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 October 2, 1999September 30, 2000
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: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.)
Post Office Box 12069, 160 South Industrial Boulevard, Calhoun, Georgia 30703Delaware 52-1604305
(State or other jurisdiction of (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
-------- ---------[X] No[_]
The number of shares outstanding of the issuer's classes of capital stock
as of November 1, 1999,3, 2000, the latest practicable date, is as follows: 60,624,94752,624,516.
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 -
October 2, 1999September 30, 2000 and December 31, 19981999 3
Condensed Consolidated Statements of Earnings -
Three months ended September 30, 2000 and October 2, 1999 and September 26, 1998 5
Condensed Consolidated Statements of Earnings -
Nine months ended September 30, 2000 and October 2, 1999 and September 26, 1998 6
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and October 2, 1999 and September 26, 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1110
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
Part II. Other Information 14
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
October 2, 1999September 30, 2000 December 31, 1998
--------------- -----------------1999
--------------------------- --------------------------
(Unaudited)
Current assets:
CashReceivables $ - 2,384
Receivables 385,344 331,928394,896 337,824
Inventories 537,579 423,837592,828 494,774
Prepaid expenses 13,444 19,32216,091 25,184
Deferred income taxes 52,568 52,568
--------------- -----------------76,628 76,628
--------------------------- --------------------------
Total current assets 988,935 830,039
--------------- -----------------1,080,443 934,410
--------------------------- --------------------------
Property, plant and equipment, at cost 1,111,433 883,6751,192,149 1,139,660
Less accumulated depreciation and
amortization 491,440 428,808
--------------- -----------------569,277 514,846
--------------------------- --------------------------
Net property, plant and equipment 619,993 454,867
--------------- -----------------622,872 624,814
--------------------------- --------------------------
Other assets 107,310 103,684
--------------- -----------------119,544 123,649
--------------------------- --------------------------
Total assets $ 1,716,238 1,388,590
=============== =================1,822,859 1,682,873
=========================== ==========================
See accompanying notes to condensed consolidated financial statements.
3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)thousands)
October 2, 1999September 30, 2000 December 31, 1998
--------------- -----------------1999
--------------------------- --------------------------
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 197,013 44,42433,874 33,961
Accounts payable and accrued expenses 401,869 364,037
--------------- -----------------411,540 340,392
--------------------------- --------------------------
Total current liabilities 598,882 408,461445,414 374,353
Deferred income taxes 31,025 31,02553,783 53,783
Long-term debt, 363,252 332,665less current portion 592,747 562,104
Other long-term liabilities 864 5,380
--------------- -----------------592 87
--------------------------- --------------------------
Total liabilities 994,023 777,531
--------------- -----------------1,092,536 990,327
--------------------------- --------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 60,62560,772 and 60,53360,657 shares issued
in 2000 and 1999, and 1998, respectively 606 606608 607
Additional paid-in capital 179,714 172,045182,250 179,993
Retained earnings 555,757 438,408
--------------- -----------------
736,077 611,059719,269 595,932
--------------------------- --------------------------
902,127 776,532
Less treasury stock at cost; 7017,764 in shares in
2000 and 3,952 in 1999 13,862 -
--------------- -----------------171,804 83,986
--------------------------- --------------------------
Total stockholders' equity 722,215 611,059
--------------- -----------------730,323 692,546
--------------------------- --------------------------
Total liabilities and stockholders' equity $ 1,716,238 1,388,590
=============== =================1,822,859 1,682,873
=========================== ==========================
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, 2000 October 2, 1999
September 26, 1998
--------------- --------------------------------------------- --------------------------
Net sales $ 838,514 809,933 718,772
Cost of sales 624,294 606,687
541,010
--------------- --------------------------------------------- --------------------------
Gross profit 214,220 203,246 177,762
Selling, general and administrative expenses 127,151 119,258
108,279
--------------- ------------------Class action legal settlement 7,000 -
--------------------------- --------------------------
Operating income 80,069 83,988
69,483
--------------- --------------------------------------------- --------------------------
Other expense:
Interest expense 10,173 8,335 7,245
Other expense, net 846 1,142
805
--------------- --------------------------------------------- --------------------------
11,019 9,477
8,050
--------------- --------------------------------------------- --------------------------
Earnings before income taxes 69,050 74,511 61,433
Income taxes 26,913 29,432
24,373
--------------- --------------------------------------------- --------------------------
Net earnings $ 42,137 45,079
37,060
=============== ============================================= ==========================
Basic earnings per share $ 0.79 0.74
