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 April 3, 1999
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.)
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
May 12, 1999, the latest practicable date, is as follows: 60,598,978 shares of
Common Stock, $.01 par value.
INDEX
Page No.
-------
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 3, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Earnings -
Three months ended April 3, 1999 and March 28, 1998 5
Condensed Consolidated Statements of Cash Flows -
Three months ended April 3, 1999 and March 28, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
Part II. Other Information 12
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
April 3, 1999 December 31, 1998
------------- -----------------
Current assets:
Cash $ - 2,384
Receivables 360,676 331,574
Inventories 499,003 423,837
Prepaid expenses 8,649 21,605
Deferred income taxes 52,304 52,304
---------- ---------
Total current assets 920,632 831,704
---------- ---------
Property, plant and equipment, at cost 1,043,092 883,942
Less accumulated depreciation and
amortization 451,466 429,045
---------- ---------
Net property, plant and
equipment 591,626 454,897
---------- ---------
Other assets 111,411 102,341
---------- ---------
Total assets $1,623,669 1,388,942
========== =========
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)
April 3, 1999 December 31, 1999
------------- -----------------
Current liabilities:
Current portion of long-term debt $ 197,087 44,424
Accounts payable and accrued expenses 381,556 364,369
---------- -------
Total current liabilities 578,643 408,793
Deferred income taxes 31,045 31,045
Long-term debt, less current portion 363,369 332,665
Other long-term liabilities 4,905 5,380
---------- -------
Total liabilities 977,962 777,883
---------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 60,580 and 60,533 shares issued
in 1999 and 1998, respectively 606 606
Additional paid-in capital 178,434 172,045
Retained earnings 466,667 438,408
---------- -------
Total stockholders' equity 645,707 611,059
---------- -------
Total liabilities and stockholders'
equity $1,623,669 1,388,942
========== =========
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
--------------------------------
April 3, 1999 March 28, 1998
------------- --------------
Net sales $709,217 589,521
Cost of sales 529,518 452,778
-------- -------
Gross profit 179,699 136,743
Selling, general and administrative expenses 124,090 98,464
-------- -------
Operating income 55,609 38,279
-------- -------
Other expense:
Interest expense 7,854 7,990
Other expense (income), net 1,469 (56)
-------- -------
9,323 7,934
-------- -------
Earnings before income taxes 46,286 30,345
Income taxes 18,394 13,210
-------- -------
Net earnings $ 27,892 17,135
======== =======
Basic earnings per share $ 0.46 0.28
======== =======
Weighted-average common shares outstanding 60,565 60,266
======== =======
Diluted earnings per share $ 0.46 0.28
======== =======
Weighted-average common and dilutive potential
common shares outstanding 61,285 60,977
======== =======
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
----------------------------------
April 3, 1999 March 28, 1998
------------- --------------
Cash flows from operating activities:
Net earnings $ 27,892 17,135
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 23,473 19,459
Deferred taxes - 1,857
Provision for doubtful accounts 3,408 2,185
Loss on sale of property, plant and equipment 44
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables (8,923) (29,062)
Inventories (37,908) (32,450)
Accounts payable and accrued expenses (13,682) 42,147
Other assets and prepaid expenses 13,533 6,399
Other liabilities (475) (699)
--------- -------
Net cash provided by operating activities 7,362 26,971
--------- -------
Cash flows from investing activities:
Additions to property, plant and equipment, net (30,449) (14,427)
Acquisitions (158,786) 25
--------- -------
Net cash used in investing activities (189,235) (14,402)
--------- -------
Cash flows from financing activities:
Net change in revolving line of credit 184,864 (16,565)
Redemption of acquisition indebtedness (20,917) (583)
Redemption of IRBs and other, net of proceeds (4,951) 241
Change in outstanding checks in excess of cash 13,737 2,394
Common stock transactions 6,756 1,824
--------- -------
Net cash provided by (used in) financing
activities 179,489 (12,689)
--------- -------
Net change in cash (2,384) (120)
Cash, beginning of period 2,384 200
--------- -------
Cash, end of period $ - 80
========= =======
Net cash paid during the period for:
Interest $ 10,621 9,757
========= =======
Income taxes $ 16,088 5,430
========= =======
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 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 1998 Annual Report filed on Form 10-K, as filed with the
Securities and Exchange Commission, which includes consolidated financial
statements for the fiscal year ended December 31, 1998.
The Company's basic earnings per share are computed by dividing net earnings by
the weighted-average common shares outstanding, and diluted earnings per share
are computed by dividing net earnings by the weighted-average common and
dilutive potential common shares outstanding. Dilutive common stock options are
included in the diluted earnings per share calculation using the treasury stock
method.
Certain prior year financial statement balances have been reclassified to
conform with the current year's presentation.
2. Acquisitions
On January 29, 1999, the Company acquired certain assets of Image Industries,
Inc. ("Image") for approximately $193,000, including acquisition costs and the
assumption of $30,000 of tax exempt debt. The Image acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair values at the date of acquisition. The estimated
fair values were $201,689 for assets acquired and $42,903 for the liabilities
assumed.
