================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 01-19826 MOHAWK INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 52-1604305 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 12069, 160 S. Industrial Blvd., Calhoun, Georgia 30701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (706) 629-7721 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the issuer's classes of capital stock as of November 7, 2001, the latest practicable date, is as follows: 52,612,391 shares of Common Stock, $.01 par value. ===============================================================================
MOHAWK INDUSTRIES, INC. INDEX <TABLE> <CAPTION> Page No. ------- <S> <C> Part I. Condensed Consolidated Financial Information: Item 1. Financial Statements (Unaudited) 3 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risks 16 Part II. Other Information: Item 1. Legal proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 </TABLE> 2
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (In thousands) (Unaudited) <TABLE> <CAPTION> September 29, 2001 December 31, 2000 ------------------ ----------------- <S> <C> <C> Current assets: Receivables $ 432,651 358,809 Inventories 576,218 574,595 Prepaid expenses 13,337 26,973 Deferred income taxes 66,474 66,474 ------------------ ---------------------- Total current assets 1,088,680 1,026,851 ------------------ ---------------------- Property, plant and equipment, at cost 1,274,325 1,238,200 Less accumulated depreciation and amortization 644,276 588,147 ------------------ ---------------------- Net property, plant and equipment 630,049 650,053 ------------------ ---------------------- Other assets 115,800 118,474 ------------------ ---------------------- Total assets $ 1,834,529 1,795,378 ================== ====================== </TABLE> See accompanying notes to condensed consolidated financial statements. 3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands) (Unaudited) <TABLE> <CAPTION> September 29, 2001 December 31, 2000 --------------------------- -------------------------- <S> <C> <C> Current liabilities: Current portion of long-term debt $ 238,215 224,391 Accounts payable and accrued expenses 412,075 375,268 --------------------------- -------------------------- Total current liabilities 650,290 599,659 Deferred income taxes 75,808 75,808 Long-term debt, less current portion 219,571 365,437 Other long-term liabilities 4,806 114 --------------------------- -------------------------- Total liabilities 950,475 1,041,018 --------------------------- -------------------------- Stockholders' equity: Preferred stock, $.01 par value; 60 shares authorized; no shares issued - - Common stock, $.01 par value; 150,000 shares authorized; 61,278 and 60,838 shares issued in 2001 and 2000, respectively 613 608 Additional paid-in capital 193,722 183,303 Retained earnings 887,930 758,531 Accumulated other comprehensive loss (4,617) - --------------------------- -------------------------- 1,077,648 942,442 Less treasury stock at cost; 8,715 shares in 2001 and 8,538 shares in 2000 193,594 188,082 --------------------------- -------------------------- Total stockholders' equity 884,054 754,360 --------------------------- -------------------------- Total liabilities and stockholders' equity $ 1,834,529 1,795,378 =========================== ========================== </TABLE> See accompanying notes to condensed consolidated financial statements. 4
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended ----------------------------------------------------------- September 29, 2001 September 30, 2000 --------------------------- -------------------------- <S> <C> <C> Net sales $ 869,666 838,514 Cost of sales 649,023 624,294 --------------------------- -------------------------- Gross profit 220,643 214,220 Selling, general and administrative expenses 128,235 127,151 Class action legal settlement - 7,000 --------------------------- -------------------------- Operating income 92,408 80,069 --------------------------- -------------------------- Other expense: Interest expense, net 6,869 10,173 Other expense, net 1,051 846 --------------------------- -------------------------- 7,920 11,019 --------------------------- -------------------------- Earnings before income taxes 84,488 69,050 Income taxes 28,761 26,913 --------------------------- -------------------------- Net earnings $ 55,727 42,137 =========================== ========================== Basic earnings per share $ 1.06 0.79 =========================== ========================== Weighted-average common shares outstanding 52,412 53,097 =========================== ========================== Diluted earnings per share $ 1.05 0.79 =========================== ========================== Weighted-average common and dilutive potential common shares outstanding 53,211 53,634 =========================== ========================== </TABLE> See accompanying notes to condensed consolidated financial statements. 5
