================================================================================
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, 200029, 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 (I.R.S. Employer
Identification No.)
incorporation or organization) P.O.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
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[_]No [_]
The number of shares outstanding of the issuer's classes of capital stock as
of November 3, 2000,7, 2001, the latest practicable date, is as follows: 52,624,516.52,612,391
shares of Common Stock, $.01 par value.
- --------------------------------------------------------------------------------===============================================================================
MOHAWK INDUSTRIES, INC.
INDEX
Page No.
-------
Part I. Condensed Consolidated 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 (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 1012
Item 3. Quantitative and Qualitative Disclosures About Market Risks 1416
Part II. Other Information 14Information:
Item 1. Legal proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
September 30, 200029, 2001 December 31, 1999
--------------------------- --------------------------
(Unaudited)2000
------------------ -----------------
Current assets:
Receivables $ 394,896 337,824432,651 358,809
Inventories 592,828 494,774576,218 574,595
Prepaid expenses 16,091 25,18413,337 26,973
Deferred income taxes 76,628 76,628
--------------------------- --------------------------66,474 66,474
------------------ ----------------------
Total current assets 1,080,443 934,410
--------------------------- --------------------------1,088,680 1,026,851
------------------ ----------------------
Property, plant and equipment, at cost 1,192,149 1,139,6601,274,325 1,238,200
Less accumulated depreciation and
amortization 569,277 514,846
--------------------------- --------------------------644,276 588,147
------------------ ----------------------
Net property, plant and equipment 622,872 624,814
--------------------------- --------------------------630,049 650,053
------------------ ----------------------
Other assets 119,544 123,649
--------------------------- --------------------------115,800 118,474
------------------ ----------------------
Total assets $ 1,822,859 1,682,873
=========================== ==========================1,834,529 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, 200029, 2001 December 31, 19992000
--------------------------- --------------------------
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 33,874 33,961238,215 224,391
Accounts payable and accrued expenses 411,540 340,392412,075 375,268
--------------------------- --------------------------
Total current liabilities 445,414 374,353650,290 599,659
Deferred income taxes 53,783 53,78375,808 75,808
Long-term debt, less current portion 592,747 562,104219,571 365,437
Other long-term liabilities 592 874,806 114
--------------------------- --------------------------
Total liabilities 1,092,536 990,327950,475 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; 60,77261,278 and 60,65760,838 shares issued
in 2001 and 2000, and 1999, respectively 613 608 607
Additional paid-in capital 182,250 179,993193,722 183,303
Retained earnings 719,269 595,932887,930 758,531
Accumulated other comprehensive loss (4,617) -
--------------------------- --------------------------
902,127 776,5321,077,648 942,442
Less treasury stock at cost; 7,7648,715 shares in
2001 and 8,538 shares in 2000 and 3,952 in 1999 171,804 83,986193,594 188,082
--------------------------- --------------------------
Total stockholders' equity 730,323 692,546884,054 754,360
--------------------------- --------------------------
Total liabilities and stockholders' equity $ 1,822,859 1,682,8731,834,529 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 29, 2001 September 30, 2000 October 2, 1999
--------------------------- --------------------------
Net sales $ 869,666 838,514 809,933
Cost of sales 649,023 624,294 606,687
--------------------------- --------------------------
Gross profit 220,643 214,220 203,246
Selling, general and administrative expenses 128,235 127,151 119,258
Class action legal settlement - 7,000 -
--------------------------- --------------------------
Operating income 92,408 80,069 83,988
--------------------------- --------------------------
Other expense:
Interest expense, net 6,869 10,173 8,335
Other expense, net 1,051 846 1,142
--------------------------- --------------------------
7,920 11,019 9,477
--------------------------- --------------------------
Earnings before income taxes 84,488 69,050 74,511
Income taxes 28,761 26,913 29,432
--------------------------- --------------------------
