================================================================================
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 June 30, 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 August 3, 2001, the latest practicable date, is as follows: 52,401,233 shares
of Common Stock, $.01 par value.
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MOHAWK INDUSTRIES, INC.
INDEX
Page No.
-------
Part I. Condensed Consolidated Financial Information:
Item 1. Financial Statements (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
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 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
June 30, 2001 December 31, 2000
-------------------- ----------------------
Current assets:
Receivables $ 392,552 358,809
Inventories 619,177 574,595
Prepaid expenses 17,873 26,973
Deferred income taxes 66,474 66,474
-------------------- ----------------------
Total current assets 1,096,076 1,026,851
-------------------- ----------------------
Property, plant and equipment, at cost 1,262,172 1,238,200
Less accumulated depreciation and
amortization 626,614 588,147
-------------------- ----------------------
Net property, plant and equipment 635,558 650,053
-------------------- ----------------------
Other assets 116,788 118,474
-------------------- ----------------------
Total assets $ 1,848,422 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)
June 30, 2001 December 31, 2000
-------------------- ------------------------
Current liabilities:
Current portion of long-term debt $ 236,348 224,391
Accounts payable and accrued expenses 392,560 375,268
-------------------- ------------------------
Total current liabilities 628,908 599,659
Deferred income taxes 75,808 75,808
Long-term debt, less current portion 319,456 365,437
Other long-term liabilities 781 114
-------------------- ------------------------
Total liabilities 1,024,953 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; 61,029 and 60,838 shares issued
in 2001 and 2000, respectively 610 608
Additional paid-in capital 187,369 183,303
Retained earnings 832,203 758,531
Accumulated other comprehensive loss (617) -
-------------------- ------------------------
1,019,565 942,442
Less treasury stock at cost; 8,796 shares in
2001 and 8,538 shares in 2000 196,096 188,082
-------------------- ------------------------
Total stockholders' equity 823,469 754,360
-------------------- ------------------------
Total liabilities and stockholders' equity $ 1,848,422 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
------------------------------------------------------
June 30, 2001 July 1, 2000
---------------------- ----------------------
Net sales $ 828,348 852,808
Cost of sales 611,628 636,926
---------------------- ----------------------
Gross profit 216,720 215,882
Selling, general and administrative expenses 133,159 126,971
---------------------- ----------------------
Operating income 83,561 88,911
---------------------- ----------------------
Other expense:
Interest expense, net 8,232 9,674
Other expense, net 1,574 1,215
---------------------- ----------------------
9,806 10,889
---------------------- ----------------------
Earnings before income taxes 73,755 78,022
Income taxes 27,289 30,819
---------------------- ----------------------
Net earnings $ 46,466 47,203
====================== ======================
Basic earnings per share $ 0.89 0.88
====================== ======================
Weighted-average common shares outstanding 52,266 53,836
====================== ======================
Diluted earnings per share $ 0.88 0.87
====================== ======================
Weighted-average common and dilutive potential
common shares outstanding 52,882 54,336
====================== ======================
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)
Six Months Ended
------------------------------------------------------
June 30, 2001 July 1, 2000
---------------------- ---------------------
Net sales $ 1,572,031 1,617,891
Cost of sales 1,177,286 1,211,446
---------------------- ---------------------
Gross profit 394,745 406,445
Selling, general and administrative expenses 257,579 251,828
---------------------- ---------------------
Operating income 137,166 154,617
---------------------- ---------------------
Other expense:
Interest expense, net 17,184 18,414
Other expense, net 3,043 1,988
---------------------- ---------------------
20,227 20,402
---------------------- ---------------------
Earnings before income taxes 116,939 134,215
Income taxes 43,267 53,015
---------------------- ---------------------
Net earnings $ 73,672 81,200
====================== =====================
Basic earnings per share $ 1.41 1.48
====================== =====================
Weighted-average common shares outstanding 52,314 54,723
====================== =====================
Diluted earnings per share $ 1.39 1.47
====================== =====================
Weighted-average common and dilutive potential
common shares outstanding 52,926 55,217
====================== =====================
See accompanying notes to condensed consolidated financial statements.
