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 March 29, 1997 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 (I.R.S. Employer of incorporation or organization) Identification No.) Post Office Box 12069, 160 South Industrial Boulevard, Calhoun, Georgia 30703 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (706) 629-7721 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ The number of shares outstanding of the issuer's classes of capital stock as of April 30, 1997, the latest practicable date, is as follows: 34,534,049 shares of Common Stock, $.01 par value.
MOHAWK INDUSTRIES, INC. INDEX <TABLE> <CAPTION> Page No. ------- <S> <C> Part I. Financial Information: Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 29, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Earnings - Three months ended March 29, 1997 and March 30, 1996 5 Condensed Consolidated Statements of Cash Flows - Three months ended March 29, 1997 and March 30, 1996 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risks 10 Part II. Other Information 11 </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> March 29, 1997 December 31, 1996 ------------------ --------------------- <S> <C> <C> Current assets: Receivables $ 221,420 215,111 Inventories 338,941 302,723 Prepaid expenses 18,804 20,221 Deferred income taxes 18,186 18,186 ------------------ --------------------- Total current assets 597,351 556,241 ------------------ --------------------- Property, plant and equipment, at cost 535,520 529,961 Less accumulated depreciation and amortization 219,228 205,263 ------------------ --------------------- Net property, plant and equipment 316,292 324,698 ------------------ --------------------- Other assets 74,474 74,836 ------------------ --------------------- Total assets $ 988,117 955,775 ================== ===================== </TABLE> See accompanying notes to condensed consolidated financial statements. 3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> March 29, 1997 December 31, 1996 ------------------ --------------------- <S> <C> <C> Current liabilities: Current portion of long-term debt $ 20,565 41,832 Accounts payable and accrued expenses 222,276 202,741 ------------------ --------------------- Total current liabilities 242,841 244,573 Deferred income taxes 27,530 27,530 Long-term debt 370,948 345,748 Other long-term liabilities 4,551 4,725 ------------------ --------------------- Total liabilities 645,870 622,576 ------------------ --------------------- Stockholders' equity: Preferred stock, $.01 par value; 60,000 shares authorized; no shares issued - - Common stock, $.01 par value; 75,000 shares authorized; 34,533 and 34,471 shares issued in 1997 and 1996, respectively 345 345 Additional paid-in capital 132,061 131,560 Retained earnings 209,841 201,294 ------------------ --------------------- Total stockholders' equity 342,247 333,199 ------------------ --------------------- Total liabilities and stockholders' equity $ 988,117 955,775 ================== ===================== </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 -------------------------------------------------------- March 29, 1997 March 30, 1996 ------------------- ------------------ <S> <C> <C> Net sales $ 412,829 383,667 Cost of sales 318,920 297,494 ------------------- ------------------ Gross profit 93,909 86,173 Selling, general and administrative expenses 71,961 68,128 ------------------- ------------------ Operating income 21,948 18,045 ------------------- ------------------ Other expense: Interest expense 7,523 8,491 Other expense, net 300 731 ------------------- ------------------ 7,823 9,222 ------------------- ------------------ Earnings before income taxes 14,125 8,823 Income taxes 5,578 3,485 ------------------- ------------------ Net earnings $ 8,547 5,338 =================== ================== Earnings per common and common equivalent share $ 0.25 0.16 =================== ================== Weighted average common and common equivalent shares outstanding 34,876 34,099 =================== ================== </TABLE> See accompanying notes to condensed consolidated financial statements. 5
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended -------------------------------------------------------- March 29, 1997 March 30, 1996 --------------------------- ------------------------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 8,547 5,338 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 15,074 13,829 Provision for doubtful accounts 1,613 2,497 Changes in operating assets and liabilities: Receivables (7,922) (19,610) Inventories (36,218) (36,738) Accounts payable and accrued expenses 34,239 39,345 Other assets and prepaid expenses 1,340 (4,471) Other liabilities (174) (119) ---------------------- ------------------- Net cash provided by operating activities 16,499 71 ---------------------- ------------------- Cash flows used in investing activities: Additions to property, plant and equipment, net (6,846) (5,824) ---------------------- ------------------- Cash flows from financing activities: Net change in revolving line of credit 25,133 15,066 Payment of note payable (21,200) - Change in outstanding checks in excess of cash (14,087) (16,274) Common stock transactions 501 6,961 ---------------------- ------------------- Net cash provided by (used in) financing activities (9,653) 5,753 ---------------------- ------------------- Net change in cash - - Cash, beginning of year - - ---------------------- ------------------- Cash, end of period $ - - ====================== =================== Net cash paid during the period for: Interest $ 8,704 9,400 ====================== =================== Income taxes $ 5,770 1,276 ====================== =================== </TABLE> See accompanying notes to condensed consolidated financial statements. 