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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 July 1,September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
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 Identification No.)
incorporation or organization)
P. O.P.O. Box 12069, 160 S. Industrial Blvd., 30701
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 4,November 3, 2000, the latest practicable date, is as follows: 53,149,86652,624,516.
shares of Common Stock, $.01 par value.
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MOHAWK INDUSTRIES, INC.
INDEX
Page No.
-------
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
July 1,September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Earnings -
Three months ended July 1,September 30, 2000 and July 3,October 2, 1999 5
Condensed Consolidated Statements of Earnings -
SixNine months ended July 1,September 30, 2000 and July 3,October 2, 1999 6
Condensed Consolidated Statements of Cash Flows -
SixNine months ended July 1,September 30, 2000 and July 3,October 2, 1999 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 Disclosures About Market Risks 1314
Part II. Other Information 1314
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
July 1,September 30, 2000 December 31, 1999
---------------- ------------------------------------------------ --------------------------
(Unaudited)
Current assets:
Receivables $ 396,223394,896 337,824
Inventories 576,653592,828 494,774
Prepaid expenses 12,82016,091 25,184
Deferred income taxes 76,628 76,628
------------ -------------------------------------- --------------------------
Total current assets 1,062,3241,080,443 934,410
------------ -------------------------------------- --------------------------
Property, plant and equipment, at cost 1,175,9691,192,149 1,139,660
Less accumulated depreciation and
amortization 553,067569,277 514,846
------------ -------------------------------------- --------------------------
Net property, plant and equipment 622,902622,872 624,814
------------ -------------------------------------- --------------------------
Other assets 118,331119,544 123,649
------------ -------------------------------------- --------------------------
Total assets $ 1,803,5571,822,859 1,682,873
============ ====================================== ==========================
See accompanying notes to condensed consolidated financial statements.
3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
July 1,September 30, 2000 December 31, 1999
---------------- ------------------------------------------------ --------------------------
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 33,89333,874 33,961
Accounts payable and accrued expenses 444,372411,540 340,392
------------ ----------------------------------------- --------------------------
Total current liabilities 478,265445,414 374,353
Deferred income taxes 53,783 53,783
Long-term debt, less current portion 579,603592,747 562,104
Other long-term liabilities 392592 87
------------ ----------------------------------------- --------------------------
Total liabilities 1,112,0431,092,536 990,327
------------ ----------------------------------------- --------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 60,71560,772 and 60,657 shares issued
in 2000 and 1999, respectively 607608 607
Additional paid-in capital 181,199182,250 179,993
Retained earnings 677,132719,269 595,932
------------ --------------
858,938--------------------------- --------------------------
902,127 776,532
Less treasury stock at cost; 7,5897,764 in shares in
2000 and 3,952 in 1999 167,424171,804 83,986
------------ ----------------------------------------- --------------------------
Total stockholders' equity 691,514730,323 692,546
------------ ----------------------------------------- --------------------------
Total liabilities and stockholders' equity $ 1,803,5571,822,859 1,682,873
============ ========================================= ==========================
See accompanying notes to condensed consolidated financial statements.
