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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [Mark One] [X ] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal
year ended December 31, 2005 OR [ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from to Commission File Number 01-19826 MOHAWK INDUSTRIES, INC. (Exact name of registrant as
specified in its charter)
Delaware
52-1604305
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
P. O. Box 12069, 160 S. Industrial
Blvd., Calhoun, Georgia
30701
(Address of principal executive
offices)
(Zip Code)
Registrant's
telephone number, including area code: (706) 629-7721
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of Each Class
Name of
Each Exchange on Which Registered Common Stock,
$.01 par value New York Stock
Exchange
Securities
Registered Pursuant to Section 12(g) of the Act: None Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ x ] No [ ] Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act Yes [ ] No [ x ] 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 [ ] Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ] Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ x ] Accelerated filer [ ] Non-accelerated filer [
] Indicate by
check whether the Registrant is a shell company (as defined by Rule 12b-2 of
the Act). The
aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant (41,675,793 shares) on July 2, 2005 (the last
business day of the Registrant's most recently completed fiscal second quarter)
was $3,425,750,185. The aggregate market value was computed by reference
to the closing price of the Common Stock on such date. Number
of shares of Common Stock outstanding as of March 14,
2006: 67,621,254
shares of Common Stock, $.01 par value. DOCUMENTS
INCORPORATED BY REFERENCE Portions
of the definitive Proxy Statement for the 2006 Annual Meeting of
Stockholders-Part III.
Table
of Contents Page No. Part I Item 1. 3 Item 1a. 9 Item 1b. 14 Item 2. 14 Item 3. 14 Item 4. 15 Part II Item 5.
Market for Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities 16 Item 6. 17 Item 7.
Management's Discussion and
Analysis of Financial Condition and Results of Operations 18 Item 7A 25 Item 8. 27 Item 9.
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure 59 Item 9A 59 Item 9B 59 Part III Item 10.
Directors and Executive Officers
of the Registrant and Related Stockholder Matters 60 Item 11. 60 Item 12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters 60 Item 13. 60 Item 14. 60 Part IV Item 15. 60 PART I Item 1. Business General Mohawk
Industries, Inc., ("Mohawk" or the "Company"), a term which
includes the Company and its subsidiaries, including its primary operating
subsidiaries, Mohawk Carpet Corporation, Aladdin Manufacturing Corporation,
Dal-Tile International Inc. and Unilin Flooring BVBA,
Unilin Holding Inc., and their subsidiaries (the Unilin Group), is a
leading producer of floor covering products for residential and commercial
applications in the United States and Europe. The Company is the second largest
carpet and rug manufacturer and one of the largest manufacturers, marketers and
distributors of ceramic tile and natural stone in the United States as well as
a leading producer of laminate flooring in the United States and Europe. The
Company had annual net sales in 2005 in excess of $6.6 billion. Approximately 98%
of this amount was generated by sales in North America and 2% was generated by
sales outside North America. Selected financial information for the Mohawk,
Dal-Tile, and Unilin segments is set forth in Note 16 to the Consolidated
Financial Statements. The Mohawk segment designs,
manufactures, sources, distributes and markets its floor covering product
lines, which include carpet, rug, carpet pad, ceramic tile, laminate, hardwood
and resilient, in a broad range of colors, textures and patterns for
residential and commercial applications in both new construction and
remodeling. The Mohawk segment markets and distributes its carpets and rugs
under its soft surface floor covering brands and ceramic tile, laminate,
hardwood and resilient under its hard surface floor covering brands. The Mohawk
segment positions its products in all price ranges and emphasizes quality,
style, performance and service. The Mohawk segment is widely recognized through
its premier brand names, which include "Mohawk®,"
"Aladdin®," "Mohawk Home®," "Bigelow®,"
"Custom Weave®," "Durkan®," "Helios®,"
"Horizon®," "Karastan®," "Lees®,"
"MeritTM ," "Ralph Lauren®"
and "WundaWeve®." The Mohawk segment
markets and distributes soft and hard surface products through over 30,000
customers, which include independent floor covering retailers, home centers,
mass merchandisers, department stores, commercial dealers and commercial end
users. Some products are also marketed through private labeling programs. The
Mohawk segment's soft surface operations are vertically integrated from the
extrusion of resin to the manufacture and shipment of finished carpets and
rugs. The Dal-Tile segment
designs, manufactures, sources, distributes and markets a broad line of ceramic
tile, porcelain tile, natural stone and other products used in the residential
and commercial markets for both new construction and remodeling. Most of the
Dal-Tile segment's ceramic tile products are marketed under the "Dal-Tile®" and "American Olean®" brand names and sold through independent distributors, home
center retailers, tile and flooring retailers and contractors. The Dal-Tile
segment operations are vertically integrated from the production of raw
material for body and glaze preparation to the manufacturing and distribution
of ceramic and porcelain tile. On October 31, 2005, the Company acquired all the
outstanding shares of Unilin Holding NV (the "Unilin Acquisition").
The total purchase price for acquiring Unilin, net of cash, was approximately
Euro 2.2 billion (approximately $2.6 billion). The results of operations for the
Unilin business have been included with the Unilin segment results and in the Company's
consolidated financial statements since that date. The primary reason for the
acquisition was to expand the Company's presence in the laminate flooring
market. The Unilin segment, which is
headquartered in Belgium, is a leading manufacturer, distributor and marketer
of laminate flooring in Europe and the United States. Unilin is one of the
leaders in laminate flooring technology, having commercialized direct pressure
laminate, or DPL, a technology used in a majority of laminates today, and has
developed the patented UNICLIC® glueless
installation system and a variety of other new technologies, such as beveled
edges, multiple length planks and new surface technologies. Unilin is the only
vertically-integrated laminate flooring manufacturer in the United States
producing both laminate flooring and related high density fiberboard. Unilin
sells its laminate flooring products under the Quick-Step® brand through independent distributors and specialty
stores in Europe and the United States, as well as through traditional
retailers in France, Belgium and the Netherlands and, in some circumstances,
under private label names. Unilin also produces insulated roofing and other
wood-based panels. Industry The
United States floor covering industry has grown from $12.4 billion in sales in
1992 to $22.8 billion in 2004. In 2004, the primary categories of the United
States floor covering industry were carpet and rug (62%), ceramic tile (13%),
hardwood (10%), resilient and rubber (9%), and laminate (6%). Each of these
categories has been positively impacted by:
increases in average selling price per square foot;
increases in the residential builder and homeowner remodeling
markets;
growth in housing starts and housing resales;
increases in average house size; and
increases in home ownership. Compound average growth
rates for all categories, except the resilient and rubber category, for the
period from 1999 through 2004 have met or exceeded the growth rates (measured
in sales dollars) for the gross domestic product of the United States over the
same period. Ceramic tile, laminate and hardwood continued to exceed the
growth rate for housing starts over the same period. During this period, the
compound average growth rate was 3.0% for carpets and rugs, 7.0% for ceramic
tile, 0.6% for resilient and rubber, 17.4% for laminate and 9.4% for hardwood. According
to the most recent figures available from the United States Department of
Commerce, worldwide carpet and rug sales volume of American manufacturers and
their domestic divisions was approximately 2.3 billion square yards in 2004.
This volume represents a market in excess of $14 billion. The overall level of
sales in the floor covering industry is influenced by a number of factors,
including consumer confidence, spending for durable goods, interest rates,
turnover in housing, the condition of the residential and commercial
construction industries and the overall strength of the economy. Broadloom
carpet, defined as carpet over six feet by nine feet in size, has two primary
markets, residential and commercial, with the residential market making up
approximately 76% of industry amounts shipped in 2004 and the commercial market
comprising approximately 24%. An estimated 49% of industry shipments are made
in response to replacement demand, which usually involves exact yardage, or
"cut order," shipments that typically provide higher profit margins than sales
of carpet sold in full rolls. Because the replacement business generally
involves higher quality carpet cut to order by the manufacturer, rather than
the dealer, this business tends to be more profitable for manufacturers than
the new construction business. The
United States ceramic tile industry shipped 3.1 billion square feet, or $2.9
billion, in 2004. Sales in the ceramic tile industry are influenced by the same
factors that influence the carpet industry, including consumer confidence,
spending for durable goods, interest rates, turnover in housing, the condition
of the residential and commercial construction industries and the overall
strength of the economy. The
ceramic tile industry's two primary markets, residential applications and
commercial applications, represent 69.8% and 28.8% of the industry total,
respectively. Of the total residential market, 61% of the dollar values of
shipments are for new construction. In 2004, the United States
laminate industry shipped 1.1 billion square feet, representing a market of
approximately $1.4 billion, and the European laminate industry shipped 5.2
billion square feet. In 2003, the laminate industry accounted for approximately
10% of the European floor covering markets. Sales in the laminate industry are
influenced by the same factors that influence the carpet industry, including
consumer confidence, spending for durable goods, interest rates, turnover in
housing, the condition of the residential and commercial construction
industries and the overall strength of the economy. Sales and Distribution
Mohawk
Segment Through its
Mohawk segment, the Company designs, manufactures and markets hundreds of styles
of carpet and rugs in a broad range of colors, textures and patterns. In
addition, the Mohawk segment markets and distributes ceramic tile, laminate,
carpet pad, hardwood and resilient floor covering. The Mohawk segment positions
product lines in all price ranges and emphasizes quality, style, performance and
service. The Mohawk segment markets and distributes its soft and hard surface
product lines to over 30,000 customers, which include independent floor
covering retailers, home centers, mass merchandisers, department stores,
commercial dealers and commercial end users. Some products are also marketed
through private labeling programs. Sales to residential customers represent a
significant portion of the total industry and the majority of the Company's
carpet and rug sales. The
Company has positioned its premier residential carpet and rug brand names
across all price ranges. "Mohawk®,"
"Custom Weave®," "WundaWeve®," "Horizon®," "Helios®" and "Karastan®" are
positioned to sell primarily in the medium-to-high retail price channels in the
residential broadloom market. These lines have substantial brand name
recognition among carpet dealers and retailers, with the "Karastan®" and
"Mohawk®" brands having the highest consumer recognition in the industry.
"Karastan®" is the leader in the exclusive high-end market. The "Aladdin®" and
"Mohawk Home®" brand names compete primarily in the value retail price channel.
The Company markets its hard surface product lines, which include "Mohawk
Ceramic®", "Mohawk Hardwood®", "Mohawk Resilient®" and "Mohawk Laminate®"
across all price ranges. In addition, the Company markets its decorative throws
and pillows, woven bedspreads, textile wall hangings and blankets primarily
through the retail channel. The
Company offers marketing and advertising support through dealer programs like
Karastan Gallery, Mohawk ColorCenter, Mohawk Floorscapes and Mohawk Floorz.
These programs offer varying degrees of support to dealers in the form of sales
and management training, merchandising systems, exclusive promotions and
assistance in certain administrative functions such as consumer credit,
advertising and insurance. The
commercial customer base is divided into several channels: corporate office
space, educational institutions, hospitality facilities, retail space and
health care facilities. In addition, the Company produces and sells carpet for
the federal government and other niche businesses. Different purchase decision
makers and decision-making processes exist for each channel. The
Company's sales forces are generally organized based on product type and sales
channels in order to best serve each type of customer. A hub-and-spoke distribution
network accomplishes the product distribution on a regional level. In this
system, trucks generally deliver product from manufacturing and central
distribution centers to regional and satellite warehouses. From there, it is
shipped to retailers or to local distribution warehouses, then to retailers.
Dal-Tile
Segment The
Dal-Tile segment designs, manufactures and markets a broad line of ceramic
tile, porcelain tile and natural stone products. Products are distributed
through separate distribution channels consisting of retailers, contractors,
commercial users, independent distributors and home centers. The business is
organized to address the specific customer needs of each distribution channel,
and dedicated sales forces support the various channels. The
Company has six regional distribution centers in the Dal-Tile operations. These
centers help deliver high-quality customer service by focusing on shorter lead
times, increased order fill rates and improved on-time deliveries to customers.
These distribution centers also enhance the ability to plan and schedule
production and manage inventory requirements. A
network of approximately 250 sales service centers located in the United
States, Canada and Puerto Rico distributes primarily the "Dal-Tile®" brand
product, serving customers in all 50 states and portions of Canada and Puerto
Rico. The service centers provide distribution points for both customer pick-up
and delivery and include showrooms to assist customers with product selection.
The
Company serves as a "one-stop" source that provides customers with one of the
ceramic tile industry's broadest product lines-a complete selection of glazed
floor tile, glazed wall tile, glazed and unglazed ceramic mosaic tile, porcelain
tile, quarry tile and stone products, as well as allied products. In addition
to products manufactured by the Company's ceramic tile business, the Company
also purchases products from other manufacturers to enhance its product
offering. The
independent distributor channel offers a distinct product line under the
"American Olean®" brand. Currently, the "American Olean®" brand is distributed
through approximately 200 independent distributor locations that service a
variety of residential and commercial customers. The Company is focused on
increasing its presence in the independent distributor channel, particularly in
tile products that are most commonly used in flooring applications. The
Company believes that it has two of the leading brand names in the U.S. ceramic
tile industry-"Dal-Tile®" and "American Olean®". The "Dal-Tile®" and "American
Olean®" brand names date back over fifty and seventy-five years, respectively
and are well recognized in the industry. The
Company's sales service centers primarily distribute the "Dal-Tile®" brand,
with a fully integrated marketing program, emphasizing a focus on quality and
fashion. The broad product offering satisfies the needs of its residential,
commercial and builder customers. The "American Olean®" brand consists of a
full product offering and is distributed primarily through independent
distributors. Both of these brands are supported by a fully integrated
marketing program, displays, merchandising (sample boards, chip chests),
literature/catalogs and an Internet website. Unilin
Segment The
Unilin segment's laminate flooring products are distributed through separate
distribution channels consisting of retailers, contractors, commercial users,
independent distributors and home centers. The business is organized to address
the specific customer needs of each distribution channel. In
the United States, the Unilin operations have three regional distribution
centers. These distribution centers help deliver high-quality customer service
and also enhance the Company's ability to plan and schedule production and
manage inventory requirements. In
Europe, the Unilin operations distribute products directly from its
manufacturing facilities. This integration with its manufacturing sites allows
for quick responses to customer needs and low inventory levels. In
the Unilin business, the Company markets and sells laminate flooring products
under the "Quick-Step®" brand, which the
Company believes is one of the leading brand names in the U.S. and European
laminate industry. Advertising and Promotion
The Company promotes
its brands through national advertising in both television and print media as
well as in the form of cooperative advertising, point-of-sale displays, advertising
and sponsorship of a cycling team, and marketing literature provided to assist
in marketing various flooring styles. The Company also continues to rely on the
substantial brand name recognition of its product lines. The cost of producing
display samples, a significant promotional expense, is partially offset by
sales of samples and support from suppliers in the carpet and rug business. Manufacturing and Operations
Mohawk Segment The
Company's manufacturing operations are vertically integrated and include the
extrusion of resin and post-consumer plastics into polypropylene, polyester and
nylon fiber, yarn processing, tufting, weaving, dyeing, coating and finishing.
Capital expenditures are primarily focused on increasing capacity, improving
productivity and reducing costs. Over the past three
years, the Company has incurred capital expenditures that have helped increase
manufacturing efficiency and capacity and improve overall cost competitiveness.
Dal-Tile
Segment Over
the past three years, the Dal-Tile segment has
invested in capital expenditures, principally in new plant and state-of-the-art
equipment to increase manufacturing capacity, improve efficiency and develop
new capabilities. The
Company believes that its manufacturing organization offers competitive
advantages due to its ability to manufacture a differentiated product line
consisting of one of the industry's broadest product offerings of colors,
textures and finishes, as well as the industry's largest offering of trim and
angle pieces and its ability to utilize the industry's newest technology. Unilin
Segment
The
Company's laminate flooring manufacturing operations are vertically integrated,
both in the United States and in Europe, and include high-density fiberboard
("HDF") production, short-cycle pressing, cutting and milling. The European
operations also include resin production. Unilin has state-of-the-art equipment
that results in competitive manufacturing in terms of cost and flexibility.
Most of the equipment for the production of laminate flooring in Belgium and
North Carolina is relatively new. The Company's laminate flooring plant in
North Carolina is one of the largest in the United States. In addition, Unilin
is the only fully integrated laminate manufacturer in the United States with
its own "HDF" production facility. The
manufacturing facilities for other activities in the Unilin business (insulated
roofing and other wood-based panels) are all configured for cost-efficient
manufacturing and production flexibility and are competitive in the European
market. Raw Materials and Suppliers
Mohawk
Segment The
principal raw materials the carpet and rug business uses are nylon,
polypropylene, polyester and wool resins and fibers; synthetic backing
materials; latex and various dyes and chemicals. Major raw materials used in
the Company's manufacturing process are available from independent sources and
the Company obtains all of its externally purchased nylon fibers principally
from two major suppliers: Invista Inc., and Solutia, Inc. Although temporary
disruptions of supply of carpet raw materials have been experienced as a result
of recent hurricanes, the carpet and rug business has not experienced
significant shortages of raw materials in recent years. The Company believes
that there is an adequate supply of all grades of resin and fiber, which are
readily available. Dal-Tile
Segment In the ceramic tile
business, the Company manufactures tile primarily from clay, talc, nepheline
syenite and glazes. The Company has entered into a long-term supply agreement
for most of its talc requirements. The
Company owns long-term clay mining rights in Alabama, Kentucky and Mississippi
that satisfy nearly all of its clay requirements for producing unglazed quarry
tile. The Company purchases a number of different grades of clay for the
manufacture of its non-quarry tile. The Company believes that there is an
adequate supply of all grades of clay and that all are readily available from a
number of independent sources. The
Company has two suppliers for its nepheline syenite requirements. If these
suppliers were unable to satisfy the requirements, the Company believes that
alternative supply arrangements would be available. Glazes
are used on a significant percentage of manufactured tile. Glazes consist of
frit (ground glass), zircon, stains and other materials, with frit being the
largest ingredient. The Company manufactures approximately 45% of its frit requirements.
Unilin Segment
The
principal raw materials used in producing boards and laminate flooring are
wood, paper and resin. Wood
supply is a very fragmented market in Europe. The Company has long-standing
relationships with approximately 25 suppliers. These suppliers provide a wide
variety of wood species, varying from fresh round wood to several kinds of
by-products of sawmills and used wood recycled specifically for chipboard
production, giving the Company a cost-effective and secure supply of raw
material. In
the United States, the Company has a long-term contract with a strategic
partner that supplies approximately 90% of its total needs for wood on a
vendor-managed inventory program. Major
manufacturers supply the papers required in the laminate flooring business in
both Europe and the United States. The Company does more than 90% of the paper
impregnation internally in its laminate flooring facilities in Europe and the
United States. In Europe, the resins for paper impregnation are manufactured by
the Company, which permits greater control over the laminate flooring
manufacturing process, enabling the Company to produce higher-quality products.