Net earnings $ 55,727 42,137 45,079
=========================== ==========================
Basic earnings per share $ 1.06 0.79 0.74
=========================== ==========================
Weighted-average common shares outstanding 52,412 53,097 60,600
=========================== ==========================
Diluted earnings per share $ 1.05 0.79 0.74
=========================== ==========================
Weighted-average common and dilutive potential
common shares outstanding 53,211 53,634 61,114
=========================== ==========================
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 29, 2001 September 30, 2000 October 2, 1999
--------------------------- --------------------------
Net sales $ 2,441,697 2,456,405 2,307,717
Cost of sales 1,826,309 1,835,740 1,725,231
--------------------------- --------------------------
Gross profit 615,388 620,665 582,486
Selling, general and administrative expenses 385,814 378,979 361,920
Class action legal settlement - 7,000 -
--------------------------- --------------------------
Operating income 229,574 234,686 220,566
--------------------------- --------------------------
Other expense:
Interest expense, net 24,053 28,587 23,942
Other expense, net 4,094 2,834 3,130
--------------------------- --------------------------
28,147 31,421 27,072
--------------------------- --------------------------
Earnings before income taxes 201,427 203,265 193,494
Income taxes 72,028 79,928 76,430
--------------------------- --------------------------
Net earnings $ 129,399 123,337 117,064
=========================== ==========================
Basic earnings per share $ 2.47 2.28 1.93
=========================== ==========================
Weighted-average common shares outstanding 52,347 54,181 60,586
=========================== ==========================
Diluted earnings per share $ 2.44 2.26 1.91
=========================== ==========================
Weighted-average common and dilutive potential
common shares outstanding 53,021 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)
Nine Months Ended
------------------------------------------------------------
September 29, 2001 September 30, 2000 October 2, 1999
--------------------------- --------------------------
Cash flows from operating activities:
Net earnings $ 129,399 123,337 117,064
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 62,696 61,411 76,099
Provision for doubtful accounts 12,175 11,599
Loss on sale of property, plant
and equipment 1,164 100 2,184
Changes in operating assets and liabilities,
net of effects of acquisition:liabilities:
Receivables (69,247) (40,411)(73,842) (57,072)
Inventories (1,623) (98,054) (75,242)
Accounts payable and accrued expenses 43,908 78,591 (21,775)
Other assets and prepaid expenses 13,407 7,167 15,939
Other liabilities 4,692 505 (4,516)
--------------------------- --------------------------
Net cash provided by operating activities 179,801 115,985 80,941
--------------------------- --------------------------
Cash flows fromused in investing activities:
Additionsactivities-
additions to property, plant and equipment, net (40,953) (53,538) (115,216)
Acquisitions - (162,463)
--------------------------- --------------------------
Net cash used in investing activities (53,538) (277,679)
--------------------------- --------------------------
Cash flows from financing activities:
Net change in revolving line of credit (118,526) 53,758
214,282
PaymentsNet change in asset securitization 13,896 -
Payment on term loans (26,494) (26,502)
(26,503)
Redemption of acquisition indebtedness - (20,917)
ProceedsNet (redemption) proceeds of IRBs and other net of proceeds(918) 3,300 (8,057)
Change in outstanding checks in excess of cash (9,073) (7,443) 41,457
Acquisition of treasury stock (8,157) (87,818) (13,862)
Common stock transactions 10,424 2,258 7,954
--------------------------- --------------------------
Net cash (used in) provided byused in financing
activities (138,848) (62,447) 194,354
--------------------------- --------------------------
Net change in cash - (2,384)-
Cash, beginning of period - 2,384-
--------------------------- --------------------------
Cash, end of period $ - -
=========================== ==========================
Net cash paid during the period for:
Interest $ 27,084 28,258 29,529
=========================== ==========================
Income taxes $ 57,541 71,899 92,558
=========================== ==========================
See accompanying notes to condensed consolidated financial statements.
7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)thosands)
(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)adjustments) considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the consolidated 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.
