================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000March 31, 2001
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
01-19826
MOHAWK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1604305
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
incorporation or organization)
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
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[_]
The number of shares outstanding of the issuer's classes of capital stock as
of November 3, 2000,May 11, 2001, the latest practicable date, is as follows: 52,624,516.52,286,280 shares
of Common Stock, $.01 par value.
- --------------------------------------------------------------------------------
MOHAWK INDUSTRIES, INC.
INDEX
Page No.
---------------
Part I. Financial Information:
Item 1. Financial Statements Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999(Unaudited) 3
Condensed Consolidated Statements of Earnings -
Three months ended September 30, 2000 and October 2, 1999 5
Condensed Consolidated Statements of Earnings -
Nine months ended September 30, 2000 and October 2, 1999 6
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and October 2, 1999 7
Notes to Condensed Consolidated Financial Statements 8(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 1011
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
Part II. Other Information
Item 1. Legal proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
September 30, 2000March 31, 2001 December 31, 1999
--------------------------- --------------------------
(Unaudited)2000
------------------------------ -------------------------
Current assets:
Receivables $ 394,896 337,824389,042 358,809
Inventories 592,828 494,774621,308 574,595
Prepaid expenses 16,091 25,18421,818 26,973
Deferred income taxes 76,628 76,628
--------------------------- --------------------------66,474 66,474
------------------------------ -------------------------
Total current assets 1,080,443 934,410
--------------------------- --------------------------1,098,642 1,026,851
------------------------------ -------------------------
Property, plant and equipment, at cost 1,192,149 1,139,6601,249,647 1,238,200
Less accumulated depreciation and
amortization 569,277 514,846
--------------------------- --------------------------607,978 588,147
------------------------------ -------------------------
Net property, plant and equipment 622,872 624,814
--------------------------- --------------------------641,669 650,053
------------------------------ -------------------------
Other assets 119,544 123,649
--------------------------- --------------------------117,970 118,474
------------------------------ -------------------------
Total assets $ 1,822,859 1,682,873
=========================== ==========================1,858,281 1,795,378
============================== =========================
See accompanying notes to condensed consolidated financial statements.
3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
September 30, 2000March 31, 2001 December 31, 1999
--------------------------- --------------------------
(Unaudited)2000
------------------------------ -------------------------
Current liabilities:
Current portion of long-term debt $ 33,874 33,961203,635 224,391
Accounts payable and accrued expenses 411,540 340,392
--------------------------- --------------------------422,756 375,268
------------------------------ -------------------------
Total current liabilities 445,414 374,353626,391 599,659
Deferred income taxes 53,783 53,78375,808 75,808
Long-term debt, less current portion 592,747 562,104378,310 365,437
Other long-term liabilities 592 87
--------------------------- --------------------------138 114
------------------------------ -------------------------
Total liabilities 1,092,536 990,327
--------------------------- --------------------------1,080,647 1,041,018
------------------------------ -------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 60,77260,964 and 60,65760,838 shares
issued in 2001 and 2000, and 1999, respectively 610 608 607
Additional paid-in capital 182,250 179,993185,735 183,303
Retained earnings 719,269 595,932
--------------------------- --------------------------
902,127 776,532785,737 758,531
Accumulated other comprehensive loss (1,398) -
------------------------------ -------------------------
970,684 942,442
Less treasury stock at cost; 7,7648,703 shares
in 2001 and 8,538 shares in 2000 and 3,952 in 1999 171,804 83,986
--------------------------- --------------------------193,050 188,082
------------------------------ -------------------------
Total stockholders' equity 730,323 692,546
--------------------------- --------------------------777,634 754,360
------------------------------ -------------------------
Total liabilities and stockholders'
equity $ 1,822,859 1,682,873
=========================== ==========================1,858,281 1,795,378
============================== =========================
See accompanying notes to condensed consolidated financial statements.
4
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
-----------------------------------------------------------
September 30,----------------------------------------------------------------
March 31, 2001 April 1, 2000
October 2, 1999
--------------------------- -------------------------------------------------------- -------------------------
Net sales $ 838,514 809,933743,683 765,083
Cost of sales 624,294 606,687
--------------------------- --------------------------565,658 574,520
------------------------------ -------------------------
Gross profit 214,220 203,246178,025 190,563
Selling, general and administrative expenses 127,151 119,258
Class action legal settlement 7,000 -
--------------------------- --------------------------124,420 124,857
------------------------------ -------------------------
Operating income 80,069 83,988
--------------------------- --------------------------53,605 65,706
------------------------------ -------------------------
Other expense:
Interest expense 10,173 8,3358,952 8,740
Other expense, net 846 1,142
--------------------------- --------------------------
11,019 9,477
--------------------------- --------------------------1,469 773
------------------------------ -------------------------
10,421 9,513
------------------------------ ------------------------
Earnings before income taxes 69,050 74,51143,184 56,193
Income taxes 26,913 29,432
--------------------------- --------------------------15,978 22,196
------------------------------ ------------------------
Net earnings $ 42,137 45,079
=========================== ==========================27,206 33,997
============================== ========================
Basic earnings per share $ 0.79 0.74
=========================== ==========================0.52 0.61
============================== ========================
Weighted-average common shares outstanding 53,097 60,600
=========================== ==========================52,361 55,611
============================== ========================
Diluted earnings per share $ 0.79 0.74
=========================== ==========================0.51 0.61
============================== ========================
Weighted-average common and dilutive potential
common shares outstanding 53,634 61,114
=========================== ==========================52,970 56,097
============================== ========================
See accompanying notes to condensed consolidated financial statements.