The
Company buys the balance of its resin requirements from a number of companies.
The Company believes there are ample sources of supply. All the plants of the
Company are located within a distance of about 100 miles to the chemical plants
manufacturing those types of resins used in its laminate products. Competition
The
principal methods of competition within the floor covering industry generally
are service, style, quality, price and, to a certain extent, product
innovation and technology. In each of the markets other than laminate flooring,
price competition and market coverage are particularly important because there
is limited differentiation among competing product lines. In the laminate
flooring market, the Company believes it has a competitive advantage as a
result of Unilin's high-end products and patented technologies, which allows
the Company to distinguish its laminate flooring products in the areas of
finish, quality, installation and assembly. In the Mohawk and Dal-Tile
segments, the recent investments in modernized advanced manufacturing and data
processing equipment, the extensive diversity of equipment that has been
invested, as well as the Company's marketing strategy and distribution system
contribute to its ability to compete primarily on the basis of performance,
quality, style and service, rather than just price. The carpet and rug industry
has experienced substantial consolidation in recent years, and the Company is
one of the largest carpet and rug manufacturers in the world. While the ceramic
tile industry is more fragmented, the Company believes it is substantially
larger than the next largest competitor and that it is the only significant
manufacturer with its own North American distribution system. The laminate
flooring industry has a number of significant competitors more than either the
carpet and rug industry or the ceramic tile industry. The Company faces
competition in the laminate flooring market from a large number of domestic and
foreign manufacturers. Mohawk
Segment The
carpet and rug industry is highly competitive. Based on industry publications,
the top 20 North American carpet and rug manufacturers (including their
American and foreign divisions) in 2004 had worldwide sales in excess of $12.5
billion, and in 1998 the top 20 manufacturers had sales in excess of $9.6 billion.
In 2004, the top five manufacturers had worldwide sales in excess of $10.0
billion. The Company believes it is the second largest producer of carpets and
rugs (in terms of sales volume) in the world based on its 2004 sales. Dal-Tile
Segment The
Company estimates that over 100 tile manufacturers, more than half of which are
based outside the United States, compete for sales of ceramic tile to customers
located in the United States. Although the U.S. ceramic tile industry is highly
fragmented at both the manufacturing and distribution levels, the Company
believes it is one of the largest manufacturers, distributors and marketers of
ceramic tile in the United States and the world. Unilin
Segment Laminate
flooring is the fastest growing product in the floor covering industry and is
produced by more than 130 industrial manufacturers in 25 countries. The Company
believes it is one of the largest manufacturers, distributors and marketers of
laminate flooring in the world, with a focus on high-end products. The Company
is also the only vertically-integrated laminate flooring manufacturer in the
United States producing both high density fiberboard and laminate flooring.
Patents and Trademarks
Intellectual
property is important to the Company's business, and the Company relies on a
combination of patent, copyright, trademark and trade secret laws to protect
its interests. The Company
uses several trademarks that it considers important in the marketing of its
products, including "Aladdin®," "American
Olean®," "Bigelow®," "Custom Weave®,"
"Dal-Tile®," "Durkan®," "Helios®,"
"Horizon®," "Karastan®," "Lees®,"
"Mohawk®," "Mohawk Home,™"
"PERSPECTIVE, ®" "Portico, ®" "Quick-Step®,"
"UNICLIC®," "UNILIN®," and "WundaWeve®."
Unilin owns a
number of patent families, totaling approximately 150 patents and applications
in Europe and the United States. The most important of these patent families is
the UNICLIC® family, which protects
Unilin's interlocking laminate flooring panel technology. The patents in the
UNICLIC® family are not expected to
expire until at least 2017. Sales Terms and Major
Customers The
Company's sales terms are the same as those generally available throughout the
industry. The Company generally permits its customers to return carpet, rug,
ceramic tile, and laminate flooring purchased from it within specified time
periods from the date of sale, if the customer is not satisfied with the
quality of the product. During 2005, no
single customer accounted for more than 10% of total net sales, and the top ten
customers accounted for less than 15% of the Company's sales. The Company
believes the loss of one or a few major customers would not have a material
adverse effect on its business. Employees As
of March 10, 2006, the Company employed approximately 37,700 persons.
Approximately 460 United States employees, approximately 3,500 Mexico
employees, and the majority of European manufacturing employees are members of
unions. Other than with respect to these employees, the Company is not a party
to any collective bargaining agreements. Additionally, the Company has not
experienced any strikes or work stoppages in the United States or Mexico for
over 20 years. The Company believes that its relations with its employees are
good. Available Information The Company's Internet
address is http://mohawkind.com. The Company makes the following reports filed
by it available, free of charge, on its website under the heading
"Investor Information:" The foregoing reports are
made available on the Company's website as soon as practicable after they are
filed with, or furnished to, the Securities and Exchange Commission
("SEC"). Item 1a. Risk Factors
Certain Factors
affecting the Company's Performance In
addition to the other information provided in this Annual Report on Form 10-K,
the following risk factors should be considered when evaluating an investment
in shares of Common Stock. If any of the events described in these risks
were to occur, it could have a material adverse effect on the Company's
business, financial condition and results of operations. The floor covering industry
is sensitive to changes in general economic conditions, such as consumer
confidence and income, corporate and government spending, interest rate levels
and demand for housing. A prolonged decline in spending for replacement floor
covering products or new construction activity could have a material adverse
effect on the Company's business. The floor covering industry in which the Company
participates is highly dependent on general economic conditions, such as
consumer confidence and income, corporate and government spending and interest
rate levels. The Company derives a majority of the Company's sales from the
replacement segment of the market. Therefore, economic changes that result in a
prolonged decline in spending for remodeling and replacement activities could
have a material adverse effect on the Company's business and results of
operations. The floor covering industry is highly dependent on
construction activity, including new construction, which is cyclical in nature.
Although the impact of a decline in new construction activity is typically
accompanied by an increase in remodeling and replacement activity, a prolonged
decline in residential or commercial construction activity could have a
material adverse effect on the Company's business and results of operations.
The construction industry has experienced significant
downturns in the past, which have adversely affected suppliers to the industry.
The industry could experience similar downturns in the future, which could have
a negative impact on the Company's business. The Company
may be unable to pass increases in the costs of raw materials and fuel-related
costs on to its customers, which could have a material adverse effect on the
Company's profitability. The prices of raw materials and fuel-related costs
vary with market conditions. As a result of recent hurricanes and other general
economic factors, the Company's costs of carpet raw materials and fuel-related
costs are currently higher than historical averages and may remain so
indefinitely. Although the Company generally attempts to pass on increases in
the costs of raw materials and fuel-related costs to its customers, the
Company's ability to do so is dependent upon the rate and magnitude of any
increase, competitive pressures and market conditions for the Company's
products. There have been in the past, and may be in the future, periods of
time during which increases in these costs cannot be recovered. During such
periods of time, the Company's profitability may be materially adversely
affected. The Company
faces intense competition in the industry, which could decrease demand for the
Company's products or force it to lower prices, which could have a material
adverse effect on the Company's profitability. The floor covering industry is highly competitive. The
Company faces competition from a number of manufacturers and independent distributors.
Some of the Company's competitors are larger and have greater resources and
access to capital than the Company does. Maintaining the Company's competitive
position may require substantial investments in the Company's product
development efforts, manufacturing facilities, distribution network and sales
and marketing activities. Competitive pressures may also result in decreased
demand for the Company's products or force the Company to lower prices. Any of
these factors could have a material adverse effect on the Company's business. The Company
may not be able to successfully integrate Unilin or other acquisitions that the
Company may make in the future. The process of combining the businesses of Unilin with
the Company's existing businesses involves risks. The Company will face
challenges in consolidating functions, integrating the Company's organizations,
procedures, operations and product lines in a timely and efficient manner and
retaining key personnel. These challenges will result principally because the
two companies currently maintain executive offices in
different locations; manufacture and sell different
types of products through different distribution channels; conduct business
from various locations; maintain different
operating systems and software on different computer hardware; and have different
employment and compensation arrangements for their employees. In addition, the majority of Unilin's operating
facilities are located in Europe, where the Company has not previously operated
a manufacturing facility. As a result, the integration will be complex and will
require additional attention from members of management. The diversion of
management attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on the Company's revenues, level
of expenses and operating results. The Company may face similar challenges in
combining the Company's businesses with any other businesses that the Company
acquires in the future. Failure to successfully manage and integrate Unilin
with the Company's existing operations could lead to the potential loss of
customers of the acquired business, the potential loss of employees who may be
vital to the new operations, the potential loss of business opportunities or
other adverse consequences that could affect the Company's financial condition
and results of operations. Even if integration occurs successfully, failure of
the Unilin Acquisition or any future acquisition to achieve levels of
anticipated sales growth, profitability or productivity or otherwise not
perform as expected, may adversely impact the Company's financial condition and
results of operations. The Company has incurred, and will continue to incur,
certain liabilities and expenses in connection with the Unilin Acquisition or
any future acquisitions. The Company
has not yet completed the testing of the adequacy of Unilin's internal control
over financial reporting, and it is possible that the Company's testing or that
of the Company's independent auditors in connection with the audit of the
Company's financial results for the year ended December 31, 2006, will
reveal material weaknesses in Unilin's internal control over financial
reporting. As part of the integration of Unilin, the Company is
in the process of documenting and testing of the Unilin's internal control over
financial reporting to allow management and the Company's independent
registered public accounting firm to report in 2006 on the effectiveness of the
internal control over financial reporting as it pertains to Unilin's
operations. The adequacy of Unilin's internal control over financial reporting
has not previously been attested to by any independent accounting firm, as no
such attestation was required by virtue of Unilin's status as a foreign,
privately-held company. The Company anticipates completing the testing of
Unilin's internal control over financial reporting by the end of 2006. The
Company's testing, or the subsequent testing by the Company's independent
registered public accounting firm, may reveal deficiencies in the Company's
internal control over financial reporting. In that event, the Company's
management may not be able to report that the Company's internal control over
financial reporting is effective, and the Company's auditors will not be able
to express an opinion on the Company's internal control over financial
reporting, which could have a material adverse effect on the Company's
business. A failure to
identify suitable acquisition candidates and to complete acquisitions could
have a material adverse effect on the Company's business. As part of the Company's business strategy, the
Company intends to continue to pursue acquisitions of complementary businesses.
Although the Company regularly evaluates acquisition opportunities, the Company
may not be able successfully to identify suitable acquisition candidates; to
obtain sufficient financing on acceptable terms to fund acquisitions; to
complete acquisitions; or to manage profitably acquired businesses. The Company may be unable
to obtain raw materials on a timely basis, which could have a material adverse
effect on the Company's business. The
principal raw materials used in the Company's manufacturing operations include
nylon, polyester and polypropylene resins and fibers and carpet backings, which
are used primarily in the Company's carpet and rugs business; talc, clay,
nepheline syenite and various glazes, including frit (ground glass), zircon and
stains, which are used exclusively in the Company's ceramic tile business;
wood, paper, and resins which are used primarily in the Company's laminate
flooring business; and other materials. An extended interruption in the supply
of these or other raw materials used in the Company's business or in the supply
of suitable substitute materials would disrupt the Company's operations, which
could have a material adverse effect on the Company's business. The Company
has been, and in the future may be, subject to claims and liabilities under
environmental, health and safety laws and regulations, which could be
significant. The
Company's operations are subject to various environmental, health and safety
laws and regulations, including those governing air emissions, wastewater
discharges, and the use, storage, treatment and disposal of hazardous
materials. The applicable requirements under these laws are subject to
amendment, to the imposition of new or additional requirements and to changing
interpretations of agencies or courts. The Company could incur material
expenditures to comply with new or existing regulations, including fines and
penalties. The
nature of the Company's operations, including the potential discovery of
presently unknown environmental conditions, exposes it to the risk of claims
under environmental, health and safety laws and regulations. The Company could
incur material costs or liabilities in connection with such claims. Changes in
international trade laws and in the business, political and regulatory
environment in Mexico and Europe could have a material adverse effect on the
Company's business. The Company's Monterrey, Mexico manufacturing facility
and the Company's manufacturing facilities in Europe represent a significant
portion of the Company's total manufacturing capacity for ceramic tile and
laminate flooring, respectively. In addition, as a result of the Unilin
Acquisition, the Company now has more significant general operations abroad,
particularly in Europe. Accordingly, an event that has a material adverse
impact on the Company's Mexican operations could have a material adverse effect
on the Company's tile operations as a whole. Similarly, an event that has a
material adverse impact on the Company's European operations could have a
material adverse effect on the Company's laminate flooring operations, as a
whole. The business, regulatory and political environments in Mexico and in
Europe differ from those in the United States, and the Company's Mexican and
European operations are exposed to legal, currency, tax, political, and
economic risks specific to the countries in which they occur, particularly with
respect to labor regulations, which tend to be more stringent in Europe and, to
a lesser extent, Mexico. The Company cannot assure investors that the Company
will succeed in developing and implementing policies and strategies to counter
the foregoing factors effectively in each location where the Company does
business and therefore that the foregoing factors will not have a material
adverse effect on the Company's operations or upon the Company's financial
condition and results of operations. The Company
could face increased competition as a result of the General Agreement on
Tariffs and Trade ("GATT") and the North American Free Trade Agreement
("NAFTA"). The Company is uncertain what effect reduced import
duties under GATT may have on the Company's operations, although these reduced
rates may stimulate additional competition from manufacturers that export
ceramic tile to the United States. Although NAFTA lowers the tariffs imposed on the
Company's ceramic tile manufactured in Mexico and sold in the United States and
will eliminate such tariffs entirely on January 1, 2008, it may also
stimulate competition in the United States and Canada from manufacturers
located in Mexico. Fluctuations
in currency exchange rates may impact the Company's financial condition and
results of operations and may affect the comparability of results between the
Company's financial periods. The results of the Company's foreign subsidiaries
reported in the local currency are translated into U.S. dollars for balance
sheet accounts using exchange rates in effect at the balance sheet date and for
the statement of earnings accounts using the Company's weighted average rates
during the period. The exchange rates between some of these currencies and the
U.S. dollar in recent years have fluctuated significantly and may continue to
do so in the future. Although the Company has not yet experienced material
losses due to foreign currency fluctuation, the Company may not be able to
manage effectively the Company's currency translation risks, and volatility in
currency exchange rates may have a material adverse effect on the carrying
value of the Company's debt and results of operations and affect comparability
of the Company's results between financial periods. If the
Company is unable to protect the Company's intellectual property rights,
particularly with respect to the Company's patented laminate flooring
technology and the Company's registered trademarks, the Company's business and
prospects could be harmed. The future success and competitive position of certain
of the Company's businesses, particularly the Company's laminate flooring
business, depend in part upon the Company's ability to obtain and maintain
proprietary technology used in the Company's principal product families. The
Company relies, in part, on the patent, trade secret and trademark laws of the
United States and countries in Europe, as
well as confidentiality agreements with
some of the Company's employees, to protect that technology. The Company has obtained a number of patents relating
to the Company's products and associated methods and has filed applications for
additional patents, including the UNICLIC® family of
patents, which protects Unilin's interlocking laminate flooring panel
technology. The Company cannot assure investors that any patents owned by or
issued to it will provide the Company with competitive advantages, that third
parties will not challenge these patents, or that the Company's pending patent
applications will be approved. In addition, patent filings by third parties,
whether made before or after the date of the Company's filings, could render
the Company's intellectual property less valuable. Furthermore, despite the Company's efforts, the
Company may be unable to prevent competitors and/or third parties from using
the Company's technology without the Company's authorization, independently
developing technology that is similar to that of the Company or designing
around the Company's patents. The use of the Company's technology or similar
technology by others could reduce or eliminate any competitive advantage the Company
has developed, cause us to lose sales or otherwise harm the Company's business.
In addition, if the Company does not obtain sufficient protection for the
Company's intellectual property, the Company's competitiveness in the markets
it serves could be significantly impaired, which would limit the Company's
growth and future revenue. The Company has obtained and applied for numerous U.S.
and foreign service marks and trademark registrations and will continue to
evaluate the registration of additional service marks and trademarks, as
appropriate. The Company cannot guarantee that any of the Company's pending or
future applications will be approved by the applicable governmental
authorities. Moreover, even if such applications are approved, third parties
may seek to oppose or otherwise challenge the registrations. A failure to
obtain trademark registrations in the United States and in other countries
could limit the Company's ability to protect the Company's trademarks and
impede the Company's marketing efforts in those jurisdictions. The Company requires third parties with access to the
Company's trade secrets to agree to keep such information confidential. While
such measures are intended to protect the Company's trade secrets, there can be
no assurance that these agreements will not be breached, that the Company will
have adequate remedies for any breach or that the Company's confidential and
proprietary information and technology will not be independently developed by
or become otherwise known to third parties. In any of these circumstances, the
Company's competitiveness could be significantly impaired, which would limit
the Company's growth and future revenue. Companies
may claim that the Company infringed their intellectual property or proprietary
rights, which could cause it to incur significant expenses or prevent it from
selling the Company's products. The Company has in the past had companies claim that
certain technologies incorporated in the Company's products infringe their patent
rights. There can be no assurance that the Company will not receive notices in
the future from parties asserting that the Company's products infringe, or may
infringe, those parties' intellectual property rights. The Company cannot be
certain that the Company's products do not and will not infringe issued patents
or other intellectual property rights of others. Historically, patent
applications in the United States and some foreign countries have not been
publicly disclosed until the patent is issued (or, in some recent cases, until
18 months following submission), and the Company may not be aware of currently
filed patent applications that relate to the Company's products or processes.
If patents are later issued on these applications, the Company may be liable
for infringement. Furthermore, the Company may initiate claims or
litigation against parties for infringement of the Company's proprietary rights
or to establish the invalidity, noninfringement, or unenforceability of the
proprietary rights of others. Likewise, the Company may have similar claims
brought against it by competitors. Litigation, either as plaintiff or
defendant, could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel from operations,
whether or not such litigation is resolved in the Company's favor. In the event
of an adverse ruling in any such litigation, the Company might be required to
pay substantial damages (including punitive damages and attorneys fees),
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology. There can be no assurance that licenses to disputed technology or
intellectual property rights would be available on reasonable commercial terms,
if at all. In the event of a successful claim against the Company along with
failure to develop or license a substitute technology, the Company's business,
financial condition and results of operations would be materially and adversely
affected. Forward-Looking Information Certain
of the statements in this Annual Report on Form 10-K, particularly those
anticipating future performance, business prospects, growth and operating
strategies, proposed acquisitions, and similar matters, and those that include
the words "believes," "anticipates," "forecast,"
"estimates" or similar expressions constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, 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. There can be no assurance that the forward-looking
statements will be accurate because they are based on many assumptions, which
involve risks and uncertainties. The following important factors could cause
future results to differ: changes in industry conditions; competition; raw
material prices; energy costs; timing and level of capital expenditures;
integration of acquisitions; introduction of new products; rationalization of
operations; litigation; and other risks identified in Mohawk's SEC reports and
public announcements. Item 1b. Unresolved Staff Comments None Item 2.