0.61
=============== ============================================= ==========================
Weighted-average common shares outstanding 53,097 60,600
60,435
=============== ============================================= ==========================
Diluted earnings per share $ 0.79 0.74
0.61
=============== ============================================= ==========================
Weighted-average common and dilutive potential
common shares outstanding 53,634 61,114
61,169
=============== ============================================= ==========================
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
September 26, 1998
--------------- --------------------------------------------- --------------------------
Net sales $ 2,456,405 2,307,717 1,997,733
Cost of sales 1,835,740 1,725,231
1,505,976
--------------- --------------------------------------------- --------------------------
Gross profit 620,665 582,486 491,757
Selling, general and administrative expenses 378,979 361,920
316,102
--------------- ------------------Class action legal settlement 7,000 -
--------------------------- --------------------------
Operating income 234,686 220,566
175,655
--------------- --------------------------------------------- --------------------------
Other expense:
Interest expense 28,587 23,942 23,336
Other expense, net 2,834 3,130
1,624
--------------- --------------------------------------------- --------------------------
31,421 27,072
24,960
--------------- --------------------------------------------- --------------------------
Earnings before income taxes 203,265 193,494 150,695
Income taxes 79,928 76,430
60,553
--------------- --------------------------------------------- --------------------------
Net earnings $ 123,337 117,064
90,142
=============== ============================================= ==========================
Basic earnings per share $ 2.28 1.93
1.49
=============== ============================================= ==========================
Weighted-average common shares outstanding 54,181 60,586
60,359
=============== ============================================= ==========================
Diluted earnings per share $ 2.26 1.91
1.48
=============== ============================================= ==========================
Weighted-average common and dilutive potential
common shares outstanding 54,689 61,218
61,107
=============== ============================================= ==========================
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 30, 2000 October 2, 1999
September 26, 1998
--------------- --------------------------------------------- --------------------------
Cash flows from operating activities:
Net earnings $ 123,337 117,064 90,142
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 61,411 76,099 59,198
Deferred taxes - 5,951
Provision for doubtful accounts 12,175 11,599 8,057
Loss on sale of property, plant
and equipment 100 2,184 17
Changes in operating assets and liabilities,
net of effects of acquisitions:acquisition:
Receivables (69,247) (40,411)
(66,906)
Inventories (98,054) (75,242) (52,683)
Accounts payable and accrued expenses 78,591 (21,775) 65,010
Other assets and prepaid expenses 7,167 15,939 7,353
Other liabilities 505 (4,516)
(1,427)
--------------- --------------------------------------------- --------------------------
Net cash provided by operating activities 115,985 80,941
114,712
--------------- --------------------------------------------- --------------------------
Cash flows used infrom investing activities:
Additions to property, plant and equipment, net (53,538) (115,216)
(100,403)
AcquisitionAcquisitions - (162,463)
25
--------------- --------------------------------------------- --------------------------
Net cash used in investing activities (53,538) (277,679)
(100,378)
--------------- --------------------------------------------- --------------------------
Cash flows from financing activities:
Net change in revolving line of credit 53,758 214,282 15,785
Payments on term loans (26,502) (26,503) (32,143)
Redemption of acquisition indebtedness - (20,917)
(19,517)
(Redemption)/Proceeds (redemption) of IRBs and other,
net of proceeds 3,300 (8,057) 9,596
Change in outstanding checks in excess of cash (7,443) 41,457 8,291
Acquisition of treasury stock (87,818) (13,862) -
Common stock transactions 2,258 7,954
3,526
--------------- --------------------------------------------- --------------------------
Net cash (used in) provided by (used in) financing
activities (62,447) 194,354
(14,462)
--------------- --------------------------------------------- --------------------------
Net change in cash - (2,384) (128)
Cash, beginning of period - 2,384
200
--------------- --------------------------------------------- --------------------------
Cash, end of period $ - 72
=============== ==================-
=========================== ==========================
Net cash paid during the period for:
Interest $ 28,258 29,529
25,456
=============== ============================================= ==========================
Income taxes $ 71,899 92,558
49,713
=============== ============================================= ==========================
See accompanying notes to condensed consolidated financial statements.
7
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 generally accepted accounting
principles 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 19981999 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, 1998.1999.
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.
Certain prior year financial statement balances have been reclassified to
conform with the current year's presentation.