The operating results of Image are included in the Company's consolidated
statement of earnings from the date of acquisition. The following unaudited pro
forma information presents a summary of consolidated results of operations of
the Company and Image as if the acquisition had occurred at the beginning of
1998.
Three Months Ended
-------------------------------------
April 3, 1999 March 28,1998
------------- -------------
Net sales $725,066 635,017
Net earnings $ 27,533 17,860
Basic earnings per share $ 0.45 0.30
Diluted earnings per share $ 0.45 0.29
On March 9, 1999, the Company acquired all the outstanding capital stock of
Durkan Patterned Carpets, Inc. ("Durkan") for 3,150 shares of the Company's
common stock valued at $116,500 based on the closing stock price the day the
letter of intent was executed. The Durkan acquisition has been accounted for
using the pooling-of-interests method of accounting and, accordingly, the
Company's historical consolidated financial statements have been restated to
include the accounts and results of operations of Durkan.
7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
(Unaudited)
3. Receivables
Receivables are as follows:
April 3, 1999 December 31, 1998
------------- -----------------
Customers, trade $414,540 385,768
Other 7,222 3,687
-------- -------
421,762 389,455
Less allowance for discounts,
returns, claims and doubtful
accounts 61,086 57,881
-------- -------
Net receivables $360,676 331,574
======== =======
4. Inventories
The components of inventories are
as follows:
April 3, 1999 December 31, 1998
------------- -----------------
Finished goods $249,984 219,776
Work in process 69,367 60,266
Raw materials 179,652 143,795
-------- -------
Total inventories $499,003 423,837
======== =======
5. Other assets
Other assets are as follows:
April 3, 1999 December 31, 1998
------------- -----------------
Goodwill, net of accumulated
amortization of $11,018 and
$10,363, respectively $ 94,467 85,972
Other assets 16,944 16,369
-------- -------
Total other assets $111,411 102,341
======== =======
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as follows:
April 3, 1999 December 31, 1998
------------- -----------------
Outstanding checks in excess of cash $ 40,631 26,894
Accounts payable, trade 164,961 158,929
Accrued expenses 119,366 126,702
Accrued compensation 56,598 51,844
-------- -------
Total accounts payable and
accrued expenses $381,556 364,369
======== =======
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
On January 29, 1999, the Company acquired certain assets of Image Industries,
Inc. ("Image") for approximately $193 million, including acquisition costs and
the assumption of $30 million of tax exempt debt. The Image acquisition has
been accounted for under the purchase method of accounting.
On March 9, 1999, the Company acquired all of the outstanding capital stock of
Durkan Patterned Carpets, Inc. ("Durkan") for approximately 3.1 million shares
of the Company's common stock valued at $116.5 million based on the closing
stock price the day the letter of intent was executed. The Durkan acquisition
has been accounted for using the pooling of interests method of accounting and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of operations of Durkan.
These acquisitions have created opportunities to enhance Mohawk's operations
by (i) broadening price points, (ii) increasing vertical integration efforts,
(iii) expanding distribution capabilities and (iv) facilitating entry into niche
businesses.
Through the Company's restructuring efforts over the past three years, new
information technology systems have been installed throughout all of the
organization, all of which are Year 2000 compliant. In addition, the Company
has concluded identification of all other significant information technology
systems that are not Year 2000 compliant. The Company has completed its review
of equipment and software with the respective vendors from whom the equipment
and software was purchased to address any noncompliance issues. The Company has
identified certain Year 2000 issues with respect to its business systems. The
Company has formed a committee of employees familiar with its information
technology systems to assess and prioritize the need to act, on the basis of
each system's importance, to ensure that its business systems will be made Year
2000 compliant. The Company has also completed a review of all process control
systems, both proprietary and non-proprietary. This review revealed that
certain Year 2000 issues exist. Although the Company can provide no assurances,
it estimates that it will cost no more than $500,000 of incremental costs to
make its business systems Year 2000 compliant. These upgrades have been
substantially completed, and the upgrades that are still in process will be
completed in the second quarter of 1999. Testing of these upgrades is underway
and will be completed in the third quarter of 1999.
The Company has completed the review of its top suppliers and customers to
determine its progress in becoming Year 2000 compliant. The review indicated
that all of its major suppliers and customers appear to be in the process of
resolving any of their Year 2000 compliance issues and that they do not foresee
any material problems. The Company continues to follow-up with all of its
suppliers and customers to insure that all potential problems, including those
of its individual plant locations and local suppliers, are managed correctly.
If the Company cannot successfully and timely resolve its Year 2000 issues,
its business, results of operations and financial condition could be materially
adversely affected. The Company has not developed a contingency plan in the
event of a Year 2000 problem, however, based upon the results of its internal
review, the Company does not believe a contingency plan is necessary. The
Company will, however, continue to evaluate the need for a contingency plan.
