================================================================================
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 March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
01-19826
MOHAWK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1604305
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
P.O. Box 12069, 160 S. Industrial Blvd., Calhoun, Georgia 30701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 629-7721
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[_]
The number of shares outstanding of the issuer's classes of capital stock as
of May 11, 2001, the latest practicable date, is as follows: 52,286,280 shares
of Common Stock, $.01 par value.
MOHAWK INDUSTRIES, INC.
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
Part II. Other Information
Item 1. Legal proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
March 31, 2001 December 31, 2000
------------------------------ -------------------------
Current assets:
Receivables $ 389,042 358,809
Inventories 621,308 574,595
Prepaid expenses 21,818 26,973
Deferred income taxes 66,474 66,474
------------------------------ -------------------------
Total current assets 1,098,642 1,026,851
------------------------------ -------------------------
Property, plant and equipment, at cost 1,249,647 1,238,200
Less accumulated depreciation and
amortization 607,978 588,147
------------------------------ -------------------------
Net property, plant and equipment 641,669 650,053
------------------------------ -------------------------
Other assets 117,970 118,474
------------------------------ -------------------------
Total assets $ 1,858,281 1,795,378
============================== =========================
See accompanying notes to condensed consolidated financial statements.
3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
March 31, 2001 December 31, 2000
------------------------------ -------------------------
Current liabilities:
Current portion of long-term debt $ 203,635 224,391
Accounts payable and accrued expenses 422,756 375,268
------------------------------ -------------------------
Total current liabilities 626,391 599,659
Deferred income taxes 75,808 75,808
Long-term debt, less current portion 378,310 365,437
Other long-term liabilities 138 114
------------------------------ -------------------------
Total liabilities 1,080,647 1,041,018
------------------------------ -------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 60,964 and 60,838 shares
issued in 2001 and 2000, respectively 610 608
Additional paid-in capital 185,735 183,303
Retained earnings 785,737 758,531
Accumulated other comprehensive loss (1,398) -
------------------------------ -------------------------
970,684 942,442
Less treasury stock at cost; 8,703 shares
in 2001 and 8,538 shares in 2000 193,050 188,082
------------------------------ -------------------------
Total stockholders' equity 777,634 754,360
------------------------------ -------------------------
Total liabilities and stockholders'
equity $ 1,858,281 1,795,378
============================== =========================
See accompanying notes to condensed consolidated financial statements.
4
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
----------------------------------------------------------------
March 31, 2001 April 1, 2000
------------------------------ -------------------------
Net sales $ 743,683 765,083
Cost of sales 565,658 574,520
------------------------------ -------------------------
Gross profit 178,025 190,563
Selling, general and administrative expenses 124,420 124,857
------------------------------ -------------------------
Operating income 53,605 65,706
------------------------------ -------------------------
Other expense:
Interest expense 8,952 8,740
Other expense, net 1,469 773
------------------------------ -------------------------
10,421 9,513
------------------------------ ------------------------
Earnings before income taxes 43,184 56,193
Income taxes 15,978 22,196
------------------------------ ------------------------
Net earnings $ 27,206 33,997
============================== ========================
Basic earnings per share $ 0.52 0.61
============================== ========================
Weighted-average common shares outstanding 52,361 55,611
============================== ========================
Diluted earnings per share $ 0.51 0.61
============================== ========================
Weighted-average common and dilutive potential
common shares outstanding 52,970 56,097
============================== ========================
See accompanying notes to condensed consolidated financial statements.