Properties The Company
owns a 47,500 square foot headquarters office in Calhoun, Georgia on an
eight-acre site. The Company also owns a 2,089,000 square foot manufacturing
facility located in Dalton, Georgia, used by the Mohawk segment, a 1,773,145
square foot manufacturing facility located in Monterey, Mexico used by the
Dal-Tile segment and a 1,128,535 square foot manufacturing facility located in Wielsbeke, Belgium used by the Unilin segment.
The following table summarizes the Company's facilities both owned and leased
for each segment in square feet: Mohawk Segment Dal-Tile Segment Unilin Segment Primary Purpose Owned Leased Owned Leased Owned Leased Manufacturing
20,059,803
685,338
4,589,135
22,000
6,676,517
831,600 Selling and Distribution
4,174,479
5,996,943
152,811
6,961,621
-
- Other
910,548
-
321,312
36,000
-
- Total
25,144,830
6,682,281
5,063,258
7,019,621
6,676,517
831,600 The
Company's properties are in good condition and adequate for its requirements.
The Company believes its principal plants are generally adequate to meet its
production plans pursuant to the Company's long-term sales goals. In the
ordinary course of business, the Company monitors the condition of its
facilities to ensure that they remain adequate to meet long-term sales goals
and production plans. Item 3.
Legal Proceedings The
Company is involved in litigation from time to time in the regular course of
its business. Except as noted below or under the section "-Environmental
Matters," there are no material legal proceedings pending or known by the
Company to be contemplated to which the Company is a party or to which any of its
property is subject. In
Shirley Williams, et al vs. Mohawk Industries, Inc., four plaintiffs
filed a purported class action lawsuit in January 2004, in the United States
District Court for the Northern District of Georgia, alleging that they are
former and current employees of the Company and that the actions and conduct of
the Company, including the employment of persons who are not permitted to work
in this country, have damaged them and the other members of the purported class
by suppressing the wages of the Company's hourly employees in Georgia. The
plaintiffs seek a variety of relief, including (a) treble damages; (b) return
of any allegedly unlawful profits; and (c) attorney's fees and costs of
litigation. In February 2004, the Company filed a Motion to Dismiss the
Complaint, which was denied by the Northern District in April 2004. The Company
then sought and obtained permission to file an immediate appeal of the Northern
District's decision to the United States Court of Appeals for the 11th Circuit.
In June 2005, the 11th Circuit reversed in part and affirmed in part the lower
court's decision (Williams v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir.
2005)). In June 2005, the Company filed a motion requesting review by the full
11th Circuit, which was denied in August 2005. In October 2005, the Company
filed a petition for certiorari with the United States Supreme Court, which
petition was granted in December of 2005. The Company believes it has
meritorious defenses and intends to continue vigorously defending itself
against this action. The
Company believes that adequate provisions have been made for all pending
litigation for probable losses with respect to the resolution of all claims and
pending litigation and that the ultimate outcome of these actions will not have
a material adverse effect on its financial condition but could have a material effect
on its results of operations in a given quarter or annual period. Environmental Matters The
Company is subject to various federal, state, local and foreign environmental
health and safety laws and regulations, including those governing air
emissions, wastewater discharges, the use, storage, treatment and disposal of
solid and hazardous materials, and the cleanup of contamination associated
therewith. Because of the nature of the Company's business, the Company has
incurred, and will continue to incur, costs relating to compliance with such
laws and regulations. The Company is involved in various proceedings relating
to environmental matters and is currently engaged in environmental
investigation, remediation and post-closure care programs at certain sites. The
Company has provided accruals for such activities that it has determined to be
both probable and reasonably estimable. The Company does not expect that the
ultimate liability with respect to such activities will have a material adverse
effect on its operations, but may have an effect on the results of operations
for a given quarter or annual period. Item 4.
Submission of Matters to a Vote of Security
Holders No
matters were submitted to a vote of security holders of the Company during the
fourth quarter ended December 31, 2005. PART II Market for the Common Stock The Company's common
stock, $.01 par value per share (the "Common Stock") is quoted on the
New York Stock Exchange ("NYSE") under the symbol "MHK."
The table below shows the high and low sales prices per share of the Common
Stock as reported on the NYSE Composite Tape, for each fiscal period indicated. Mohawk Common Stock High Low First quarter $
85.79
68.77
Second quarter
82.98
68.89
Third quarter
81.60
69.07
Fourth quarter
92.44
74.05
First quarter $
94.72
82.15
Second quarter
89.00
76.54
Third quarter
92.45
76.19
Fourth quarter
89.71
74.55
First quarter (through March 13, 2006)
$
90.88
80.05
As
of March 13, 2006, there were approximately 384 holders of record of Common Stock. The Company has
not paid or declared any cash dividends on shares of its Common Stock since
completing its initial public offering. The Company's policy is to retain all
net earnings for the development of its business, and presently, it does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The payment of future cash dividends will be at the sole discretion of the
Board of Directors and will depend upon the Company's profitability, financial
condition, cash requirements, future prospects and other factors deemed
relevant by the Board of Directors. The Company did not
repurchase any of its common stock during the fourth quarter of 2005. On
October 31, 2005, the Company entered into an agreement to issue 585,549 shares
of Common Stock to certain Unilin officers for $81.00 per share, for an
aggregate purchase price of $47.4 million. The shares of Common Stock purchased
by the Unilin officers, 389,976 of which were issued on November 7, 2005, and
195,573 of which were issued on November 9, 2005, were issued in reliance on
the exemption from registration provided under Section 4(2) of the Securities
Act of 1933, as amended, as a transaction by the issuer not involving a public
offering. All of these securities were acquired by the recipients for
investment and with no view toward public resale or distribution of the
securities without registration. There was not any public solicitation and the
issued stock certificates bear restrictive legends.
Item 6. Selected Financial Data
The following table sets forth the selected financial data of the Company
for the periods indicated, which information is derived from the consolidated
financial statements of the Company. On March 20, 2002, the Company acquired all
the outstanding capital stock of Dal-Tile International Inc. ("Dal-Tile") in
exchange for approximately $1,469 million, consisting of approximately 12.9
million shares of the Company's common stock, options to purchase approximately
2.1 million shares of the Company's common stock and $718 million in cash. The
acquisition was accounted for using the purchase method of accounting. On
November 10, 2003, the Company acquired certain assets and assumed certain
liabilities of the Lees Carpet division of Burlington Industries, Inc. ("Lees
Carpet") for approximately $350 million in cash. The acquisition was recorded
using the purchase method of accounting. On October 31, 2005 the Company
acquired all the outstanding shares of Unilin Holding NV. The total
purchase price of the Unilin Acquisition, net of cash, was approximately Euro .2
billion (approximately $2.6 billion). The acquisition was recorded using
the purchase method of accounting. The consolidated financial statements include
the results of all acquisitions from the date of acquisition. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto included elsewhere herein. At or for the
Years Ended December 31, 2005 2004 2003 2002 (c) 2001 (In thousands,
except per share data) Statement of earnings data: Net sales $
6,620,099
5,880,372
4,999,381
4,516,957
3,441,267
Cost of sales (a)
4,896,965
4,259,531
3,605,579
3,247,865
2,583,669
Gross profit
1,723,134
1,620,841
1,393,802
1,269,092
857,598
Selling, general and administrative expenses
1,095,862
985,251
851,773
747,027
530,441
Operating income
627,272
635,590
542,029
522,065
327,157
Interest expense (b)
66,791
53,392
55,575
68,972
29,787
Other expense (income), net
3,460
4,809
(1,980)
9,464
5,954
70,251
58,201
53,595
78,436
35,741
Earnings before income taxes
557,021
577,389
488,434
443,629
291,416
Income taxes
198,826
208,767
178,285
159,140
102,824
Net earnings $
358,195
368,622
310,149
284,489
188,592
Basic earnings per share $
5.35
5.53
4.68
4.46
3.60
Weighted-average common shares outstanding
66,932
66,682
66,251
63,723
52,418
Diluted earnings per share $
5.30
5.46
4.62
4.39
3.55
Weighted-average common and dilutive potential common shares outstanding
67,644
67,557
67,121
64,861
53,141
Balance sheet data: Working capital $
1,228,573
968,923
592,310
640,846
449,361
Total assets
7,991,523
4,403,118
4,163,575
3,596,743
1,768,485
Long-term debt (including current portion)
3,308,370
891,341
1,012,413
820,427
308,433
Stockholders' equity
3,027,120
2,666,337
2,297,801
1,982,879
948,551
(a) In
2005, the Company recorded a non-recurring $34,300 (net of tax of $22,300) fair
value adjustment to Unilin's acquired inventory. (b) In
December 2002, the Company discontinued hedge accounting for its interest rate
swap. The impact of discontinuing the hedge was to increase interest expense by
approximately $10.7 million. (c) In
2002, the Company adopted the provisions of Financial Accounting Standards
Board SFAS No. 142 "Goodwill and Other Intangible Assets" which
required the Company to cease amortizing goodwill and evaluate such goodwill
and indefinite intangibles for impairment. Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of Operations Overview The Company is a
leading producer of floor covering products for residential and commercial
applications in the United States and Europe
with net sales in 2005 in excess of $6.6 billion. The Company is the second
largest carpet and rug manufacturer, and a leading manufacturer, marketer and
distributor of ceramic tile and natural stone, in the United States and a
leading producer of laminate flooring in the United States and Europe. The
Company has three reporting segments, the Mohawk segment, the Dal-Tile segment
and the Unilin segment. The Mohawk segment distributes its product lines, which
include carpet, rug, pad, ceramic tile, hardwood, resilient and laminate
through its network of approximately 52 regional distribution centers and
satellite warehouses using its fleet of company-operated trucks, common carrier
or rail transportation. The segment product lines are purchased by independent
floor covering retailers, home centers, mass merchandisers, department stores,
independent distributors, commercial dealers and commercial end users. The
Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products
distributed through approximately 250 company-operated sales service centers
and regional distribution centers using primarily common carriers and rail
transportation. The segment product lines are purchased by tile specialty
dealers, tile contractors, floor covering retailers, commercial end users,
independent distributors and home centers. The Unilin segment manufactures and
markets laminate flooring products which are distributed through separate
distribution channels consisting of retailers, contractors, commercial users,
independent distributors and home centers. The business is organized to address
the specific customer needs of each distribution channel. The primary categories of the
United States floor covering industry include carpet and rug (62%), ceramic
tile (12%), hardwood (10%), resilient and rubber (9%) and laminate (6%).
Compound average growth rates for all categories, except the resilient and
rubber category, for the period from 1999 through 2004 have met or exceeded the
growth rates (measured in sales dollars) for the gross domestic product of the
United States over the same period. Ceramic tile, laminate and hardwood
continued to exceed the growth rate for housing starts over the same period.
During this period, the compound average growth rate was 3.0% for carpet and
rug, 7.0% for ceramic tile, 0.6% for resilient and rubber, 17.4% for laminate
and 9.4% for hardwood. On
October 31, 2005, the Company acquired all the outstanding shares of Unilin
Holding NV. The total purchase price of the Unilin Acquisition, net of cash of
$167.5 million, was approximately Euro 2.2 billion (approximately $2.6 billion).
The results of operations for the Unilin segment have been included in the
Company's consolidated financial statements since that date. The primary reason
for the acquisition was to expand the Company's presence in the laminate
flooring market. On
November 10, 2003, the Company acquired the assets and assumed certain
liabilities of the commercial carpet division of Burlington Industries, Inc.,
known as Lees Carpet, from W.L. Ross & Company for approximately $350
million in cash. The results of operations for Lees Carpet have been included
with the Mohawk segment results and in the Company's consolidated financial
statements since that date. The primary reason for the acquisition was to
expand the Company's presence in the commercial carpet market. The
Company reported net earnings of $358.2 million or diluted earnings per share
("EPS") of $5.30, compared to net earnings of $368.6 million and
$5.46 EPS for 2004. The decrease in EPS resulted from
a non-recurring $34.3 million (net of tax of $22.3 million) fair value
adjustment applied to Unilin's acquired inventory, continuing raw material and
energy cost increases, offset by sales growth and better leveraging of selling,
general and administrative costs when compared to the year ended December 31,
2004. Results of Operations Following are the results of operations for the last three
years: For the Years Ended December 31, 2005 2004 2003 (In thousands) Statement of earnings
data: Net sales $
6,620,099
100.0 %
5,880,372
100.0 %
4,999,381
100.0 % Cost of sales
4,896,965
74.0 %
4,259,531
72.4 %
3,605,579
72.1 % Gross profit
1,723,134
26.0 %
1,620,841
27.6 %
1,393,802
27.9 % Selling, general and
administrative expenses
1,095,862
16.6 %
985,251
16.8 %
851,773
17.0 % Operating income
627,272
9.5 %
635,590
10.8 %
542,029
10.9 % Interest expense
66,791
1.0 %
53,392
0.9 %
55,575
1.1 % Other (income) expense, net
3,460
0.1 %
4,809
0.1 % (1,980)
0.0 %
70,251
1.1 %
58,201
1.0 %
53,595
1.1 % Earnings before income
taxes
557,021
8.4 %
577,389
9.8 %
488,434
9.8 % Income taxes
198,826
3.0 %
208,767
3.6 %
178,285
3.6 % Net earnings. $
358,195
5.4 %
368,622
6.3 %
310,149
6.2 % Year Ended December 31,
2005, as Compared with Year Ended December 31, 2004 Net
sales for the year ended December 31, 2005, were $6,620.1 million, reflecting an increase of $739.7 million, or
approximately 12.6%, over the $5,880.4 million reported for the year ended
December 31, 2004. The increased net sales are
primarily attributable to price increases and internal sales growth and the
Unilin Acquisition. The Mohawk segment
recorded net sales of $4,716.7 million in 2005 compared to $4,368.8 million in
2004, representing an increase of $347.9
million or approximately 8.0%. The increase was attributable to price increases and
internal growth within the nylon filament and polyester carpets, commercial
carpet tile, and hard surface flooring offset by declines in nylon staple and
polypropylene carpets and home products. The Dal-Tile segment recorded
net sales of $1,734.8 million in 2005, reflecting an increase of $223.3 million
or 14.8%, over the $1,511.5 million reported in the year ended December 31,
2004. The increase was mostly attributable to strong internal growth in all
product categories with stone and floor tile reflecting the strongest growth. Quarterly
net sales and the percentage changes in net sales by quarter for 2005 versus
2004 were as follows (dollars in thousands) 2005 2004 Change First quarter $
1,493,222
1,389,725
7.4 % Second quarter
1,624,692
1,485,897
9.3 Third quarter
1,697,634
1,529,651
11.0 Fourth quarter
1,804,551
1,475,099
22.3 Total year $
6,620,099
5,880,372
12.6 % Gross
profit was $1,723.1 million (26.0% of net sales) for 2005 and $1,620.8 million
(27.6% of net sales) for 2004. The reduction in
percentage was primarily attributable to increased raw material costs, energy
costs, transportation costs, an increase in the LIFO reserve requirement, a
non-recurring fair value adjustment applied to Unilin's acquired inventory, and
higher import costs. Selling,
general and administrative expenses for 2005 were $1,095.9 million (16.6% of
net sales) compared to $985.3 million (16.8% of net sales) for 2004. The reduction in percentage was attributable to better
leveraging of selling, general and administrative expenses. Operating
income for 2005 was $627.3 million (9.5% of net sales) compared to $635.6
million (10.8% of net sales) in 2004. Operating income attributable to the
Mohawk segment was $381.7 million (8.1% of segment net sales) in 2005 compared
to $424.3 million (9.7% of segment net sales) in 2004. The
percentage decrease in operating income was attributable to higher raw
material costs, energy costs and transportation costs. Operating income
attributable to the Dal-Tile segment was $260.2 million (15.0% of segment net
sales) in 2005, compared to $219.8 million (14.5% of segment net sales) in
2004. The increase in operating income as a percentage of net sales is
primarily attributable to product mix shift and implementing increased pricing
to help offset increased raw material, energy, transportation, and higher
import costs. Interest
expense for 2005 was $66.8 million compared to $53.4 million in 2004. The
increase in interest expense was attributable to the
debt raised to fund the Unilin Acquisition. Income
tax expense was $198.8 million, or 35.7% of earnings before income taxes for
2005 compared to $208.8 million, or 36.2% of earnings before income taxes for
2004. The improved rate was primarily attributable to
the utilization of tax credits and the one-time effect of state tax law
changes. Year Ended December 31,
2004, as Compared with Year Ended December 31, 2003 Net
sales for the year ended December 31, 2004, were $5,880.4 million, reflecting
an increase of $881.0 million, or approximately 17.6%, over the $4,999.4
million reported for the year ended December 31, 2003. The increased net sales
are primarily attributable to strong internal sales growth from both the Mohawk
and Dal-Tile segments. The Mohawk segment recorded net sales of $4,368.8
million in 2004 compared to $3,730.8 million in 2003, representing an increase
of $638.0 million or approximately 17.1%. The increase was attributable to
strong internal growth in all product categories and the Lees Carpet
acquisition. The Dal-Tile segment recorded net sales of $1,511.5 million in
2004, reflecting an increase of $243.0 million or 19.2%, over the $1,268.5
million reported in the year ended December 31, 2003. The increase was mostly
attributable to strong internal growth in all product categories with stone and
floor tile reflecting the strongest growth. Quarterly
net sales and the percentage changes in net sales by quarter for 2004 versus
2003 were as follows (dollars in thousands):
2004
2003 Change First quarter $
1,389,725
1,083,422
28.3 % Second quarter
1,485,897
1,245,870
19.3 Third quarter
1,529,651
1,301,547
17.5 Fourth quarter
1,475,099
1,368,542
7.8 Total year $
5,880,372
4,999,381
17.6 % Sales
in the first and fourth quarters of 2004 were impacted by a shift of four days
from the fourth to the first quarter when compared to 2003. Gross
profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8 million
(27.9% of net sales) for 2003. The reduction in percentage was primarily
attributable to increased raw material costs, energy costs, transportation
costs and higher import costs. Selling,
general and administrative expenses for 2004 were $985.3 million (16.8% of net
sales) compared to $851.8 million (17.0% of net sales) for 2003. The reduction
in percentage was attributable to better leveraging of selling, general and
administrative expenses. Operating
income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0
million (10.9% of net sales) in 2003. Operating income attributable to the
Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared
to $364.0 million (9.8% of segment net sales) in 2003. The percentage decrease
in operating income was attributable to higher raw material costs, energy
costs and transportation costs. Operating income attributable to the Dal-Tile
segment was $219.8 million (14.5% of segment net sales) in 2004, compared to
$187.2 million (14.8% of segment net sales) in 2003. The decrease in operating
income as a percentage of net sales is primarily attributable to higher energy
costs, import costs and transportation costs. Interest
expense for 2004 was $53.4 million compared to $55.6 million in 2003. The
decrease in interest expense was attributable to a larger benefit from a fair
value adjustment related to an interest rate swap during 2004 when compared to
2003. Income
tax expense was $208.8 million, or 36.2% of earnings before income taxes for
2004 compared to $178.3 million, or 36.5% of earnings before income taxes for
2003. The improved rate was a result of the utilization of tax credits. 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 primarily
through a combination of internally generated funds, bank credit lines, term
and senior notes, the sale of receivables and credit terms from suppliers. Cash
flows generated by operations for 2005 were $561.5
million compared to $242.8 million for 2004. The increase was primarily
attributable to an increase in accounts payable and accrued expenses, which
increased from $623.1 million at the beginning of 2005 to $998.1 million at
December 31, 2005. In addition, inventory turnover increased during 2005. The
increases were primarily attributable to sales growth within both the Mohawk
and Dal-Tile segments and the Unilin Acquisition. Net cash used in investing
activities in 2005 was $2.9 billion compared to $121.6 million for 2004. The
increase was primarily attributable to the Unilin Acquisition and higher
capital expenditures. Capital expenditures were incurred primarily to
modernize, add and expand manufacturing and distribution facilities and
equipment. Capital expenditures, including $3.0 billion for acquisitions, have
totaled $3.5 billion over the past three years. Capital spending during 2005
for the Mohawk, Dal-Tile and Unilin segments combined, excluding acquisitions,
is expected to range from $290 million to $310 million, and will be used
primarily to purchase equipment and to add manufacturing and distribution
capacity. Net
cash provided by financing activities for 2005 was $2,440.7
million compared to cash provided in 2004 of $121.2 million. The primary reason
for the change was an increase in debt levels as a result of the Unilin
Acquisition in 2005 when compared to 2004. On
October 28, 2005, the Company entered into a $1.5 billion 364-day senior,
unsecured, bridge term loan facility, which is referred to as the bridge credit
facility, and a $1.5 billion five-year, senior, unsecured, revolving credit and
term loan facility, which is referred to as the new senior unsecured credit
facilities. The new senior unsecured credit facilities replaced a then-existing
credit facility and various uncommitted credit lines. The Company entered into
both the bridge credit facility and the new senior unsecured credit facilities
to finance the Unilin Acquisition and to provide for working capital
requirements. The
senior multi-currency unsecured credit facility consists of (i) a $750 million
revolving credit facility, (ii) a $389.2 million term loan facility and (iii) a
Euro 300 million term loan facility, all of which mature on October 28, 2010. Availability under the revolving credit facility is reduced
by the amount of letters of credit issued under this facility. At December 31,
2005, the amount of these letters of credit was $78.3 million. At the Company's election, both the credit facility and the
new senior credit facilities bear interest at (i) the greater of (x) prime rate
or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an
indexed amount based on the Company's senior, unsecured, long-term debt rating.