4
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
------------------------------
July 1,-----------------------------------------------------------
September 30, 2000 July 3,October 2, 1999
------------ --------------------------------------- --------------------------
Net sales $ 852,808 790,617838,514 809,933
Cost of sales 636,926 589,706
--------- --------624,294 606,687
--------------------------- --------------------------
Gross profit 215,882 200,911214,220 203,246
Selling, general and administrative expenses 126,971 119,997
--------- --------127,151 119,258
Class action legal settlement 7,000 -
--------------------------- --------------------------
Operating income 88,911 80,914
--------- --------80,069 83,988
--------------------------- --------------------------
Other expense:
Interest expense net 9,674 7,75310,173 8,335
Other expense, net 1,215 280
--------- --------
10,889 8,033
--------- --------846 1,142
--------------------------- --------------------------
11,019 9,477
--------------------------- --------------------------
Earnings before income taxes 78,022 72,88169,050 74,511
Income taxes 30,819 28,788
--------- --------26,913 29,432
--------------------------- --------------------------
Net earnings $ 47,203 44,093
========= ========42,137 45,079
=========================== ==========================
Basic earnings per share $ 0.88 0.73
========= ========0.79 0.74
=========================== ==========================
Weighted-average common shares outstanding 53,836 60,593
========= ========53,097 60,600
=========================== ==========================
Diluted earnings per share $ 0.87 0.72
========= ========0.79 0.74
=========================== ==========================
Weighted-average common and dilutive potential
common shares outstanding 54,336 61,257
========= ========53,634 61,114
=========================== ==========================
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)
SixNine Months Ended
------------------------------
July 1,-----------------------------------------------------------
September 30, 2000 July 3,October 2, 1999
------------ --------------------------------------- --------------------------
Net sales $ 1,617,891 1,497,7842,456,405 2,307,717
Cost of sales 1,211,446 1,118,544
----------- -----------1,835,740 1,725,231
--------------------------- --------------------------
Gross profit 406,445 379,240620,665 582,486
Selling, general and administrative expenses 251,828 242,662
----------- -----------378,979 361,920
Class action legal settlement 7,000 -
--------------------------- --------------------------
Operating income 154,617 136,578
----------- -----------234,686 220,566
--------------------------- --------------------------
Other expense:
Interest expense net 18,414 15,60728,587 23,942
Other expense, net 1,988 1,988
----------- -----------
20,402 17,595
----------- -----------2,834 3,130
--------------------------- --------------------------
31,421 27,072
--------------------------- --------------------------
Earnings before income taxes 134,215 118,983203,265 193,494
Income taxes 53,015 46,998
----------- -----------79,928 76,430
--------------------------- --------------------------
Net earnings $ 81,200 71,985
=========== ===========123,337 117,064
=========================== ==========================
Basic earnings per share $ 1.48 1.19
=========== ===========2.28 1.93
=========================== ==========================
Weighted-average common shares outstanding 54,723 60,579
=========== ===========54,181 60,586
=========================== ==========================
Diluted earnings per share $ 1.47 1.17
=========== ===========2.26 1.91
=========================== ==========================
Weighted-average common and dilutive potential
common shares outstanding 55,217 61,271
=========== ===========54,689 61,218
=========================== ==========================
See accompanying notes to condensed consolidated financial statements.
6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SixNine Months Ended
------------------------------------------------------------
July 1,September 30, 2000 July 3,October 2, 1999
--------------------------- --------------------------
Cash flows from operating activities:
Net earnings $ 81,200 71,985123,337 117,064
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 41,819 51,25361,411 76,099
Provision for doubtful accounts 8,447 7,50012,175 11,599
Loss on sale of property, plant
and equipment 63 3,095100 2,184
Changes in operating assets and liabilities,
net of effects of acquisitions:acquisition:
Receivables (66,846) (23,992)(69,247) (40,411)
Inventories (81,879) (66,690)(98,054) (75,242)
Accounts payable and accrued expenses 85,844 (11,290)78,591 (21,775)
Other assets and prepaid expenses 12,554 16,0517,167 15,939
Other liabilities 305 (4,531)505 (4,516)
--------------------------- --------------------------
Net cash provided by operating activities 81,507 43,381115,985 80,941
--------------------------- --------------------------
Cash flows from investing activities:
Additions to property, plant and equipment, net (34,842) (74,469)(53,538) (115,216)
Acquisitions - (162,463)
--------------------------- --------------------------
Net cash used in investing activities (34,842) (236,932)(53,538) (277,679)
--------------------------- --------------------------
Cash flows from financing activities:
Net change in revolving line of credit 15,498 190,46153,758 214,282
Payments on term loans (26,502) (26,503)
Redemption of acquisition indebtedness - (20,917)
Proceeds (redemption) of IRBs and other,
net of proceeds 1,933 (28,904)3,300 (8,057)
Change in outstanding checks in excess of cash 18,136 21,961(7,443) 41,457
Acquisition of treasury stock (83,438) -(87,818) (13,862)
Common stock transactions 1,206 7,6492,258 7,954
--------------------------- --------------------------
Net cash (used in) provided by financing
activities (46,665) 191,167(62,447) 194,354
--------------------------- --------------------------
Net change in cash - (2,384)
Cash, beginning of period - 2,384
--------------------------- --------------------------
Cash, end of period $ - -
=========================== ==========================
Net cash paid during the period for:
Interest $ 18,805 18,69828,258 29,529
=========================== ==========================
Income taxes $ 37,086 54,25571,899 92,558
=========================== ==========================
See accompanying notes to condensed consolidated financial statements.