5
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
-----------------------------------------------------------------
March 31, 2001 April 1, 2000
------------------------------ -------------------------
Cash flows from operating activities:
Net earnings $ 27,206 33,997
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 20,943 20,875
Loss (gain) on sale of property, plant
and equipment 89 (45)
Changes in operating assets and
liabilities:
Receivables (30,233) (33,505)
Inventories (46,713) (58,493)
Accounts payable and accrued expenses 55,397 89,504
Other assets and prepaid expenses 4,708 10,400
Other liabilities 25 105
------------------------------ -------------------------
Net cash provided by operating
activities 31,422 62,838
------------------------------ -------------------------
Cash flows from investing activities:
Additions to property, plant and equipment,
net (11,697) (18,059)
------------------------------ -------------------------
Net cash used in investing
activities (11,697) (18,059)
------------------------------ -------------------------
Cash flows from financing activities:
Net change in revolving line of credit 13,172 7,524
Net change in asset securitization (20,729) -
Redemption (proceeds) of IRBs and other, net (326) 2,405
Change in outstanding checks in excess of cash (9,308) (9,496)
Acquisition of treasury stock (4,968) (45,849)
Common stock transactions 2,434 637
------------------------------ -------------------------
Net cash (used in) provided by
financing activities (19,725) (44,779)
------------------------------ -------------------------
Net change in cash - -
Cash, beginning of period - -
------------------------------ -------------------------
Cash, end of period $ - -
============================== =========================
Net cash paid during the period for:
Interest $ 10,681 7,983
============================== =========================
Income taxes $ 1,939 9,825
============================== =========================
See accompanying notes to condensed consolidated financial statements.
6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's 2000 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, 2000.
Certain prior period financial statement balances have been reclassified to
conform with the current period's presentation.
The Company's basic earnings per share are computed by dividing net
earnings by the weighted-average common shares outstanding, and diluted earnings
per share are computed by dividing net earnings by the weighted-average common
and dilutive potential common shares outstanding. Dilutive common stock options
are included in the diluted earnings per share calculation using the treasury
stock method.
2. Receivables
Receivables are as follows:
March 31, 2001 December 31, 2000
---------------------------- -----------------------
Customers, trade $ 458,663 433,042
Other 3,017 4,125
---------------------------- -----------------------
461,680 437,167
Less allowance for discounts, returns, claims
and doubtful accounts 72,638 78,358
---------------------------- -----------------------
Net receivables $ 389,042 358,809
============================ =======================
Effective January 1, 2001 the Company adopted Statement of Financial
Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-A Replacement of FASB
Statement No. 125 ("SFAS 125")," which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral. The
provisions of SFAS 140 carry over most of the guidance outlined in SFAS 125 and
further establish accounting and reporting standards with a financial-components
approach that focuses on control. Under this approach, financial assets or
liabilities are recognized when control is established and derecognized when
control has been surrendered or the liability has been extinguished. In
addition, specific implementation guidelines have been established to further
distinguish transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS 140 is effective prospectively for transfers occurring
after March 31, 2001 and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. The adoption of
SFAS 140 did not have a material effect on the Company's results of operations.
7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
3. Inventories
The components of inventories are as follows:
March 31, 2001 December 31, 2000
---------------------------- -----------------------
Finished goods $ 322,086 295,447
Work in process 81,505 73,658
Raw materials 217,717 205,490
---------------------------- -----------------------
Total inventories $ 621,308 574,595
============================ =======================
4. Other assets
Other assets are as follows:
March 31, 2001 December 31, 2000
---------------------------- -----------------------
Goodwill, net of accumulated amortization of
$17,157 and $16,355, respectively $ 111,574 112,376
Other assets 6,396 6,098
---------------------------- -----------------------
Total other assets $ 117,970 118,474
============================ =======================
5. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
March 31, 2001 December 31, 2000
---------------------------- -----------------------
Outstanding checks in excess of cash $ 33,587 42,895
Accounts payable, trade 197,435 165,108
Accrued expenses 120,863 104,313
Accrued compensation 70,871 62,952
---------------------------- -----------------------
Total accounts payable and accrued
expenses $ 422,756 375,268
============================ =======================
6. Derivative Financial Instruments
Effective January 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 133-"Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and its amendments, which require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in its fair value are
either offset against the change in fair value of the assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings.