2. Receivables
Receivables are as follows:
September 29, 2001 December 31, 2000
--------------------------- ----------------------
Customers, trade $ 510,793 433,042
Other 1,188 4,125
--------------------------- ----------------------
511,981 437,167
Less allowance for discounts, returns, claims
and doubtful accounts 79,330 78,358
--------------------------- ----------------------
Net receivables $ 432,651 358,809
========================== =====================
3. Inventories
The components of inventories are as follows:
September 29, 2001 December 31, 2000
-------------------------- ------------------------
Finished goods $ 306,372 295,447
Work in process 79,065 73,658
Raw materials 190,781 205,490
-------------------------- ------------------------
Total inventories $ 576,218 574,595
========================== ========================
4. Other assets
Other assets are as follows:
September 29, 2001 December 31, 2000
-------------------------- ------------------------
Goodwill, net of accumulated amortization of
$18,762 and $16,355, respectively $ 109,969 112,376
Other assets 5,831 6,098
-------------------------- ------------------------
Total other assets $ 115,800 118,474
========================== ========================
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
5. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as
follows:
September 29, 2001 December 31, 2000
---------------------- ------------------------
Outstanding checks in excess of cash $ 33,822 42,895
Accounts payable, trade 185,170 165,108
Accrued expenses 118,831 104,313
Accrued compensation 74,252 62,952
-------------------- ----------------------
Total accounts payable and accrued expenses $ 412,075 375,268
==================== =====================
6. Comprehensive income
Comprehensive income is as follows:
Three Months Ended Nine Months Ended
---------------------------------------- ---------------------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------------ ----------------- ----------------- -----------------
Net earnings $ 55,727 42,137 129,399 123,337
Other comprehensive (loss):
Unrealized (loss) on
derivative instruments,
net of income taxes (4,000) - (4,617) -
-------------- -------------- -------------- --------------
Comprehensive income $ 51,727 42,137 124,782 123,337
============== ============== ============== ==============
7. Commitments and 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.
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 of the State of
California, City and 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.
8. Earnings per share
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, 2000 December 31, 1999
--------------------------- --------------------------
Customers, trade $ 472,500 405,477
Other 2,359 2,826
--------------------------- --------------------------
474,859 408,303
Less allowance for discounts, returns, claims
and doubtful accounts 79,963 70,479
--------------------------- --------------------------
Net receivables $ 394,896 337,824
=========================== ==========================
3. Inventories
The components of inventories are as follows:
September 30, 2000 December 31, 1999
--------------------------- --------------------------
Finished goods $ 295,793 254,179
Work in process 83,104 65,456
Raw materials 213,961 175,139
--------------------------- --------------------------
Total inventories $ 592,858 494,774
=========================== ==========================
89
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
5. Other assets
Other assets are included in the diluted earnings per share calculation using the treasury
stock method.
Earnings per share is as follows:
Three Months Ended Nine Months Ended
------------------------------------------ --------------------------------------
September 29, September 30, September 29, September 30,
2001 2000 December 31, 1999
--------------------------- --------------------------2001 2000
--------------------- ----------------- ----------------- -----------------
Goodwill, net of accumulated amortization of
$15,546 and $13,171, respectively $ 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 cashNet earnings $ 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 payable55,727 42,137 129,399 123,337
===================== ================= ================= =================
Weighted-average common
and accrued expensesdilutive shares
outstanding:
Weighted-average common
shares outstanding 52,412 53,097 52,347 54,181
===================== ================= ================= =================
Add weighted-average
dilutive potential common
shares-options to purchase
common shares, net 799 537 674 508
--------------------- ----------------- ----------------- -----------------
Weighted-average common
and dilutive potential
common shares outstanding 53,211 53,634 53,021 54,689
===================== ================= ================= =================
Basic earnings per share: $ 411,540 340,392
=========================== ==========================1.06 0.79 2.47 2.28
===================== ================= ================= =================
Diluted earnings per share: $ 1.05 0.79 2.44 2.26
===================== ================= ================= =================
7. Property, Plant9. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and Equipment
EffectiveSFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142.
The Company is required to adopt the provisions of SFAS No. 141
immediately, and SFAS No. 142 effective January 1, 2000,2002. Furthermore, any
goodwill determined to have an indefinite useful life that was acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized. Goodwill acquired in business combinations completed before July 1,
2001 will discontinue being amortized after December 31, 2001.
The Company is currently evaluating its existing goodwill that was acquired
in prior purchase business combinations for impairment and believes such
evaluation will not result in an adjustment that is material to the consolidated
financial statements.
As of the date of adoption, the Company changedexpects to have unamortized
goodwill in the estimated useful
livesamount of buildings (25 years$109,161. Amortization expense related to 35 years), tufting equipment (7 years to 10
years), extrusion equipment (7 years to 15 years)goodwill was
$3,184 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 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. The after tax effect of the charge$2,407 for the threeyear ended December 31, 2000 and the nine months ended
September 30, 2000, was $4,271,29, 2001, respectively.
10
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thosands)
(Unaudited)
In August 2001, the Financial Standards Board issued SFAS No. 144,
Accounting for the Impairment or $0.08 per
share.
