007
  September 29,
2007
  December 31,
2007
 

Net sales

  $1,863,863  1,977,210  1,937,677  1,807,268 

Gross profit

   523,440  556,698  545,383  489,263 

Net earnings

   90,378  115,268  122,054  379,114(2)

Basic earnings per share

   1.33  1.69  1.79  5.55 

Diluted earnings per share

   1.32  1.68  1.78  5.53 

58

(1)
Includes the impact of a tax valuation allowance of approximately $253,000 which was recognized during the third quarter of 2008. Additionally, the third and fourth quarters of 2008 were impacted by $1,418,912 and $124,485, respectively, related to impairment of goodwill and other intangibles.
(2)Includes the impact of an income tax benefit of approximately $272,000 which was recognized during the fourth quarter of 2007.



Index to Financial Statements
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone

 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), which have been designed to provide reasonable assurance that such controls and procedures will meet their objectives, 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 at a reasonable assurance level 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, 2005.2008. 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 has excluded from the scope of its assessment of internal control over financial reporting as of December 31, 2005, Unilin Flooring BVBA, Unilin Holding Inc., and their subsidiaries (the Unilin Group), which businesses were acquired on October 31, 2005 and whose financial statements reflect total assets constituting approximately 14% (excluding goodwill and identified intangible assets of approximately 27%) and revenues of approximately 3% of the company's related consolidated financial statements as of and for the year ended December 31, 2005. The Company'sCompany’s management has concluded that, as of December 31, 2005,2008, 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's assessment of the Company'sCompany’s internal control over financial reporting, which is included herein.

Changes in Internal Control Over Financial Reporting

      Except for the implementation of a financial consolidation system designed to facilitate the production of consolidated financial statements, including the recently acquired Unilin operations, thereThere were no changes in ourthe Company’s internal control 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 control over financial reporting.

Limitations on the Effectiveness of Controls

The Company'sCompany’s management including its Chief Executive Officer and Chief Financial Officer, does not expectrecognizes that the Company's disclosure controls and procedures or the Company's internal control over financial reporting will prevent all errors and all fraud. Aa 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.

Index to Financial Statements

Item 9B. PART IIIOther Information

 None.

59

Item 10.
Directors and Executive Officers and Corporate Governance




PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item is incorporated by reference to information contained in the Company'sCompany’s Proxy Statement for the 20062009 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 20062009 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,” “—Compensation Committee Report,” and Committees of the Board of Directors."“Director Compensation.”

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 20062009 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 20062009 Annual Meeting of Stockholders under the following heading: "Executive“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 20062009 Annual Meeting of Stockholders under the following heading: "Principal“Audit Committee—Principal Accountant Fees and Services."Services” and “Meetings and Committees of the Board.”

Index to Financial Statements

PART IV

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.

60




2. Consolidated Financial Statement Schedules

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

3. Exhibits

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

Mohawk
Exhibit
Number
                                                                             Description                                                                  

*2.1Mohawk
Exhibit
Number

Description

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

*3.1

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

*3.2

  *3.2Restated Bylaws of Mohawk, as amended.Mohawk. (Incorporated herein by reference to Exhibit 3.13.2 in Mohawk'sMohawk’s Report on Form 8-K dated February 23, 2006.December 4, 2007.)

*4.1

  *4.1See Article 4 of the Restated Certificate of Incorporation of Mohawk. (Incorporated herein by reference to Exhibit 3.1 in Mohawk'sMohawk’s Annual Report on Form 10-K (File No. 001-13697) for the fiscal year ended December 31, 1998.)

*4.2

  *4.2See Articles 2, 6, and 9 of the Restated Bylaws of Mohawk, as amended.Mohawk. (Incorporated herein by reference to Exhibit 3.13.2 in Mohawk'sMohawk’s Current Report on Form 8-K dated February 23, 2006.December 4, 2007.)

*4.3

  *4.3Indenture, dated as of April 2, 2002 between Mohawk Industries, Inc. and Wachovia Bank, National Association, as Trustee (Incorporated herein by reference to Exhibit 4.1 in Mohawk'sMohawk’s Registration Statement on Form S-4, Registration No. 333-86734, as filed April 22, 2002.)