5
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
-----------------------------------------------------------
September 30, 2000 October 2, 1999
--------------------------- --------------------------
Net sales $ 2,456,405 2,307,717
Cost of sales 1,835,740 1,725,231
--------------------------- --------------------------
Gross profit 620,665 582,486
Selling, general and administrative expenses 378,979 361,920
Class action legal settlement 7,000 -
--------------------------- --------------------------
Operating income 234,686 220,566
--------------------------- --------------------------
Other expense:
Interest expense 28,587 23,942
Other expense, net 2,834 3,130
--------------------------- --------------------------
31,421 27,072
--------------------------- --------------------------
Earnings before income taxes 203,265 193,494
Income taxes 79,928 76,430
--------------------------- --------------------------
Net earnings $ 123,337 117,064
=========================== ==========================
Basic earnings per share $ 2.28 1.93
=========================== ==========================
Weighted-average common shares outstanding 54,181 60,586
=========================== ==========================
Diluted earnings per share $ 2.26 1.91
=========================== ==========================
Weighted-average common and dilutive potential
common shares outstanding 54,689 61,218
=========================== ==========================
See accompanying notes to condensed consolidated financial statements.
6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NineThree Months Ended
------------------------------------------------------------
September 30,-----------------------------------------------------------------
March 31, 2001 April 1, 2000
October 2, 1999
--------------------------- -------------------------------------------------------- -------------------------
Cash flows from operating activities:
Net earnings $ 123,337 117,06427,206 33,997
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 61,411 76,099
Provision for doubtful accounts 12,175 11,59920,943 20,875
Loss (gain) on sale of property, plant
and equipment 100 2,18489 (45)
Changes in operating assets and
liabilities,
net of effects of acquisition:liabilities:
Receivables (69,247) (40,411)(30,233) (33,505)
Inventories (98,054) (75,242)(46,713) (58,493)
Accounts payable and accrued expenses 78,591 (21,775)55,397 89,504
Other assets and prepaid expenses 7,167 15,9394,708 10,400
Other liabilities 505 (4,516)
--------------------------- --------------------------25 105
------------------------------ -------------------------
Net cash provided by operating
activities 115,985 80,941
--------------------------- --------------------------31,422 62,838
------------------------------ -------------------------
Cash flows from investing activities:
Additions to property, plant and equipment,
net (53,538) (115,216)
Acquisitions - (162,463)
--------------------------- --------------------------(11,697) (18,059)
------------------------------ -------------------------
Net cash used in investing
activities (53,538) (277,679)
--------------------------- --------------------------(11,697) (18,059)
------------------------------ -------------------------
Cash flows from financing activities:
Net change in revolving line of credit 53,758 214,282
Payments on term loans (26,502) (26,503)13,172 7,524
Net change in asset securitization (20,729) -
Redemption of acquisition indebtedness - (20,917)
Proceeds (redemption)(proceeds) of IRBs and other, net of proceeds 3,300 (8,057)(326) 2,405
Change in outstanding checks in excess of cash (7,443) 41,457(9,308) (9,496)
Acquisition of treasury stock (87,818) (13,862)(4,968) (45,849)
Common stock transactions 2,258 7,954
--------------------------- --------------------------2,434 637
------------------------------ -------------------------
Net cash (used in) provided by
financing activities (62,447) 194,354
--------------------------- --------------------------(19,725) (44,779)
------------------------------ -------------------------
Net change in cash - (2,384)-
Cash, beginning of period - 2,384
--------------------------- ---------------------------
------------------------------ -------------------------
Cash, end of period $ - -
=========================== ======================================================== =========================
Net cash paid during the period for:
Interest $ 28,258 29,529
=========================== ==========================10,681 7,983
============================== =========================
Income taxes $ 71,899 92,558
=========================== ==========================1,939 9,825
============================== =========================
See accompanying notes to condensed consolidated financial statements.
76
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and do not include
all of the information and footnotes required by accounting principles generally
accepted accounting
principlesin the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's 19992000 Annual Report filed on Form 10-K, as
filed with the Securities and Exchange Commission, which includes consolidated
financial statements for the fiscal year ended December 31, 1999.2000.
Certain prior period financial statement balances have been reclassified to
conform with the current period's presentation.
The Company's basic earnings per share are computed by dividing net
earnings by the weighted-average common shares outstanding, and diluted earnings
per share are computed by dividing net earnings by the weighted-average common
and dilutive potential common shares outstanding. Dilutive common stock options
are included in the diluted earnings per share calculation using the treasury
stock method.
2. Acquisitions
On October 10, 2000, the Company signed a definitive agreement with Crown
Crafts, Inc. to acquire certain assets of its Woven Division. Under the
agreement, the Company will pay approximately $40,000 in cash for substantially
all of the fixed assets and inventory of the division. The acquisition is
expected to close by the end of the fourth quarter of 2000.