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Nine Months Ended ----------------------------------------------------------- September 29, 2001 September 30, 2000 --------------------------- -------------------------- <S> <C> <C> Net sales $ 2,441,697 2,456,405 Cost of sales 1,826,309 1,835,740 --------------------------- -------------------------- Gross profit 615,388 620,665 Selling, general and administrative expenses 385,814 378,979 Class action legal settlement - 7,000 --------------------------- -------------------------- Operating income 229,574 234,686 --------------------------- -------------------------- Other expense: Interest expense, net 24,053 28,587 Other expense, net 4,094 2,834 --------------------------- -------------------------- 28,147 31,421 --------------------------- -------------------------- Earnings before income taxes 201,427 203,265 Income taxes 72,028 79,928 --------------------------- -------------------------- Net earnings $ 129,399 123,337 =========================== ========================== Basic earnings per share $ 2.47 2.28 =========================== ========================== Weighted-average common shares outstanding 52,347 54,181 =========================== ========================== Diluted earnings per share $ 2.44 2.26 =========================== ========================== Weighted-average common and dilutive potential common shares outstanding 53,021 54,689 =========================== ========================== </TABLE> See accompanying notes to condensed consolidated financial statements. 6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended ------------------------------------------------------------ September 29, 2001 September 30, 2000 --------------------------- -------------------------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 129,399 123,337 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 62,696 61,411 Loss on sale of property, plant and equipment 1,164 100 Changes in operating assets and liabilities: Receivables (73,842) (57,072) Inventories (1,623) (98,054) Accounts payable and accrued expenses 43,908 78,591 Other assets and prepaid expenses 13,407 7,167 Other liabilities 4,692 505 --------------------------- -------------------------- Net cash provided by operating activities 179,801 115,985 --------------------------- -------------------------- Cash flows used in investing activities- additions to property, plant and equipment, net (40,953) (53,538) --------------------------- -------------------------- Cash flows from financing activities: Net change in revolving line of credit (118,526) 53,758 Net change in asset securitization 13,896 - Payment on term loans (26,494) (26,502) Net (redemption) proceeds of IRBs and other (918) 3,300 Change in outstanding checks in excess of cash (9,073) (7,443) Acquisition of treasury stock (8,157) (87,818) Common stock transactions 10,424 2,258 --------------------------- -------------------------- Net cash used in financing activities (138,848) (62,447) --------------------------- -------------------------- Net change in cash - - Cash, beginning of period - - --------------------------- -------------------------- Cash, end of period $ - - =========================== ========================== Net cash paid during the period for: Interest $ 27,084 28,258 =========================== ========================== Income taxes $ 57,541 71,899 =========================== ========================== </TABLE> See accompanying notes to condensed consolidated financial statements. 7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thosands) (Unaudited) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2000 Annual Report filed on Form 10-K, as filed with the Securities and Exchange Commission, which includes consolidated financial statements for the fiscal year ended December 31, 2000. Certain prior period financial statement balances have been reclassified to conform with the current period's presentation. 2. Receivables Receivables are as follows: <TABLE> <CAPTION> September 29, 2001 December 31, 2000 --------------------------- ---------------------- <S> <C> <C> Customers, trade $ 510,793 433,042 Other 1,188 4,125 --------------------------- ---------------------- 511,981 437,167 Less allowance for discounts, returns, claims and doubtful accounts 79,330 78,358 --------------------------- ---------------------- Net receivables $ 432,651 358,809 ========================== ===================== </TABLE> 3. Inventories The components of inventories are as follows: <TABLE> <CAPTION> September 29, 2001 December 31, 2000 -------------------------- ------------------------ <S> <C> <C> Finished goods $ 306,372 295,447 Work in process 79,065 73,658 Raw materials 190,781 205,490 -------------------------- ------------------------ Total inventories $ 576,218 574,595 ========================== ======================== </TABLE> 4. Other assets Other assets are as follows: <TABLE> <CAPTION> September 29, 2001 December 31, 2000 -------------------------- ------------------------ <S> <C> <C> Goodwill, net of accumulated amortization of $18,762 and $16,355, respectively $ 109,969 112,376 Other assets 5,831 6,098 -------------------------- ------------------------ Total other assets $ 115,800 118,474 ========================== ======================== </TABLE> 8
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) 5. Accounts payable and accrued expenses Accounts payable and accrued expenses are as follows: <TABLE> <CAPTION> September 29, 2001 December 31, 2000 ---------------------- ------------------------ <S> <C> <C> Outstanding checks in excess of cash $ 33,822 42,895 Accounts payable, trade 185,170 165,108 Accrued expenses 118,831 104,313 Accrued compensation 74,252 62,952 -------------------- ---------------------- Total accounts payable and accrued expenses $ 412,075 375,268 ==================== ===================== </TABLE> 6. Comprehensive income Comprehensive income is as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ---------------------------------------- --------------------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------------ ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Net earnings $ 55,727 42,137 129,399 123,337 Other comprehensive (loss): Unrealized (loss) on derivative instruments, net of income taxes (4,000) - (4,617) - -------------- -------------- -------------- -------------- Comprehensive income $ 51,727 42,137 124,782 123,337 ============== ============== ============== ============== </TABLE> 7. Commitments and contingencies The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known to be contemplated to which the Company is a party or to which any of its property is subject. The Company is a party to two consolidated lawsuits captioned Gaehwiler v. Sunrise Carpet Industries, Inc. et al. and Patco Enterprises, Inc. v. Sunrise Carpet Industries, Inc. et al., both of which were filed in the Superior Court of the State of California, City and County of San Francisco, in 1996. Both complaints were brought on behalf of a purported class of indirect purchasers of polypropylene carpet in the State of California and seek damages for alleged violations of California antitrust and unfair competition laws. In February 1999, a similar complaint was filed in the Superior Court of the State of California, City and County of San Francisco, on behalf of a purported class based on indirect purchasers of nylon carpet in the State of California and alleges violations of California antitrust and unfair competition laws. The complaints described above do not specify any specific amount of damages but do request injunctive relief and treble damages plus reimbursement for fees and costs. The Company believes it has meritorious defenses and intends to vigorously defend against these actions. 8. Earnings per share The Company's basic earnings per share are computed by dividing net earnings by the weighted-average common shares outstanding, and diluted earnings per share are computed by dividing net earnings by the weighted-average common and dilutive potential common shares outstanding. Dilutive common stock options 9
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) are included in the diluted earnings per share calculation using the treasury stock method. Earnings per share is as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------------------------ -------------------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 --------------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Net earnings $ 55,727 42,137 129,399 123,337 ===================== ================= ================= ================= Weighted-average common and dilutive shares outstanding: Weighted-average common shares outstanding 52,412 53,097 52,347 54,181 ===================== ================= ================= ================= Add weighted-average dilutive potential common shares-options to purchase common shares, net 799 537 674 508 --------------------- ----------------- ----------------- ----------------- Weighted-average common and dilutive potential common shares outstanding 53,211 53,634 53,021 54,689 ===================== ================= ================= ================= Basic earnings per share: $ 1.06 0.79 2.47 2.28 ===================== ================= ================= ================= Diluted earnings per share: $ 1.05 0.79 2.44 2.26 ===================== ================= ================= ================= </TABLE> 9. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company is required to adopt the provisions of SFAS No. 141 immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill determined to have an indefinite useful life that was acquired in a purchase business combination completed after June 30, 2001 will not be amortized. Goodwill acquired in business combinations completed before July 1, 2001 will discontinue being amortized after December 31, 2001. The Company is currently evaluating its existing goodwill that was acquired in prior purchase business combinations for impairment and believes such evaluation will not result in an adjustment that is material to the consolidated financial statements. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $109,161. Amortization expense related to goodwill was $3,184 and $2,407 for the year ended December 31, 2000 and the nine months ended September 29, 2001, respectively. 10
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thosands) (Unaudited) In August 2001, the Financial Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS 144 is effective for the Company's fiscal year beginning in 2002 and is not expected to materially change the methods used by the Company to measure impairment losses on long-lived assets, but may result in more matters being reported as discontinued operations than is permitted under current accounting principles. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Quarter Ended September 29, 2001 as Compared with Quarter Ended September 30, ----------------------------------------------------------------------------- 2000 ---- Net sales for the quarter ended September 29, 2001 were $869.7 million, reflecting an increase of $31.2 million, or approximately 3.7%, over the $838.5 million reported in the quarter ended September 30, 2000. The Company believes that the increase was attributable to growth in soft non-carpet products and hard surface products. Gross profit for the third quarter of the current year was $220.6 million (25.4% of net sales) and represented a $6.4 million increase over the gross profit of $214.2 million (25.5% of net sales) for the prior year's quarter. Selling, general and administrative expenses for the current quarter were $128.2 million (14.7% of net sales) compared to $127.2 million (15.2% of net sales) for the prior year's third quarter. The decreased percentage was attributable to cost containment and leveraging of expenses against a higher sales volume in the current quarter. In the third quarter of 2000, the Company reached an agreement to settle two antitrust class actions. The Company contributed $13.5 million to the settlement fund to resolve price fixing