*4.4

  *4.4Indenture 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'sMohawk’s Registration Statement on Form S-3, Registration Statement No. 333-130910.)

*4.5

  *4.5First 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'sMohawk’s Current Report on form 8-K dated January 17, 2006.)

*10.1

Five Year Credit Agreement dated as of October 28, 2005, by and among Mohawk Industries, Inc., each of the Banks party thereto from time to time, and Wachovia Bank, National Assocation,Association, as Administrative Agent. (Incorporated by reference to Exhibit 10.3 of Mohawk'sMohawk’s Current Report on form 8-K dated as of October 28, 2005.)

Index to Financial Statements

Mohawk
Exhibit
Number

Description

*10.2

Five Year Credit Agreement dated as of November 8, 2005, by and among Mohawk International Holdings S.a.r.l, each of the Banks party thereto from time to time, and KBC Bank, N.V., as Administrative Agent. (Incorporated herein by reference to Exhibit 10.1 in Mohawk'sMohawk’s Current Report on form 8-K dated as of November 9, 2005.)

*10.3

Registration Rights Agreement by and among Mohawk, Citicorp Investments, Inc., ML‑LeeML-Lee Acquisition Fund, L.P. and Certain Management Investors. (Incorporated herein by reference to Exhibit 10.14 of Mohawk'sMohawk’s Registration Statement on Form S‑1,S-1, Registration No. 33‑45418.33-45418.)

*10.4

Voting Agreement, Consent of Stockholders and Amendment to 1992 Registration Rights Agreement dated December 3, 1993 by and among Aladdin, Mohawk, Citicorp Investments, Inc., ML‑LeeML-Lee Acquisition Fund, L.P., David L. Kolb, Donald G. Mercer, Frank A. Procopio and John D. Swift. (Incorporated herein by reference to Exhibit 10(b) of Mohawk'sMohawk’s Registration Statement on Form S‑4,S-4, Registration No. 33‑74220.33-74220.)

61




*10.5

Registration Rights Agreement by and among Mohawk and the former shareholders of Aladdin. (Incorporated herein by reference to Exhibit 10.32 of Mohawk'sMohawk’s Annual Report on Form 10‑K10-K (File No. 001-13697) for the fiscal year ended December 31, 1993.)

*10.6

Waiver Agreement between Alan S. Lorberbaum and Mohawk dated as of March 23, 1994 to the Registration Rights Agreement dated as of February 25, 1994 between Mohawk and those other persons who are signatories thereto. (Incorporated herein by reference to Exhibit 10.3 of Mohawk'sMohawk’s Quarterly Report on Form 10‑Q10-Q (File No. 001-13697) for the quarter ended July 2, 1994.)

*10.7

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

*10.8

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

*10.9

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

*10.10

Second Amendment to the Liquidity Asset Purchase Agreement dated as of October 23, 2002 by and among Mohawk Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as Agent dated as of October 25, 2000. (Incorporated herein by reference to Exhibit 10.28 of Mohawk'sMohawk’s Annual Report on Form 10‑K10-K for the year ended December 31, 2002)

*10.11

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 Mohawk'sMohawk’s Quarterly Report on Form 10-Q for the period ended October 2, 2003.)