On November 8, 2005, one of the Company's subsidiaries
entered into a Euro 130 million , or approximately $156 million (based on the then
prevailing exchange rate), five-year unsecured, revolving credit facility,
maturing on November 8, 2010, which
is referred to as the Euro revolving credit facility. This revolving credit facility bears
interest at EURIBOR plus an indexed amount based on the Company's senior,
unsecured, long-term debt rating. The Company guaranteed the obligations of
that subsidiary under this revolving credit facility and of any of the
Company's other subsidiaries that become borrowers under this credit facility.
As of December 31, 2005, the Company had no borrowings outstanding under this
facility. The
Company's new senior unsecured credit facilities and the Euro revolving credit
facility both contain debt to capital ratio requirements and other customary
covenants. The Company was in compliance with these covenants at December 31,
2005. Under both of these credit facilities, the Company must pay an annual
facility fee ranging from 0.06% to 0.25%, depending upon the Company's senior
unsecured long-term debt rating as determined by certain credit rating
agencies. At
December 31, 2005, a total of approximately $507.9 million was available under
the new senior unsecured credit facilities, and the Euro revolving credit
facility, compared to $234.1 million available under both the then-existing
credit facility and uncommitted credit lines at December 31, 2004. The amount
used under the new senior unsecured credit facilities at December 31, 2005, was
$1.1 billion. The amount used under the unsecured credit facilities is composed
of $1.1 billion in borrowings, $55.6 million in letters of credit guaranteeing
the Company's industrial revenue bonds and $22.7 million in standby letters of
credit related to various insurance contracts and foreign vendor commitments. On
January 17, 2006, the Company issued $500 million aggregate principal amount of
5.750% notes due 2011 and $900 million aggregate principal amount of 6.125%
notes due 2016. The net proceeds from the issuance of these notes were used to
pay off the outstanding balance of the bridge credit facility and accordingly
the Company reclassified the bridge credit facility as long-term debt. Interest
payable on each series of notes will be increased in the event of a downgrade
in the Company's debt rating determined by certain rating agencies. The maximum
increase in the event of a downgrade is 2%. If the Company's debt rating
subsequently improves, then the interest rates would be reduced accordingly. The
Company has an on-balance sheet trade accounts receivable securitization
agreement (the "Securitization Facility"). The Securitization
Facility allows the Company to borrow up to $350 million based on available
accounts receivable. At December 31, 2005, the Company had $40 million
outstanding compared to $90 million at December 31, 2004. The Securitization
Facility is secured with trade receivables. During the third quarter of 2005,
the Company extended the term of its Securitization Facility until August 2006. The
Company's Board of Directors has authorized the repurchase of up to 15 million
shares of the Company's outstanding common stock. For the year ended December
31, 2005, a total of approximately 186,000 shares of the Company's common stock
were purchased at an aggregate cost of approximately $14.5 million. Since the
inception of the program in 1999, a total of approximately 11.4 million shares
have been repurchased at an aggregate cost of approximately $326.1 million. All
of these repurchases have been financed through the Company's operations and
banking arrangements. The
outstanding checks in excess of cash represent trade payables checks that have
not yet cleared the bank. When the checks clear the bank, they are funded by
the revolving credit facility. This policy does not impact any liquid assets on
the consolidated balance sheets. The
following is a summary of the Company's future minimum payments under
contractual obligations as of December 31, 2005 (in thousands): Payments due by period 2006 2007 2008 2009 2010 Thereafter Total Long-term debt $
113,809
314,277
11,259
4,275
1,063,178
1,801,572
3,308,370 Estimated interest payments
(1)
174,731
160,205
154,393
153,885
146,479
316,354
1,106,047 Operating leases
93,553
75,247
61,973
51,558
37,064
103,116
422,511 Purchase commitments (2)
168,235
163,995
161,545
72,497
-
-
566,272 $
550,328
713,724
389,170
282,215
1,246,721
2,221,042
5,403,200 Critical Accounting Policies In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, the Company must
make decisions which impact the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures. Such decisions include the
selection of appropriate accounting principles to be applied and the
assumptions on which to base accounting estimates. In reaching such decisions,
the Company applies judgment based on its understanding and analysis of the
relevant circumstances and historical experience. Actual amounts could differ
from those estimated at the time the consolidated financial statements are
prepared. The
Company's significant accounting policies are described in Note 1 to the Consolidated
Financial Statements included elsewhere in this report. Some of those
significant accounting policies require the Company to make subjective or
complex judgments or estimates. Critical accounting policies are defined as
those that are both most important to the portrayal of a company's financial
condition and results and require management's most difficult, subjective, or
complex judgment, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods. The
Company believes the following accounting policies require it to use judgments
and estimates in preparing its consolidated financial statements and represent
critical accounting policies. Recent Accounting Pronouncements In
December 2004, the FASB issued FASB Staff Position 109-1, Application of
FASB Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109") to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation
Act of 2004 (the "Jobs Act"), enacted October 22, 2004, provides a
tax deduction for income from qualified domestic production activities. FSP
109-1 provides the treatment for the deduction as a special deduction as
described in SFAS No. 109. FSP 109-1 is effective prospectively as of January
1, 2005. The adoption of FSP 109-1 did not have a significant impact on the
Company's consolidated financial statements. In
December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" ("FSP 109-2"), which
provides guidance under SFAS No. 109 with respect to recording the potential
impact of the repatriation provisions of the Jobs Act on enterprises' income
tax expense and deferred tax liability. FSP 109-2 states that an enterprise is
allowed time beyond the financial reporting period of enactment to evaluate the
effect of the Jobs Act on its plan for reinvestment or repatriation of foreign
earnings for purposes of applying FASB Statement No. 109. The adoption of FSP
109-2 did not have a significant impact on the Company's consolidated financial
statements. In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs be recognized as current-period charges regardless
of whether they meet the criterion of "so abnormal" as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years beginning after
June 15, 2005. The Company will adopt SFAS 151 effective January 1, 2006 and
does not expect its adoption will have a material impact on the Company's
consolidated financial statements. In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Transition may be accomplished using
either the prospective or retrospective method. The Company currently measures
compensation costs related to share-based payments under APB Opinion No. 25. In
April 2005, the Securities and Exchange Commission announced that the effective
date of SFAS 123R should be no later than the beginning of the first fiscal
year beginning after June 15, 2005. The Company will adopt SFAS 123R in the
first quarter of 2006 after completing its evaluation. In
March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143" ("FIN 47"), which requires an entity to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the liability's fair value can be reasonably estimated. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
Effective December 31, 2005, the Company adopted FIN 47 which did not have a
material impact on the Company's consolidated financial statements. In
May 2005, the FASB issued SFAS No. 154,
"Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20
and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No.
20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting
Changes in Interim Financial Statements." SFAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires that a
change in depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The impact of this standard, if any, will depend upon
accounting changes or errors that may occur in future periods. The Company
adopted SFAS 154 effective December 31, 2005. Impact of Inflation Inflation
affects the Company's manufacturing costs, distribution costs and operating
expenses. The carpet, tile and laminate industry have experienced significant
inflation in the prices of raw materials and fuel-related costs beginning in
the first quarter of 2004. For the period from 1999 through 2005 the carpet and
tile industry experienced moderate inflation in the prices of raw materials and
fuel-related costs. In the past, the Company has generally been able to pass
along these price increases to its customers and has been able to enhance
productivity to help offset increases in costs resulting from inflation in its
operations. Seasonality The Company is a calendar year-end company. With
respect to its Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest. The
second, third and fourth quarters typically produce higher net sales and
operating income in these segments. These results are primarily due to
consumer residential spending patterns for floor covering, which historically
have decreased during the first two months of each year following the holiday
season. The Unilin segment second and fourth quarters typically produce higher
net sales and earnings followed by a moderate first quarter and a weaker third
quarter. The third quarter is traditionally the weakest due to the European
holiday in late summer, Item 7A.
Quantitative and Qualitative Disclosures About
Market Risk Financial
exposures are managed as an integral part of the Company's risk management
program, which seeks to reduce the potentially adverse effect that the
volatility of the exchange rate and natural gas markets may have on its
operating results. The Company does not regularly engage in speculative
transactions, nor does it regularly hold or issue financial instruments for
trading purposes. Natural
Gas Risk Management The
Company uses a combination of natural gas futures contracts and long-term
supply agreements to manage unanticipated changes in natural gas prices. The
contracts are based on forecasted usage of natural gas measured in Million
British Thermal Units ("MMBTU"). The
Company has designated the natural gas futures contracts as cash flow hedges.
The outstanding contracts are valued at market with the offset applied to other
comprehensive income, net of applicable income taxes and any hedge
ineffectiveness. Any
gain or loss is reclassified from other comprehensive income and recognized in
cost of goods sold in the same period or periods during which the hedged
transaction affects earnings. At December 31,
2005, the Company had natural gas contracts that mature from January 2006 to
October 2006 with an aggregate notional amount of approximately 660,000
MMBTU's. The fair value of these contracts was an asset of $1.9 million. At December 31, 2004, the Company had natural gas
contracts that matured from January 2005 to March 2005 with an aggregate
notional amount of approximately 1 million MMBTU's. The fair value of these
contracts was a liability of $1.3 million. The offset to these assets is
recorded in other comprehensive income, net of applicable income taxes. The
ineffective portion of the derivative is recognized directly in the cost of
goods sold within the consolidated statements of earnings and was not
significant for the periods reported. The amount that the Company anticipates
will be reclassified out of accumulated other comprehensive income in the next
twelve months is a gain of approximately $1.9 million. The
Company's natural gas long-term supply agreements are accounted for under the
normal purchases provision within SFAS No. 133 and its amendments. At December
31, 2005, the Company had normal purchase commitments of approximately 1.8
million MMBTU's for periods maturing from January 2006 through October 2006.
The contracted value of these commitments was approximately $17.2 million and
the fair value of these commitments was approximately $20.5 million, at
December 31, 2005. At December 31, 2004, the Company had normal purchase
commitments of approximately 1.9 million MMBTU's for periods maturing from
January 2005 through March 2006. The contracted value of these commitments was
approximately $9.9 million and the fair value of these commitments was
approximately $11.9 million, at December 31, 2004. Foreign Currency Rate Management The Company enters
into foreign exchange forward contracts to hedge foreign denominated costs
associated with its operations in Mexico. The objective of these transactions
is to reduce volatility of exchange rates where these operations are located by
fixing a portion of their costs in U.S. currency. Accordingly, these contracts
have been designated as cash flow hedges. Gains and losses are reclassified
from other comprehensive income and recognized in cost of goods sold in the
same period or periods during which the hedged transaction affects earnings.
The Company had forward contracts to purchase approximately 8 million Mexican
pesos at December 31, 2005. The aggregate U.S. dollar value of these contracts
at December 31, 2005 was approximately $0.7 million. The contracts are marked
to market in other current liabilities with the offset to other comprehensive
income, net of applicable income taxes. Unrealized losses for the year ended
December 31, 2005 were not significant. The Company had no forward contracts
outstanding at December 31, 2004. The Company also had
forward exchange contracts to sell the British Pound and Canadian Dollar for a
notional amount of $5.6 million at December 31, 2005. The contracts do not
qualify for hedge accounting and are marked to market in other expenses at the
end of each reporting period. The change in fair value is recorded in other
expense and the contracts do not qualify for hedge accounting. The impact of
the change in fair value on the statements of operations was not significant
for the period ended December 31, 2005. Item 8.
Consolidated Financial
Statements and Supplementary Data INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent
Registered Public Accounting Firm The Board of Directors and
Stockholders We
have audited the accompanying consolidated balance sheets of Mohawk Industries,
Inc. and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December
31, 2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
combined consolidated financial statements of Unilin Flooring BVBA and Unilin
Holding Inc. and their subsidiaries (Unilin Group), which financial statements
reflect total assets constituting approximately 41 percent and total revenues
constituting approximately 3 percent in 2005, of the related consolidated
totals. Those financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Unilin Group, is based solely on the report of the other auditors. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion. In
our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mohawk Industries, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles. We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Mohawk
Industries, Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 15, 2006 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting. /s/: KPMG Atlanta, Georgia Report
of Independent Registered Public Accounting Firm The Shareholders and the Board of Directors We
have audited the accompanying combined consolidated financial statements of
Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (the Unilin
Group) as of December 31, 2005 and the related combined consolidated statements
of operations, stockholders' equity and comprehensive income (loss), and cash
flows for the two month period then ended. These financial statements are the
responsibility of the combined Companies' management. Our responsibility is to
express an opinion on these combined consolidated financial statements based on
our audit. We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The combined Companies
are not required to have, nor were we engaged to perform, an audit of their
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the combined Companies'
internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the combined consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. In
our opinion, the combined consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Unilin
Group at December 31, 2005 and the results of their operations and their cash
flows for the two month period then ended in conformity with accounting
principles generally accepted in the United States of America. February 17, 2006 /s/: BDO Atrio Bedrijfsrevisoren Burg. CVBA The Board of Directors and
Stockholders We
have audited management's assessment, included in the "Management's Report on
Internal Control over Financial Reporting" set forth in Item 9A of Mohawk
Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31,
2005, that Mohawk Industries, Inc. maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Mohawk Industries,
Inc.'s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit. We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion. A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements. Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. In
our opinion, management's assessment that Mohawk Industries, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion,
Mohawk Industries, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). As
described in the Management's Report on Internal Control Over Financial
Reporting, management excluded from its assessment of the effectiveness of
Mohawk Industries, Inc.'s internal control over financial reporting as of
December 31, 2005, Unilin Flooring BVBA and Unilin Holding Inc. and their
subsidiaries (Unilin Group), which businesses were acquired on October 31,
2005 and whose financial statements reflect total assets constituting
approximately 14% (excluding goodwill and identified intangible assets of
approximately 27%) and revenues of approximately 3% of the related consolidated
financial statement amounts as of and for the year ended December 31, 2005.
Accordingly, our audit of internal control over financial reporting of Mohawk
Industries, Inc. also excluded an evaluation of the internal control over
financial reporting of the Unilin Group. We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Mohawk Industries, Inc., and subsidiaries as of December 31, 2005 and 2004, and
the related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated March 15, 2006 expressed
an unqualified opinion on those consolidated financial statements. /s/: KPMG Atlanta, Georgia
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
2005
2004 Current assets:
Cash and cash equivalents $
134,585
-
Receivables
848,666
660,650
Inventories
1,166,913
1,017,983
Prepaid expenses and other assets
140,789
49,381
Deferred income taxes
49,534
55,311
Total current assets
2,340,487
1,783,325 Property, plant and equipment, net
1,810,728
905,332 Goodwill
2,621,963
1,377,349 Tradenames
622,094
272,280 Other intangible assets
552,003
50,366 Other assets
44,248
14,466 $
7,991,523
4,403,118
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Current portion of long-term debt $
113,809
191,341
Accounts payable and accrued expenses
998,105
623,061
Total current liabilities
1,111,914
814,402 Deferred income taxes
625,887
191,761 Long-term debt, less current portion
3,194,561
700,000 Other long-term liabilities.
32,041
30,618
Total liabilities
4,964,403
1,736,781 Stockholders' equity:
Preferred stock, $.01 par value; 60 shares authorized;
no shares issued
-
-
Common stock, $.01 par value; 150,000 shares authorized; 78,478
and 77,514 shares issued in 2005 and 2004, respectively
785
775
Additional paid-in capital
1,123,991
1,058,537
Retained earnings.