claims. During the quarter in 2000, the Company recorded a charge of $7 million in connection with the settlement. Interest expense for the current quarter was $6.9 million compared to $10.2 million in the third quarter of 2000. The decrease was due to a reduction in debt levels and a decrease in the weighted average borrowing rate compared to the third quarter of 2000. Income tax expense was $28.8 million, or 34.0% of earnings before income taxes in the current quarter compared to $26.9 million, or 39% of earnings before income taxes for the prior year's third quarter. The reduction in the effective income tax rate was primarily due to tax credits. Nine months Ended September 29, 2001 as Compared with Nine months Ended ----------------------------------------------------------------------- September 30, 2000 ------------------ Net sales for the first nine months ended September 29, 2001 were $2,441.7 million, reflecting a decrease of $14.7 million, or approximately .6%, from the $2,456.4 million reported in the nine month period ended September 30, 2000. The Company believes that the decrease was attributable to the cyclical downturn in the overall economy, which led to declining industry shipments. Gross profit for the first nine months of the current year was $615.4 million (25.2% of net sales) and represented a $5.3 million decrease from the gross profit of $620.7 million (25.3% of net sales) for the first nine months of 2000. Selling, general and administrative expenses for the current period were $385.8 million (15.8% of net sales) compared to $379.0 million (15.4% of net sales) for the prior year's first nine months. The increased percentage was primarily due to costs of rolling out the hard surface product lines. In the third quarter of 2000, the Company reached an agreement to settle two antitrust class actions. The Company contributed $13.5 million to the settlement fund to resolve price fixing claims. During the quarter the Company recorded a charge of $7 million in connection with the settlement. Interest expense for the current period was $24.1 million compared to $28.6 million in the prior year's first nine months. The decrease was due to a reduction in debt levels, and a decrease in the weighted average borrowing rate compared to the first nine months of 2000. 12
Income tax expense was $72.0 million, or 35.8% of earnings before income taxes in the current period compared to $79.9 million, or 39.3% of earnings before income taxes for the prior year's first nine months. The reduction in the effective income tax rate was primarily due to 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 through a combination of internally generated funds, bank credit lines, securitization of accounts receivable and credit terms from suppliers. The level of accounts receivable increased from $358.8 million at the beginning of 2001 to $432.7 million at September 29, 2001. The $73.9 million increase was attributable to seasonal fluctuation. Inventories increased from $574.6 million at the beginning of 2001 to $576.2 million at September 29, 2001, due primarily to the rollout of the hard surface products, Ralph Lauren and Crown Crafts product lines, partially offset by a reduction in broadloom carpet inventories. Capital expenditures totaled $40.9 million for the first nine months of 2001, and were incurred primarily to modernize and expand manufacturing facilities and equipment. The Company's capital projects are primarily focused on increasing capacity, improving productivity and reducing costs. Capital spending for the remainder of 2001 is expected to range from $35.8 million to $45.8 million, the majority of which will be used to purchase equipment to increase production capacity and productivity. The Company's Board of Directors has authorized the repurchase of up to 15 million shares of its outstanding common stock. Since the inception of the program, a total of approximately 9.0 million shares have been repurchased at an aggregate cost of approximately $200.8 million. All of these repurchases have been financed through the Company's operations and banking arrangements. Impact of Inflation Inflation affects the Company's manufacturing costs and operating expenses. The carpet industry has experienced significant inflation in the prices of raw materials and fuel-related costs, beginning in the third quarter of 1999, but such cost pressures have lessened during the last half of 2000 and first three quarters of 2001. The Company has generally passed along nylon fiber price increases to its customers. Seasonality The carpet business is seasonal, with the Company's second, third and fourth quarters typically producing higher net sales and operating income. By comparison, results for the first quarter tend to be the weakest. This seasonality is primarily attributable to consumer residential spending patterns and higher installation levels during the spring and summer months. Certain factors affecting the Company's performance In addition to the other information provided in this Form 10-Q, the following risk factors should be considered when evaluating an investment in shares of Mohawk common stock. A failure by Mohawk to complete acquisitions and successfully integrate acquired -------------------------------------------------------------------------------- operations could materially and adversely affect its business. -------------------------------------------------------------- Management intends to pursue acquisitions of complementary businesses as part of its business and growth strategies. Although management regularly evaluates acquisition opportunities, it cannot offer assurance that it will be able to: . successfully identify suitable acquisition candidates; . obtain sufficient financing on acceptable terms to fund acquisitions; . complete acquisitions; . integrate acquired operations into Mohawk's existing operations; or . profitably manage acquired businesses. Acquired operations may not achieve levels of sales, operating income or productivity comparable to those 13