6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
------------------------------------------------------------
June 30, 2001 July 1, 2000
--------------------------- --------------------------
Cash flows from operating activities:
Net earnings $ 73,672 81,200
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 42,019 41,819
Provision for doubtful accounts 3,680 8,447
Loss on sale of property, plant 1,054 63
and equipment
Changes in operating assets and liabilities:
Receivables (37,423) (66,846)
Inventories (44,582) (81,879)
Accounts payable and accrued expenses 28,994 85,844
Other assets and prepaid expenses 8,855 12,554
Other liabilities 667 305
--------------------------- --------------------------
Net cash provided by operating activities 76,936 81,507
--------------------------- --------------------------
Cash flows from investing activities:
Additions to property, plant and equipment, net (26,647) (34,842)
--------------------------- --------------------------
Net cash used in investing activities (26,647) (34,842)
--------------------------- --------------------------
Cash flows from financing activities:
Net change in revolving line of credit (45,408) 15,498
Net change in asset securitization 12,002 -
Net (redemption) proceeds of IRBs and other (618) 1,933
Change in outstanding checks in excess of cash (12,319) 18,136
Acquisition of treasury stock (8,014) (83,438)
Common stock transactions 4,068 1,206
--------------------------- --------------------------
Net cash used in financing
activities (50,289) (46,665)
--------------------------- --------------------------
Net change in cash - -
Cash, beginning of period - -
--------------------------- --------------------------
Cash, end of period $ - -
=========================== ==========================
Net cash paid during the period for:
Interest $ 18,634 18,805
=========================== ==========================
Income taxes $ 32,322 37,086
=========================== ==========================
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 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
adjustments) considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 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:
June 30, 2001 December 31, 2000
--------------------------- --------------------------
Customers, trade $ 464,019 433,042
Other 1,749 4,125
--------------------------- --------------------------
465,768 437,167
Less allowance for discounts, returns, claims
and doubtful accounts 73,216 78,358
--------------------------- --------------------------
Net receivables $ 392,552 358,809
=========================== ==========================
3. Inventories
The components of inventories are as follows:
June 30, 2001 December 31, 2000
--------------------------- --------------------------
Finished goods $ 319,990 295,447
Work in process 84,245 73,658
Raw materials 214,942 205,490
--------------------------- --------------------------
Total inventories $ 619,177 574,595
=========================== ==========================
4. Other assets
Other assets are as follows:
June 30, 2001 December 31, 2000
--------------------------- --------------------------
Goodwill, net of accumulated amortization of
$17,959 and $16,355, respectively $ 110,772 112,376
Other assets 6,016 6,098
--------------------------- --------------------------
Total other assets $ 116,788 118,474
=========================== ==========================
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
5. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as
follows:
June 30, 2001 December 31, 2000
--------------------------- --------------------------
Outstanding checks in excess of cash $ 30,576 42,895
Accounts payable, trade 185,708 165,108
Accrued expenses 109,002 104,313
Accrued compensation 67,274 62,952
--------------------------- --------------------------
Total accounts payable and accrued expenses $ 392,560 375,268
=========================== ==========================
6. Comprehensive income
Comprehensive Income is as follows:
Three Month Ended Six Month Ended
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
---------------------- --------------- ----------------- -----------------
Net earnings $ 46,466 47,203 73,672 81,200
Other comprehensive income (loss):
Unrealized gain (loss) on derivative
instruments, net of income taxes 781 - (617) -
---------------------- --------------- ----------------- -----------------
Comprehensive income $ 47,247 47,203 73,055 81,200
====================== =============== ================= =================
7. Commitments and contingencies
The Company is involved in routine litigation from time to time in the
regular course of its business. Except as noted below, there are no material
legal proceedings pending or known to be contemplated to which the Company is a
party or to which any of its property is subject.
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.
9
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
The Company is a party to two consolidated lawsuits captioned Gaehwiler v.