9. Subsequent events
In October 2000,Disposal of Long-Lived Assets. SFAS 144
provides new guidance on the Company entered intorecognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a one-year receivables
purchase agreement enablingdiscontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS 144 is effective
for the Company's fiscal year beginning in 2002 and is not expected to
materially change the methods used by the Company to sell up to $250,000 of an undivided
interestmeasure impairment losses
on long-lived assets, but may result in a defined pool of trade accounts receivable and the securitization
agreement may be extended for one-year terms. The Company received approximately
$195,000 in proceeds from the initial sale of receivables. The proceeds were
used to reduce borrowingsmore matters being reported as
discontinued operations than is permitted 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.
9current accounting principles.
11
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, 200029, 2001 as Compared with Quarter Ended October 2, 1999
- -------------------------------------------------------------------------------September 30,
-----------------------------------------------------------------------------
2000
----
Net sales for the quarter ended September 30, 200029, 2001 were $838.5$869.7 million,
reflecting an increase of $28.6$31.2 million, or approximately 4%3.7%, over the $809.9$838.5
million reported in the quarter ended October 2, 1999. All major product
categories achieved sales increases for the third quarter of 2000 as compared to
1999.September 30, 2000. The Company believes
that the third quarter of 2000 net sales increase was attributable to internal growth.growth in soft non-carpet products and
hard surface products.
Gross profit for the third quarter of the current year was $214.2$220.6 million
(25.5%(25.4% of net sales) and represented ana $6.4 million increase over the gross
profit of $203.2$214.2 million (25.1%(25.5% 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 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 quarter were
$127.2$128.2 million (15.2%(14.7% of net sales) compared to $119.3$127.2 million (14.7%(15.2% of net
sales) for the prior year's third quarter. The increasedecreased percentage was
primarily dueattributable to start upcost containment and leveraging of expenses associated withagainst a higher
sales volume in the expansion of the Company's hard surfaces
product lines throughout the United States.current quarter.
In the third quarter of 2000, the Company reached an agreement in principle
to settle
two antitrust class actions. The Company will contribute $13,500contributed $13.5 million to athe
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 in 2000, the
Company recorded a charge of $7,000$7 million in connection with the settlement.
Interest expense for the current quarter was $10.2$6.9 million compared to $8.3$10.2
million in the third quarter of 1999.2000. The primary factors contributingdecrease was due to the
increase was an increasea reduction in
debt levels which was attributable to the stock
repurchase program and an increasea decrease in the weighted average borrowing rate compared to
the third quarter of 1999.2000.
Income tax expense was $26.9$28.8 million, or 39%34.0% of earnings before income
taxes in the current quarter compared to $29.4$26.9 million, or 39.5%39% of earnings
before income taxes for the prior year's third quarter. The reduction in the
effective income tax rate was primarily due to tax credits.
Nine months Ended September 30, 200029, 2001 as Compared with Nine Monthsmonths Ended
October
- -------------------------------------------------------------------------------
2, 1999
- ------------------------------------------------------------------------------
September 30, 2000
------------------
Net sales for the first nine months ended September 30, 200029, 2001 were $2,456.4$2,441.7
million, reflecting an increasea decrease of $148.7$14.7 million, or approximately 6%.6%, overfrom the
$2,307.7$2,456.4 million reported in the first nine month period ended October 2, 1999.
All major product categories achieved sales increases forSeptember 30, 2000. The
Company believes that the nine months of
2000 as compareddecrease was attributable to 1999.the cyclical downturn in
the overall economy, which led to declining industry shipments.
Gross profit for the first nine months of the current year was $620.7$615.4
million (25.3%(25.2% of net sales) and represented an increase overa $5.3 million decrease from the
gross profit of $582.5$620.7 million (25.2%(25.3% 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$385.8 million (15.4%(15.8% of net sales) compared to $361.9$379.0 million (15.7%(15.4% of net
sales) for the prior year's first nine months. The decreaseincreased percentage was
primarily due to improved cost controls and better leveragingcosts of these expenses against higher
sales volume overrolling out the nine month period.hard surface product lines.
In the third quarter of 2000, the Company reached an agreement in principle
to settle
two antitrust class actions. The Company will contribute $13,500contributed $13.5 million to athe
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$7 million in connection with the settlement.
Interest expense for the current period was $28.6$24.1 million compared to $23.9$28.6
million in the prior year's first nine months. The primary factor contributingdecrease was due to the increase was an increasea
reduction in debt levels, which was attributable to the
stock repurchase program and an increasea decrease in the weighted average borrowing rate
compared to the first nine months of 1999.2000.