2. Acquisitions
On January 29, 1999,October 10, 2000, the Company acquiredsigned a definitive agreement with Crown
Crafts, Inc. to acquire certain assets of Image Industries,
Inc. ("Image")its Woven Division. Under the
agreement, the Company will pay approximately $40,000 in cash for approximately $192,000, including acquisition costs and the
assumption of $30,000 of tax exempt debt. The Image acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair values at the date of acquisition. The estimated
fair values were $205,366 for assets acquired and $42,903 for the liabilities
assumed.
The operating results of Image are included in the Company's 1999 consolidated
statement of earnings from the date of acquisition. The following unaudited pro
forma information presents a summary of consolidated results of operationssubstantially
all of the Companyfixed assets and Image as if the acquisition had occurred at the beginning of
1998.
Nine Months Ended
--------------------------------------
October 2, 1999 September 26,1998
--------------- -----------------
Net sales $ 2,323,566 2,146,137
Net earnings $ 116,702 92,422
Basic earnings per share $ 1.93 1.53
Diluted earnings per share $ 1.91 1.51
On March 9, 1999, the Company acquired all the outstanding capital stock of
Durkan Patterned Carpets, Inc. ("Durkan") for approximately 3,150 sharesinventory of the Company's common stock valued at $116,500 based ondivision. The acquisition is
expected to close by the closing stock priceend of the day the letter of intent was executed. The Durkan acquisition has been accounted
for using the pooling-of-interests method of accounting and, accordingly, the
Company's historical consolidated financial statements have been restated to
include the accounts and results of operations of Durkan.
3. Treasury Stock
In the thirdfourth quarter of 1999, the Company began acquiring shares2000.
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 its common
stock in connection with a stock repurchase program announced in September 1999.
That program authorizes the Company to purchase up to 5,000 common shares from
time to time on the open market at such times and at such pricesinventories are as the
Company's management may determine is appropriate. The Company purchased
approximately 701 shares of common stock at an aggregate cost of approximately
$13,900 as of October 2, 1999.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
=========================== ==========================
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
(In thousands)
(Unaudited)
4. Receivables
Receivables are as follows:
October 2, 1999 December 31, 1998
--------------- -----------------
Customers, trade $ 447,775 385,783
Other 3,300 4,378
--------------- -----------------
451,075 390,161
Less allowance for discounts, returns,
claims doubtful accounts 65,731 58,233
--------------- -----------------
Net receivables $ 385,344 331,928
=============== =================
5. Inventories
The components of inventories are as
follows:
October 2, 1999 December 31, 1998
--------------- -----------------
Finished goods $ 274,755 219,776
Work in process 72,008 60,266
Raw materials 190,816 143,795
--------------- -----------------
Total inventories $ 537,579 423,837
=============== =================
6. Other assets
Other assets are as follows:
October 2, 1999
September 30, 2000 December 31, 1998
--------------- -----------------1999
--------------------------- --------------------------
Goodwill, net of accumulated amortization of
$12,387$15,546 and $10,363,$13,171, respectively $ 97,344 85,972113,185 113,560
Other assets 9,966 17,712
--------------- -----------------6,359 10,089
--------------------------- --------------------------
Total other assets $ 107,310 103,684
=============== =================
9
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
(Unaudited)
119,544 123,649
=========================== ==========================
7.6. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as
follows:
October 2, 1999September 30, 2000 December 31, 1998
--------------- -----------------1999
--------------------------- --------------------------
Outstanding checks in excess of cash $ 68,351 26,89734,930 42,373
Accounts payable, trade 171,739 159,966195,989 159,812
Accrued expenses 99,334 126,023107,150 83,253
Accrued compensation 62,445 51,151
--------------- -----------------73,471 54,954
--------------------------- --------------------------
Total accounts payable and accrued expenses $ 401,869 364,037
expenses =============== =================411,540 340,392
=========================== ==========================
7. Property, Plant and Equipment
Effective January 1, 2000, the Company changed the estimated useful
lives 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 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 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. The Company received approximately
$195,000 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.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OnEffective January 29, 1999,1, 2000, the Company acquiredchanged 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 Image Industries,
Inc. ("Image") for approximately $192 million, including acquisition costs andits Woven Division. Under the
assumption of $30 million of tax exempt debt. The Image acquisition has
been accounted for under the purchase method of accounting.