3. Receivables
Receivables are as follows:
September 30, 2000March 31, 2001 December 31, 1999
--------------------------- --------------------------2000
---------------------------- -----------------------
Customers, trade $ 472,500 405,477458,663 433,042
Other 2,359 2,826
--------------------------- --------------------------
474,859 408,3033,017 4,125
---------------------------- -----------------------
461,680 437,167
Less allowance for discounts, returns, claims
and doubtful accounts 79,963 70,479
--------------------------- --------------------------72,638 78,358
---------------------------- -----------------------
Net receivables $ 394,896 337,824
=========================== ==========================389,042 358,809
============================ =======================
Effective January 1, 2001 the Company adopted Statement of Financial
Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-A Replacement of FASB
Statement No. 125 ("SFAS 125")," which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral. The
provisions of SFAS 140 carry over most of the guidance outlined in SFAS 125 and
further establish accounting and reporting standards with a financial-components
approach that focuses on control. Under this approach, financial assets or
liabilities are recognized when control is established and derecognized when
control has been surrendered or the liability has been extinguished. In
addition, specific implementation guidelines have been established to further
distinguish transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS 140 is effective prospectively for transfers occurring
after March 31, 2001 and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. The adoption of
SFAS 140 did not have a material effect on the Company's results of operations.
7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
3. Inventories
The components of inventories are as follows:
September 30, 2000March 31, 2001 December 31, 1999
--------------------------- --------------------------2000
---------------------------- -----------------------
Finished goods $ 295,793 254,179322,086 295,447
Work in process 83,104 65,45681,505 73,658
Raw materials 213,961 175,139
--------------------------- --------------------------217,717 205,490
---------------------------- -----------------------
Total inventories $ 592,858 494,774
=========================== ==========================621,308 574,595
============================ =======================
4. Other assets
Other assets are as follows:
March 31, 2001 December 31, 2000
---------------------------- -----------------------
Goodwill, net of accumulated amortization of
$17,157 and $16,355, respectively $ 111,574 112,376
Other assets 6,396 6,098
---------------------------- -----------------------
Total other assets $ 117,970 118,474
============================ =======================
5. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
March 31, 2001 December 31, 2000
---------------------------- -----------------------
Outstanding checks in excess of cash $ 33,587 42,895
Accounts payable, trade 197,435 165,108
Accrued expenses 120,863 104,313
Accrued compensation 70,871 62,952
---------------------------- -----------------------
Total accounts payable and accrued
expenses $ 422,756 375,268
============================ =======================
6. Derivative Financial Instruments
Effective January 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 133-"Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and its amendments, which require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in its fair value are
either offset against the change in fair value of the assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings.
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
5. Other assets
Other assetsThe Company engages in activities that expose it to various market risks,
including the effects of a change in interest rates. This financial exposure is
managed as an integral part of the Company's risk management program, which
seeks to reduce the potentially adverse effects that the volatility of the
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. The Company maintains an interest rate risk management
strategy that uses derivative instruments, currently interest rate swaps, to
minimize significant, unanticipated earnings fluctuations caused by volatility
in interest rates.
The Company formally documents all hedging instruments and hedging items,
as well as its risk management objective and strategy for undertaking various
hedged items. This process includes linking all derivatives that are designated
as follows:cash flow hedges to specific liabilities on the balance sheet. The Company
also assesses, both at inception and on an ongoing basis, whether the
derivatives that are used in the hedging transaction are highly effective in
offsetting changes in cash flows of the hedged items. When it is determined that
a derivative is not highly effective, the derivative expires, or is sold,
terminated, or exercised, the Company discontinues hedge accounting for that
specific hedge instrument.
The Company uses interest rate swap contracts to adjust a proportion of
total debt that is subject to variable interest rates. Under an interest rate
swap contract, the Company agrees to pay a fixed rate of interest times a
notional principal amount, and to receive in return an amount equal to a
specified variable rate of interest times the same notional principal. The
contract fair value is reflected on the balance sheet and related gains and
losses are deferred in other comprehensive income. These deferred gains and
losses are recognized through earnings as an adjustment to interest expense over
the same period in which the related interest payments being hedged are
recognized in income. As of March 31, 2001, the Company had an interest swap
agreement outstanding for $100,000, which will be in effect until January 2,
2006. Under the terms of the swap agreement, the Company pays a fixed interest
rate of 5.82%. The fair value of the swap agreement as of March 31, 2001
resulted in an unrealized loss, net of taxes, of $1,398 and, accordingly, the
unrealized loss is recorded in other comprehensive income.
