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 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 01-19826
MOHAWK INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 52-1604305
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
Post Office Box 12069, 160 South Industrial
Boulevard, Calhoun, Georgia 30703
(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
July 23, 1998, the latest practicable date, is as follows: 52,374,694 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 -
June 27, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Earnings -
Three months ended June 27, 1998 and June 28, 1997 5
Six months ended June 27, 1998 and June 28, 1997 6
Condensed Consolidated Statements of Cash Flows -
Six months ended June 27, 1998 and June 28, 1997 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 11
Part II. Other Information 12
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
JUNE 27, 1998 DECEMBER 31, 1997
------------- -----------------
Current assets:
Receivables $ 276,133 238,579
Inventories 329,162 291,306
Prepaid expenses 4,886 15,192
Deferred income taxes 27,670 28,192
---------- --------
Total current assets 637,851 573,269
---------- --------
Property, plant and equipment, at cost 606,042 580,764
Less accumulated depreciation and
amortization 290,117 260,946
---------- --------
Net property, plant and equipment 315,925 319,818
---------- --------
Other assets 67,378 67,868
---------- --------
Total assets $1,021,154 960,955
========== =======
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)
JUNE 27, 1988 DECEMBER 31, 1997
------------- --------------------
Current liabilities:
Current portion of long-term debt $ 32,209 35,959
Accounts payable and accrued expenses 284,202 227,161
---------- -------
Total current liabilities 316,411 263,120
Deferred income taxes 28,391 28,391
Long-term debt 216,806 257,238
Other long-term liabilities 5,488 6,291
---------- -------
Total liabilities 567,096 555,040
---------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 52,351 and 52,167 shares issued
in 1998 and 1997, respectively 524 522
Additional paid-in capital 138,848 136,069
Retained earnings 314,686 269,324
---------- -------
Total stockholders' equity 454,058 405,915
---------- -------
Total liabilities and stockholders' equity $1,021,154 960,955
========== =======
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 27, 1998 JUNE 28, 1997
------------- -------------
Net sales $ 546,411 475,127
Cost of sales 404,734 364,119
----------- ------------
Gross profit 141,677 111,008
Selling, general and administrative expenses 84,609 70,648
----------- ------------
Operating income 57,068 40,360
----------- ------------
Other expense:
Interest expense 5,684 7,458
Other expense, net 763 998
----------- ------------
6,447 8,456
----------- ------------
Earnings before income taxes 50,621 31,904
Income taxes 19,996 12,597
----------- ------------
Net earnings $ 30,625 19,307
=========== ============
Basic earnings per share $ 0.59 0.37
=========== ============
Weighted-average common shares outstanding 52,327 51,807
=========== ============
Diluted earnings per share $ 0.58 0.37
=========== ============
Weighted-average common and dilutive potential
common shares outstanding 53,124 52,178
=========== ============
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 27, 1998 JUNE 28, 1997
---------------- -------------
Net sales $1,006,166 884,416
Cost of sales 759,584 683,661
---------- ------------
Gross profit 246,582 200,755
Selling, general and administrative expenses 159,428 138,487
---------- ------------
Operating income 87,154 62,268
---------- ------------
Other expense:
Interest expense 11,316 14,854
Other expense, net 859 1,385
---------- ------------
12,175 16,239
---------- ------------
Earnings before income taxes 74,979 46,029
Income taxes 29,617 18,175
---------- ------------
Net earnings $ 45,362 27,854
========== ============
Basic earnings per share $ 0.87 0.54
========== ============
Weighted-average common shares outstanding 52,272 51,792
========== ============
Diluted earnings per share $ 0.86 0.53
========== ============
Weighted-average common and dilutive potential
common shares outstanding 53,026 52,245
========== ============
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 27, 1998 JUNE 28,1997
------------- --------------
Cash flows from operating activities:
Net earnings $ 45,362 27,854
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 32,717 29,993
Provision for doubtful accounts 5,383 3,659
Changes in operating assets and liabilities:
Receivables (42,937) (22,609)
Inventories (37,856) (23,304)
Accounts payable and accrued expenses 54,117 30,129
Other assets and prepaid expenses 10,416 5,462
Other liabilities (803) (2,380)
-------- -------
Net cash provided by operating activities 66,399 48,804
-------- -------
Cash flows used in investing activities:
Additions to property, plant and equipment, net (27,922) (12,533)
-------- -------
Cash flows from financing activities:
Net change in revolving line of credit (45,720) (6,292)
Payment of note payable (21,200)
Payment on term loan (3,750) (3,750)
Proceeds from IRBs and other, net of payments 5,288 3,694
Change in outstanding checks in excess of cash 2,924 (9,556)
Common stock transactions 2,781 833
-------- -------
Net cash used in financing activities (38,477) (36,271)
-------- -------
Net change in cash - -
Cash, beginning of year - -
-------- -------
Cash, end of period $ - -
======== =======
Net cash paid during the period for:
Interest $ 10,989 14,695
======== =======
Income taxes $ 23,217 20,124
======== =======
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 the 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 1997 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, 1997.