7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. These statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1999 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, 1999.
The Company's basic earnings per share are computed by dividing net earnings by
the weighted-average common shares outstanding, and diluted earnings per share
are computed by dividing net earnings by the weighted-average common and
dilutive potential common shares outstanding. Dilutive common stock options are
included in the diluted earnings per share calculation using the treasury stock
method.
2. Acquisitions
On October 10, 2000, the Company signed a definitive agreement with Crown
Crafts, Inc. to acquire certain assets of its Woven Division. Under the
agreement, the Company will pay approximately $40,000 in cash for substantially
all of the fixed assets and inventory of the division. The acquisition is
expected to close by the end of the fourth quarter of 2000.
3. Receivables
Receivables are as follows:
July 1,September 30, 2000 December 31, 1999
--------------------------- --------------------------
Customers, trade $ 476,156472,500 405,477
Other 2,2682,359 2,826
--------------------------- --------------------------
478,424474,859 408,303
Less allowance for discounts, returns, claims
and doubtful accounts 82,20179,963 70,479
--------------------------- --------------------------
Net receivables $ 396,223394,896 337,824
=========================== ==========================
3. Inventories
The components of inventories are as follows:
July 1,September 30, 2000 December 31, 1999
--------------------------- --------------------------
Finished goods $ 295,314295,793 254,179
Work in process 75,34483,104 65,456
Raw materials 205,995213,961 175,139
--------------------------- --------------------------
Total inventories $ 576,653592,858 494,774
=========================== ==========================
4. Other assets
Other assets are as follows:
July 1, 2000 December 31, 1999
--------------------------- --------------------------
Goodwill, net of accumulated amortization of
$14,750 and $13,171, respectively $ 111,981 113,560
Other assets 6,350 10,089
--------------------------- --------------------------
Total other assets $ 118,331 123,649
=========================== ==========================
8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
5. Other assets
Other assets are as follows:
September 30, 2000 December 31, 1999
--------------------------- --------------------------
Goodwill, net of accumulated amortization of
$15,546 and $13,171, respectively $ 113,185 113,560
Other assets 6,359 10,089
--------------------------- --------------------------
Total other assets $ 119,544 123,649
=========================== ==========================
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses are as
follows:
July 1,September 30, 2000 December 31, 1999
--------------- ---------------------------------------------- --------------------------
Outstanding checks in excess of cash $ 60,50934,930 42,373
Accounts payable, trade 211,840195,989 159,812
Accrued expenses 104,404107,150 83,253
Accrued compensation 67,61973,471 54,954
--------------- ---------------------------------------------- --------------------------
Total accounts payable and accrued expenses $ 444,372411,540 340,392
=============== ============================================== ==========================
6.7. Property, Plant and Equipment
Effective January 1, 2000, the Company changed the estimated useful
lives of buildings (25 years to 35 years), tufting equipment (7 years to 10
years), extrusion equipment (7 years to 15 years) and furniture and fixtures (5
years to 7 years). Management believes the change more accurately reflects the
actual lives of these assets and is more consistent with industry practice. The
prospective change is estimated to reduce annual depreciation expense by
approximately $20,000 in 2000.
8. Nonrecurring costs
In the third quarter of 2000, the Company reached an agreement in
principle to settle two antitrust class actions. The Company will contribute
$13,500 to a settlement fund to resolve price fixing claims. The settlement is
subject to preliminary approval of the court, notice to members of the
settlement classes, certification of the proposed settlement classes and final
approval by the court. During the quarter, the Company recorded a charge of
$7,000 in connection with the settlement. The after tax effect of the charge for
the three and nine months ended September 30, 2000, was $4,271, or $0.08 per
share.