7. Comprehensive income
September 30,Three Months Ended
-----------------------------------------------------------------
March 31, 2001 April 1, 2000
December 31, 1999
--------------------------- -------------------------------------------------------- -------------------------
Goodwill,Net earnings $ 27,206 33,997
Other Comprehensive Loss:
Unrealized loss on derivative
instruments,
net of accumulated amortization of
$15,546 and $13,171, respectivelyincome taxes ( 1,398) -
------------------------------ -------------------------
Comprehensive Income $ 113,185 113,560
Other assets 6,359 10,089
--------------------------- --------------------------
Total other assets $ 119,544 123,649
=========================== ==========================
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as
follows:
September 30, 2000 December 31, 1999
--------------------------- --------------------------
Outstanding checks in excess of cash $ 34,930 42,373
Accounts payable, trade 195,989 159,812
Accrued expenses 107,150 83,253
Accrued compensation 73,471 54,954
--------------------------- --------------------------
Total accounts payable and accrued expenses $ 411,540 340,392
=========================== ==========================25,808 33,997
------------------------------ -------------------------
7. Property, Plant8. Commitments and Equipment
Effective January 1,contingencies
The Company is involved in routine litigation from time to time in the
regular course of its business. Except as noted below, there are no material
legal proceedings pending or known to be contemplated to which the Company is a
party or to which any of its property is subject.
In December 1995, the Company and four other carpet manufacturers were
added as defendants in a purported class action lawsuit, In re Carpet Antitrust
Litigation, pending in the United States District Court for the Northern
District of Georgia, Rome Division. The amended complaint alleges price-fixing
regarding polypropylene products in violation of Section One of the Sherman Act.
In September 1997, the Court granted the plaintiffs' motion to certify the
class. In October 1998, two plaintiffs, on behalf of an alleged class of
purchasers of nylon carpet products, filed a complaint in the United States
District Court for the Northern District of Georgia against the Company and two
of its subsidiaries, as well as certain competitors. The
9
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
complaint alleges that the Company acted in concert with other carpet
manufacturers to restrain competition in the sale of certain nylon carpet
products. The Company filed an answer, denied the allegations in the complaint
and set forth its defenses.
On August 11, 2000, the Company changedpresented to the estimated useful
livesCourt the terms of buildings (25 years to 35 years), tufting equipment (7 years to 10
years), extrusion equipment (7 years to 15 years) and furniture and fixtures (5
years to 7 years). Management believes the change more accurately reflects the
actual lives of these assets and is more consistent with industry practice. The
prospective change is estimated to reduce annual depreciation expense by
approximately $20,000 in 2000.
8. Nonrecurring costs
In the third quarter of 2000, the Company reached an
agreement in principle to settle these two antitrust class actions. Thecases. On February 5, 2001, the Court
dismissed all claims against the Company will contributeand granted final approval to the
settlement. Under the terms of the settlement agreement, the Company contributed
$13,500 at the beginning of the second quarter of 2001 to a settlement fund to
resolve price fixing claims. The settlement is
subject to preliminary approvalprice-fixing claims brought by a class of the court, notice to memberspurchasers of the
settlement classes, certification of thepolypropylene
carpet and a proposed settlement classes and final
approval by the court. During the quarter, theclass of purchasers of nylon carpet. The
Company recorded a charge of $7,000 in the third quarter of 2000, in connection
with the settlement. The after tax effect of the charge for
the three and nine months ended September 30, 2000, was $4,271, or $0.08 per
share.
9. Subsequent events
In October 2000, the Company entered into a one-year receivables
purchase agreement enabling the Company to sell up to $250,000 of an undivided
interest in a defined pool of trade accounts receivable and the securitization
agreement may be extended for one-year terms.lawsuit. The Company received approximately
$195,000denies all liability and wrongdoing and has agreed
to settle these claims in proceeds fromorder to avoid the initial salecosts of receivables. The proceeds were
used to reduce borrowings under the revolving credit facility and will be
accounted for as a short-term financing.further litigation.
The Company is generally at riska party to two consolidated lawsuits captioned Gaehwiler v.
Sunrise Carpet Industries, Inc. et al. and Patco Enterprises, Inc. v. Sunrise
Carpet Industries, Inc. et al., both of which were filed in the Superior Court
of the State of California, City and County of San Francisco, in 1996. Both
complaints were brought on behalf of a purported class of indirect purchasers of
polypropylene carpet in the State of California and seek damages for losses associated withalleged
violations of California antitrust and unfair competition laws. In February
1999, a similar complaint was filed in the sold receivablesSuperior Court of the State of
California, City and will provideCounty of San Francisco, on behalf of a purported class
based on indirect purchasers of nylon carpet in the State of California and
alleges violations of California antitrust and unfair competition laws. The
complaints described above do not specify any specific amount of damages but do
request injunctive relief and treble damages plus reimbursement for fees and
costs. The Company believes it has meritorious defenses and intends to
vigorously defend against these losses
within the financial statements.
9actions.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Effective January 1, 2000, the Company changed the estimated useful lives
of certain property, plant and equipment. Management believes this change more
accurately reflects the actual lives of these assets and is more consistent with
industry practice. The prospective change is estimated to reduce annual
depreciation expense by approximately $20 million in 2000.
Effective November 1, 2000, the Company entered into an agreement with
Congoleum Corporation, Inc. to become a national distributor of their vinyl
products. This will give the Company a complete line of soft and hard floor
covering products to supply to customers throughout the United States. In
conjunction with this program and the other hard surface floor coverings, the
Company anticipates significant start up costs with the rolling out of these
product lines into all sales regions during the remainder of 2000 and 2001. The
Company anticipates that the growth in sales will lag the increase in costs
during the start up period.