2,268,578
1,910,383
Accumulated other comprehensive loss
(47,433)
(2,441)
3,345,921
2,967,254
Less treasury stock at cost; 10,981 and 10,755 shares in 2005
and 2004, respectively
318,801
300,917
Total stockholders' equity
3,027,120
2,666,337 $
7,991,523
4,403,118
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
2005
2004
2003 Net sales $
6,620,099
5,880,372
4,999,381 Cost of sales
4,896,965
4,259,531
3,605,579
Gross profit
1,723,134
1,620,841
1,393,802 Selling, general and administrative
expenses
1,095,862
985,251
851,773
Operating income
627,272
635,590
542,029 Other expense (income): Interest expense
66,791
53,392
55,575 Other expense
11,714
9,731
6,252 Other income
(8,254)
(4,922)
(8,232)
70,251
58,201
53,595
Earnings before income taxes
557,021
577,389
488,434 Income taxes
198,826
208,767
178,285 Net
earnings $
358,195
368,622
310,149 Basic earnings per share $
5.35
5.53
4.68 Weighted-average common shares
outstanding
66,932
66,682
66,251 Diluted earnings per share $
5.30
5.46
4.62 Weighted-average common and dilutive
potential common shares
outstanding
67,644
67,557
67,121
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
Accumulated
Additional
other
Total
Common stock
paid-in
Retained
comprehensive
Treasury stock
stockholders'
Shares
Amount
capital
earnings
income (loss)
Shares
Amount
equity Balances at December 31, 2002
76,371 $
763 $
1,006,550 $
1,231,612 $
1,126
(10,006) $
(257,172) $
1,982,879 Stock options exercised
679
7
18,283
-
-
-
-
18,290 Purchase of treasury stock
-
-
-
-
-
(593)
(27,839)
(27,839) Grant to employee profit sharing plan
-
-
2,080
-
-
72
1,929
4,009 Grant to executive incentive plan
-
-
63
-
-
12
306
369 Tax benefit from exercise of stock options
-
-
8,757
-
-
-
-
8,757 Comprehensive Income: Currency translation adjustment
-
-
-
-
47
-
-
47 Unrealized gain on hedge instruments net of taxes
-
-
-
-
1,140
-
-
1,140 Net earnings
-
-
-
310,149
-
-
-
310,149 Total Comprehensive Income
311,336 Balances at December 31, 2003
77,050
770
1,035,733
1,541,761
2,313
(10,515)
(282,776)
2,297,801 Stock options exercised
464
5
14,952
-
-
-
-
14,957 Purchase of treasury stock
-
-
-
-
-
(250)
(18,413)
(18,413) Grant to executive incentive plan and other
-
-
307
-
-
10
272
579 Tax benefit from exercise of stock options
-
-
7,545
-
-
-
-
7,545 Comprehensive Income: Currency translation adjustment
-
-
-
-
(1,675)
-
-
(1,675) Unrealized loss on hedge instruments net of taxes
-
-
-
-
(3,079)
-
-
(3,079) Net earnings
-
-
-
368,622
-
-
-
368,622 Total Comprehensive Income
363,868 Balances at December 31, 2004
77,514
775
1,058,537
1,910,383
(2,441)
(10,755)
(300,917)
2,666,337 Stock options exercised
378
4
10,070
-
-
-
-
10,074 Stock issuance
586
6
47,429
-
-
-
-
47,435 Purchase of treasury stock . ..
-
-
-
-
-
(186)
(14,521)
(14,521) Grant to executive incentive plan
and other
-
-
2,717
-
-
(40)
(3,363)
(646) Tax benefit from exercise of stock options
-
-
5,238
-
-
-
-
5,238 Comprehensive Income: Currency translation adjustment
-
-
-
-
(47,074)
-
-
(47,074) Unrealized gain on hedge instruments net of taxes
-
-
-
-
2,082
-
-
2,082 Net earnings
-
-
-
358,195
-
-
-
358,195 Total Comprehensive Income
313,203 Balances at December 31, 2005
78,478 $
785 $
1,123,991 $
2,268,578 $
(47,433)
(10,981) $
(318,801) $
3,027,120
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
2005
2004
2003 Cash flows from operating activities: Net earnings $
358,195
368,622
310,149 Adjustments to
reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization
149,329
123,088
106,615
Deferred income taxes
(6,866)
38,700
34,775
Tax benefit on stock options exercised
5,238
7,545
8,757
Loss on sale of property, plant and equipment
4,676
3,037
3,267
Changes in assets and liabilities, net of
effects of acquisitions:
Receivables
3,574
(85,417)
(47,443)
Inventories
11,542
(179,765)
(104,964)
Accounts payable and accrued expenses
91,960
(25,241)
(2,769)
Other assets and prepaid expenses
(60,877)
(6,598)
(5,592)
Other liabilities
4,773
(1,134)
6,595
Net cash provided by operating activities
561,544
242,837
309,390 Cash flows from investing activities: Additions
to property, plant and equipment
(247,306)
(106,601)
(114,631)
Acquisitions, net of cash
(2,613,529)
(14,998)
(384,121)
Net cash used in investing activities
(2,860,835)
(121,599)
(498,752) Cash flows from financing activities: Net change in
short term credit lines
(37,721)
(3,981)
37,299 Payments on
revolving line of credit
(539,294)
-
- Proceeds from
revolving line of credit
856,940
-
- Proceeds from
bridge credit facility
1,400,000
-
- Net change in
asset securitization borrowings
(50,000)
(92,000)
182,000 Payments on
term loans
(15,055)
(25,034)
(26,492) Proceeds on
term loans
750,000
-
- Payments of
other debt
(30,861)
(57)
(821) Change in
outstanding checks in excess of cash
63,670
3,290
6,925 Acquisition of
treasury stock
(14,521)
(18,413)
(27,839) Common stock
transactions
57,509
14,957
18,290
Net cash provided by (used in) financing activities
2,440,667
(121,238)
189,362
Effect of exchange rate changes on cash and cash equivalents
(6,791)
-
-
Net change in cash.
134,585
-
- Cash and cash equivalents, beginning of
year
-
-
- Cash and cash equivalents, end of year $
134,585
-
-
See accompanying notes to consolidated financial statements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (1) Summary
of Significant Accounting Policies (a) Basis of
Presentation The
consolidated financial statements include the accounts of Mohawk Industries,
Inc. and its subsidiaries (the "Company" or "Mohawk"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. (b) Cash and Cash Equivalents The
Company considers investments with an original maturity of three months or less
when purchased to be cash equivalents. (c) Accounts
Receivable and Revenue Recognition The
Company is principally a carpet, rugs, ceramic tile and laminate manufacturer
and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and
laminate flooring products in the United States. In addition, the Company
manufactures laminate and sells carpet, rugs and laminate flooring products in
Europe principally for residential and commercial use. The Company grants credit
to customers, most of whom are retail-flooring dealers and commercial end users,
under credit terms that the Company believes are customary in the industry.
The
Company warrants certain qualitative attributes of its flooring products. The
Company has recorded a provision for estimated warranty and related costs, based
on historical experience and periodically adjusts these provisions to reflect
actual experience. Revenues
are recognized when there is persuasive evidence of an arrangement, delivery has
occurred, the price has been fixed or is determinable, and collectibility can be
reasonably assured. The Company provides allowances for expected cash
discounts, returns, claims and doubtful accounts based upon historical bad debt
and claims experience and periodic evaluations of specific customer accounts.
Royalty revenues received from third parties for patents are recognized based on
contractual agreements. The amount of patent revenue for the year ended December
31, 2005 was $10,461 and is recorded in net sales. (d)
Inventories
Inventories are stated at the lower of cost or market (net realizable
value). Cost is determined using the last-in, first-out method (LIFO) for
approximately 86% (69% of total inventory) of the inventory within the Mohawk
segment, which matches current costs with current revenues, and the first-in,
first-out method (FIFO), which is used to value inventory within the Dal-Tile
and Unilin segments and inventory not valued under the LIFO method in the Mohawk
segment. Inventories on hand are compared against anticipated future usage,
which is a function of historical usage, anticipated future selling price,
expected sales below cost, excessive quantities and an evaluation for
obsolescence. Actual results could differ from assumptions used to value
obsolete inventory, excessive inventory or inventory expected to be sold below
cost and additional reserves may be required.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(e) Property,
Plant and Equipment Property,
plant and equipment are stated at cost, including capitalized interest.
Depreciation is calculated on a straight-line basis over the estimated remaining
useful lives, which are 25-35 years for buildings and improvements, 5-15 years
for machinery and equipment, the shorter of the estimated useful life or lease
term for leasehold improvements and 3-7 years for furniture and fixtures. (f) Goodwill
and Other Intangible Assets In
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" the Company tests
goodwill and other intangible assets with indefinite lives for impairment on an
annual basis (or on an interim basis if an event occurs that might reduce the
fair value of the reporting unit below its carrying value). The Company conducts
testing for impairment during the fourth quarter of its fiscal year. Intangible
assets that do not have indefinite lives are amortized based on average lives,
which range from 7-16 years. (g) Income
Taxes Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. (h) Financial
Instruments The
Company's financial instruments consist primarily of receivables, accounts
payable, accrued expenses and long-term debt. The carrying amount of
receivables, accounts payable and accrued expenses approximates its fair value
because of the short-term maturity of such instruments. The carrying amount of
the Company's floating rate debt approximates its fair value. Interest rates
that are currently available to the Company for issuance of long-term debt with
similar terms and remaining maturities are used to estimate the fair value of
the Company's long-term debt. The estimated fair value of the Company's
long-term debt at December 31, 2005 and 2004 was $3,282,715 and $961,120,
compared to a carrying amount of $3,308,370 and $891,341, respectively.
(i)
Derivative Instruments Accounting for Derivative
Instruments and Hedging Activities requires the Company to recognize all
derivatives on the consolidated balance sheet at fair value. Derivatives that
are not qualifying hedges must be adjusted to fair value through earnings. If
the derivative is a qualifying hedge, depending on the nature of the hedge,
changes in its fair value are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company engages in activities that expose it to market risks, including the
effects of changes in interest rates, exchange rates and natural gas commodity
prices. Financial exposures are managed as an integral part of the Company's
risk management program, which seeks to reduce the potentially adverse effect
that the volatility of the interest rate, exchange rate and natural gas
commodity markets may have on operating results. The Company does not engage in
speculative transactions, nor does it hold or issue financial instruments for
trading purposes.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The
Company formally documents hedging instruments and hedging items, as well as its
risk management objective and strategy for undertaking hedged items. This
process includes linking all derivatives that are designated as fair value and
cash flow hedges to specific assets, liabilities or firm commitments on the
consolidated balance sheet or to forecasted transactions. The Company also
formally assesses, both at inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair value or cash flows of hedged items. When it is
determined that a derivative is not highly effective, the derivative expires, or
is sold, terminated, or exercised, or the derivative is discontinued because it
is unlikely that a forecasted transaction will occur, the Company discontinues
hedge accounting prospectively for that specific hedge instrument. (j)
Advertising Costs and Vendor Consideration Advertising and promotion expenses
are charged to earnings during the period in which they are incurred.
Advertising and promotion expenses included in selling, administrative, and
general expenses were $41,339 in 2005, $31,474 in 2004 and $26,990 in 2003. Vendor
consideration, generally cash, is classified as a reduction of net sales, unless
specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration. The Company makes various payments to
customers, including slotting fees, advertising allowances, buy-downs and co-op
advertising. All of these payments reduce gross sales with the exception of
co-op advertising. Co-op advertising is classified as a selling, general and
administrative expense in accordance with EITF 01-09. Co-op advertising
expenses, a component of advertising and promotion expenses, were $14,408 in
2005, $10,389 in 2004 and $9,355 in 2003. (k)
Impairment of Long-Lived Assets Long-lived
assets and intangibles subject to amortization are reviewed for impairment when
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If the carrying amount of the asset exceeds the expected
undiscounted cash flows of the asset, an impairment charge is recognized equal
to the amount by which the carrying amount exceeds the expected undiscounted
cash flows. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less estimated costs of disposal and are no longer
depreciated. (l) Foreign Currency Translation The
Company's subsidiaries that operate outside the United States use their local
currency as the functional currency, with the exception of operations carried
out in Canada and Mexico, in which case the functional currency is the U.S.
dollar. Other than Canada and Mexico, the functional currency is translated into
U.S. dollars for balance sheet accounts using the month end rates in effect as
of the balance sheet date and average exchange rate for revenue and expense
accounts for each respective period. The translation adjustments are deferred as
a separate component of stockholders' equity, within other comprehensive income,
net of tax where applicable. Gains or losses resulting from transactions
denominated in foreign currencies are included in other income or expense,
within the consolidated statements of earnings. The assets and liabilities of
the Company's Canada and Mexico operations are re-measured using a month end
rate, except for non-monetary assets and liabilities, which are re-measured
using the historical exchange rate. Income and expense accounts are re-measured
using an average monthly rate for the period, except for expenses related to
those balance sheet accounts that are re-measured using historical exchange
rates. The resulting re-measurement adjustment is reported in the consolidated
statements of operations when incurred.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(m) Earnings
per Share ("EPS") Basic net
earnings per share ("EPS") is calculated using net earnings available to common
stockholders divided by the weighted-average number of shares of common stock
outstanding during the year. Diluted EPS is similar to basic EPS except that the
weighted-average number of shares is increased to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued. Dilutive
common stock options are included in the diluted EPS calculation using the
treasury stock method. Common stock options that were not included in the
diluted EPS computation because the options' exercise price was greater than the
average market price of the common shares for the periods presented were 351, 21
and 605 for 2005, 2004 and 2003, respectively.
Computations of basic and diluted earnings per share are presented in the
following table:
Years Ended December 31,
2005
2004
2003 Net earnings. $
358,195
368,622
310,149 Weighted-average common and dilutive
potential common
shares outstanding:
Weighted-average common shares outstanding.
66,932
66,682
66,251 Add
weighted-average dilutive potential common
shares - options to purchase common
shares, net.
712
875
870 Weighted-average common and dilutive
potential
common shares outstanding
67,644
67,557
67,121 Basic earnings per share $
5.35
5.53
4.68 Diluted earnings per share $
5.30
5.46
4.62
(n) Stock-Based Compensation
Effective January 1, 2003, the Company adopted the
disclosure provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation and requires prominent disclosure in
both the annual and interim financial statements of the method of accounting
used and the financial impact of stock-based compensation. As permitted by SFAS.
123, the Company accounts for stock options granted as prescribed under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which recognizes compensation cost based upon the intrinsic value of
the award.
In December 2004, the FASB issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123, and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Transition may be accomplished using either the modified
prospective or modified retrospective method. The Company currently measures
compensation costs related to share-based payments under APB Opinion No. 25. In
April 2005, the Securities and Exchange Commission announced that the effective
date of SFAS 123R should be no later than the beginning of the first fiscal year
beginning after June 15, 2005. The Company will adopt SFAS 123R in the first
quarter of 2006 after completing its evaluation.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
If the
Company had elected to recognize compensation expense under SFAS 123 based upon
the fair value at the grant dates for awards under its plans, the Company's net
earnings per share would have been reduced as follows:
2005
2004
2003
Net earnings as reported. $
358,195
368,622
310,149
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects
(8,628)
(7,519)
(6,284)
Pro forma net earnings. $
349,567
361,103
303,865
Net earnings per common share (basic)
As reported $
5.35
5.53
4.68
Pro forma $
5.22
5.42
4.59
Net earnings per common share (diluted)
As reported $
5.30
5.46
4.62
Pro forma. $
5.18
5.36
4.54 The
average fair value of options granted during 2005, 2004 and 2003 was $37.29,
$34.39 and $24.73, respectively. This fair value was estimated using the Black-Scholes
option pricing model based on a weighted-average market price at grant date of
$87.19 in 2005, $74.62 in 2004 and $53.93 in 2003 and the following
weighted-average assumptions:
2005
2004
2003
Dividend yield.
-
-
-
Risk-free interest rate
4.0 %
2.9 %
2.3 %
Volatility.
37.7 %
43.1 %
44.9 %
Expected life (years)
6
6
6
(o) Comprehensive Income
Comprehensive income includes foreign currency translation of assets and
liabilities of foreign subsidiaries, effects of exchange rate changes on
intercompany balances of a long-term nature and transactions and derivative
financial instruments designated as cash flow hedges. The Company does not
provide income taxes on currency translation adjustments, as earnings from
foreign subsidiaries are considered to be indefinitely reinvested. Amounts
recorded in Accumulated other comprehensive income on the Consolidated
Statements of Shareholders' Equity for the years ended December 31, 2005, 2004
and 2003 are as follows:
Translation
Hedge
Tax expense
Adjustment
Instruments
(benefit)
Total 2003 $
47
3,569
(1,302)
2,314 2004
(1,628)
(1,280)
467
(2,441) 2005
(48,702)
1,998
(729)
(47,433)
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(p) Effect of
New Accounting Pronouncements In December
2004, the FASB issued FASB Staff Position 109-1, "Application of FASB Statement
No. 109, "Accounting for Income Taxes" ("SFAS No. 109") to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"),
enacted October 22, 2004, provides a tax deduction for income from qualified
domestic production activities. FSP 109-1 provides the treatment for the
deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is
effective prospectively as of January 1, 2005. The adoption of FSP 109-1 did not
have a significant impact on the Company's consolidated financial statements. In
December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under
SFAS No. 109 with respect to recording the potential impact of the repatriation
provisions of the Jobs Act on enterprises' income tax expense and deferred tax
liability. FSP 109-2 states that an enterprise is allowed time beyond the
financial reporting period of enactment to evaluate the effect of the Jobs Act
on its plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109. The Company did not elect to repatriate any
foreign earnings during 2005 and accordingly, the adoption of FSP 109-2 did not
have a significant impact on the Company's consolidated financial statements. In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of
ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and re-handling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005. The Company
will adopt SFAS 151 effective January 1, 2006 and does not expect its adoption
will have a material impact on the Company's consolidated financial statements. In March
2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN
47"), which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. Effective December 31, 2005, the
Company adopted FIN 47 which did not have a material impact on the Company's
consolidated financial statements. In
May 2005, the FASB issued Statement of Financial Accounting Standards No. 154,
"Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20
and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No.
20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting
Changes in Interim Financial Statements." SFAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires that a
change in depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The impact of this standard, if any, will depend upon
accounting changes or errors that may occur in future periods. The Company
adopted SFAS 154 effective December 31, 2005. (q) Fiscal
Year The
Company ends its fiscal year on December 31. Each of the first three quarters in
the fiscal year ends on the Saturday nearest the calendar quarter end.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(r)
Reclassifications The
Company reclassified certain prior period financial statement balances to
conform to current presentations. (2) Acquisitions On
November 10, 2003, the Company acquired the assets and assumed certain
liabilities of the carpet division of Burlington Industries, Inc. ("Lees
Carpet") from W.L. Ross & Company for approximately $352,009 in cash. The
results of Lees Carpet have been included with the Mohawk segment results in the
Company's consolidated financial statements since that date. The primary reason
for the acquisition was to expand the Company's presence in the commercial
carpet market. The following table summarizes the
fair values of the assets acquired and the liabilities assumed at the date of
acquisition for Lees Carpet:
Current assets $
62,939
Property, plant and equipment
53,424
Goodwill
78,083
Intangible assets
178,340
Other assets
52
Total assets acquired
372,838
Current liabilities
12,829
Other liabilities
8,000
Total liabilities assumed
20,829
Net assets acquired. $
352,009 Of the
approximately $178,340 of acquired intangible assets, approximately $125,580 was
assigned to trade names and not subject to amortization. The remaining $52,760
was assigned to customer relationships with a weighted-average useful life of
approximately 15 years. Goodwill of approximately $78,083 was assigned to the
Mohawk segment. The goodwill is deductible for income tax purposes. On October
31, 2005 the Company acquired all the outstanding shares of Unilin Holdings NV
by acquiring Unilin Flooring. BVBA, which then purchased Unilin Holdings NV. The
Company simultaneously acquired all the outstanding shares of Unilin Holding
Inc., and its subsidiaries. (together with Unilin Flooring BVBA. "Unilin").