12
Income tax expense was $79.9$72.0 million, or 39.3%35.8% of earnings before income
taxes in the current period compared to $76.4$79.9 million, or 39.5%39.3% of earnings
before income taxes for the prior year's first nine months. The reduction in the
effective income tax rate was primarily due to tax credits.
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$432.7 million at September 30, 2000.29, 2001. The $57.1$73.9 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$576.2 million at September 30, 2000,29, 2001,
due primarily to the need forrollout of the hard surface products, Ralph Lauren and
Crown Crafts product lines, partially offset by a higher level of inventory to meet the increased
sales volume and seasonal demand.
11
reduction in broadloom carpet
inventories.
Capital expenditures totaled $53.5$40.9 million for the first nine 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$35.8 million to
$31$45.8 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. During 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, a total of approximately
.2 million shares of the Company's common stock was purchased at an aggregate
cost of approximately $4.4 million.stock. Since the inception of the
program, a total of approximately 7.89.0 million shares have been purchasedrepurchased at an
aggregate cost of approximately $172.0$200.8 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.banking arrangements.
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. For1999, but
such cost pressures have lessened during the period from 1997, through the endlast half of the second quarter2000 and first three
quarters of 1999, the carpet
industry has experienced moderate inflation in the prices of raw materials and
fuel-related costs.2001. The Company has generally passed along nylon fiber price
increases to its customers.
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
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operations could materially and adversely affect its business.
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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
13
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
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lessen the demand for Mohawk's products and impair growth and profitability.
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----------------------------------------------------------------------------
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
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operations to fluctuate on a quarterly basis.
-
---------------------------------------------
Mohawk is a calendar year end company and its results of operations for the
first quarterand fourth quarters tend to be the weakest. Mohawk's second third and fourththird
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.
Mohawk's business is competitive and a failure by Mohawk to compete effectively
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could have a material and adverse impact on Mohawk's results of operations.
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---------------------------------------------------------------------------
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
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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
14
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.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142.
The Company is required to adopt the provisions of SFAS No. 141
immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill determined to have an indefinite useful life that was acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized. Goodwill acquired in business combinations completed before July 1,
2001 will discontinue being amortized after December 31, 2001.
The Company is currently evaluating its existing goodwill that was acquired
in prior purchase business combinations for impairment and believes such
evaluation will not result in an adjustment that is material to the consolidated
financial statements.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $109.2 million. Amortization expense related to
goodwill was $3.2 million and $2.4 million for the year ended December 31, 2000
and the nine months ended September 29, 2001, respectively.
In August 2001, the Financial Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS 144 is effective
for the Company's fiscal year beginning in 2002 and is not expected to
materially change the methods used by the Company to measure impairment losses
on long-lived assets, but may result in more matters being reported as
discontinued operations than is permitted under current accounting principles.
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-
lookingThose
statements are based on assumptions regarding the Company's ability to maintain
its sales growth and gross margins and to control costs. These or other
assumptions could prove inaccurate and therefore, there can be no assurance that
the "forward-looking statements" will prove to be accurate. 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 floorcoveringfloor covering markets
served by Mohawk; competition from other carpet, rug and floorcoveringfloor covering
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
15
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 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's market risk-sensitive instruments do not subjectTo reduce the risk of interest rate fluctuations, the Company engages in
the use of interest rate swap agreements. At September 29, 2001, the Company
held one interest rate swap agreement under which the Company pays a fixed
percent of interest times the notional principal amount and receives in return
an amount equal to material market risk exposures.a specified variable rate of interest times the same notional
principal amount. The fixed interest rate per the agreement is 5.82%, which
expires January 2, 2006. The average rate as of September 29, 2001 was 3.1%.
This agreement is considered highly effective as of September 29, 2001. The
cumulative fair value of the agreement as of September 29, 2001 was a liability
of $4.6 million, which was recorded in long-term liabilities with the offset to
other comprehensive loss, net of applicable income taxes.
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. Under the terms of the
settlement agreement, Mohawk will contribute $13.5 million 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. Mohawk
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 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
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 ScheduleNone.
(b) Reports on Form 8-K
Current Report on Form 8-K: Second quarter 2001 earnings press release,announcement,
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.
1516, 2001.
16
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, 20007, 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, 20007, 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