On October 10, 2000, the Company signed a definitive agreement with Crown
Crafts, Inc. to acquire certain assets of its Woven Division. Under the
agreement, the Company will pay approximately $40 million in cash for
substantially all of the fixed assets and inventory of the division. The
acquisition is expected to close by the end of the fourth quarter of 2000.
In 1999, Staff Accounting Bulletin 101 ("SAB 101") "Revenue Recognition"
was issued requiring that revenue be recognized when certain criteria are met.
In conjunction, the Emerging Issues Task Force ("EITF") reached a consensus on
issue EITF 00-10 in September 2000, "Accounting for Shipping and Handling Fees
and Costs". The Company is currently analyzing the implications of both SAB101
and EITF 00-10. The Company believes that these will not have a material impact
on the Company's consolidated financial statements.
In 1998, the Financial Accounting Standards Board ("FASB") issued FAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". In 2000, the
Financial Accounting Standards Board ("FASB") issued FAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities". The Company is
currently analyzing the implications of both FAS No. 131 and FAS No. 138. The
Company believes that these will not have a material impact on the Company's
consolidated financial statements.
Results of Operations
Quarter Ended September 30, 2000March 31, 2001 as Compared with Quarter Ended October 2, 1999April 1, 2000
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Net sales for the quarter ended September 30, 2000March 31, 2001 were $838.5$743.7 million,
reflecting an increasea decrease of $28.6$21.4 million, or approximately 4%3%, overfrom the $809.9$765.1
million reported in the quarter ended October 2, 1999. All majorApril 1, 2000. With the exception of
hardsurface and rug product categories, achievedall other product categories experienced
sales increasesdecreases for the thirdfirst quarter of 20002001 as compared to 1999.2000. The Company
believes that the thirdfirst quarter of 20002001 net sales increasedecrease was attributable to
internal growth.the cyclical down turn in the overall economy, which led to declining industry
shipments.
Gross profit for the thirdfirst quarter of the current year was $214.2$178.0 million
(25.5%(23.9% of net sales) and represented an increase overa decrease from the gross profit of $203.2$190.6
million (25.1%(24.9% of net sales) for the prior year's quarter. Gross profit as a
percentage of sales was favorably impacted by productivity improvements and an
increase in the estimated useful livescurrent quarter was unfavorably impacted when
compared to the first quarter of property, plant and equipment, which
was effective January 1, 2000. These increases were offset2000 by raw material price increases, resulting
from rising oil and gas prices. The Company continues to
experience increased oil-related costs that have been difficult to recover or
offset on a timely basis. The Company believes that these higher costs and
higher interest rates are also having a dampening effectprices, losses on the economydisposition of Crown Crafts
obsolete inventory, and the
flooring industry.an unfavorable product mix.
Selling, general and administrative expenses for the current quarter were
$127.2$124.4 million (15.2%(16.7% of net sales) compared to $119.3$124.9 million (14.7%(16.3% of net
sales) for the prior year's thirdfirst quarter. The increaseincreased percentage was
primarily due to start up expenses associated with the expansionincrease in personnel costs as a result of rolling out the
Company's hard surfaceshardsurface product lines, throughoutoffset by cost savings realized in the United States.
In the third quarter of 2000, the Company reached an agreement in principle
to settle two antitrust class actions. The Company will contribute $13,500 to a
settlement fund to resolve price fixing claims. The settlement is subject to
10
preliminary approval of the court, notice to members of the settlement classes,
certification of the proposed settlement classes and final approval by the
court. During the quarter, the Company recorded a charge of $7,000 in connection
with the settlement.first quarter.
Interest expense for the current quarter was $10.2$9.0 million compared to $8.3$8.7
million in the thirdfirst quarter of 1999. The primary factors contributing to the
increase was an increase in debt levels, which was attributable to the stock
repurchase program and an increase in the weighted average borrowing rate
compared to the third quarter of 1999.2000.
Income tax expense was $26.9$16.0 million, or 39%37% of earnings before income
taxes in the current quarter compared to $29.4 million, or 39.5% of earnings
before income taxes for the prior year's third quarter.
Nine months Ended September 30, 2000 as Compared with Nine Months Ended October
- -------------------------------------------------------------------------------
2, 1999
- -------
Net sales for the first nine months ended September 30, 2000 were $2,456.4
million, reflecting an increase of $148.7 million, or approximately 6%, over the
$2,307.7 million reported in the first nine month period ended October 2, 1999.
All major product categories achieved sales increases for the nine months of
2000 as compared to 1999.
Gross profit for the first nine months of the current year was $620.7
million (25.3% of net sales) and represented an increase over the gross profit
of $582.5 million (25.2% of net sales) for the first nine months of 1999. Gross
profit as a percentage of sales was impacted by favourable manufacturing
efficiencies, product mix and an increase in the estimated useful lives of
property, plant and equipment, which was effective January 1, 2000. These
increases were offset by raw material price increases, resulting from rising oil
and gas prices. The Company continues to experience increased oil-related costs
that have been difficult to recover or offset on a timely basis. The Company
believes that these higher costs and higher interest rates are also having a
dampening effect on the economy and the flooring industry.
Selling, general and administrative expenses for the current period were
$379.0 million (15.4% of net sales) compared to $361.9 million (15.7% of net
sales) for the prior year's first nine months. The decrease was primarily due to
improved cost controls and better leveraging of these expenses against higher
sales volume over the nine month period.