Unilin, together with its subsidiaries is a leading manufacturer, distributor
and marketer of laminate flooring in Europe and the United States.
The total preliminary purchase price of acquiring Unilin, net of cash of
$165,709, was Euro 2,110,176 or $2,546,349 based on the prevailing exchange rate at
the closing. The acquisition was accounted for by the purchase method and,
accordingly, the results of operations of Unilin have been included in the
Company's consolidated financial statements from October 31, 2005. The
purchase price was allocated to the assets acquired and liabilities assumed
based upon the estimated fair values at the date of acquisition. Intangibles and
property plant and equipment values were established with the assistance of an
independent third party. The excess of the purchase price over the fair value of
the net identifiable assets acquired of approximately $1,249,720 was recorded as
goodwill. The primary reason for the acquisition was to expand the Company's
presence in the laminate flooring market.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company considered whether
identifiable intangible assets existed during the purchase price negotiations
and during the subsequent purchase allocation period. Accordingly the Company
recognized goodwill, tradenames, patents, customer lists, contingent assets and
backlogs. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), goodwill recorded in the Unilin Acquisition will not be
amortized. Additionally, the Company determined that the tradenames intangible
assets have indefinite useful lives because they are expected to generate cash
flows indefinitely. Goodwill and the tradenames intangible assets are subject to
annual impairment testing. The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition, excluding cash of $165,709. The
Company is in the process of finalizing the valuation and accordingly, the
allocation of the purchase price has not been finalized
Current assets $
387,695
Property, plant and equipment
774,677
Goodwill
1,249,720
Intangible assets
882,886
Other assets
890
Total assets acquired
3,295,868
Current liabilities
275,214
Long-term debt
32,027
Other liabilities
442,278
Total liabilities assumed
749,519
Net assets acquired $
2,546,349 Of the
$882,886 of acquired intangibles, $356,521 was assigned to registered tradenames
that are not subject to amortization. The remaining acquired intangibles
were assigned to customer relationships for $270,709 (7 year weighted average
useful life) and patents for $255,656 (12 year weighted average useful life).
The $1,249,720 of goodwill is not deductible for tax purposes.
The following unaudited pro forma financial information
presents the combined results of operations of the Company and Unilin as if the
acquisition had occurred at the beginning of 2004, after giving effect to
certain adjustments, including increased interest expense on debt related to the
acquisition, and the amortization of intangible assets. The pro forma
information does not necessarily reflect the results of operations that would
have occurred had the Company and Unilin constituted a single entity during such
periods. The following table discloses the results for the fiscal years ended
December 31:
2005 (a)
2004
Net sales $
7,553,506
6,873,858
Net earnings (a)
400,408
374,755
Basic earnings per share
5.98
5.62
Diluted earnings per share
5.92
5.55
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
During 2005, the Company acquired certain assets of a carpet
backing manufacturer and all outstanding shares of a distributor of natural
stone slabs for approximately $67,642. Goodwill related to the acquisitions was
approximately $10,955. (3)
Receivables
Receivables are as follows:
2005
2004
Customers, trade $
925,714
746,233
Other
25,662
9,720
951,376
755,953
Less allowance for discounts, returns, claims and
doubtful accounts
102,710
95,303
Net receivables $
848,666
660,650 The
following table reflects the activity of allowances for discounts, returns,
claims and doubtful accounts for the years ended December 31:
Balance at
charged to Balance beginning
costs and at end
of year
expenses (1)
Deductions (2)
of year
2003 $
84,673
279,583
269,839
94,417
2004
94,417
310,368
309,482
95,303
2005
95,303
324,024
316,617
102,710 (4)
Inventories
The components of inventories are as follows:
2005
2004
Finished goods $
754,663
665,565
Work in process
89,179
86,883
Raw materials
323,070
265,535
Total inventories. $
1,166,913
1,017,983 There were
no LIFO liquidations in either 2005 or 2004. Inventories, included above, in the
amount of $764,140 and $710,016 at December 31, 2005 and 2004, respectively,
were valued at the lower of LIFO cost or market. If the LIFO method had not been
used inventories would have been $48,560 and $3,402 higher than reported at
December 31, 2005 and 2004, respectively, which approximates the difference
between replacement and carrying value.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(5) Goodwill
and Other Intangible Assets The
Company evaluates its goodwill and indefinite life intangibles on an annual
basis for impairment. The Company has three reporting segments, the Mohawk
segment, the Dal-Tile segment, and the Unilin segment. Accordingly the
Company has assigned the acquired goodwill and indefinite life intangibles to
the respective reporting segments. During the fourth quarter of 2005, the
Company evaluated the goodwill and indefinite life intangibles using the
discounted cash flow approach and determined that there was no impairment. The
following table summarizes the components of intangible assets:
2005
2004 Carrying
amount of amortized intangible assets:
Customer relationships $
326,039
54,160
Patents
256,256
600 Effect of
translation
(9,902)
- $
572,393
54,760
Accumulated amortization of amortized intangible assets:
Customer relationships $
13,467
4,324
Patents
7,006
70 Effect of
translation
(83)
- $
20,390
4,394
Indefinite life intangible assets: Trade names
628,801
272,280 Effect of
translation
(6,707)
- $
622,094
272,280
Total other intangible assets $
1,174,097
322,646
Aggregate amortization expense
For the year ended December 31 $
15,996
3,843
Estimated amortization expense for years ended
December 31, are as follows:
2006 $
77,103
2007
83,733
2008
65,410
2009
64,282
2010
62,640
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The
changes in the carrying amount of goodwill for the years ended December 31, 2005
and 2004 are as follows:
Mohawk
Dal-Tile
Unilin
Total
Balances as of January 1, 2004 $
195,083
1,173,617
-
1,368,700
Goodwill acquired during the year
1,549
7,100
-
8,649
Balances as of December 31, 2004
196,632
1,180,717
-
1,377,349
Goodwill acquired during the year
1,500
10,955
1,249,720
1,262,175 Effect of
translation
-
-
(17,561)
(17,561)
Balances as of December 31, 2005 $
198,132
1,191,672
1,232,159
2,621,963 The increase in goodwill during 2005
was attributable to the acquisitions made within the Mohawk and Dal-Tile
reporting segments and the Unilin Acquisition. (6) Property, Plant and Equipment
Following is a summary of property, plant and equipment:
2005
2004
Land $
155,670
59,638
Buildings and improvements
559,723
378,389
Machinery and equipment
1,802,370
1,233,140
Furniture and fixtures
44,765
44,371
Leasehold improvements
28,784
24,120
Construction in progress
233,525
78,165
2,824,837
1,817,823
Less accumulated depreciation and amortization
1,014,109
912,491
Net property, plant and equipment $
1,810,728
905,332 Property,
plant and equipment includes capitalized interest of $6,000, $3,197 and $5,634
in 2005, 2004 and 2003, respectively. Depreciation expense was $133,333,
$117,768 and $104,450 for 2005, 2004 and 2003, respectively. Included in
the property, plant and equipment are capital leases with a cost of $135,210 and
accumulated depreciation of $118 at December 31, 2005. (7) Long-Term
Debt On October
28, 2005, the Company entered into a $1,500,000 364-day senior, unsecured,
bridge term loan facility, which is referred to herein as the bridge credit
facility, and a $1,500,000 five-year, senior, unsecured, revolving credit and
term loan facility, which is referred to herein as the senior unsecured credit
facilities. The senior unsecured credit facilities replaced a
then-existing credit facility and various uncommitted credit lines. The
Company entered into both the bridge credit facility and the senior unsecured
credit facilities to finance the Unilin Acquisition and to provide for working
capital requirements.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The new
senior multi-currency unsecured credit facilities consist of (i) a
multi-currency $750,000 revolving credit facility, (ii) a $389,200 term loan
facility and (iii) a Euro 300,000 (based on the then prevailing exchange rate) term
loan facility, all of which mature on October 28, 2010. Availability under the
revolving credit facility is reduced by the amount of letters of credit issued
under this facility. At December 31, 2005, the amount of these letters of credit
was $78,338. At the Company's election, both the bridge credit facility
and the new senior credit facilities bear interest at (i) the greater of (x)
prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR
plus an indexed amount based on the Company's senior, unsecured, long-term debt
rating. On
November 8, 2005, one of the Company's subsidiaries entered into a Euro 130,000, or
approximately $156,000 (based on the then prevailing exchange rate), five-year
unsecured, revolving credit facility, maturing on November 8, 2010, which is
referred to as the Euro revolving credit facility. This agreement bears interest
at EURIBOR plus an indexed amount based on the Company's senior, unsecured,
long-term debt rating. The Company guaranteed the obligations of that subsidiary
under this revolving credit facility and of any of the Company's other
subsidiaries that become borrowers under this credit facility. As of December
31, 2005, the Company had no borrowings outstanding under this facility.
The
Company's new senior unsecured credit facilities and the Euro revolving credit
facility both contain debt to capital ratio requirements and other customary
covenants. The Company was in compliance with these covenants at December
31, 2005. Under both of these credit facilities, the Company must pay an annual
facility fee ranging from 0.060% to 0.25% depending upon the Company's senior
unsecured long-term debt rating as determined by certain rating agencies.
At
December 31, 2005, a total of approximately $507,918 was available under the new
senior unsecured credit facilities, and the Euro 130,000 credit agreement,
compared to $234,130 available under both the then-existing credit facility and
uncommitted credit lines at December 31, 2004. The amount used under the senior
unsecured credit facilities at December 31, 2005, was $1,140,379. The amount
used under the unsecured credit facilities is composed of $1,062,041 borrowings,
$55,599 standby letters of credit guaranteeing the Company's industrial revenue
bonds and $22,739 standby letters of credit related to various insurance
contracts and foreign vendor commitments. On January
17, 2006, the Company issued $500,000 aggregate principal amount of 5.750% notes
due 2011 and $900,000 aggregate principal amount of 6.125% notes due 2016. The
net proceeds from the issuance of these notes were used to pay off the bridge
credit facility, and accordingly the Company reclassified the bridge credit
facility as long-term debt. Interest payable on each series of notes will be
increased in the event of a downgrade in the Company's debt rating determined by
certain rating agencies. The maximum increase in the event of a downgrade is 2%.
If the Company's debt rating subsequently improves, then the interest rates
would be reduced accordingly. The
Company has an on-balance sheet trade accounts receivable securitization
agreement (the "Securitization Facility"). The Securitization Facility allows
the Company to borrow up to $350,000 based on available accounts receivable. At
December 31, 2005, the Company had $40,000 outstanding compared to $90,000 at
December 31, 2004. The Securitization Facility is secured by trade receivables.
During the third quarter of 2005, the Company extended the term of its
Securitization Facility until August 2006.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Long-term
debt consists of the following:
2005
2004
Short term uncommitted credit lines $
-
37,721
Five year unsecured credit facility, due October 28, 2010
1,062,041
-
Securitization Facility, due August 1, 2006
40,000
90,000 6.50% senior notes, payable April
15, 2007
interest payable semiannually
300,000
300,000
7.20% senior notes, payable April 15, 2012
interest payable semiannually
400,000
400,000
364-day senior, unsecured bridge term credit facility,
due October 27, 2006
1,400,000
-
7.14%-7.23% senior notes, payable in annual principal
installments beginning in 1997, due September 1, 2005,
interest payable semiannually
-
9,447
Industrial revenue bonds, capital leases and other
106,329
54,173
Total long-term debt
3,308,370
891,341
Less current portion
113,809
191,341
Long-term debt, excluding current portion $
3,194,561
700,000 The
aggregate maturities of long-term debt as of
December 31, 2005 are as follows:
2006 $
113,809
2007
314,277
2008
11,259
2009
4,275
2010
1,063,178
Thereafter
1,801,572 $
3,308,370 (8) Accounts
Payable and Accrued Expenses
Accounts payable and accrued expenses are as follows:
2005
2004
Outstanding checks in excess of cash $
97,389
33,719
Accounts payable, trade
401,543
277,851
Accrued expenses
325,856
180,978
Income taxes payable
36,504
16,143
Accrued compensation
136,813
114,370
Total accounts payable and accrued expenses $
998,105
623,061
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(9)
Derivative Financial Instruments Natural Gas
Risk Management The
Company uses a combination of natural gas futures contracts and long-term supply
agreements to manage unanticipated changes in natural gas prices. The contracts
are based on forecasted usage of natural gas measured in Million British Thermal
Units ("MMBTU"). The
Company has designated the natural gas futures contracts as cash flow hedges.
The outstanding contracts are valued at market with the offset applied to other
comprehensive income, net of applicable income taxes and any hedge
ineffectiveness. Any gain
or loss is reclassified from other comprehensive income and recognized in cost
of goods sold in the same period or periods during which the hedged transaction
affects earnings. At December 31, 2005, the Company had natural gas contracts
that mature from January 2006 to October 2006 with an aggregate notional amount
of approximately 660 MMBTU's. The fair value of these contracts was an asset of
$1,941. At December 31, 2004, the Company had natural gas contracts that mature
from January 2005 to March 2005 with an aggregate notional amount of
approximately 1,010 MMBTU's. The fair value of these contracts was a liability
of $1,280. The offset to these assets is recorded in other comprehensive
income, net of applicable income taxes. The ineffective portion of the
derivative is recognized in the cost of goods sold within the consolidated
statements of earnings and was not significant for the periods reported. The
amount that the Company anticipates that will be reclassified out of accumulated
other comprehensive income in the next twelve months is a gain of approximately
$1,941. The Company's natural gas long-term
supply agreements are accounted for under the normal purchases provision within
SFAS No. 133 and its amendments. At December 31, 2005, the Company had normal
purchase commitments of approximately 1,867 MMBTU's for periods maturing from
January 2006 through October 2006. The contracted value of these commitments was
approximately $17,219 and the fair value of these commitments was approximately
$20,488, at December 31, 2005. At December 31, 2004, the Company had
normal purchase commitments of approximately 1,892 MMBTU's for periods maturing
from January 2005 through March 2006. The contracted value of these commitments
was approximately $9,879 and the fair value of these commitments was
approximately $11,941, at December 31, 2004. Foreign Currency Rate Management The Company enters into foreign
exchange forward contracts to hedge foreign denominated costs associated with
its operations in Mexico. The objective of these transactions is to reduce
volatility of exchange rates where these operations are located by fixing a
portion of their costs in U.S. currency. Accordingly, these contracts have been
designated as cash flow hedges. Gains and losses are reclassified from other
comprehensive income and recognized in cost of goods sold in the same period or
periods during which the hedged transaction affects earnings. The Company had
forward contracts to purchase approximately 8,000 Mexican pesos at December 31,
2005. The aggregate U.S. dollar value of these contracts at December 31, 2005
was approximately $697. The contracts are marked to market in other current
liabilities with the offset to other comprehensive income, net of applicable
income taxes. Unrealized losses for the year ended December 31, 2005 were not
significant. The Company had no forward contracts outstanding at December 31,
2004. The Company also had forward
exchange contracts to sell the British Pound and Canadian Dollar for a notional
amount of $5,555 at December 31, 2005. The contracts do not qualify for hedge
accounting and are marked to market in other expenses at the end of each
reporting period. The change in fair value is recorded in other expense and the
contracts do not qualify for hedge accounting. The impact of the change in fair
value on the statements of operations was not significant for the period ended
December 31, 2005.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(10) Product warranties The Company warrants certain
qualitative attributes of its products for up to 20 years. The Company records a
provision for estimated warranty and related costs, based on historical
experience and periodically adjusts these provisions to reflect actual
experience.
Product warranties are as follows:
2005
2004
2003 Balance at beginning of
year $
23,473
24,063
28,919
Warranty claims
(46,850)
(45,553)
(50,040)
Warranty expense
49,365
44,963
45,184
Balance at end of year $
25,988
23,473
24,063 (11) Stock
Options, Stock Compensation and Treasury Stock Under the
2002 Long-Term Incentive Plan, options may be granted to directors and key
employees through 2012 to purchase a maximum of 3,200 shares of common stock.
Under the 2002 plan, options that were not issued from the 1992, 1993 and 1997
plans were cancelled. During 2005, 2004 and 2003, options to purchase 460,
411 and 565 shares, respectively, were granted under the 2002 plan. Options
granted under each of these plans expire 10 years from the date of grant and
become exercisable at such dates and at prices as determined by the Compensation
Committee of the Company's Board of Directors. During
1996, the Company adopted the 1997 Non-Employee Director Stock Compensation
Plan. The plan provides for awards of common stock of the Company for
non-employee directors to receive in lieu of cash for their annual retainers.
During 2005, 2004 and 2003, a total of 1, 1 and 1 shares, respectively, were
awarded to the non-employee directors under the plan. Additional
information relating to the Company's stock option plans follows: 2005
2004
2003 Options outstanding at beginning of year
2,281
2,413
2,624 Options granted
460
411
565 Options exercised
(378)
(464)
(679) Options canceled
(87)
(79)
(97) Options outstanding at end of year
2,276
2,281
2,413 Options exercisable at end of year
857
791
765 Option prices per share: Options granted during the year $
76.73-89.46
61.33-90.97
48.50-74.93 Options exercised during the year $
9.33-82.50
9.33-65.02
6.67-63.14 Options canceled during the year $
30.53-90.97
11.17-82.50
9.33-63.90 Options outstanding at end of year $
11.33-90.97
9.33-90.97
9.33-74.93 Options exercisable at end of year $
11.33-90.97
9.33-74.93
9.33-65.02
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Summarized
information about stock options outstanding and exercisable at December 31,
2005, is as follows:
Outstanding
Exercisable Exercise price range
Number of Shares
Average Life (1)
Average Price (2)
Number of Shares
Average Price (2) Under $30.53
392
4.15 $
24.79
303 $
23.15 $30.69-48.50
437
6.34
44.93
169
39.87 $49.09-63.14
408
6.40
60.79
216
60.48 $63.90-73.45
519
7.61
70.31
156
68.11 $73.54-88.33
510
9.20
86.51
12
83.21 $89.46-90.97
10
9.17
90.42
1
90.97 Total
2,276
6.91
59.60
857
44.96 The
Company's Board of Directors has authorized the repurchase of up to 15,000
shares of its outstanding common stock. For the year ended December 31, 2005, a
total of approximately 186 shares of the Company's common stock were purchased
at an aggregate cost of approximately $14,521. Since the inception of the
program, a total of approximately 11,393 shares have been repurchased at an
aggregate cost of approximately $326,063. All of these repurchases have been
financed through the Company's operations and banking arrangements. On October
31, 2005, the Company entered into an agreement to issue approximately 585
shares to certain Unilin officers at $81.00 per share for an aggregate purchase
price of $47,429. These shares were issued in November 2005. The securities were
issued in reliance on the exemption from registration provided under Section
4(2) of the Securities Act of 1933, as amended. (12) Employee
Benefit Plans The
Company has a 401(k) retirement savings plan (the "Mohawk Plan") open to
substantially all of its employees within the Mohawk and Dal-Tile segments who
have completed 90 days of eligible service. For the Mohawk segment, the Company
contributes $0.50 for every $1.00 of employee contributions up to a maximum of
4% of the employee's salary and an additional $0.25 for every $1.00 of employee
contributions in excess of 4% of the employee's salary up to a maximum of 6%.