Sunrise Carpet Industries, Inc. et al. and Patco Enterprises, Inc. v. Sunrise
Carpet Industries, Inc. et al., both of which were filed in the Superior Court
of the State of California, City and County of San Francisco, in 1996. Both
complaints were brought on behalf of a purported class of indirect purchasers of
polypropylene carpet in the State of California and seek damages for alleged
violations of California antitrust and unfair competition laws. In February
1999, a similar complaint was filed in the Superior Court of the State of
California, City and County of San Francisco, on behalf of a purported class
based on indirect purchasers of nylon carpet in the State of California and
alleges violations of California antitrust and unfair competition laws. The
complaints described above do not specify any specific amount of damages but do
request injunctive relief and treble damages plus reimbursement for fees and
costs. The Company believes it has meritorious defenses and intends to
vigorously defend against these actions.
8. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142.
The Company is required to adopt the provisions of SFAS No. 141
immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill determined to have an indefinite useful life that was acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized. Goodwill acquired in business combinations completed before July 1,
2001 will discontinue being amortized after December 31, 2001.
The Company is currently evaluating its existing goodwill that was acquired
in prior purchase business combinations for impairment and believes such
evaluation will not result in an adjustment that is material to the consolidated
financial statements.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $109,161. Amortization expense related to goodwill was
$3,184 and $1,605 for the year ended December 31, 2000 and the six months ended
June 30, 2001, respectively.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarter Ended June 30, 2001 as Compared with Quarter Ended July 1, 2000
- -----------------------------------------------------------------------
Net sales for the quarter ended June 30, 2001 were $828.4 million,
reflecting a decrease of $24.5 million, or approximately 2.9%, over the $852.8
million reported in the quarter ended July 1, 2000. The Company believes that
the decrease was attributable to the cyclical downturn in the overall economy,
which led to declining industry shipments.
Gross profit for the second quarter of the current year was $216.7 million
(26.2% of net sales) and represented a $0.8 million increase over the gross
profit of $215.9 million (25.3% of net sales) for the prior year's quarter.
Gross profit as a percentage of net sales, was favorably impacted by increased
manufacturing efficiencies and cost reductions.
Selling, general and administrative expenses for the current quarter were
$133.2 million (16.1% of net sales) compared to $127 million (14.9% of net
sales) for the prior year's second quarter. The increased percentage was
primarily due to costs of rolling out the hardsurface product lines.
Interest expense for the current quarter was $8.2 million compared to $9.7
million in the second quarter of 2000. The decrease was due to a reduction in
debt levels and a decrease in the weighted average borrowing rate compared to
the second quarter of 2000.
Income tax expense was $27.3 million, or 37.0% of earnings before income
taxes in the current quarter compared to $30.8 million, or 39.5% of earnings
before income taxes for the prior year's second quarter. The reduction in the
effective income tax rate was primarily due to tax planning strategies.
Six months Ended June 30, 2001 as Compared with Six Months Ended July 1, 2000
- -----------------------------------------------------------------------------
Net sales for the first six months ended June 30, 2001 were $1,572 million,
reflecting a decrease of $46 million, or approximately 2.8%, over the $1,618
million reported in the six month period ended July 1, 2000. The Company
believes that the decrease was attributable to the cyclical downturn in the
overall economy, which led to declining industry shipments.
Gross profit for the first six months of the current year was $394.7
million (25.1% of net sales) and represented a $11.7 million decrease over the
gross profit of $406.4 million (25.1% of net sales) for the first six months of
2000.
Selling, general and administrative expenses for the current period were
$257.6 million (16.4% of net sales) compared to $251.8 million (15.6% of net
sales) for the prior year's first six months. The increased percentage was
primarily due to costs of rolling out the hardsurface product lines.
Interest expense for the current period was $17.2 million compared to $18.4
million in the prior year's first six months. The decrease was due to a
reduction in debt levels, and a decrease in the weighted average borrowing rate
compared to the first six months of 2000.