In the third quarter of 2000, the Company reached an agreement in principle
to settle two antitrust class actions. The Company will contribute $13,500 to a
settlement fund to resolve price fixing claims. The settlement is subject to
preliminary approval of the court, notice to members of the settlement classes,
certification of the proposed settlement classes and final approval by the
court. During the quarter, the Company recorded a charge of $7,000 in connection
with the settlement.
Interest expense for the current period was $28.6 million compared to $23.9
million in the prior year's first nine months. The primary factor contributing
to the increase was an increase in debt levels, which was attributable to the
stock repurchase program and an increase in the weighted average borrowing rate
compared to the first nine months of 1999.
Income tax expense was $79.9 million, or 39.3% of earnings before income
taxes in the current period compared to $76.4$22.2 million, or 39.5% of earnings
before income taxes for the prior year's first nine months.quarter. The reduction in the
effective income tax rate was primarily due to tax planning strategies.
Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital
expenditures acquisitions and stock repurchases.acquisitions. The Company's capital needs are met through a
combination of internally generated funds, bank credit lines, securitization of
accounts receivable and credit terms from suppliers.
The level of accounts receivable increased from $337.8$358.8 million at the
beginning of 20002001 to $394.9$389.0 million at September 30, 2000.March 31, 2001. The $57.1$30.2 million
increase was attributable to strong sales growth.seasonal fluctuation. Inventories increased from
$494.8$574.6 million at the beginning of 20002001 to $592.8$621.3 million at September 30, 2000,March 31, 2001, due
primarily to the need for a higher level of inventory to meet seasonal sales
demand and the increased
sales volumerollout of the hardsurface products, Ralph Lauren and seasonal demand.
11
Crown
Crafts product lines.
Capital expenditures totaled $53.5$11.7 million for the first ninethree months of
2000,2001, and were incurred primarily to modernize and expand manufacturing
facilities and equipment. The Company's capital projects are primarily focused
on increasing capacity, improving productivity and reducing costs. Capital
spending for the remainder of 20002001 is expected to range from $21$55 million to $31$65
million, the majority of which will be used to purchase equipment to increase
production capacity and productivity.
During 1999, theThe Company's Board of Directors has authorized the repurchase of up to 1015
million shares of its outstanding common shares. Duringstock. For the quarter ended July 1, 2000, the Board of Directors authorized an additional repurchase
of 5 million outstanding shares bringing the total authorized repurchase to 15
million. During the quarter ended September 30, 2000,March 31,
2001, a total of approximately .2 million171 shares of the Company's common stock was
purchased at an aggregate cost of approximately $4.4$5.0 million. Since the
inception of the program, a total of approximately 7.88.9 million shares have been
purchasedrepurchased at an aggregate cost of approximately $172.0$197.6 million. All of these
repurchases have been financed through the Company's operations and revolving
line of credit.
In October 2000, the Company entered into a one-year receivables purchase
agreement enabling the Company to sell up to $250 million of an undivided
interest in a defined pool of trade accounts receivable and the securitization
agreement may be extended for one-year terms. The Company received approximately
$195 million in proceeds from the initial sale of receivables. The proceeds were
used to reduce borrowings under the revolving credit facility and will be
accounted for as a short-term financing. The Company is generally at risk for
losses associated with the sold receivables and will provide for these losses
within the financial statements.11
Impact of Inflation
Inflation affects the Company's manufacturing costs and operating expenses.
The carpet industry has experienced significant inflation in the prices of raw
materials and fuel-related costs, beginning in the third quarter of 1999. For
the period from 1997,1998 through the end of the second quarter of 1999, the carpet
industry has experienced moderate inflation in the prices of raw materials and
fuel-related costs. The Company has generally passed along nylon fiber price
increases to its customers.customers although additional costs resulting from recent
significant inflationary pressures may not be fully recoverable through such
price increases in the near-term.
Seasonality
The carpet business is seasonal, with the Company's second, third and
fourth quarters typically producing higher net sales and operating income. By
comparison, results for the first quarter tend to be the weakest. This
seasonality is primarily attributable to consumer residential spending patterns
and higher installation levels during the spring and summer months.
Certain factors affecting the Company's performance
In addition to the other information provided in this Form 10-Q, the
following risk factors should be considered when evaluating an investment in
shares of Mohawk common stock.
A failure by Mohawk to complete acquisitions and successfully integrate acquired
- --------------------------------------------------------------------------------
operations could materially and adversely affect its business.
- --------------------------------------------------------------
Management intends to pursue acquisitions of complementary businesses as
part of its business and growth strategies. Although management regularly
evaluates acquisition opportunities, it cannot offer assurance that it will be
able to:
. successfully identify suitable acquisition candidates;
. obtain sufficient financing on acceptable terms to fund
acquisitions;
. complete acquisitions;
. integrate acquired operations into Mohawk's existing operations;or
. profitably manage acquired businesses.
Acquired operations may not achieve levels of sales, operating income or
productivity comparable to those of Mohawk's existing operations, or otherwise
perform as expected. Acquisitions may also involve a number of special risks,
some or all of which could have a material adverse effect on Mohawk's business,
results of operations and
12
financial condition, including, among others:
. possible adverse effects on Mohawk's operating results;
. diversion of Mohawk management's attention and its resources; and
. dependence on retaining and training acquired key personnel.