*10.12

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

Index to Financial Statements

Mohawk

Exhibit

Number

Description

*10.13

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

*10.14

Amendment to Third Amended and Restated Liquidity Asset Purchase Agreement dated July 30, 2007, among Mohawk Factoring, Inc., Variable Funding Capital Company LLC, and Wachovia Bank, National Association. (Incorporated herein by reference to Exhibit 10.2 of Mohawk’s Quarterly Report on Form 10-Q for the period ended September 29, 2007.)
*10.15Amendment to Liquidity Asset Purchase Agreement dated July 30, 2007 among Mohawk Factoring, Inc., Suntrust Bank, Three Pillars Funding LLC, and SunTrust Capital Markets, Inc. (Incorporated herein by reference to Exhibit 10.1 of Mohawk’s Quarterly Report on Form 10-Q for the period ended September 29, 2007.)
*10.16Second Amended and Restated Credit and Security Agreement, dated as of July 28, 2008, among Mohawk Factoring, Inc., Mohawk Servicing, Inc., Victory Receivables Corporation, Three Pillars Funding LLC, SunTrust Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, individually and as a co-agent, and SunTrust Robinson Humphrey, Inc., as a co-agent and administrative (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 1, 2008).
*10.17Second Amended and Restated Receivables Purchase and Sale Agreement, dated as of July 28, 2008, among Mohawk Carpet Distribution, L.P. and Dal-Tile Corporation, Dal-Tile SSC West, Inc. and Dal-Tile SSC East, Inc., as originators, and Mohawk Factoring, Inc., as the Buyer (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 1, 2008).
*10.18First Amendment to Five Year Credit Agreement, dated as of December 31, 2008, by and among Mohawk Industries, Inc. and Wachovia Bank, National Association, as Administrative Agent on behalf of the Banks (Incorporated by reference to the Company’s Current Report on Form 8-K dated January 6, 2009).
Exhibits Related to Executive Compensation Plans, Contracts and other ArrangementsArrangements::

*10.14

     Management

*10.19Service Agreement dated October 31, 2005,February 24, 2009, by and between Unilin FlooringIndustries BVBA and Frans De Cock.Cock Management (Incorporated herein by reference to Exhibit 10.1 of Mohawk'sMohawk’s Current Report on form 8-K dated October 28, 2005.)

February 24, 2009).

*10.15

*10.20Amended and Restated Employment Agreement dated November 15, 2005,May 1, 2008, by and between Mohawk Industries, Inc. and W. Christopher Wellborn. (Incorporated herein by reference to Exhibit 99.110.1 of Mohawk's CurrentMohawk’s Quarterly Report on form 8-K dated November 14, 2005.10-Q for the period ended March 29, 2008.)

*10.16

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

*10.17

10.21

Mohawk Carpet Corporation Supplemental Executive Retirement Plan, as amended. (Incorporated herein by reference to Exhibit 10.2 of Mohawk'sMohawk’s Registration Statement on Form S‑1,S-1, Registration No. 33‑45418.33-45418.)

*10.18

*10.22Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.8 of Mohawk'sMohawk’s Registration Statement on Form S‑1,S-1, Registration No. 33‑45418.33-45418.)

*10.19

*10.23Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.2 in Mohawk'sMohawk’s quarterly report on Form 10‑Q10-Q (File No. 001-13697) for the quarter ended July 3, 1993.)

62




*10.20

10.24

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'sMohawk’s Annual Report on Form 10‑K10-K (File No. 001-13697) for the fiscal year ended December 31, 1999.)

Index to Financial Statements

Mohawk

Exhibit

Number

Description

*10.21

*10.25Mohawk Industries, Inc. 1992 Mohawk‑HorizonMohawk-Horizon Stock Option Plan. (Incorporated herein by reference to Exhibit 10.15 of Mohawk'sMohawk’s Registration Statement on Form S‑1,S-1, Registration Number 33‑53932.333-53932.)

*10.22

*10.26Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 Mohawk‑HorizonMohawk-Horizon Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of Mohawk'sMohawk’s quarterly report on Form 10‑Q10-Q (File No. 001-13697) for the quarter ended July 3, 1993.)

*10.23

*10.27Second 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'sMohawk’s Annual Report on Form 10‑K10-K (File No. 001-13697) for the fiscal year ended December 31, 1999.)

*10.24

*10.28Mohawk Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.39 of Mohawk'sMohawk’s Annual Report on Form 10‑K10-K (File No. 001-13697) for the fiscal year ended December 31, 1992.)

*10.25

*10.29First Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.40 of Mohawk'sMohawk’s Annual Report on Form 10‑K10-K (File No. 001-13697) for the fiscal year ended December 31, 1999.)