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. Receivables
Receivables are as follows:
JUNE 27, 1998 DECEMBER 31, 1997
------------- -----------------
Customers, trade $315,258 273,636
Other 1,783 956
-------- -------
317,041 274,592
Less allowance for discounts, returns, claims
and doubtful accounts 40,908 36,013
-------- -------
Net receivables $276,133 238,579
======== =======
3. Inventories
The components of inventories are as follows:
JUNE 27, 1998 DECEMBER 31, 1997
------------- -----------------
Finished goods $175,365 154,059
Work in process 52,272 44,579
Raw materials 101,525 92,668
-------- -------
Total inventories $329,162 291,306
======== =======
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
(Unaudited)
4. Other assets
Other assets are as follows:
JUNE 27, 1998 DECEMBER 31, 1997
------------- -----------------
Goodwill, net of accumulated amortization of
$7,821 and $7,077, respectively $ 51,447 52,191
Other assets 15,931 15,677
------------ -------------
Total other assets $ 67,378 67,868
============ =============
5. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
JUNE 27, 1998 DECEMBER 31, 1997
------------- -----------------
Outstanding checks in excess of cash $ 29,867 26,943
Accounts payable, trade 129,773 102,621
Accrued expenses 90,053 60,667
Accrued compensation 34,509 36,930
------------ -------------
Total accounts payable and accrued expenses $ 284,202 227,161
============ =============
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended June 27, 1998 As Compared With Quarter Ended June 28, 1997
- ------------------------------------------------------------------------
Net sales for the quarter ended June 27, 1998 were $546.4 million, which
represented an increase of 15% from the $475.1 million reported for the second
quarter of 1997. The Company believes the second quarter 1998 net sales
increase was attributable to favorable industry conditions and a gain in market
share resulting from continued emphasis on supporting its dealers and strong
acceptance of new products. Additionally, much of the sales increase can be
attributed to responsive customer service, leadership in product quality and
competitive pricing of products.
Gross profit for the second quarter of the current year was $141.7 million
(25.9% of net sales). In the second quarter of 1997, gross profit was $111.0
million (23.4% of net sales). Much of the increase in gross profit can be
attributed to favorable product mix, improved productivity, lower material costs
and better leveraging of expenses with higher sales volume. Many of these
improvements are primarily attributable to restructuring improvements the
Company has made since 1996.
Selling, general and administrative expenses for the current quarter were
$84.6 million (15.5% of net sales) compared to $70.6 million (14.9% of net
sales) for the prior year's second period. The increase was primarily due to
higher sales volume in 1998.
Interest expense for the current period was $5.7 million compared to $7.5
million in the second quarter of 1997. The primary factor for the decrease was
a reduction in debt levels in the second quarter of 1998 as compared to the
second quarter of 1997.
In the current period, income tax expense was $20.0 million, compared to $12.6
million in the second quarter of 1997, or 39.5% of earnings before income taxes
for both periods.
Six Months Ended June 27, 1998 As Compared With Six Months Ended June 28, 1997
- ------------------------------------------------------------------------------
Net sales for the first six months ended June 27, 1998 were $1,006.2 million,
which represented an increase of 14% from the $884.4 million reported for the
first six months of 1997. This sales increase was attributable to favorable
industry conditions and a gain in market share resulting from continued emphasis
on supporting its dealers and strong acceptance of new products. Additionally,
much of the sales increase can be attributed to responsive customer service,
leadership in product quality and competitive pricing of products.
Gross profit for the first six months of the current year was $246.6 million
(24.5% of net sales). In the first six months of 1997, gross profit was $200.8
million (22.7% of net sales). Much of the increase in gross profit can be
attributed to favorable product mix, improved productivity, lower material costs
and better leveraging of expenses with higher sales volume. Many of these
improvements are primarily attributable to restructuring improvements the
Company has made since 1996.