The carpet industry is cyclical and a downturn in the overall economy could
- ---------------------------------------------------------------------------
lessen the demand for Mohawk's products and impair growth and profitability.
- ----------------------------------------------------------------------------
The carpet industry is cyclical and is influenced by a number of general
economic factors. Prevailing interest rates, consumer confidence, spending for
durable goods, disposable income, turnover in housing and the condition of the
residential and commercial construction industries (including the number of new
housing starts and the level of new commercial construction) all have an impact
on Mohawk's growth and profitability. In addition, sales of Mohawk's principal
products are related to construction and renovation of commercial and
residential buildings. Any adverse cycle could lessen the overall demand for
Mohawk's products and could, in turn, impair Mohawk's growth and profitability.
The carpet business is seasonal and this seasonality causes Mohawk's results of
- -------------------------------------------------------------------------------
operations to fluctuate on a quarterly basis.
- ---------------------------------------------
Mohawk is a calendar year end company and its results of operations for the
first quarter tend to be the weakest. Mohawk's second, third and fourth quarters
typically produce higher net sales and operating income. These results are
primarily due to consumer residential spending patterns and more carpet being
installed in the spring and summer months.
12
Mohawk's business is competitive and a failure by Mohawk to compete effectively
- -------------------------------------------------------------------------------
could have a material and adverse impact on Mohawk's results of operations.
- ---------------------------------------------------------------------------
Mohawk operates in a highly competitive industry. Mohawk and other
manufacturers in the carpet industry compete on the basis of price, style,
quality and service. Some of Mohawk's competitors may have greater financial
resources at their disposal. Mohawk has one competitor whose size could allow it
certain manufacturing cost advantages compared to other industry participants. If competitors substantially increase production
and marketing of competing products, then Mohawk might be required to lower its
prices or spend more on product development, marketing and sales, which could
adversely affect Mohawk's profitability.
An increase in the cost of raw materials could negatively impact Mohawk's
- -------------------------------------------------------------------------
profitability.
- --------------
The cost of raw materials has a significant impact on the profitability of
Mohawk. In particular, Mohawk's business requires it to purchase large volumes
of nylon fiber and polypropylene resin, which is used to manufacture fiber. The
cost of these raw materials is related to oil prices. Mohawk does not have any
long-term supply contracts for any of these products. While Mohawk generally
attempts to match cost increases with price increases, large increases in the
cost of such raw materials could adversely affect its business, results of
operations and financial condition if it is unable to pass these costs through
to its customers.
Mohawk may be responsible for environmental cleanup, which could negatively
- ---------------------------------------------------------------------------
impact profitability.
- ---------------------
Various federal, state and local environmental laws govern the use of
Mohawk's facilities. Such laws govern:
. discharges to air and water;
. handling and disposal of solid and hazardous substances and waste;
and
. remediation of contamination from releases of hazardous substances
in Mohawk's facilities and off-site disposal locations.
Mohawk's operations are also governed by the laws relating to workplace safety
and worker health, which, among other things, establish asbestos and noise
standards and regulate the use of hazardous chemicals in the workplace. Mohawk
has taken and will continue to take steps to comply with these laws. Based upon
current available information, Mohawk believes that complying with environmental
and safety and health requirements will not require material capital
expenditures in the foreseeable future. However, Mohawk cannot provide assurance
that complying with these environmental or health and safety laws and
requirements will not adversely affect its business, results of 13
operations and
financial condition. Future laws, ordinances or regulations could give rise to
additional compliance or remediation costs, which could have a material adverse
effect on its business, results of operations and financial condition.
Forward-Looking Information
Certain of the matters discussed in the preceding pages, particularly
regarding anticipating future financial performance, business prospects, growth
and operating strategies, proposed acquisitions, new products and similar
matters, and those preceded by, followed by or that otherwise include the words
"believes," "expects," "anticipates," "intends," "estimates" or similar
expressions constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, 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. Forward-
looking statements involve a number of risks and uncertainties. The following
important factors, in addition to those discussed elsewhere in this document,
affect the future results of Mohawk and could cause those results to differ
materially from those expressed in the forward-looking statements: materially
adverse changes in economic conditions generally in the carpet, rug and
floorcovering markets served by Mohawk; competition from other carpet, rug and
floorcovering manufacturers; oil price increases; raw material prices; timing and level of capital
expenditures; the successful integration of acquisitions, including the
challenges inherent in diverting Mohawk management's attention and resources
from other strategic matters and from operational matters for an extended period
of time; the successful introduction of new products; the successful
rationalization of existing operations; and other risks identified from time to
time in the Company's SEC reports and public announcements. Any forward-looking
statements represent Mohawk's estimates only as of the date of this report and
should not be relied upon as representing Mohawk's estimates as of any
subsequent date. While Mohawk may elect to update forward-looking
13
statements at some point in the future, Mohawk specifically disclaims any
obligation to do so, even if Mohawk's estimates change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company engages in activities that expose it to various market risks,
including the effects of a change in interest rates. This financial exposure is
managed as an integral part of the Company's market risk-sensitiverisk management program, which
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on operating results. The Company does not engage in
speculative transactions, nor does it hold or issue financial instruments do not subject thefor
trading purposes. The Company maintains an interest rate risk management
strategy that uses derivative instruments, currently interest rate swaps, to
material market risk exposures.minimize significant, unanticipated earnings fluctuations caused by volatility
in interest rates.