9. Subsequent events
In October 2000, the Company entered into a one-year receivables
purchase agreement enabling the Company to sell up to $250,000 of an undivided
interest in a defined pool of trade accounts receivable and the securitization
agreement may be extended for one-year terms. The Company received approximately
$195,000 in proceeds from the initial sale of receivables. The proceeds were
used to reduce borrowings under the revolving credit facility and will be
accounted for as a short-term financing. The Company is generally at risk for
losses associated with the sold receivables and will provide for these losses
within the financial statements.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Effective January 1, 2000, the Company changed the estimated useful lives
of certain property, plant and equipment. Management believes this change more
accurately reflects the actual lives of these assets and is more consistent with
industry practice. The prospective change is estimated to reduce annual
depreciation expense by approximately $20 million in 2000.
Effective November 1, 2000, the Company entered into an agreement with
Congoleum Corporation, Inc. to become a national distributor of their vinyl
products. This will give the Company a complete line of soft and hard floor
covering products to supply to customers throughout the United States. In
conjunction with this program and the other hard surface floor coverings, the
Company anticipates significant start up costs with the rolling out of these
product lines into all sales regions during the remainder of 2000 and 2001. The
Company anticipates that the growth in sales will lag the increase in costs
during the start up period.
On October 10, 2000, the Company signed a definitive agreement with Crown
Crafts, Inc. to acquire certain assets of its Woven Division. Under the
agreement, the Company will pay approximately $40 million in cash for
substantially all of the fixed assets and inventory of the division. The
acquisition is expected to close by the end of the fourth quarter of 2000.
In 1999, Staff Accounting Bulletin 101 ("SAB 101") "Revenue Recognition"
was issued requiring that revenue be recognized when certain criteria are met.
In conjunction, the Emerging Issues Task Force ("EITF") reached a consensus on
issue EITF 00-10 in September 2000, "Accounting for Shipping and Handling Fees
and Costs". The Company is currently analyzing the implications of both SAB101
and EITF 00-10. The Company believes that these will not have a material impact
on the Company's consolidated financial statements.
In 1998, the Financial Accounting Standards Board ("FASB") issued FAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". In 2000, the
Financial Accounting Standards Board ("FASB") issued FAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities". The Company is
currently analyzing the implications of both FAS No. 131 and FAS No. 138. The
Company believes that these will not have a material impact on the Company's
consolidated financial statements.
Results of Operations
Quarter Ended July 1,September 30, 2000 as Compared with Quarter Ended July 3,October 2, 1999
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Net sales for the quarter ended July 1,September 30, 2000 were $852.8$838.5 million,
reflecting an increase of $62.2$28.6 million, or approximately 8%4%, over the $790.6$809.9
million reported in the quarter ended July 3,October 2, 1999. All major product
categories achieved sales increases for the secondthird quarter of 2000 as compared to
1999. The Company believes that the secondthird quarter of 2000 net sales increase was
attributable to internal growth.
Gross profit for the secondthird quarter of the current year was $215.9$214.2 million
(25.3%(25.5% of net sales) and represented a $15.0 millionan increase over the gross profit of $200.9$203.2
million (25.4%(25.1% of net sales) for the prior year's quarter. Gross profit as a
percentage of net sales was unfavorablyfavorably impacted by raw
material cost increases, resulting from rising oil prices, which were partially
offset by productivity improvements selling price increases and an
increase in the estimated useful lives of property, plant and equipment, which
was effective January 1, 2000. These increases were offset by raw material price
increases, resulting from rising oil and gas prices. The Company continues to
experience increased oil-related costs that have been difficult to recover or
offset on a timely basis. The Company believes that these higher costs and
higher interest rates are also having a dampening effect on the economy and the
flooring industry.
Selling, general and administrative expenses for the current quarter were
$127$127.2 million (14.9%(15.2% of net sales) compared to $120$119.3 million (15.2%(14.7% of net
sales) for the prior year's secondthird quarter. The decrease as a percentage of net salesincrease was primarily due to
improved cost controlsstart up expenses associated with the expansion of the Company's hard surfaces
product lines throughout the United States.
In the third quarter of 2000, the Company reached an agreement in principle
to settle two antitrust class actions. The Company will contribute $13,500 to a
settlement fund to resolve price fixing claims. The settlement is subject to
10
preliminary approval of the court, notice to members of the settlement classes,
certification of the proposed settlement classes and final approval by the
leveragingcourt. During the quarter, the Company recorded a charge of these expenses
against higher sales volume$7,000 in connection
with the current quarter.settlement.