of Mohawk's existing operations, or otherwise perform as expected. Acquisitions may also involve a number of special risks, some or all of which could have a material adverse effect on Mohawk's business, results of operations and financial condition, including, among others: . possible adverse effects on Mohawk's operating results; . diversion of Mohawk management's attention and its resources; and . dependence on retaining and training acquired key personnel. The carpet industry is cyclical and a downturn in the overall economy could --------------------------------------------------------------------------- lessen the demand for Mohawk's products and impair growth and profitability. ---------------------------------------------------------------------------- The carpet industry is cyclical and is influenced by a number of general economic factors. Prevailing interest rates, consumer confidence, spending for durable goods, disposable income, turnover in housing and the condition of the residential and commercial construction industries (including the number of new housing starts and the level of new commercial construction) all have an impact on Mohawk's growth and profitability. In addition, sales of Mohawk's principal products are related to construction and renovation of commercial and residential buildings. Any adverse cycle could lessen the overall demand for Mohawk's products and could, in turn, impair Mohawk's growth and profitability. The carpet business is seasonal and this seasonality causes Mohawk's results of ------------------------------------------------------------------------------- operations to fluctuate on a quarterly basis. --------------------------------------------- Mohawk is a calendar year end company and its results of operations for the first and fourth quarters tend to be the weakest. Mohawk's second and third quarters typically produce higher net sales and operating income. These results are primarily due to consumer residential spending patterns and more carpet being installed in the spring and summer months. Mohawk's business is competitive and a failure by Mohawk to compete effectively ------------------------------------------------------------------------------- could have a material and adverse impact on Mohawk's results of operations. --------------------------------------------------------------------------- Mohawk operates in a highly competitive industry. Mohawk and other manufacturers in the carpet industry compete on the basis of price, style, quality and service. Some of Mohawk's competitors may have greater financial resources at their disposal. If competitors substantially increase production and marketing of competing products, then Mohawk might be required to lower its prices or spend more on product development, marketing and sales, which could adversely affect Mohawk's profitability. An increase in the cost of raw materials could negatively impact Mohawk's ------------------------------------------------------------------------- profitability. -------------- The cost of raw materials has a significant impact on the profitability of Mohawk. In particular, Mohawk's business requires it to purchase large volumes of nylon fiber and polypropylene resin, which is used to manufacture fiber. The cost of these raw materials is related to oil prices. Mohawk does not have any long-term supply contracts for any of these products. While Mohawk generally attempts to match cost increases with price increases, large increases in the cost of such raw materials could adversely affect its business, results of operations and financial condition if it is unable to pass these costs through to its customers. Mohawk may be responsible for environmental cleanup, which could negatively --------------------------------------------------------------------------- impact profitability. --------------------- Various federal, state and local environmental laws govern the use of Mohawk's facilities. Such laws govern: . discharges to air and water; . handling and disposal of solid and hazardous substances and waste; and . remediation of contamination from releases of hazardous substances in Mohawk's facilities and off-site disposal locations. Mohawk's operations are also governed by the laws relating to workplace safety and worker health, which, among other things, establish asbestos and noise standards and regulate the use of hazardous chemicals in the workplace. Mohawk has taken and will continue to take steps to comply with these laws. Based upon current available information, Mohawk believes that complying with environmental and safety and health requirements will not require material capital expenditures in the foreseeable future. However, Mohawk cannot 14