Results of Operations
Quarter Ended April 3, 1999 As Compared With Quarter Ended March 28, 1998
- -------------------------------------------------------------------------
Net sales for the quarter ended April 3, 1999 were $709.2 million, which
represented an increase of 20% from the $589.5 million reported for the first
quarter of 1998. The Company believes the first quarter 1999 net sales
comparison to the first quarter of 1998 was impacted by internal growth, four
additional business days in the 1999 first quarter and the impact of 1998 and
1999 acquisitions. Sales, excluding the effect of acquisitions, increased 15%
over the same period in 1998. Four additional business days in the first
quarter of 1999 compared to the first quarter of 1998 were somewhat offset by
harsher winter conditions in the Midwest and Northeast during 1999. Excluding
the additional days and acquisitions, sales increased approximately 8% during
the first quarter of 1999 compared to the first quarter of 1998.
Gross profit for the first quarter of the current year was $179.7 million
(25.3% of net sales). In the first quarter of 1998, gross profit was $136.7
million (23.2% of net sales). The improvement in gross margin primarily
resulted from manufacturing efficiencies and favorable material costs.
Selling, general and administrative expenses for the current quarter were
$124.1 million (17.5% of net sales) compared to $98.5 million (16.7% of net
sales) for the prior year's first period. The percentage increase was primarily
due to higher sampling and other marketing costs related to new marketing
initiatives under the Floorscapes and Color Center programs.
10
Interest expense for the current period was $7.9 million compared to $8.0
million in the first quarter of 1998. The primary factor for the decrease was a
reduction in the average borrowing rate in the first quarter of 1999 as compared
to the first quarter of 1998.
In the current period, income tax expense was $18.4 million, or 39.7% of
earnings before income taxes, compared to $13.2 million, or 43.5% of earnings
before income taxes, in the first quarter of 1998. The higher income tax rate
in 1998 is due to the impact of prior year restatements related to the
acquisitions of World Carpets, Inc. ("World") and Durkan.
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.
The level of accounts receivable increased from $331.6 million at the
beginning of 1999 to $360.7 million at April 3, 1999. The $29.1 million
increase resulted primarily from seasonally higher sales volume in the first
quarter as compared to December. Inventories rose from $423.8 million at the
beginning of 1999 to $499.0 million at April 3, 1999, due to requirements to
meet seasonal customer demand.
Capital expenditures totaled $189.2 million in the first three months of 1999
(including amounts paid for the Image acquisition) 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 1999 is
expected to range from $145 million to $155 million, the majority of which will
be used to increase capacity and productivity.
On January 28, 1999, the Company amended and restated its revolving credit
agreement to increase total availability to $450 million, comprised of the
Tranche A commitment of $250 million due on January 28, 2004 and the Tranche B
commitment of $200 million due on January 27, 2000.
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, Year 2000
compliance 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; failure of our vendors,
customers and suppliers to timely identify and adequately address Year 2000
compliance issues; 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.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk-sensitive instruments do not subject the Company to
material market risk exposures.
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 determined that the plaintiffs met their burden of
establishing the requirements for class certification and granted the
plaintiffs' motion to certify the class. The Company is a party to two
consolidated lawsuits captioned Gaehwiler v. Sunrise Carpet Industries, Inc. et.
al. and Patco Enterprises, Inc. v. Sunrise Carpet Industries, Inc. et. al.; both
of which were filed in the Superior Court of the State of California, City and
County of San Francisco in 1996. Both complaints were brought on behalf of a
purported class of indirect purchasers of carpet in the State of California and
seek damages for alleged violations of California antitrust and unfair
competition laws. The complaints filed do not specify any amount of damages but
do request for any unlawful conduct to be enjoined and treble damages plus
reimbursement for fees and costs. In October 1998, two plaintiffs, on behalf of
an alleged class of purchasers of nylon carpet products, filed a complaint in
the United States District Court for the Northern District of Georgia against
the Company and two of its subsidiaries as well as a competitor and one of its
subsidiaries. The complaint alleges that the Company acted in concert with
other carpet manufacturers to restrain competition in the sale of certain nylon
carpet products. The Company has filed an answer and denied the allegations in
the complaint and set forth its defenses. 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 purchases 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.
12
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
Current report on Form 8-K dated January 29, 1999 related to the
closing of the Company's acquisition of Image.
Current report on Form 8-K dated February 2, 1999 related to the
amendment of the Company's credit agreement.
Current report on Form 8-K dated February 4, 1999 related to the
Company's announcement of its 1998 fourth quarter earnings.
Current report on Form 8-K dated February 19, 1999 related to the
Stock Restriction and Registration Rights Agreement entered into by
the Company and the former shareholders of World.
Current report on Form 8-K dated April 22, 1999 related to the
Company's announcement of its 1999 first quarter earnings.
13
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 12, 1999 By: /s/ David L. Kolb
------------------------------------
DAVID L. KOLB, Chairman of the Board
and Chief Executive Officer (principal
executive officer)
Dated: May 12, 1999 By: /s/ John D. Swift
------------------------------------
JOHN D. SWIFT, Chief Financial Officer,
Vice President-Finance and Assistant
Secretary (principal financial and
accounting officer)
14
EXHIBIT INDEX
No. Description
- --- ------------------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
15