*10.26

  10.30The Mohawk Industries, Inc. Amended and Restated Executive Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.65 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)

*10.27

  10.31The Mohawk Industries, Inc. Amended and Restated Management Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.66 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)

*10.28

  10.32Mohawk Industries, Inc. 1997 Non-Employee Director Stock Compensation Plan (Amended and Restated as of March 31, 2003)January 1, 2009). (Incorporated herein by reference to Exhibit 10.38 of Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.)

*10.29

*10.331997 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.80 of Mohawk'sMohawk’s Annual Report on Form 10-K (File No. 001-13697) for the fiscal year ended December 31, 1996.)

*10.30

*10.342002 Long-Term Incentive Plan. (Incorporated herein by reference to Appendix A in the 2002 Mohawk Industries, Inc. Proxy Statement dated March 29, 2002.)

*10.31

*10.35Mohawk Industries, Inc. 2007 Incentive Plan (Incorporated herein by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A (File No. 001-13697) filed with the Securities and Exchange Commission on April 9, 2007)
*10.36Supply 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.)

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

 21          Subsidiaries of the Registrant.
       23.1       Consent of Independent Registered Public Accounting Firm (KPMG)
       23.2       Consent of Independent Registered Public Accounting Firm (BDO).
       31.1       Certification Pursuant

*Indicates exhibit incorporated by reference.

Index to Rule 13a-14(a).
       31.2       Certification Pursuant to Rule 13a-14(a).
       32.1       Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       32.2       Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*  Indicates exhibit incorporated by reference.

63

Financial Statements




SIGNATURES

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: March 15, 20062, 2009

By:

By: /s/: JEFFREY/s/    JEFFREY S. LORBERBAUMLORBERBAUM        

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: March 15, 20062, 2009

/s/: JEFFREY    JEFFREY S. LORBERBAUMLORBERBAUM

Jeffrey S. Lorberbaum,

Chairman and Chief Executive Officer

(principal executive officer)

Dated: March 15, 20062, 2009

/s/: FRANK    FRANK H. BOYKINBOYKIN

Frank H. Boykin,

Chief Financial Officer and Vice President‑FinancePresident-Finance

(principal financial officer)

Dated: March 15, 20062, 2009

/s/: MICHEL S. VERMETTE    THOMAS J. KANUK

Michel S. Vermette,

Thomas J. Kanuk,

Vice President and Corporate Controller

(principal accounting officer)

Dated: March 15, 20062, 2009

/s/: LEO BENATAR    PHYLLIS O. BONANNO

Leo Benatar,

Phyllis O. Bonanno,

Director

Dated: March 15, 20062, 2009

/s/: Phyllis O. BONANNO    BRUCE C. BRUCKMANN

Phyllis O. Bonanno,

Bruce C. Bruckmann,

Director

Dated: March 15, 20062, 2009

/s/: BRUCE C. BRUCKMANN    FRANS DE COCK

Frans De Cock,
Director

Bruce C. Bruckmann,Dated:

DirectorJohn F. Fiedler,

Director

Dated: March 15, 20062, 2009

/s/: FRANS DE COCK    DAVID L. KOLB

Frans De Cock,

David L. Kolb,

Director

Index to Financial Statements

Dated: March 15, 20062, 2009

/s/:                                     LARRY W. MCCURDY

John F. Fiedler,

Larry W. McCurdy,

Director

Dated: March 15, 20062, 2009

/s/: DAVID L. KOLB    ROBERT N. POKELWALDT

David L. Kolb,

Robert N. Pokelwaldt,

Director

64




Dated: March 15, 20062, 2009

/s/: LARRY W. MCCURDY    JOSEPH A. ONORATO

Larry W. McCurdy,

Joseph A. Onorato,

Director

Dated: March 15, 20062, 2009

/s/: ROBERT N. POKELWALDT    W. CHRISTOPHER WELLBORN

Robert N. Pokelwaldt,

W. Christopher Wellborn,

Director

Dated: March 15, 2006

/s/: S. H. SHARPEDirector

S. H. Sharpe,

Director

Dated: March 15, 2006

/s/: W. CHRISTOPHER WELLBORN

W. Christopher Wellborn,

Director

65

78