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
The Company engages in activities that expose it to various market risks,
including the effects of a change in interest rates. This financial exposure is
managed as an integral part of the Company's risk management program, which
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on operating results. The Company does not engage in
speculative transactions, nor does it hold or issue financial instruments for
trading purposes. The Company maintains an interest rate risk management
strategy that uses derivative instruments, currently interest rate swaps, to
minimize significant, unanticipated earnings fluctuations caused by volatility
in interest rates.
The Company formally documents all hedging instruments and hedging items,
as well as its risk management objective and strategy for undertaking various
hedged items. This process includes linking all derivatives that are designated
as cash flow hedges to specific liabilities on the balance sheet. The Company
also assesses, both at inception and on an ongoing basis, whether the
derivatives that are used in the hedging transaction are highly effective in
offsetting changes in cash flows of the hedged items. When it is determined that
a derivative is not highly effective, the derivative expires, or is sold,
terminated, or exercised, the Company discontinues hedge accounting for that
specific hedge instrument.
The Company uses interest rate swap contracts to adjust a proportion of
total debt that is subject to variable interest rates. Under an interest rate
swap contract, the Company agrees to pay a fixed rate of interest times a
notional principal amount, and to receive in return an amount equal to a
specified variable rate of interest times the same notional principal. The
contract fair value is reflected on the balance sheet and related gains and
losses are deferred in other comprehensive income. These deferred gains and
losses are recognized through earnings as an adjustment to interest expense over
the same period in which the related interest payments being hedged are
recognized in income. As of March 31, 2001, the Company had an interest swap
agreement outstanding for $100,000, which will be in effect until January 2,
2006. Under the terms of the swap agreement, the Company pays a fixed interest
rate of 5.82%. The fair value of the swap agreement as of March 31, 2001
resulted in an unrealized loss, net of taxes, of $1,398 and, accordingly, the
unrealized loss is recorded in other comprehensive income.
7. Comprehensive income
Three Months Ended
-----------------------------------------------------------------
March 31, 2001 April 1, 2000
------------------------------ -------------------------
Net earnings $ 27,206 33,997
Other Comprehensive Loss:
Unrealized loss on derivative
instruments,
net of income taxes ( 1,398) -
------------------------------ -------------------------
Comprehensive Income $ 25,808 33,997
------------------------------ -------------------------
8. 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.
In December 1995, the Company and four other carpet manufacturers were
added as defendants in a purported class action lawsuit, In re Carpet Antitrust
Litigation, pending in the United States District Court for the Northern
District of Georgia, Rome Division. The amended complaint alleges price-fixing
regarding polypropylene products in violation of Section One of the Sherman Act.
In September 1997, the Court granted the plaintiffs' motion to certify the
class. In October 1998, two plaintiffs, on behalf of an alleged class of
purchasers of nylon carpet products, filed a complaint in the United States
District Court for the Northern District of Georgia against the Company and two
of its subsidiaries, as well as certain competitors. The
9
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
complaint alleges that the Company acted in concert with other carpet
manufacturers to restrain competition in the sale of certain nylon carpet
products. The Company filed an answer, denied the allegations in the complaint
and set forth its defenses.
On August 11, 2000, the Company presented to the Court the terms of an
agreement in principle to settle these two cases. On February 5, 2001, the Court
dismissed all claims against the Company and granted final approval to the
settlement. Under the terms of the settlement agreement, the Company contributed
$13,500 at the beginning of the second quarter of 2001 to a settlement fund to
resolve price-fixing claims brought by a class of purchasers of polypropylene
carpet and a proposed settlement class of purchasers of nylon carpet. The
Company recorded a charge of $7,000 in the third quarter of 2000, in connection
with the lawsuit. The Company denies all liability and wrongdoing and has agreed
to settle these claims in order to avoid the costs of further litigation.
The 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarter Ended March 31, 2001 as Compared with Quarter Ended April 1, 2000
- -------------------------------------------------------------------------
Net sales for the quarter ended March 31, 2001 were $743.7 million,
reflecting a decrease of $21.4 million, or approximately 3%, from the $765.1
million reported in the quarter ended April 1, 2000. With the exception of
hardsurface and rug product categories, all other product categories experienced
sales decreases for the first quarter of 2001 as compared to 2000. The Company
believes that the first quarter of 2001 net sales decrease was attributable to
the cyclical down turn in the overall economy, which led to declining industry
shipments.