6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's 1996 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, 1996. The Company's earnings per share are computed by dividing net earnings by the weighted average common and common equivalent shares outstanding. Dilutive common stock options are included in the earnings per share calculation using the treasury stock method. During the three months ended March 30, 1996, the Company recorded a direct increase in stockholders' equity of $6,735 as a result of the tax benefit from the exercise of stock options that were granted primarily in 1988 and 1989 in connection with the Company's 1988 leveraged buyout. Certain prior year financial statement balances have been reclassified to conform with the current year's presentation. <TABLE> <CAPTION> 2. Receivables Receivables are as follows: March 29, 1997 December 31, 1996 ------------------ --------------------- <S> <C> <C> Customers, trade $ 254,012 247,485 Other 2,496 2,470 ------------------ --------------------- 256,508 249,955 Less allowance for discounts, returns, claims and doubtful accounts 35,088 34,844 ------------------ --------------------- Net receivables $ 221,420 215,111 ================== ===================== 3. Inventories The components of inventories are as follows: <CAPTION> March 29, 1997 December 31, 1996 ------------------ --------------------- <S> <C> <C> Finished goods $ 166,711 151,068 Work in process 49,958 45,428 Raw materials 122,272 106,227 ------------------ --------------------- Total inventories $ 338,941 302,723 ================== ===================== </TABLE> 7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (In thousands) (Unaudited) <TABLE> <CAPTION> 4. Other assets Other assets are as follows: March 29, 1997 December 31, 1996 ------------------ --------------------- <S> <C> <C> Goodwill, net of accumulated amortization of $5,961 and $5,589, respectively $ 53,307 53,679 Other assets 21,167 21,157 ------------------ --------------------- Total other assets $ 74,474 74,836 ================== ===================== 5. Accounts payable and accrued expenses Accounts payable and accrued expenses are as follows: <CAPTION> March 29, 1997 December 31, 1996 ------------------ --------------------- <S> <C> <C> Outstanding checks in excess of cash $ 17,713 31,800 Accounts payable, trade 115,673 86,369 Accrued expenses 68,841 64,942 Accrued compensation 20,049 19,630 ------------------ --------------------- Total accounts payable and accrued expenses $ 222,276 202,741 ================== ===================== </TABLE> 6. Credit agreement On April 15, 1997, the Company amended and restated its credit agreement to provide for an interest rate of either (i) LIBOR plus 0.2% to 0.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the prime rate less 1.0%. Additionally, the termination date of the credit agreement was extended to May 15, 2002. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Quarter Ended March 29, 1997 As Compared With Quarter Ended March 30, 1996 - -------------------------------------------------------------------------- Net sales for the quarter ended March 29, 1997 were $412.8 million, which represented an increase of 8% from the $383.7 million reported for the first quarter of 1996. This sales increase was attributable to a gain in market share which the Company believes resulted from continued support of our independent dealer base, strong acceptance of new products introduced in 1996 and Mohawk's strong product lines. Gross profit for the first quarter of the current year was $93.9 million (22.7% of net sales). In the first quarter of 1996, gross profit was $86.2 million (22.5% of net sales). This increase is due to manufacturing consolidations, higher sales and other cost efficiencies realized. The manufacturing consolidations include the closing of five residential manufacturing facilities during 1995 and one spinning mill in 1997, as well as the realignment of the remaining residential mills to better utilize the strengths of each mill. The Company's integration of the manufacturing, distribution and information systems areas is progressing as planned and continues to contribute to the margin improvement. Selling, general and administrative expenses for the current quarter were $72.0 million (17.4% of net sales) compared to $68.1 million (17.8% of net sales) for the prior year's first period. The percentage decrease was primarily due to better leveraging of costs on higher sales dollars. Interest expense for the current period was $7.5 million compared to $8.5 million in the first quarter of 1996. The primary factor for the decrease was a reduction in debt levels in the first quarter of 1997 as compared to the first quarter of 1996. In the current period, income tax expense was $5.6 million, or 39.5% of earnings before income taxes. In the first quarter of 1996, income tax expense was $3.5 million, or 39.5% of earnings before income taxes. Liquidity and Capital Resources The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. The Company's capital needs are met through a combination of internally-generated funds, bank credit lines and credit terms from suppliers. The level of accounts receivable increased from $215.1 million at the beginning of 1997 to $221.4 million at March 29, 1997. The $6.3 million increase resulted primarily from seasonally higher sales volume in March as compared to December. Inventories rose from $302.7 million at the beginning of 1997 to $338.9 million at March 29, 1997, due to requirements to meet seasonal customer demand. Capital expenditures totaled $6.8 million in the first quarter of 1997 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 1997 is expected to range from $58.0 million to $63.0 million, the majority of which will be used to increase capacity and productivity. On April 15, 1997, the Company amended and restated its credit agreement to provide for an interest rate of either (i) LIBOR plus 0.2% to 0.