On March 9, 1999,agreement, the Company acquiredwill pay approximately $40 million in cash for
substantially all of the outstanding capital stock of
Durkan Patterned Carpets, Inc. ("Durkan") for approximately 3.1 million sharesfixed assets and inventory of the Company's common stock valued at $116.5 million based ondivision. The
acquisition is expected to close by the closing
stock price the day the letterend of intent was executed. The Durkan acquisition
has been accounted for using the pooling of interests method of accounting and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of operations of Durkan.
These acquisitions have created opportunities to enhance Mohawk's operations
by (i) broadening price points,(ii) increasing vertical integration efforts,
(iii) expanding distribution capabilities and (iv) facilitating entry into niche
businesses.
In the third quarter of 1999, the Company began acquiring shares of its common
stock in connection with a stock purchase program announced in September 1999.
That program authorized the Company to purchase up to 5 million common shares
from time to time on the open market at such times and at such prices as the
Company's management may determine is appropriate. As of October 2, 1999, the
Company had purchased .7 million shares of common stock at an aggregate cost of
$13.9 million
Through the Company's restructuring efforts over the past three years, new
information technology systems have been installed throughout all of the
organization, most of which are Year 2000 compliant. In addition, the Company
has concluded identification of all other significant information technology
systems that are not Year 2000 compliant. The Company has completed its review
of equipment and software with the respective vendors from whom the equipment
and software was purchased to address any noncompliance issues. The Company has
identified certain Year 2000 issues with respect to its business systems. The
Company has formed a committee of employees familiar with its information
technology systems to assess and prioritize the need to act, on the basis of
each system's importance, to ensure that its business systems will be made Year
2000 compliant. The Company has also completed a review of all process control
systems, both proprietary and non-proprietary. This review revealed that
certain Year 2000 issues exist. Although the Company can provide no assurances,
all upgrades have been substantially completed, and testing of these upgrades
will continue into the fourth quarter of 1999.2000.
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 has completedis currently analyzing the reviewimplications of its top suppliersboth SAB101
and customers to
determine its progress in becoming Year 2000 compliant. The review indicated
that all of its major suppliers and customers appear to be in the process of
resolving any of their Year 2000 compliance issues and that they do not foresee
any material problems.EITF 00-10. The Company continues to follow-up with all of its
suppliersbelieves 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 customers to insure that all potential problems, including those
of its individual plant locationsHedging Activities". In 2000, the
Financial Accounting Standards Board ("FASB") issued FAS No. 138 "Accounting for
Certain Derivative Instruments and local suppliers, are managed correctly.
If the Company cannot successfully and timely resolve its Year 2000 issues,
its business, results of operations and financial condition could be materially
adversely affected.Certain Hedging Activities". The Company has not developed a contingency plan inis
currently analyzing the eventimplications of a Year 2000 problem, however, based upon the results of its internal
review, the Company does not believe a contingency plan is necessary.both FAS No. 131 and FAS No. 138. The
Company believes that these will however, continue to evaluatenot have a material impact on the need for a contingency plan.Company's
consolidated financial statements.
Results of Operations
Quarter Ended September 30, 2000 as Compared with Quarter Ended October 2, 1999 As Compared With Quarter Ended September 26, 1998
- -------------------------------------------------------------------------------
Net sales for the quarter ended October 2, 1999September 30, 2000 were $809.9$838.5 million,
which
representedreflecting an increase of 13% from$28.6 million, or approximately 4%, over the $718.8$809.9
million reported in the quarter ended October 2, 1999. All major product
categories achieved sales increases for the third quarter of 1998.2000 as compared to
1999. The Company believes that the third quarter 1999of 2000 net sales increase was
attributable to internal growth and the impact of the Image acquisition.growth.
Gross profit for the third quarter of the current year was $214.2 million
(25.5% of net sales) and represented an increase over the gross profit of $203.2
million (25.1% of net sales). In for the third quarterprior year's quarter. Gross profit as a
percentage of 1998, gross profitsales was $177.8
million (24.7%favorably impacted by productivity improvements and an
increase in the estimated useful lives of net sales).
11
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
$119.3$127.2 million (14.7%(15.2% of net sales) compared to $108.3$119.3 million (15.1%(14.7% of net
sales) for the prior year's third quarter. The decreaseincrease was primarily due to
better leveragingstart up expenses associated with the expansion of these expenses againstthe Company's hard surfaces
product lines throughout 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
higher sales volumesettlement 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 1999.connection
with the settlement.
Interest expense for the current periodquarter was $8.3$10.2 million compared to $7.2$8.3
million in the third quarter of 1998.1999. The primary factor forfactors contributing to the
increase was an increase in debt levels, which was attributable to the stock
repurchase program and an increase in the third quarter of 1999weighted average borrowing rate
compared to the third quarter of 1998 primarily due to the Image acquisition.