Gross profit for the first quarter of the current year was $178.0 million
(23.9% of net sales) and represented a decrease from the gross profit of $190.6
million (24.9% of net sales) for the prior year's quarter. Gross profit as a
percentage of sales in the current quarter was unfavorably impacted when
compared to the first quarter of 2000 by raw material price increases, resulting
from rising oil and gas prices, losses on the disposition of Crown Crafts
obsolete inventory, and an unfavorable product mix.
Selling, general and administrative expenses for the current quarter were
$124.4 million (16.7% of net sales) compared to $124.9 million (16.3% of net
sales) for the prior year's first quarter. The increased percentage was
primarily due to the increase in personnel costs as a result of rolling out the
hardsurface product lines, offset by cost savings realized in the first quarter.
Interest expense for the current quarter was $9.0 million compared to $8.7
million in the first quarter of 2000.
Income tax expense was $16.0 million, or 37% of earnings before income
taxes in the current quarter compared to $22.2 million, or 39.5% of earnings
before income taxes for the prior year's first quarter. The reduction in the
effective income tax rate was primarily due to tax planning strategies.
Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital
expenditures and 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 $358.8 million at the
beginning of 2001 to $389.0 million at March 31, 2001. The $30.2 million
increase was attributable to seasonal fluctuation. Inventories increased from
$574.6 million at the beginning of 2001 to $621.3 million at March 31, 2001, due
primarily to the need for a higher level of inventory to meet seasonal sales
demand and the rollout of the hardsurface products, Ralph Lauren and Crown
Crafts product lines.
Capital expenditures totaled $11.7 million for the first three months of
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 2001 is expected to range from $55 million to $65
million, the majority of which will be used to purchase equipment to increase
production capacity and productivity.
The Company's Board of Directors has authorized the repurchase of up to 15
million shares of its outstanding common stock. For the quarter ended March 31,
2001, a total of approximately 171 shares of the Company's common stock was
purchased at an aggregate cost of approximately $5.0 million. Since the
inception of the program, a total of approximately 8.9 million shares have been
repurchased at an aggregate cost of approximately $197.6 million. All of these
repurchases have been financed through the Company's operations and revolving
line of credit.
11
Impact of Inflation
Inflation affects the Company's manufacturing costs and operating expenses.
The carpet industry has experienced significant inflation in the prices of raw
materials and fuel-related costs, beginning in the third quarter of 1999. For
the period from 1998 through the end of the second quarter of 1999, the carpet
industry has experienced moderate inflation in the prices of raw materials and
fuel-related costs. The Company has generally passed along nylon fiber price
increases to its customers although additional costs resulting from recent
significant inflationary pressures may not be fully recoverable through such
price increases in the near-term.
Seasonality
The carpet business is seasonal, with the Company's second, third and
fourth quarters typically producing higher net sales and operating income. By
comparison, results for the first quarter tend to be the weakest. This
seasonality is primarily attributable to consumer residential spending patterns
and higher installation levels during the spring and summer months.
Certain factors affecting the Company's performance
In addition to the other information provided in this Form 10-Q, the
following risk factors should be considered when evaluating an investment in
shares of Mohawk common stock.
A failure by Mohawk to complete acquisitions and successfully integrate acquired
- --------------------------------------------------------------------------------
operations could materially and adversely affect its business.
- --------------------------------------------------------------
Management intends to pursue acquisitions of complementary businesses as
part of its business and growth strategies. Although management regularly
evaluates acquisition opportunities, it cannot offer assurance that it will be
able to:
. successfully identify suitable acquisition candidates;
. obtain sufficient financing on acceptable terms to fund
acquisitions;
. complete acquisitions;
. integrate acquired operations into Mohawk's existing operations; or
. profitably manage acquired businesses.