Interest expense for the current quarter was $9.7$10.2 million compared to $7.8$8.3
million in the secondthird quarter of 1999. The primary factorfactors contributing to the
increase was an increase in debt levels, which was attributable to the stock
repurchase program capital expenditures, and an increase in the weighted average borrowing rate
compared to the secondthird quarter of 1999.
Income tax expense was $30.8$26.9 million, or 39.5%39% of earnings before income
taxes in the current quarter compared to $28.8$29.4 million, or 39.5% of earnings
before income taxes for the prior year's secondthird quarter.
SixNine months Ended July 1,September 30, 2000 as Compared with SixNine Months Ended July 3,October
- -------------------------------------------------------------------------------
2, 1999
- -----------------------------------------------------------------------------------
Net sales for the first sixnine months ended July 1,September 30, 2000 were $1,618$2,456.4
million, reflecting an increase of $120$148.7 million, or approximately 8%6%, over the
$1,498$2,307.7 million reported in the sixfirst nine month period ended July 3,October 2, 1999.
The Company
believes that this increase was attributableAll major product categories achieved sales increases for the nine months of
2000 as compared to internal growth and the impact
of the acquisition of certain assets of Image Industries, Inc. on January 29, 1999.
Gross profit for the first sixnine months of the current year was $406.4$620.7
million (25.1%(25.3% of net sales) and represented a $27.2 millionan increase over the gross profit
of $379.2$582.5 million (25.3%(25.2% of net sales) for the first sixnine months of 1999. Gross
profit as a percentage of net sales was unfavorably impacted by raw
material cost increases, resulting from rising oil prices, which were partially
offset by productivity improvements, selling price increasesfavourable manufacturing
efficiencies, product mix and an increase in the estimated useful lives of
property, plant and equipment, which was effective January 1, 2000. These
increases were offset by raw material price increases, resulting from rising oil
and gas prices. The Company continues to experience increased oil-related costs
that have been difficult to recover or offset on a timely basis. The Company
believes that these higher costs and higher interest rates are also having a
dampening effect on the economy and the flooring industry.
Selling, general and administrative expenses for the current period were
$251.8$379.0 million (15.6%(15.4% of net sales) compared to $242.7$361.9 million (16.2%(15.7% of net
sales) for the prior year's first sixnine months. The decrease as a percentage of
net sales was primarily due to
improved cost controls and better leveraging of these expenses against higher
sales volume over the nine month period.
In the third quarter of 2000, the Company reached an agreement in principle
to settle two antitrust class actions. The Company will contribute $13,500 to a
settlement fund to resolve price fixing claims. The settlement is subject to
preliminary approval of the current quarter.court, notice to members of the settlement classes,
certification of the proposed settlement classes and final approval by the
court. During the quarter, the Company recorded a charge of $7,000 in connection
with the settlement.
Interest expense for the current period was $18.4$28.6 million compared to $15.6$23.9
million in the prior year's first six
10
nine months. The primary factor contributing
to the increase was an increase in debt levels, which was attributable to the
stock repurchase program capital
expenditures, and an increase in the weighted average borrowing rate
compared to the first sixnine months of 1999.
Income tax expense was $53$79.9 million, or 39.5%39.3% of earnings before income
taxes in the current period compared to $47$76.4 million, or 39.5% of earnings
before income taxes for the prior year's first sixnine months.
Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital
expenditures, acquisitions and acquisitions.stock repurchases. The Company's capital needs
are met through a combination of internally generated funds, bank credit lines
and credit terms from suppliers.
The level of accounts receivable increased from $337.8 million at the
beginning of 2000 to $396.2$394.9 million at July 1,September 30, 2000. The $58.4$57.1 million
increase was attributable to strong sales growth. Inventories increased from
$494.8 million at the beginning of 2000 to $576.7$592.8 million at July 1,September 30, 2000,
due primarily to the need for a higher level of inventory to meet the increased
sales volume and seasonal demand.