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the prime rate less 1.0%. Additionally, the termination date of the credit agreement was extended to May 15, 2002. On January 27, 1997, the Company entered into an asset purchase agreement to acquire certain assets of Diamond Rug & Carpet Mills, Inc. The proposed purchase price will be a maximum of $43.0 million in cash, subject to adjustment based on the level of inventory at closing. Under the asset purchase agreement, Mohawk has agreed to purchase selected facilities owned by Diamond's principal shareholders. If completed, the acquisition will be accomplished through a plan of reorganization under Chapter 11 of the United States Bankruptcy Code and will be financed primarily through existing credit facilities. The acquisition is scheduled to close in the third quarter of 1997. 9
Impact of Inflation Inflation affects the Company's manufacturing costs and operating expenses. The carpet industry has experienced moderate inflation in the prices of certain raw materials and outside processing for the last three years. The Company has generally passed along nylon fiber cost increases to its customers. Seasonality The carpet business is seasonal, with the Company's second, third and fourth quarters typically producing higher net sales and operating income. By comparison, results for the first quarter tend to be the weakest. This seasonality is primarily attributable to consumer residential spending patterns and higher installation levels during the spring and summer months. Forward-Looking Information Certain of the matters discussed in the preceding pages, particularly regarding the effects of changes to manufacturing, distribution and systems, levels of capital expenditures and the Diamond acquisition, may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve a number of risks and uncertainties. Factors that may cause actual results to differ materially include, but are not limited to, the following: market conditions in the carpet industry, raw material prices, timing and level of capital expenditures, the successful integration of acquisitions, the successful introduction of new products, uncertainties inherent in the Diamond Chapter 11 process and other risks identified from time to time in the Company's SEC reports and public announcements. Item 3. Quantitative and Qualitative Disclosure About Market Risks Not applicable. 10
PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known to be threatened against the Company or any of its property. In June 1994, the Company and several other carpet manufacturers received subpoenas to produce documents from a grand jury of the United States District Court in Atlanta. The subpoenas were requested by the Antitrust Division of the U. S. Department of Justice in connection with an investigation of the industry. The Company believes that the results of this investigation will not have a material adverse impact on the financial condition of the Company. In December 1995, the Company and four other carpet manufacturers were added as defendants in a purported class action lawsuit, In re Carpet Antitrust Litigation, pending in the United States District Court for the Northern District of Georgia, Rome Division. The amended complaint alleges price fixing regarding polypropylene products in violation of Section One of the Sherman Act. The Company is a party to two consolidated lawsuits captioned Gaehwiler v. Sunrise Carpet Industries, Inc. et. al. and Patco Enterprises, Inc. v. Sunrise Carpet Industries, Inc. et. al.; both of which were filed in the Superior Court of the State of California, City and County of San Francisco in early 1996. Both complaints were brought on behalf of a purported class of indirect purchasers of carpet in the State of California and seek damages for alleged violations of California antitrust and unfair competition laws. The Company believes both of these lawsuits are without merit and intends to vigorously defend against them. 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 No. Description - --- ------------------------------------------------------------- 10 Third Amended and Restated Credit Agreement, dated as of April 15, 1997 among Mohawk Industries, Inc., Aladdin Manufacturing Corporation, First Union National Bank of Georgia and Wachovia Bank of Georgia, N. A. 11 Statement re: Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K None. 11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOHAWK INDUSTRIES, INC. Dated: May 2, 1997 By: /s/ David L. Kolb ------------------------------------------- DAVID L. KOLB, Chairman of the Board and Chief Executive Officer (principal executive officer) Dated: May 2, 1997 By: /s/ John D. Swift ------------------------------------------- JOHN D. SWIFT, Chief Financial Officer, Vice President-Finance and Assistant Secretary (principal financial and accounting officer) 12
EXHIBIT INDEX No. Description - --- ----------------------------------------------------------- 10 Third Amended and Restated Credit Agreement, dated as of April 15, 1997 among Mohawk Industries, Inc., Aladdin Manufacturing Corporation, First Union National Bank of Georgia and Wachovia Bank of Georgia, N. A. 11 Statement re: Computation of Per Share Earnings 27 Financial Data Schedule 13