Acquired operations may not achieve levels of sales, operating income or
productivity comparable to those of Mohawk's existing operations, or otherwise
perform as expected. Acquisitions may also involve a number of special risks,
some or all of which could have a material adverse effect on Mohawk's business,
results of operations and financial condition, including, among others:
. possible adverse effects on Mohawk's operating results;
. diversion of Mohawk management's attention and its resources; and
. dependence on retaining and training acquired key personnel.
The carpet industry is cyclical and a downturn in the overall economy could
- ---------------------------------------------------------------------------
lessen the demand for Mohawk's products and impair growth and profitability.
- ----------------------------------------------------------------------------
The carpet industry is cyclical and is influenced by a number of general
economic factors. Prevailing interest rates, consumer confidence, spending for
durable goods, disposable income, turnover in housing and the condition of the
residential and commercial construction industries (including the number of new
housing starts and the level of new commercial construction) all have an impact
on Mohawk's growth and profitability. In addition, sales of Mohawk's principal
products are related to construction and renovation of commercial and
residential buildings. Any adverse cycle could lessen the overall demand for
Mohawk's products and could, in turn, impair Mohawk's growth and profitability.
The carpet business is seasonal and this seasonality causes Mohawk's results of
- -------------------------------------------------------------------------------
operations to fluctuate on a quarterly basis.
- ---------------------------------------------
Mohawk is a calendar year end company and its results of operations for the
first quarter tend to be the weakest. Mohawk's second, third and fourth quarters
typically produce higher net sales and operating income. These results are
primarily due to consumer residential spending patterns and more carpet being
installed in the spring and summer months.
12
Mohawk's business is competitive and a failure by Mohawk to compete effectively
- -------------------------------------------------------------------------------
could have a material and adverse impact on Mohawk's results of operations.
- ---------------------------------------------------------------------------
Mohawk operates in a highly competitive industry. Mohawk and other
manufacturers in the carpet industry compete on the basis of price, style,
quality and service. Some of Mohawk's competitors may have greater financial
resources at their disposal. If competitors substantially increase production
and marketing of competing products, then Mohawk might be required to lower its
prices or spend more on product development, marketing and sales, which could
adversely affect Mohawk's profitability.
An increase in the cost of raw materials could negatively impact Mohawk's
- -------------------------------------------------------------------------
profitability.
- --------------
The cost of raw materials has a significant impact on the profitability of
Mohawk. In particular, Mohawk's business requires it to purchase large volumes
of nylon fiber and polypropylene resin, which is used to manufacture fiber. The
cost of these raw materials is related to oil prices. Mohawk does not have any
long-term supply contracts for any of these products. While Mohawk generally
attempts to match cost increases with price increases, large increases in the
cost of such raw materials could adversely affect its business, results of
operations and financial condition if it is unable to pass these costs through
to its customers.
Mohawk may be responsible for environmental cleanup, which could negatively
- ---------------------------------------------------------------------------
impact profitability.
- ---------------------
Various federal, state and local environmental laws govern the use of
Mohawk's facilities. Such laws govern:
. discharges to air and water;
. handling and disposal of solid and hazardous substances and waste;
and
. remediation of contamination from releases of hazardous substances
in Mohawk's facilities and off-site disposal locations.
Mohawk's operations are also governed by the laws relating to workplace safety
and worker health, which, among other things, establish asbestos and noise
standards and regulate the use of hazardous chemicals in the workplace. Mohawk
has taken and will continue to take steps to comply with these laws. Based upon
current available information, Mohawk believes that complying with environmental
and safety and health requirements will not require material capital
expenditures in the foreseeable future. However, Mohawk cannot provide assurance
that complying with these environmental or health and safety laws and
requirements will not adversely affect its business, results of operations and
financial condition. Future laws, ordinances or regulations could give rise to
additional compliance or remediation costs, which could have a material adverse
effect on its business, results of operations and financial condition.