11
Capital expenditures totaled $34.8$53.5 million for the first sixnine months of
2000, and were incurred primarily to modernize and expand manufacturing
facilities and equipment. The Company's capital projects are primarily focused
on increasing capacity, improving productivity and reducing costs. Capital
spending duringfor the remainder of 2000 is expected to range from $70$21 million to $85$31
million, the majority of which will be used to purchase equipment to increase
production capacity and productivity.
During 1999, the Company's Board of Directors authorized the repurchase of
up to 10 million shares of its outstanding common shares. During the quarter
ended July 1, 2000, the Board of Directors authorized an additional repurchase
of 5 million outstanding shares bringing the total authorized repurchase to 15
million. ForDuring the quarter ended July 1,September 30, 2000, a total of approximately
1,514,000.2 million shares of the Company's common stock has beenwas purchased at an aggregate
cost of approximately $37.6$4.4 million. Since the inception of the program, a total
of approximately 7,5897.8 million shares hashave been purchased at an aggregate cost of
approximately $167.4$172.0 million. All of this repurchase hasthese repurchases have been financed
through the Company's operations and revolving line of credit.
In October 2000, the Company entered into a one-year receivables purchase
agreement enabling the Company to sell up to $250 million of an undivided
interest in a defined pool of trade accounts receivable and the securitization
agreement may be extended for one-year terms. The Company received approximately
$195 million in proceeds from the initial sale of receivables. The proceeds were
used to reduce borrowings under the revolving credit facility and will be
accounted for as a short-term financing. The Company is generally at risk for
losses associated with the sold receivables and will provide for these losses
within the financial statements.
Impact of Inflation
Inflation affects the Company's manufacturing costs and operating expenses.
The carpet industry has experienced significant inflation in the prices of raw
materials and fuel-related costs, beginning in the third quarter of 1999. For
the period from 1997, through the end of the second quarter of 1999, the carpet
industry has experienced moderate inflation in the prices of raw materials and
outside processing for the last three years.fuel-related costs. The Company has generally passed along nylon fiber price
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.
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;
11
. obtain sufficient financing on acceptable terms to fund acquisitions;
. complete acquisitions;
. integrate acquired operations into Mohawk's existing operations;or
. profitably manage acquired businesses.
Acquired operations may not achieve levels of sales, operating income or
productivity comparable to those of Mohawk's existing operations, or otherwise
perform as expected. Acquisitions may also involve a number of special risks,
some or all of which could have a material adverse effect on Mohawk's business,
results of operations and
12
financial condition, including, among others:
. possible adverse effects on Mohawk's operating results;
. diversion of Mohawk 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
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operations to fluctuate on a quarterly basis.
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Mohawk is a calendar year end company and its results of operations for the
first quarter tend to be the weakest. Mohawk's second, third and fourth quarters
typically produce higher net sales and operating income. These results are
primarily due to consumer residential spending patterns and more carpet being
installed in the spring and summer months.
Mohawk's business is competitive and a failure by Mohawk to compete effectively
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could have a material and adverse impact on Mohawk's results of operations.
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Mohawk operates in a highly competitive industry. Mohawk and other
manufacturers in the carpet industry compete on the basis of price, style,
quality and service. Some of Mohawk's competitors may have greater financial
resources at their disposal. Mohawk has one competitor whose size could allow it
certain manufacturing cost advantages compared to other industry participants.
If competitors substantially increase production and marketing of competing
products, then Mohawk might be required to lower its prices or spend more on
product development, marketing and sales, which could adversely affect Mohawk's
profitability.
An increase in the cost of raw materials could negatively impact Mohawk's
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profitability.
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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
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impact profitability.
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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
12
disposal
locations.
Mohawk's operations are also governed by the laws relating to workplace safety
and worker health, which, among other things, establish asbestos and noise
standards and regulate the use of hazardous chemicals in the workplace. Mohawk
has taken and will continue to take steps to comply with these laws. Based upon
current available information, Mohawk believes that complying with environmental
and safety and health requirements will not require material capital
expenditures in the foreseeable future. However, Mohawk cannot provide assurance
that complying with these environmental or health and safety laws and
requirements will not adversely affect its business, results of
13
operations and financial condition. Future laws, ordinances or regulations could
give rise to additional compliance or remediation costs, which could have a
material adverse 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; oil price increases; 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.