For the Dal-Tile segment, the Company contributes $.50 for every $1.00 of
employee contributions up to a maximum of 6% of the employee's salary. Employee
and employer contributions to the Mohawk Plan were $38,322 and $15,118 in 2005,
$35,440 and $13,896 in 2004, and $28,807 and $10,995 in 2003, respectively. The
Company also made a discretionary contribution to the Mohawk Plan of
approximately $5,710, $5,214 and $4,595 in 2005, 2004 and 2003, respectively.
The Unilin segment also has a defined contribution plan that covers certain
employees in the United States of America. Eligible employees may elect to
contribute a portion of their annual salary subject to a certain maximum each
year. The Company's matching of employee contributions is discretionary and is
set each year by the Company. The Company's match was approximately $40 for the
two-month period ended December 31, 2005. Unilin has
various pension plans covering most of its employees in Belgium, France and The
Netherlands. Benefits under those plans typically depend on compensation and
years of service. Unilin does not provide other postretirement benefits. The
pension plans are funded in accordance with local regulations. In The
Netherlands, some plans participate in multi-employer pension plans which have
been treated as defined contribution plans. The Company uses a December 31
measurement date for its plans.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The plan
assets for the defined benefit plans are invested 100% in insurance contracts.
Since the insurance companies primarily invest in bonds, the long term expected
rate of return reflects the yield of the bonds. A discount rate of 4.18% has
been established by reference to the return on AA corporate bonds, an expected
rate of return has been set equal to the discount rate and a rate of
compensation increase of 3.45% is based on the Company's experience. The
accumulated benefit obligation for Unilin's defined benefit plans was $14,345 at
December 31, 2005. The assets, projected benefit obligation and accumulated
benefit obligation for the pension plans with accumulated benefit obligations in
excess of the plans' assets were $12,115, $15,194 and $13,468 respectively, as
of December 31, 2005. (13) Income Taxes Following
is a summary of income from continuing operations before income taxes for United
States and foreign operations:
2005
2004
2003
United States $
545,427
568,824
483,997
Foreign
11,594
8,565
4,437 Income
before income taxes. $
557,021
577,389
488,434 Income tax
expense (benefit) for the years ended December 31, 2005, 2004 and 2003, consists
of the following:
Current
Deferred
Total
2005:
U.S. federal $
183,807
3,320
187,127
State and local
15,147
(1,395)
13,752
Foreign
11,555
(13,608)
(2,053) $
210,509
(11,683)
198,826
2004:
U.S. federal $
158,704
32,541
191,245
State, local and other
11,363
6,159
17,522 $
170,067
38,700
208,767
2003:
U.S. federal $
132,849
38,696
171,545
State, local and other
10,661
(3,921)
6,740 $
143,510
34,775
178,285
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Income tax
expense attributable to earnings before income taxes differs from the amounts
computed by applying the U.S. statutory federal income tax rate to earnings
before income taxes as follows:
2005
2004
2003 Computed
"expected" tax expense $
194,958
202,087
170,952
State and local income taxes, net of federal
income tax benefit
4,367
11,675
5,071
Foreign income taxes
(589)
(892)
2,495
Change in valuation allowance
(1,351)
(1,821)
(2,312)
Other, net
1,441
(2,282)
2,079 $
198,826
208,767
178,285 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004,
are presented below:
2005
2004
Deferred tax assets:
Accounts receivable $
20,147
32,008
Inventories
(4,969)
9,641
Federal and state net operating losses and credits
44,620
40,551
Accrued expenses
99,836
62,767
Valuation allowance.
(32,180)
(33,531)
Gross deferred tax assets
127,454
111,436
Deferred tax liabilities:
Plant and equipment
(302,552)
(129,287)
Intangibles
(325,183)
(83,545)
Other liabilities
(56,069)
(35,054)
Gross deferred tax liabilities
(683,804)
(247,886)
Net deferred tax liability (1) $
(556,350)
(136,450) Based upon
the expected reversal of deferred tax liabilities and the level of historical
and projected taxable income over periods in which the deferred tax assets are
deductible, the Company's management believes it is more likely than not the
Company will realize the benefits of these deductible differences. The
Company does not provide for U.S. federal and state income taxes on the
cumulative undistributed earnings of its foreign subsidiaries because such
earnings are reinvested and will continue to be reinvested indefinitely.
At December 31, 2005 and 2004, the Company had not provided federal income taxes
on earnings of approximately $56,763 and $48,172 from its foreign subsidiaries.
Should these earnings be distributed in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes and withholding taxes in
various international jurisdictions. These taxes would be partially offset
by U.S. foreign tax credits.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The
American Jobs Act of 2004 ("The Jobs Act") was enacted on October 22, 2004.
The new law made numerous and substantive changes in the taxation of foreign and
domestic-sourced income, including provisions for a lower tax rate on
repatriated foreign earnings. The Company has completed its analysis
of the relevant provisions of The Jobs Act and has determined that there is no
impact on the Company's consolidated financial statements. As of
December 31, 2005 and 2004, the Company had state net operating loss
carryforwards, state tax credits and Mexican asset tax credits with potential
tax benefits of approximately $44,600 and $40,600, respectively, net of federal
income tax benefit. Because the Company generates more state tax credits on an
annual basis in certain jurisdications than the related state taxable income, it
is the Company's opinion that it is more likely than not that the benefit of
these deferred tax assets related to state tax credits and certain state net
operating losses will not be realized. Accordingly, a valuation allowance of
approximately $32,180 and $33,531 has been recorded for the years ended December
31, 2005 and 2004, respectively. For 2005, the valuation allowance decreased by
$1,351 primarily as a result of a Mexican tax credit benefit recognized in the
current year, net of an increase in the state valuation allowance in various
state jurisdictions. The Company has determined that these credits and losses
may not be utilized before they expire. In the
normal course of business, the Company's tax returns are subject to examination
by various taxing authorities. Such examinations may result in future tax
and interest assessments by these taxing authorities, and the Company has
accrued a liability when it believes it is probable that it will be assessed.
Differences between the estimated and actual amounts determined upon ultimate
resolution, individually or in the aggregate, are not expected to have a
material adverse effect on the Company's consolidated financial position but
could possibly be material to the Company's consolidated results of operations
or cash flow of any one period. (14) Commitments and Contingencies The
Company is obligated under various operating leases for office and manufacturing
space, machinery, and equipment. Future minimum lease payments under
non-cancelable capital and operating leases (with initial or remaining lease
terms in excess of one year) as of December 31:
Capital
Operating
Total Future Payments
2006 $
18,382
93,553
111,935
2007
14,381
75,247
89,628
2008
11,670
61,973
73,643
2009
4,597
51,558
56,155
2010
1,223
37,064
38,287
Thereafter
1,687
103,116
104,803
Total payments
51,940
422,511
474,451
Less amount representing interest
(3,636)
Present value of capitalized lease payments $
48,304 Rental
expense under operating leases was $99,697, $87,659 and $78,007 in 2005, 2004
and 2003, respectively.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The
Company has approximately $40,958 and $36,693 as of December 31, 2005 and 2004
in standby letters of credit for various insurance contracts and commitments to
foreign vendors that expire within two years. In addition, at December 31, 2005,
the Company guaranteed approximately $72,040 for VAT and building leases related
to its operating facilities in France.
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
Shirley Williams, et al vs. Mohawk Industries, Inc, four plaintiffs filed a
purported class action lawsuit in January 2004, in the United States District
Court for the Northern District of Georgia, alleging that they are former and
current employees of the Company and that the actions and conduct of the
Company, including the employment of persons who are not permitted to work in
this country, have damaged them and the other members of the purported class by
suppressing the wages of our hourly employees in Georgia. The plaintiffs seek a
variety of relief, including (a) treble damages; (b) return of any allegedly
unlawful profits; and (c) attorney's fees and costs of litigation. In February
2004, the Company filed a Motion to Dismiss the Complaint, which was denied by
the Northern District in April 2004. The Company then sought and obtained
permission to file an immediate appeal of the Northern District's decision to
the United States Court of Appeals for the 11th Circuit. In June 2005, the 11th
Circuit reversed in part and affirmed in part the lower court's decision
(Williams v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June
2005, the Company filed a motion requesting review by the full 11th Circuit,
which was denied in August 2005. In October 2005, the Company filed a petition
for certiorari with the United States Supreme Court, which petition was granted
in December of 2005. The Company believes it has meritorious defenses and
intends to continue vigorously defending itself against this action. The Company believes that adequate
provisions have been made for all pending litigation for probable losses with
respect to the resolution of all claims and pending litigation and that the
ultimate outcome of these actions will not have a material adverse effect on its
financial condition but could have a material effect on its results of
operations in a given quarter or year. The
Company is subject to various federal, state, local and foreign environmental
health and safety laws and regulations, including those governing air emissions,
wastewater discharges, the use, storage, treatment and disposal of solid and
hazardous materials, and the cleanup of contamination associated therewith.
Because of the nature of the Company's business, the Company has incurred, and
will continue to incur, costs relating to compliance with such laws and
regulations. The Company is involved in various proceedings relating to
environmental matters and is currently engaged in environmental investigation,
remediation and post-closure care programs at certain sites. The Company has
provided accruals for such activities that it has determined to be both probable
and reasonably estimable. The Company does not expect that the ultimate
liability with respect to such activities will have a material adverse effect on
its operations, but may have an effect on a given quarter or annual period. On October
31, 2005, the Company entered into a Discounted Stock Purchase Agreement (the "DSPA")
with certain members of the Unilin management team (the "Unilin Management").
Under the terms of the DSPA the Company will be obligated to make cash payments
to the Unilin Management in the event that certain performance goals are
satisfied. In each of the years in the five-year period ended December 31, 2010,
the Unilin Management can earn amounts, in the aggregate, equal to the average
value of 35,133 shares of the Company's common stock over the 20 trading day
period ending on December 31 of the prior year. Any failure in a given
year to reach the performance goals may be rectified, and consequently the
amounts payable with respect to achieving such criteria may be made, in any of
the other years. In the
normal course of business, the Company has entered into various European
collective bargaining agreements with its workforce, either locally or within
its industry sector. Historically, the Company and its industry have maintained
favorable relationships with its workforce and expect to do so in the future.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(15) Consolidated Statements of Cash
Flows Information Supplemental disclosures of cash flow
information are as follows:
2005
2004
2003
Net cash paid during the year for:
Interest $
61,468
60,744
61,424
Income taxes $
191,601
226,227
139,914
Supplemental schedule of non-cash
investing and financing activities:
Fair value of assets acquired in acquisitions $
3,375,605
16,236
407,320
Liabilities assumed in acquisitions
(762,076)
(1,238)
(23,199) $
2,613,529
14,998
384,121 (16) Segment Reporting The Company has three reporting
segments, the Mohawk segment, the Dal-Tile segment, and the Unilin segment.
The Mohawk segment (an aggregation of the Mohawk Flooring reporting unit and the
Mohawk Home reporting unit) manufactures, sources, markets and distributes its
product lines, which include carpet, rugs, pad, ceramic tile, hardwood,
resilient and laminate through independent floor covering retailers, home
centers, mass merchandisers, department stores, commercial dealers and
commercial end users. The Dal-Tile segment product lines include ceramic tile,
porcelain tile and stone products sold through tile and flooring retailers,
contractors, independent distributors and home centers. The Unilin
segment, which is headquartered in Belgium, is a leading manufacturer,
distributor and marketer of laminate flooring, insulated roofing and other wood
panels in Europe and the United States. Unilin sells its laminate flooring
products through independent distributors and specialty stores in Europe and the
United States, as well as through traditional retailers in France, Belgium and
The Netherlands and, in some circumstances, under private label names. Amounts
disclosed for each segment are prior to any elimination or consolidation
entries. Corporate general and administrative expenses attributable to each
segment are estimated and allocated accordingly. Segment performance is
evaluated based on operating income. No single customer accounted for more than
5% of net sales for the years ended December 31, 2005, 2004 and 2003. In
addition, inter-segment net sales were not significant during these periods. The
increase from 2005 compared to 2004 is primarily a result of the acquisition of
Unilin.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Segment information is as follows:
2005
2004
2003
Net sales:
Mohawk $
4,716,659
4,368,831
3,730,845
Dal-Tile
1,734,781
1,511,541
1,268,536
Unilin
168,814
-
-
Corporate and eliminations
(155)
-
- $
6,620,099
5,880,372
4,999,381
Operating income:
Mohawk $
381,699
424,256
364,040
Dal-Tile
260,194
219,831
187,245
Unilin
(5,162)
-
-
Corporate and eliminations
(9,459)
(8,497)
(9,256) $
627,272
635,590
542,029
Depreciation and amortization:
Mohawk $
91,452
89,479
78,450
Dal-Tile
31,731
29,210
24,638
Unilin
22,367
-
-
Corporate and eliminations
3,779
4,399
3,527 $
149,329
123,088
106,615
Capital expenditures (excluding acquisitions):
Mohawk $
153,238
66,563
55,587
Dal-Tile
84,363
38,720
57,856
Unilin
6,207
-
- Corporate and
eliminations
3,498
1,318
1,188 $
247,306
106,601
114,631
Assets:
Mohawk $
2,424,983
2,285,025
Dal-Tile
2,207,514
2,063,195 Unilin
3,263,248
-
Corporate and eliminations
95,778
54,898 $
7,991,523
4,403,118
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2005
2004
2003
Geographic net sales:
North America $
6,489,511
5,880,372
4,999,381
Europe
130,588
-
- $
6,620,099
5,880,372
4,999,381
Long-lived assets (1):
North America $
2,951,681
2,282,681
Europe
1,481,010
- $
4,432,691
2,282,681 (17)
Quarterly Financial Data (Unaudited) The
supplemental quarterly financial data are as follows:
Quarters Ended
April 2,
July 2,
October 1,
December 31,
2005
2005
2005
2005
Net sales $
1,493,222
1,624,692
1,697,634
1,804,551
Gross profit
384,702
431,509
451,868
455,055
Net earnings
70,020
93,811
108,652
85,712
Basic earnings per share
1.05
1.40
1.62
1.27
Diluted earnings per share
1.03
1.39
1.61
1.26 Quarters Ended
April 3,
July 3,
October 2,
December 31,
2004
2004
2004
2004
Net sales $
1,389,725
1,485,897
1,529,651
1,475,099
Gross profit
365,546
403,319
436,053
415,923
Net earnings
66,307
87,158
112,687
102,470
Basic earnings per share
1.00
1.31
1.69
1.54
Diluted earnings per share
0.98
1.29
1.67
1.52 Item 9.
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure None. Item 9A.
Controls and Procedures Evaluation of Disclosure Controls and
Procedures Based on
an evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
report, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that such controls and procedures were effective for the period
covered by this report. Management's Report on Internal Control
over Financial Reporting The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934, as amended). The Company's management
assessed the effectiveness of its internal control over financial reporting as
of December 31, 2005. In making this assessment, the Company's management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control-Integrated Framework. The
Company has excluded from the scope of its assessment of internal control over
financial reporting as of December 31, 2005, Unilin Flooring BVBA, Unilin
Holding Inc., and their subsidiaries (the Unilin Group), which businesses were
acquired on October 31, 2005 and whose financial statements reflect total assets
constituting approximately 14% (excluding goodwill and identified intangible
assets of approximately 27%) and revenues of approximately 3% of the company's
related consolidated financial statements as of and for the year ended December
31, 2005. The Company's management has concluded that, as of December 31, 2005,
its internal control over financial reporting is effective based on these
criteria. The Company's independent registered public accounting firm, KPMG LLP,
has issued an attestation report on management's assessment of the Company's
internal control over financial reporting, which is included herein. Changes in Internal Control Over
Financial Reporting Except for
the implementation of a financial consolidation system designed to facilitate
the production of consolidated financial statements, including the recently
acquired Unilin operations, there were no changes in our internal control over
financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Limitations
on the Effectiveness of Controls The
Company's management, including its Chief Executive Officer and Chief Financial
Officer, does not expect that the Company's disclosure controls and procedures
or the Company's internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. Item 9B.
Other Information None.
PART III Item 10.
Directors and Executive Officers of the Registrant The
information required by this item is incorporated by reference to information
contained in the Company's Proxy Statement for the 2006 Annual Meeting of
Stockholders under the following headings: "Election of Directors-Director,
Director Nominee and Executive Officer Information"; "-Nominees for Director";
"-Continuing Directors"; "-Executive Officers"; "-Section 16(a) Beneficial
Ownership Reporting Compliance" and "-Audit Committee". The Company has adopted
the Mohawk Industries, Inc. Standards of Conduct and Ethics, which applies to
all of its directors, officers and employees. The standards of conduct and
ethics are publicly available on our website at http://mohawkind.com and will be
made available in print to any stockholder who requests them. If the Company
makes any substantive amendments to the standards of conduct and ethics, or
grants any waiver, including any implicit waiver, from a provision of the
standards required by regulations of the Commission to apply to the Company's
chief executive officer, chief financial officer or chief accounting officer,
the Company will disclose the nature of the amendment or waiver on its website.
The Company may elect to also disclose the amendment or waiver in a report on
Form 8-K filed with the SEC. The Company has adopted the Mohawk Industries, Inc.
Board of Directors Corporate Governance Guidelines, which are publicly available
on the Company's website and will be made available to any stockholder who
requests it. Item 11.
Executive Compensation The
information required by this item is incorporated by reference to information
contained in the Company's Proxy Statement for the 2006 Annual Meeting of
Stockholders under the following headings: "Executive Compensation and Other
Information-Summary of Cash and Certain Other Compensation," "-Option Grants,"
"-Option Exercises and Holdings," "-Pension Plans," "-Certain Relationships and
Related Transactions," and "Election of Directors-Meetings and Committees of the
Board of Directors." Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The information required by this
item is incorporated by reference to information contained in the Company's
Proxy Statement for the 2006 Annual Meeting of Stockholders under the following
headings: "Executive Compensation and Other Information," "-Equity Compensation
Plan Information" and "-Principal Stockholders of the Company." Item 13.