provide assurance that complying with these environmental or health and safety laws and requirements will not adversely affect its business, results of operations and financial condition. Future laws, ordinances or regulations could give rise to additional compliance or remediation costs, which could have a material adverse effect on its business, results of operations and financial condition. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company is required to adopt the provisions of SFAS No. 141 immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill determined to have an indefinite useful life that was acquired in a purchase business combination completed after June 30, 2001 will not be amortized. Goodwill acquired in business combinations completed before July 1, 2001 will discontinue being amortized after December 31, 2001. The Company is currently evaluating its existing goodwill that was acquired in prior purchase business combinations for impairment and believes such evaluation will not result in an adjustment that is material to the consolidated financial statements. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $109.2 million. Amortization expense related to goodwill was $3.2 million and $2.4 million for the year ended December 31, 2000 and the nine months ended September 29, 2001, respectively. In August 2001, the Financial Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS 144 is effective for the Company's fiscal year beginning in 2002 and is not expected to materially change the methods used by the Company to measure impairment losses on long-lived assets, but may result in more matters being reported as discontinued operations than is permitted under current accounting principles. Forward-Looking Information Certain of the matters discussed in the preceding pages, particularly regarding anticipating future financial performance, business prospects, growth and operating strategies, proposed acquisitions, new products and similar matters, and those preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Those statements are based on assumptions regarding the Company's ability to maintain its sales growth and gross margins and to control costs. These or other assumptions could prove inaccurate and therefore, there can be no assurance that the "forward-looking statements" will prove to be accurate. Forward-looking statements involve a number of risks and uncertainties. The following important factors, in addition to those discussed elsewhere in this document, affect the future results of Mohawk and could cause those results to differ materially from those expressed in the forward-looking statements: materially adverse changes in economic conditions generally in the carpet, rug and floor covering markets served by Mohawk; competition from other carpet, rug and floor covering manufacturers; raw material prices; timing and level of capital expenditures; the successful integration of acquisitions, including the challenges inherent in diverting Mohawk management's attention and resources from other strategic matters and from operational matters for an extended period of time; the successful introduction of new products; the successful rationalization of existing operations; and other risks identified from time to time in the Company's SEC reports and public announcements. Any forward-looking statements represent Mohawk's estimates only as of the date of this 15
report and should not be relied upon as representing Mohawk's estimates as of any subsequent date. While Mohawk may elect to update forward-looking statements at some point in the future, Mohawk specifically disclaims any obligation to do so, even if Mohawk's estimates change. Item 3. Quantitative and Qualitative Disclosures About Market Risk To reduce the risk of interest rate fluctuations, the Company engages in the use of interest rate swap agreements. At September 29, 2001, the Company held one interest rate swap agreement under which the Company pays a fixed percent of interest times the notional principal amount and receives in return an amount equal to a specified variable rate of interest times the same notional principal amount. The fixed interest rate per the agreement is 5.82%, which expires January 2, 2006. The average rate as of September 29, 2001 was 3.1%. This agreement is considered highly effective as of September 29, 2001. The cumulative fair value of the agreement as of September 29, 2001 was a liability of $4.6 million, which was recorded in long-term liabilities with the offset to other comprehensive loss, net of applicable income taxes. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known to be contemplated to which the Company is a party or to which any of its property is subject. The Company is a party to two consolidated lawsuits captioned Gaehwiler v. Sunrise Carpet Industries, Inc. et al. and Patco Enterprises, Inc. v. Sunrise Carpet Industries, Inc. et al., both of which were filed in the Superior Court of the State of California, City and County of San Francisco, in 1996. Both complaints were brought on behalf of a purported class of indirect purchasers of polypropylene carpet in the State of California and seek damages for alleged violations of California antitrust and unfair competition laws. In February 1999, a similar complaint was filed in the Superior Court of the State of California, City and County of San Francisco, on behalf of a purported class based on indirect purchasers of nylon carpet in the State of California and alleges violations of California antitrust and unfair competition laws. The complaints described above do not specify any specific amount of damages but do request injunctive relief and treble damages plus reimbursement for fees and costs. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K Current Report on Form 8-K: Second quarter 2001 earnings announcement, dated July 16, 2001. 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOHAWK INDUSTRIES, INC. Dated: November 7, 2001 By: /s/ Jeffrey S. Lorberbaum -------------------------- JEFFREY S. LORBERBAUM, President and Chief Executive Officer (principal executive officer) Dated: November 7, 2001 By: /s/ John D. Swift ----------------- JOHN D. SWIFT, Chief Financial Officer, Vice President-Finance and Assistant Secretary (principal financial and accounting officer) 17