In1999.
Income tax expense was $26.9 million, or 39% of earnings before income
taxes in the current period, income tax expense wasquarter compared to $29.4 million, or 39.5% of earnings
before income taxes compared to $24.4 million, or 39.7% of earnings
before income taxes, infor the prior year's third quarter of 1998. The higher income tax rate in
1998 is due to the impact of prior-year restatements related to the acquisitions
of World Carpets, Inc. ("World") and Durkan.quarter.
Nine months Ended September 30, 2000 as Compared with Nine Months Ended October
- -------------------------------------------------------------------------------
2, 1999
As Compared With Nine Months Ended September
- ------------------------------------------------------------------------------
26, 1998
- ---------------
Net sales for the first nine months ended October 2, 1999September 30, 2000 were $2,307.7$2,456.4
million, which representedreflecting an increase of 16% from$148.7 million, or approximately 6%, over the
$1,997.7$2,307.7 million reported
for the first nine months of 1998. This sales increase was attributable to
favorable industry conditions, internal growth, the impact of the Image
acquisition and four additional business days in the first nine months of fiscal
1999 when compared tomonth period ended October 2, 1999.
All major product categories achieved sales increases for the first nine months of
fiscal 1998.2000 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). In for the first nine months of 1998, gross1999. Gross
profit as a percentage of sales was $491.8
million (24.6% of net sales). Much of theimpacted by favourable manufacturing
efficiencies, product mix and an increase in gross profit can be
attributedthe 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 favorable product mix, improved productivity,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 better
leveraging of expenses with higher sales volume.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
$361.9$379.0 million (15.7%(15.4% of net sales) compared to $316.1$361.9 million (15.8%(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 $23.9$28.6 million compared to $23.3$23.9
million in the prior year's first nine months. The primary factor forcontributing
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 the
prior year.
In the current period, income tax expense was $76.4 million, or 39.5% of earnings
before income taxes compared to $60.6 million, or 40.2% of earnings
before income taxes, infor the prior year's first nine months. The higher income
tax rate in 1998 is due to the impact of prior-year restatements related to the
acquisitions of World and Durkan.
Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital
expenditures, acquisitions and acquisitions.stock repurchases. The Company's capital needs
are met through a combination of internally generated funds, bank credit lines
and credit terms from suppliers.
The level of accounts receivable increased from $331.9$337.8 million at the
beginning of 19992000 to $385.3$394.9 million at October 2, 1999.September 30, 2000. The $53.4$57.1 million
increase resulted primarilywas attributable to strong sales growth. Inventories increased from
seasonally higher sales volume in the third
quarter as compared to December and the acquisition of Image. Inventories rose
from $423.8$494.8 million at the beginning of 19992000 to $537.6$592.8 million at October 2,
1999,September 30, 2000,
due primarily to requirementsthe need for a higher level of inventory to meet the increased
sales volume and seasonal customer demand and the acquisition
of Image.demand.
11
Capital expenditures totaled $278$53.5 million for the first nine months of
1999
(including amounts paid for the Image acquisition)2000, 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 19992000 is expected to range from $30$21 million to $40$31
million, the majority of which will be used to purchase equipment to increase
production capacity and productivity.
During 1999, the Company's Board of Directors authorized the repurchase of
up to 10 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. Since the inception of the program, a total
of approximately 7.8 million shares have been purchased at an aggregate cost of
approximately $172.0 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.
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, through the end of the second quarter of 1999, the carpet
industry has experienced moderate inflation in the prices of certain
raw materials and
outside processing for the last three years.fuel-related costs. The Company has generally passed along nylon fiber costprice
increases to its customers.
12
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 ourthe 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.
Risks relatedA failure by Mohawk to acquisitions.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'sMohawk management's attention and its resources; and
. dependence on retaining and training acquired key personnel.
The carpet industry is cyclical.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, in spending for
durable goods, and 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.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.
Mohawk's business is competitive.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 costscost 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.
13
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.cleanup, which could negatively
- -------------------------------------------------------------------------------------------------------------------------------
impact profitability.