Certain Relationships
and Related Transactions The
information required by this item is incorporated by reference to information
contained in the Company's Proxy Statement for the 2006 Annual Meeting of
Stockholders under the following heading: "Executive Compensation and Other
Information-Certain Relationships and Related Transactions." Item 14.
Principal Accountant Fees and Services The
information required by this item is incorporated by reference to information
contained in the Company's Proxy Statement for the 2006 Annual Meeting of
Stockholders under the following heading: "Principal Accountant Fees and
Services."
PART IV Item 15.
Exhibits and Financial Statement Schedules (a)
1. Consolidated Financial Statements The
Consolidated Financial Statements of Mohawk Industries, Inc. and subsidiaries
listed in Item 8 of Part II are incorporated by reference into this item. 2.
Consolidated Financial Statement Schedules Schedules
not listed above have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto. 3.
Exhibits The
exhibit number for the exhibit as originally filed is included in parentheses at
the end of the description.
Mohawk
*2.1
Agreement and Plan of Merger dated as of December 3, 1993 and amended
as of January 17, 1994 among Mohawk, AMI Acquisition Corp., Aladdin and
certain Shareholders of Aladdin. (Incorporated herein by reference to
Exhibit 2.1(a) in Mohawk's Registration Statement on Form S-4, Registration
No. 333-74220.)
*3.1
Restated Certificate of Incorporation of Mohawk, as amended.
(Incorporated herein by reference to Exhibit 3.1 in Mohawk's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.)
*3.2 Restated
Bylaws of Mohawk, as amended. (Incorporated herein by reference to Exhibit
3.1 in Mohawk's Report on Form 8-K dated February 23, 2006.)
*4.1 See
Article 4 of the Restated Certificate of Incorporation of Mohawk.
(Incorporated herein by reference to Exhibit 3.1 in Mohawk's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.)
*4.2 See
Articles 2, 6, and 9 of the Restated Bylaws of Mohawk, as amended.
(Incorporated herein by reference to Exhibit 3.1 in Mohawk's Current Report
on Form 8-K dated February 23, 2006.)
*4.3
Indenture, dated as of April 2, 2002 between Mohawk Industries, Inc.
and Wachovia Bank, National Association, as Trustee (Incorporated herein by
reference to Exhibit 4.1 in Mohawk's Registration Statement on Form S-4,
Registration No. 333-86734, as filed April 22, 2002.)
*4.4 Indenture dated as of January 9,
2006, between Mohawk Industries, Inc. and SunTrust Bank, as trustee.
(Incorporated herein by reference to Exhibit 4.4 in Mohawk's Registration
Statement on Form S-3, Registration Statement No. 333-130910.)
*4.5 First Supplemental Indenture, dated
as of January 17, 2006, by and between Mohawk Industries, Inc., and SunTrust
Bank, as trustee. (Incorporated by reference to Exhibit 4.1 in Mohawk's
Current Report on form 8-K dated January 17, 2006.)
*10.1 Five Year Credit Agreement dated as
of October 28, 2005, by and among Mohawk Industries, Inc., each of the Banks
party thereto from time to time, and Wachovia Bank, National Assocation, as
Administrative Agent. (Incorporated by reference to Exhibit 10.3 of
Mohawk's Current Report on form 8-K dated as of October 28, 2005.)
*10.2 Five Year Credit Agreement dated as
of November 8, 2005, by and among Mohawk International Holdings S.a.r.l,
each of the Banks party thereto from time to time, and KBC Bank, N.V., as
Administrative Agent. (Incorporated herein by reference to Exhibit 10.1 in
Mohawk's Current Report on form 8-K dated as of November 9, 2005.)
*10.3
Registration Rights Agreement by and among Mohawk, Citicorp
Investments, Inc., ML‑Lee Acquisition Fund, L.P. and Certain Management
Investors. (Incorporated herein by reference to Exhibit 10.14 of Mohawk's
Registration Statement on Form S‑1, Registration No. 33‑45418.)
*10.4 Voting
Agreement, Consent of Stockholders and Amendment to 1992 Registration Rights
Agreement dated December 3, 1993 by and among Aladdin, Mohawk, Citicorp
Investments, Inc., ML‑Lee Acquisition Fund, L.P., David L. Kolb, Donald G.
Mercer, Frank A. Procopio and John D. Swift. (Incorporated herein by
reference to Exhibit 10(b) of Mohawk's Registration Statement on Form S‑4,
Registration No. 33‑74220.)
*10.5
Registration Rights Agreement by and among Mohawk and the former
shareholders of Aladdin. (Incorporated herein by reference to Exhibit 10.32
of Mohawk's Annual Report on Form 10‑K for the fiscal year ended December
31, 1993.)
*10.6 Waiver
Agreement between Alan S. Lorberbaum and Mohawk dated as of March 23, 1994
to the Registration Rights Agreement dated as of February 25, 1994 between
Mohawk and those other persons who are signatories thereto. (Incorporated
herein by reference to Exhibit 10.3 of Mohawk's Quarterly Report on Form
10‑Q for the quarter ended July 2, 1994.)
*10.7 Amended and Restated Receivables
Purchase and Sale Agreement, dated as of August 4, 2003, among Mohawk Carpet
Distribution, L.P. and Dal-Tile Corporation, as originators, and Mohawk
Factoring, Inc. (Incorporated herein by reference to Exhibit 10.3 of
Mohawk's Quarterly Report on Form 10-Q for the period ended September 27,
2003.)
*10.8 Amended and Restated Credit and
Security Agreement, dated as of August 4, 2003, Among Mohawk Factoring,
Inc., Mohawk Servicing, Inc., Blue Ridge Asset Funding Corporation, Three
Pillars Funding Corporation, SunTrust Capital Markets, Inc., as a co-agent,
and Wachovia Bank, National Association, as a co-agent and administrative
agent. (Incorporated herein by reference to Exhibit 10.3 of Mohawk's
Quarterly Report on Form 10-Q for the period ended September 27, 2003.)
*10.9 First Amendment to Amended and
Restated Credit and Security Agreement dated September 29, 2004, among
Mohawk Factoring, Inc., Blue Ridge Asset Funding Corporation, Wachovia Bank,
National Association, Three Pillars Funding LLC, and SunTrust Capital
Markets, Inc. (Incorporated herein by reference to Exhibit 10.4 of Mohawk's
Quarterly Report on Form 10-Q for the period ended October 2, 2004.)
*10.10 Second Amendment to the Liquidity
Asset Purchase Agreement dated as of October 23, 2002 by and among Mohawk
Factoring, Inc, as borrower, Mohawk Servicing, Inc., as Servicer, Blue Ridge
Asset Funding Corporation, The Liquidity Banks and Wachovia Bank, N.A., as
Agent dated as of October 25, 2000. (Incorporated herein by reference to
Exhibit 10.28 of Mohawk's Annual Report on Form 10‑K for the year ended
December 31, 2002)
*10.11
Amendment to Second Amended and Restated Liquidity Asset Purchase
Agreement dated August 2, 2004, among Mohawk Factoring, Inc., Blue Ridge
Asset Funding Corporation and Wachovia Bank, National Association.
(Incorporated herein by reference to Exhibit 10.2 of Mohawk's Quarterly
Report on Form 10-Q for the period ended October 2, 2003.)
*10.12
Amendment to Second Amended and Restated Liquidity Asset Purchase
Agreement dated August 2, 2004, among Mohawk Factoring, Inc., Three Pillars
Funding Corporation, and SunTrust Capital Markets, Inc. (Incorporated herein
by reference to Exhibit 10.2 of Mohawk's Quarterly Report on Form 10-Q for
the period ended October 2, 2003.)
*10.13
Discounted Stock Purchase Agreement dated October 31, 2005, by and
between Mohawk Industries, Inc. and Paul De Cock, Bernard Thiers, Marc Van
Canneyt and Paul De Fraeye. (Incorporated herein by reference to Mohawk's
Current Report on form 8-K dated October 28, 2005.) Exhibits Related to Executive
Compensation Plans, Contracts and other Arrangements:
*10.14
Management Agreement dated October 31, 2005, by and between Unilin Flooring
BVBA and Frans De Cock. (Incorporated herein by reference to Exhibit 10.1 of
Mohawk's Current Report on form 8-K dated October 28, 2005.)
*10.15
Employment Agreement dated November 15, 2005, by and between Mohawk
Industries, Inc. and W. Christopher Wellborn. (Incorporated herein by
reference to Exhibit 99.1 of Mohawk's Current Report on form 8-K dated
November 14, 2005.)
*10.16 Mohawk
Carpet Corporation Retirement Savings Plan, as amended. (Incorporated herein
by reference to Exhibit 10.1 of Mohawk's Registration Statement on Form S‑1,
Registration No. 33‑45418.)
*10.17 Mohawk
Carpet Corporation Supplemental Executive Retirement Plan, as amended.
(Incorporated herein by reference to Exhibit 10.2 of Mohawk's Registration
Statement on Form S‑1, Registration No. 33‑45418.)
*10.18 Mohawk
Industries, Inc. 1992 Stock Option Plan. (Incorporated herein by reference
to Exhibit 10.8 of Mohawk's Registration Statement on Form S‑1, Registration
No. 33‑45418.)
*10.19
Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992 Stock
Option Plan. (Incorporated herein by reference to Exhibit 10.2 in Mohawk's
quarterly report on Form 10‑Q for the quarter ended July 3, 1993.)
*10.20 Second
Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1992 Stock
Option Plan. (Incorporated herein by reference to Exhibit 10.35 of Mohawk's
Annual Report on Form 10‑K for the fiscal year ended December 31, 1999.)
*10.21 Mohawk
Industries, Inc. 1992 Mohawk‑Horizon Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.15 of Mohawk's Registration Statement on Form
S‑1, Registration Number 33‑53932.)
*10.22
Amendment dated July 22, 1993 to the Mohawk Industries, Inc. 1992
Mohawk‑Horizon Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.1 of Mohawk's quarterly report on Form 10‑Q for the quarter ended
July 3, 1993.)
*10.23 Second
Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1992
Mohawk-Horizon Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.38 of Mohawk's Annual Report on Form 10‑K for the fiscal year
ended December 31, 1999.)
*10.24 Mohawk
Industries, Inc. 1993 Stock Option Plan. (Incorporated herein by reference
to Exhibit 10.39 of Mohawk's Annual Report on Form 10‑K for the fiscal year
ended December 31, 1992.)
*10.25 First
Amendment dated February 17, 2000 to the Mohawk Industries, Inc. 1993 Stock
Option Plan. (Incorporated herein by reference to Exhibit 10.40 of Mohawk's
Annual Report on Form 10‑K for the fiscal year ended December 31, 1999.)
*10.26 The
Mohawk Industries, Inc. Executive Deferred Compensation Plan. (Incorporated
herein by reference to Exhibit 10.65 of Mohawk's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.)
*10.27 The
Mohawk Industries, Inc. Management Deferred Compensation Plan. (Incorporated
herein by reference to Exhibit 10.66 of Mohawk's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.)
*10.28
*10.29 1997
Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.80
of Mohawk's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.)
*10.30 2002
Long-Term Incentive Plan. (Incorporated herein by reference to Appendix A in
the 2002 Mohawk Industries, Inc. Proxy Statement dated March 29, 2002.)
*10.31 Supply Agreement dated as of
December 29, 1999, between Dal-Tile Corporation and Wold Talc Company.
(Incorporated herein by reference to Exhibit 10.18 of the Dal-Tile
International Inc., Form 10-K for fiscal year 1999.) 21 Subsidiaries of the
Registrant.
SIGNATURES Pursuant
to the requirements of Section 13 or 15(d) 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: March
15, 2006
By: /s/: JEFFREY S. LORBERBAUM
Jeffrey S. Lorberbaum,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Dated: March
15, 2006
/s/: JEFFREY S. LORBERBAUM
Jeffrey S. Lorberbaum,
Chairman and Chief Executive Officer
(principal executive officer) Dated: March
15, 2006
/s/: FRANK H. BOYKIN
Frank H. Boykin,
Chief Financial Officer and Vice President‑Finance
(principal financial officer) Dated: March
15, 2006
/s/: MICHEL S. VERMETTE
Michel S. Vermette,
Vice President and Corporate Controller
(principal accounting officer) Dated: March
15, 2006
/s/: LEO BENATAR
Leo Benatar,
Director Dated: March
15, 2006
/s/: Phyllis O. BONANNO
Phyllis O. Bonanno,
Director Dated: March
15, 2006
/s/: BRUCE C. BRUCKMANN
Bruce C. Bruckmann,
Director Dated: March
15, 2006
/s/: FRANS DE COCK
Frans De Cock,
Director Dated: March
15, 2006
/s/:
John F. Fiedler,
Director Dated: March
15, 2006
/s/: DAVID L. KOLB
David L. Kolb,
Director Dated: March
15, 2006
/s/: LARRY W. MCCURDY
Larry W. McCurdy,
Director Dated: March
15, 2006
/s/: ROBERT N. POKELWALDT
Robert N. Pokelwaldt,
Director Dated: March
15, 2006
/s/: S. H. SHARPE
S. H. Sharpe,
Director Dated: March
15, 2006
/s/: W. CHRISTOPHER WELLBORN
W. Christopher Wellborn,
Director
EXHIBIT 21
Yes [ ] No [
x ]
2004
2005
2006
(1) For
fixed rate debt, the Company calculated interest based on the applicable rates
and payment dates. For variable rate debt, the Company estimated average
outstanding balances for the respective periods and applied interest rates in
effect at December 31, 2005 to these balances.
(2) Includes
commitments for natural gas, foreign currency, and raw material purchases.
Mohawk Industries, Inc.:
KPMG
March 15, 2006
Unilin Flooring BVBA and Unilin Holding Inc.
Ooigem, Belgium
BDO Atrio Bedrijfsrevisoren Burg. CVBA
Report
of Independent Registered Public Accounting Firm
Mohawk Industries, Inc.:
KPMG
March 15, 2006
December 31, 2005 and 2004
(In thousands, except per share data)
Years Ended December 31, 2005, 2004 and 2003
(In thousands, except per share data)
Years Ended December 31, 2005, 2004 and 2003
(In thousands)
Years Ended December 31, 2005, 2004 and 2003
(In thousands)
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
(a) Excludes a non-recurring $34,300 (net of tax of
$22,300) fair value adjustment applied to Unilin's acquired inventory and $6,000
(net of tax of $3,900) adjustment related to non-recurring transaction costs.
Additions
(1) Includes $ 2,035 for 2005 related to the Unilin
Acquisition which was not charged to costs and expenses.
(2) Represents charge-offs, net of recoveries.
(1) Weighted-average
contractual life remaining in years.
(2) Weighted-average exercise price.
(1) This amount includes $25,114 of non-current
deferred tax assets which are in other assets and $5,111 current deferred tax
liabilities which are included in other accrued expenses in the consolidated
balance sheet.
(1) Long-lived assets are composed of net property
plant and equipment and goodwill.
Exhibit
Number Description
23.1 Consent of Independent Registered Public Accounting Firm
(KPMG)
23.2 Consent of Independent Registered
Public Accounting Firm (BDO).
31.1 Certification Pursuant to Rule 13a-14(a).
31.2 Certification Pursuant to Rule 13a-14(a).
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Indicates exhibit incorporated by reference.
SUBSIDIARIES OF THE REGISTRANT
Aladdin Manufacturing Corporation |
Delaware |
Aladdin of Texas Holding, LLC |
Delaware |
Aladdin Texas, LLC |
Delaware |
Horizon Europe, Inc. |
Georgia |
Lees Mohawk (UK) Limited |
UK |
Mohawk Brands, Inc. |
Delaware |
Mohawk Canada Corporation |
Nova Scotia |
Mohawk Carpet Distribution, L.P |
Delaware |
Mohawk Carpet Transportation of Georgia, LLC |
Delaware |
Mohawk Commercial, Inc. |
Delaware |
Mohawk ESV, Inc. |
Delaware |
Mohawk Factoring, Inc. |
Delaware |
Mohawk International (China) Ltd |
Mauritius |
Mohawk International FSC, Inc. |
Barbados |
Mohawk International (India) Ltd |
Mauritius |
Mohawk Mills, Inc. |
Delaware |
Mohawk Resources, Inc. |
Delaware |
Mohawk Servicing, Inc. |
Delaware |
Wayn-Tex LLC |
Delaware |
World International, Inc |
Barbados |
Dal-Tile International, Inc |
Delaware |
Dal-Elit, L.P |
Texas |
Dal Italia LLC |
Delaware |
Dal-Tile Corporation |
Pennsylvania |
Dal-Tile Group, Inc. |
Delaware |
Dal-Tile I, LLC. |
Delaware |
Dal-Tile Mexico S.A. de C.V. |
Mexico |
Dal-Tile of Canada Inc. |
Canada |
Dal-Tile Puerto Rico, Inc. |
Puerto Rico |
Dal-Tile Services, Inc. |
Delaware |
Dal-Tile SSC East, Inc. |
Delaware |
Dal-Tile SSC West, Inc. |
Delaware |
DTG Tile, LLC. |
Delaware |
DTL Tile, LLC.. |
Delaware |
DTM/CM Holdings Inc. |
Delaware |
Recumbrimentos Interceramic, S.A. de C.V. |
Mexico |
Unilin Flooring BVBA. |
Belgium |
Cevotrans BV |
Netherlands |
Flooring Industries Ltd |
Ireland |
Mohawk Global Investments S.àr.l |
Luxembourg |
Mohawk International (Europe) S.àr.l |
Luxembourg |
Mohawk International Holdings (DE) Corporation |
Delaware |
Mohawk International Holdings S.àr.l |
Luxembourg |
Mohawk Rock Holdings Limited |
Gibraltar |
Opstalan BV |
Netherlands |
Opstalan Holding BV |
Netherland |
Opstalan Timmerfabrieken BV |
Netherlands |
Timber Technique Finance Ltd |
Ireland |
Timber Technique Services Ltd |
Ireland |
Unilin Beheer BV |
Netherlands |
Unilin Dècor BVBA. |
Belgium |
Unilin Flooring NC, LLC |
N. Carolina |
Unilin GmbH |
Germany |
Unilin Holding, Inc. |
N. Carolina |
Unilin Holding BVBA |
Belgium |
Unilin Holding SAS |
France |
Unilin Immo BVBA |
Belgium |
Unilin Industries BVBA |
Belgium |
Unilin/Multiprè BV |
Netherlands |
Unilin BVBA |
Belgium |
Unilin SAS |
France |
Unilin Systems BV |
Netherlands |
Unilin Systems BVBA |
Belgium |
Unilin Systems SAS |
France |
Unilin Systems SUD SAS |
France |
Unilin UK Ltd |
UK |
Unilin US MDF |
Belgium |