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 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 determined that the plaintiffs met their burden of
establishing the requirements for class certification and 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 has 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. Under the terms of the
settlement agreement, Mohawk will contribute $13.5 million to a settlement fund
to resolve price-fixing claims brought by a class of purchasers of polypropylene
carpet and a proposed settlement class of purchasers of nylon carpet. Mohawk
denies all liability and wrongdoing and has agreed to settle these claims in
order to avoid the costs of further litigation. The settlement is subject to the
Court's preliminary approval, notice to the members of the two classes,
certification of the proposed settlement class, and final approval of the
settlement by the Court after a hearing. The one-time payment will only be made
after these conditions have occurred.
The Company is a party to two consolidated lawsuits captioned Gaehwiler v.
Sunrise Carpet Industries, Inc. et al. and Patco Enterprises, Inc. v. Sunrise
Carpet Industries, Inc. et al., both of which were filed in the Superior Court
of the State of California, City and County of San Francisco, in 1996. Both
complaints were brought on behalf of a purported class of indirect purchasers of
polypropylene carpet in the State of California and seek damages for alleged
violations of California antitrust and unfair competition laws. 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
13
answer, denied the allegations in the complaint and set forth its defenses. In February
1999, a similar complaint was filed in the Superior Court
14
of the State of California, City and County of San Francisco, on behalf of a
purported class based on indirect purchasespurchasers of nylon carpet in the State of
California and alleges violations of California antitrust and unfair competition
laws. The complaints described above do not specify any specific amount of
damages but do request injunctive relief and treble damages plus reimbursement
for fees and costs. The Company believes it has meritorious defenses and intends
to vigorously defend against these actions.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of stockholders was held on May 18, 2000, at which time
stockholders were asked to elect a class of directors to serve a three-year
term beginning in 2000.
Bruce C. Bruckmann, Larry W. McCurdy and Sylvestor H. Sharpe were elected
Class II directors of the Company for a term expiring in 2003. Mr. Bruckman
was elected by stockholders owning 42,439,065 shares of common stock, with
stockholders owning 2,804,754 shares withholding authority. With respect to
Mr. Bruckman's election there were no broker nonvotes. Mr. Mccurdy was
elected by stockholders owning 44,987,621 shares of common stock, with
stockholders owning 256,198 shares withholding authority. With respect to Mr.
Mccurdy's election there were no broker nonvotes. Mr. Sharpe was elected by
stockholders owning 44,878,054 shares of common stock, with stockholders
owning 365,765 shares withholding authority. With respect to Mr. Sharpe's
election there were no broker nonvotes. Messrs. David L. Kolb, Jeffrey S.
Lorberbaum, Leo Benatar and Robert N. Pokelwaldt continued their terms of
office as directors.None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
- --- --------------------------
(a) Exhibits
3.2 Amended and restated by-laws.
10 Consulting agreement between Mohawk Industries, Inc. and David L. Kolb
dated August 1, 2000.
11 Statement re: Computation of Per Share EarningsEarnings.
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K: FirstSecond quarter 2000 earnings announcement,press release, dated
April 18,July 20, 2000.
Current Report on Form 8-K: AppointmentRetirement of Monte Thornton and retirement of
Frank Procopio,David Kolb press release, dated
April 27,August 1, 2000.
Current Report on Form 8-K: Second increase in stock repurchase program,Legal Class Action Settlement press release,
dated May 18,August 11, 2000.
14Current Report on Form 8-K: National distributor for Congoleum Corporation
press release, dated September 25, 2000.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHAWK INDUSTRIES, INC.
Dated: August 4,November 3, 2000 By: /s/ David L. Kolb
-----------------
DAVID L. KOLB, Chairman of the Board and
Chief Executive Officer (principal executive officer)
Dated: August 4,November 3, 2000 By: /s/ John D. Swift
-----------------
JOHN D. SWIFT, Chief Financial Officer,
Vice President-Finance and Assistant Secretary
(principal financial and accounting officer)
1516
EXHIBIT INDEX
No. Description
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(a) Exhibits
3.2 Amended and restated by-laws.
10 Consulting agreement between Mohawk Industries, Inc. and David L. Kolb
dated August 1,2000.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
1617