Interest rate sensitivity table as of March 31, 2001:
Expected Maturity Dates 2001 2002 2003 2004 2005 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ---- ----------
(In thousands)
Interest rate swaps:
Pay fixed/receive variable - - - - - $100,000 $100,000 $(2,220)
Average pay - - - - - 5.82%
Average receive - - - - - 5.71%
PART II. OTHER INFORMATION
Item 1. Legal ProcedingsProceedings
The Company is involved in routine litigation from time to time in the
regular course of its business. Except as noted below, there are no material
legal proceedings pending or known to be contemplated to which the Company is a
party or to which any of its property is subject.
In December 1995, the Company and four other carpet manufacturers were
added as defendants in a purported class action lawsuit, In re Carpet Antitrust
Litigation, pending in the United States District Court for the Northern
District of Georgia, Rome Division. The amended complaint alleges price-fixing
regarding polypropylene products in violation of Section One of the Sherman Act.
In September 1997, the Court granted the plaintiffs' motion to certify the
class. In October 1998, two plaintiffs, on behalf of an alleged class of
purchasers of nylon carpet products, filed a complaint in the United States
District Court for the Northern District of Georgia against the Company and two
of its subsidiaries, as well as certain competitors. The complaint alleges that
the Company acted in concert with other carpet manufacturers to restrain
competition in the sale of certain nylon carpet products. The Company has filed an
answer, denied the allegations in the complaint and set forth its defenses.
On August 11, 2000, the Company presented to the Court the terms of an
agreement in principle to settle these two cases. On February 5, 2001, the Court
dismissed all claims against the Company and granted final approval to the
settlement. Under the terms of the settlement agreement, Mohawk will contributethe Company contributed
$13.5 million at the beginning of the second quarter of 2001 to a settlement
fund to resolve price-fixing claims brought by a class of purchasers of
polypropylene carpet and a proposed settlement class of purchasers of nylon
carpet. MohawkThe Company recorded a charge of $7 million in the third quarter of
2000, in connection with the lawsuit. The Company denies all liability and
wrongdoing and has agreed to settle these claims in order to avoid the costs of
further litigation. The settlement is subject to the
Court's preliminary approval, notice to the members of the two classes,
certification of the proposed settlement class, and final approval of the
settlement by the Court after a hearing. The one-time payment will only be made
after these conditions have occurred.
The Company is a party to two consolidated lawsuits captioned Gaehwiler v.
Sunrise Carpet Industries, Inc. et al. and Patco Enterprises, Inc. v. Sunrise
Carpet Industries, Inc. et al., both of which were filed in the Superior Court
of the State of California, City and County of San Francisco, in 1996. Both
complaints were brought on behalf of a purported class of indirect purchasers of
polypropylene carpet in the State of California and seek damages for alleged
violations of California antitrust and unfair competition laws. In February
1999, a similar complaint was filed in the Superior Court 14
of the State of
California, City and
14
County of San Francisco, on behalf of a purported class based on indirect
purchasers of nylon carpet in the State of California and alleges violations of
California antitrust and unfair competition laws. The complaints described above
do not specify any specific amount of damages but do request injunctive relief
and treble damages plus reimbursement for fees and costs. The Company believes
it has meritorious defenses and intends to vigorously defend against these
actions.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
- --- ---------------
(a) Exhibits
3.2 Amended and restated by-laws.
10 Consulting agreement between Mohawk Industries, Inc. and David L. Kolb
dated August 1, 2000.-----------
11 Statement re: Computation of Per Share Earnings.
27 Financial Data ScheduleEarnings
(b) Reports on Form 8-K
Current Report on Form 8-K: SecondFourth quarter and year-end earnings press
release, dated July 20, 2000.
Current Report on Form 8-K: Retirement of David Kolb press release, dated
August 1, 2000.
Current Report on Form 8-K: Legal Class Action Settlement press release,
dated August 11, 2000.
Current Report on Form 8-K: National distributor for Congoleum Corporation
press release, dated September 25, 2000.February 8, 2001
15
SIGNATURES
Pursuant to the requirements 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.
Dated: November 3, 2000May 11, 2001 By: /s/ David L. Kolb
-----------------
DAVID L. KOLB, Chairman of the BoardJeffrey S. Lorberbaum
--------------------------
JEFFREY S. LORBERBAUM, President and
Chief Executive Officer (principal
executive officer)
Dated: November 3, 2000May 11, 2001 By: /s/ John D. Swift
-----------------
JOHN D. SWIFT, Chief Financial Officer,
Vice President-Finance and Assistant
Secretary (principal financial and
accounting officer)
16
EXHIBIT INDEX
No. Description
- --- -----------
(a) Exhibits
3.2 Amended and restated by-laws.
10 Consulting agreement between Mohawk Industries, Inc. and David L. Kolb
dated August 1,2000.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
17