Forward-Looking Information
Certain of the matters discussed in the preceding pages, particularly
regarding anticipating future financial performance, business prospects, growth
and operating strategies, proposed acquisitions, new products and similar
matters, and those preceded by, followed by or that otherwise include the words
"believes," "expects," "anticipates," "intends," "estimates" or similar
expressions constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended. For those statements,
Mohawk claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Forward-
looking statements involve a number of risks and uncertainties. The following
important factors, in addition to those discussed elsewhere in this document,
affect the future results of Mohawk and could cause those results to differ
materially from those expressed in the forward-looking statements: materially
adverse changes in economic conditions generally in the carpet, rug and
floorcovering markets served by Mohawk; competition from other carpet, rug and
floorcovering manufacturers; raw material prices; timing and level of capital
expenditures; the successful integration of acquisitions, including the
challenges inherent in diverting Mohawk management's attention and resources
from other strategic matters and from operational matters for an extended period
of time; the successful introduction of new products; the successful
rationalization of existing operations; and other risks identified from time to
time in the Company's SEC reports and public announcements. Any forward-looking
statements represent Mohawk's estimates only as of the date of this report and
should not be relied upon as representing Mohawk's estimates as of any
subsequent date. While Mohawk may elect to update forward-looking
13
statements at some point in the future, Mohawk specifically disclaims any
obligation to do so, even if Mohawk's estimates change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company engages in activities that expose it to various market risks,
including the effects of a change in interest rates. This financial exposure is
managed as an integral part of the Company's risk management program, which
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on operating results. The Company does not engage in
speculative transactions, nor does it hold or issue financial instruments for
trading purposes. The Company maintains an interest rate risk management
strategy that uses derivative instruments, currently interest rate swaps, to
minimize significant, unanticipated earnings fluctuations caused by volatility
in interest rates.
Interest rate sensitivity table as of March 31, 2001:
Expected Maturity Dates 2001 2002 2003 2004 2005 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ---- ----------
(In thousands)
Interest rate swaps:
Pay fixed/receive variable - - - - - $100,000 $100,000 $(2,220)
Average pay - - - - - 5.82%
Average receive - - - - - 5.71%
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 filed an
answer, denied the allegations in the complaint and set forth its defenses.
On August 11, 2000, the Company presented to the Court the terms of an
agreement in principle to settle these two cases. On February 5, 2001, the Court
dismissed all claims against the Company and granted final approval to the
settlement. Under the terms of the settlement agreement, the Company contributed
$13.5 million at the beginning of the second quarter of 2001 to a settlement
fund to resolve price-fixing claims brought by a class of purchasers of
polypropylene carpet and a proposed settlement class of purchasers of nylon
carpet. The Company recorded a charge of $7 million in the third quarter of
2000, in connection with the lawsuit. The Company denies all liability and
wrongdoing and has agreed to settle these claims in order to avoid the costs of
further litigation.
The 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
14
County of San Francisco, on behalf of a purported class based on indirect
purchasers of nylon carpet in the State of California and alleges violations of
California antitrust and unfair competition laws. The complaints described above
do not specify any specific amount of damages but do request injunctive relief
and treble damages plus reimbursement for fees and costs. The Company believes
it has meritorious defenses and intends to vigorously defend against these
actions.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
- --- -----------
11 Statement re: Computation of Per Share Earnings
(b) Reports on Form 8-K
Current Report on Form 8-K: Fourth quarter and year-end earnings press
release, dated February 8, 2001
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHAWK INDUSTRIES, INC.
Dated: May 11, 2001 By: /s/ Jeffrey S. Lorberbaum
--------------------------
JEFFREY S. LORBERBAUM, President and
Chief Executive Officer (principal
executive officer)
Dated: May 11, 2001 By: /s/ John D. Swift
-----------------
JOHN D. SWIFT, Chief Financial Officer,
Vice President-Finance and Assistant
Secretary (principal financial and
accounting officer)
16
EXHIBIT INDEX
No. Description
- --- -----------
(a) Exhibits
11 Statement re: Computation of Per Share Earnings
17