- ---------------------
Various federal, state and local environmental laws govern the use of
Mohawk's facilities. Such laws govern:
. dischargedischarges 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 affecteffect 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 Year 2000
compliance and similar
matters, and those preceded by, followed by or that otherwise include the words
"believes," "expects," "anticipates," "intends," "estimates,""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-lookingForward-
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
floor-coveringfloorcovering markets served by Mohawk; failure of our vendors,
customers and suppliers to timely identify and adequately address Year 2000
compliance issues; competition from other carpet, rug and
floor-covering
manufacturers,floorcovering manufacturers; oil price increases; raw material prices,prices; timing
and level of capital expenditures,expenditures; the successful integration of acquisitions,
including the challenges inherent in diverting Mohawk's managementMohawk management's attention and
resources from other strategic matters and from operational matters for an
extended period of time,time; the successful introduction of new products,products; the
successful rationalization of existing operations,operations; and other risks identified
from time to time in the Company's SEC reports and public announcements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk- sensitiverisk-sensitive instruments do not subject the Company
to material market risk exposure.exposures.
PART II. OTHER INFORMATION
Item 1. Legal ProceedingsProcedings
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 fixingprice-fixing
regarding polypropylene products in violation of Section One of the Sherman Act.
In September 1997, the Court determined that the plaintiffs met their burden of
establishing the requirements for class certification
14
and granted the plaintiffs' motion to certify the
class. 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 carpet in the State of California
and seek damages for alleged violations of California antitrust and unfair
competition laws. The complaints filed do not specify any amount of damages but
do request for any unlawful conduct to be enjoined and treble damages plus
reimbursement for fees and costs. 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 a competitor and one of its
subsidiaries.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, and 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 purchasespurchasers 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
10.1 Amended and Restated Note Purchase agreement dated as of August 31,
1999 for $100 million 8.46% Senior Notes due September, 2004 among
Mohawk Industries, Inc., The Prudential Insurance Company of America,
Principal Life Insurance Company, John Hancock Mutual Life Insurance
Company, Massachusetts Mutual Life Insurance Company, Alexander
Hamilton Life Insurance Company of America and The Franklin Life
Insurance Company.
10.2 Amended and Restated Series Note Agreement dated as of August 31, 1999
for $85 million due September 1, 2005 among Mohawk Industries, Inc.,
John Hancock Mutual Life Insurance Company, John Hancock Variable Life
Insurance Company, Investors Partner Life Insurance Company, Principal
Life Insurance Company, The Franklin Life Insurance Company and The
Prudential Insurance Company of America.
10.3 Second Consolidated, Amended and Restated Note Agreement dated as of
August 31, 1999 for $50 million, among Mohawk Industries, Inc., and The
Prudential Insurance Company of America.
15
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 EarningsEarnings.
27 Financial Data Schedule
27.1 1999 Financial Data Schedule (restated)
27.2 1998 Financial Data Schedule (restated)
(b) Reports on Form 8-K
None.
16Current Report on Form 8-K: Second quarter 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.
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 8, 19993, 2000 By: /s/ David L. Kolb
-----------------
DAVID L. KOLB, Chairman of the Board and
Chief Executive Officer (principal executive officer)
Dated: November 8, 19993, 2000 By: /s/ John D. Swift
-----------------
JOHN D. SWIFT, Chief Financial Officer,
Vice President-Finance and Assistant Secretary
(principal financial and accounting officer)
1716
EXHIBIT INDEX
No. Description
- --- -----------
(a) Exhibits
10.13.2 Amended and Restated Note Purchaserestated by-laws.
10 Consulting agreement dated as of August 31,
1999 for $100 million 8.46% Senior Notes due September, 2004 amongbetween Mohawk Industries, Inc., The Prudential Insurance Company of America,
Principal Life Insurance Company, John Hancock Mutual Life Insurance
Company, Massachusetts Mutual Life Insurance Company, Alexander
Hamilton Life Insurance Company of America and The Franklin Life
Insurance Company.
10.2 Amended and Restated Series Note AgreementDavid L. Kolb
dated as of August 31,
1999 for $85 million due September 1, 2005 among Mohawk Industries,
Inc., John Hancock Mutual Life Insurance Company, John Hancock
Variable Life Insurance Company, Investors Partner Life Insurance
Company, Principal Life Insurance Company, The Franklin Life
Insurance Company and The Prudential Insurance Company of America.
10.3 Second Consolidated, Amended and Restated Note Agreement dated as of
August 31, 1999 for $50 million, among Mohawk Industries, Inc., and
The Prudential Insurance Company of America.1,2000.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
27.1 1999 Financial Data Schedule (restated)
27.2 1998 Financial Data Schedule (restated)
1817