Income tax expense was $43.3 million, or 37.0% of earnings before income
taxes in the current period compared to $53 million, or 39.5% of earnings before
income taxes for the prior year's first six months. The reduction in the
effective income tax rate was primarily due to tax planning strategies.
11
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 $392.6 million at June 30, 2001. The $33.7 million increase
was attributable to seasonal fluctuation. Inventories increased from $574.6
million at the beginning of 2001 to $619.2 million at June 30, 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 $26.6 million for the first six 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 $50.1 million to
$60.1 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 June 30,
2001, a total of approximately 94 thousand shares of the Company's common stock
was purchased at an aggregate cost of approximately $3.2 million. Since the
inception of the program, a total of approximately 9.0 million shares have been
repurchased at an aggregate cost of approximately $200.8 million. All of these
repurchases have been financed through the Company's operations and banking
arrangements.
Impact of Inflation
Inflation affects the Company's manufacturing costs and operating expenses.
The carpet industry has experienced significant inflation in the prices of raw
materials and fuel-related costs, beginning in the third quarter of 1999, but
such cost pressures have lessened during the last half of 2000 and the first
half of 2001. 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
12
. 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 and fourth quarters tend to be the weakest. Mohawk's second and third
quarters typically produce higher net sales and operating income. These results
are primarily due to consumer residential spending patterns and more carpet
being installed in the spring and summer months.
Mohawk's business is competitive and a failure by Mohawk to compete effectively
- -------------------------------------------------------------------------------
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
13
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.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142.
The Company is required to adopt the provisions of SFAS No. 141
immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill determined to have an indefinite useful life that was acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized. Goodwill acquired in business combinations completed before July 1,
2001 will discontinue being amortized after December 31, 2001.
The Company is currently evaluating its existing goodwill that was acquired
in prior purchase business combinations for impairment and believes such
evaluation will not result in an adjustment that is material to the consolidated
financial statements.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $109,161. Amortization expense related to goodwill was
$3,184 and $1,605 for the year ended December 31, 2000 and the six months ended
June 30, 2001, respectively.
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 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
To reduce the risk of interest rate fluctuations, the Company engages in
the use of interest rate swap agreements. At June 30, 2001, the Company held one
interest rate swap agreement under which the Company pays a fixed percent of
interest times the notional principal amount and receives in return an amount
equal to a specified variable rate of interest times the same notional principal
amount. The fixed interest rate per the agreement is 5.82%, which expires
January 2, 2006. The average rate as of June 30, 2001 was 5.1%. This agreement
is considered highly effective as of June 30, 2001. The cumulative fair value of
the agreement as of June 30, 2001 was a liability of $979 thousand, which was
recorded in long-term liabilities with the offset to other comprehensive income,
net of applicable income taxes.
PART II. OTHER INFORMATION
Item 1. Legal Procedings
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.
14
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 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
The Annual Meeting of Stockholders was held on May 17, 2001, at which time
stockholders were asked to elect a class of directors to serve a three-year term
beginning in 2001.
Leo Benatar and David L. Kolb were elected Class III directors of the
Company for a term expiring in 2004. Mr. Benatar was elected by stockholders
owning 50,074,214 shares of common stock, with stockholders owning 278,757
shares withholding authority. With respect to Mr. Benatar's election there were
no broker nonvotes. Mr. Kolb was elected by stockholders owning 50,075,994
shares of common stock, with stockholders owning 276,977 shares withholding
authority. With respect to Mr. Kolb's election there were no broker nonvotes.
Messrs Jeffrey S. Lorberbaum, Robert N. Pokelwaldt, Bruce C. Bruckmann, Larry W.
McCurdy and Sylvestor H. Sharpe continued their terms of office as directors.
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: First quarter 2001 earnings announcement, dated
April 16, 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: August 3, 2001 By: /s/ Jeffrey S. Lorberbaum
--------------------------
JEFFREY S. LORBERBAUM, President and
Chief Executive Officer (principal executive
officer)
Dated: August 3, 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