Selling, general and administrative expenses for the current period were
$159.4 million (15.8% of net sales) compared to $138.5 million (15.7% of net
sales) for the prior year's first six months.
Interest expense for the first six months of 1998 was $11.3 million compared
to $14.9 million in the first six months of 1997. The primary factor for the
decrease was a reduction in debt levels in the first half of 1998 compared to
the first half of 1997.
In the current period, income tax expense was $29.6 million, compared to $18.2
million in the first six months of 1997, or 39.5% of earnings before income
taxes for both periods.
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 and credit terms
from suppliers.
10
The level of accounts receivable increased from $238.6 million at the
beginning of 1998 to $276.1 million at June 27, 1998. The $37.5 million
increase resulted primarily from seasonally higher sales volume in the second
quarter as compared to December. Inventories rose from $291.3 million at the
beginning of 1998 to $329.2 million at June 27, 1998, due to requirements to
meet seasonal customer demand.
Capital expenditures totaled $27.9 million in the first half of 1998 and were
incurred primarily to modernize and expand manufacturing facilities and
equipment. In July 1998, the Company completed the purchase of a 300,000 square
foot yarn processing facility to fill current capacity requirements for spun
yarn, and the purchase of Newmark & James, Inc., a company that produces high-
end washable bath rugs with annual sales in excess of $35 million. The
Company's capital projects are primarily focused on increasing capacity,
improving productivity and reducing costs. Capital spending for the remainder
of 1998 is expected to range from $37.0 million to $42.0 million, the majority
of which will be used to increase capacity and productivity.
IMPACT OF INFLATION
Inflation affects the Company's manufacturing costs and operating expenses.
The carpet industry has experienced moderate inflation in the prices of certain
raw materials and outside processing for the last three years. The Company has
generally passed along nylon fiber cost increases to its customers.
SEASONALITY
The carpet business is seasonal, with the Company's second, third and fourth
quarters typically producing higher net sales and operating income. By
comparison, results for the first quarter tend to be the weakest. This
seasonality is primarily attributable to consumer residential spending patterns
and higher installation levels during the spring and summer months.
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's management 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
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 threatened against the Company or any of its
property.
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 determined that the plaintiffs met their burden of
establishing the requirements for class certification and granted the
plaintiffs' motion to certify class action. 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 early 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 Company believes both of these lawsuits are without merit
and intends to vigorously defend against them. 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.
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 21, 1998, at which time
stockholders were asked to elect a class of directors to serve a three-year term
beginning in 1998 and to consider and vote upon an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock, par value $0.01 per share, from seventy-five million
(75,000,000) shares to one hundred fifty million (150,000,000) shares.
Leo Benatar and David L. Kolb were elected as Class III directors of the
Company for a term expiring in 2001. Mr. Benatar was elected by stockholders
owning 48,959,401 shares of common stock, with stockholders owning 273,386
shares withholding authority. With respect to Mr. Benatar's election, there
were no broker nonvotes. Mr. Kolb was elected by stockholders owning 48,959,393
shares of common stock, with stockholders owning 273,394 shares withholding
authority. With respect to Mr. Kolb's election, there were no broker nonvotes.
Messrs. Bruce C. Bruckmann, Alan S. Lorberbaum, Larry W. McCurdy, Robert N.
Pokelwaldt and Jeffrey S. Lorberbaum continued their terms of office as
directors.
The amendment to the Company's Restated Certificate of Incorporation, a
description of which is contained in the Company's Proxy Statement dated March
31, 1998, was approved by stockholders owning 48,216,094 shares of common stock,
with stockholders owning 1,000,075 shares voting against the amendment and
16,618 shares abstaining. There were no broker nonvotes with respect to the
amendment.
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
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None.
12
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: July 23, 1998 By: /s/ David L. Kolb
-------------------------------------
DAVID L. KOLB, Chairman of the Board and
Chief Executive Officer (principal
executive officer)
Dated: July 23, 1998 By: /s/ John D. Swift
-------------------------------------
JOHN D. SWIFT, Chief Financial Officer,
Vice President-Finance and Assistant
Secretary (principal financial and
accounting officer)
13
EXHIBIT INDEX
No. DESCRIPTION
- --- -------------------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
14