10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 July 2, 2011

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

01-13697

 

 

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.)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s classes of common stock as of July 29, 2011, the latest practicable date, is as follows: 68,758,713 shares of Common Stock, $.01 par value.

 

 

 


Table of Contents

MOHAWK INDUSTRIES, INC.

INDEX

 

     Page No  

Part I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Condensed Consolidated Balance Sheets as of July 2, 2011 and December 31, 2010

     3   
 

Condensed Consolidated Statements of Operations for the three months ended July 2, 2011 and July 3, 2010

     5   
 

Condensed Consolidated Statements of Operations for the six months ended July 2, 2011 and July 3, 2010

     6   
 

Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2011 and July 3, 2010

     7   
 

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     26   

Item 4.

 

Controls and Procedures

     26   

Part II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     27   

Item 1A.

 

Risk Factors

     27   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3.

 

Defaults Upon Senior Securities

     34   

Item 4.

 

(Removed and Reserved)

     34   

Item 5.

 

Other Information

     34   

Item 6.

 

Exhibits

     34   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(In thousands)

(Unaudited)

 

     July 2, 2011      December 31, 2010  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 285,422         354,217   

Restricted cash

     —           27,954   

Receivables, net

     797,893         614,473   

Inventories

     1,102,769         1,007,503   

Prepaid expenses

     103,518         91,731   

Deferred income taxes

     135,338         133,304   

Other current assets

     22,297         19,431   
  

 

 

    

 

 

 

Total current assets

     2,447,237         2,248,613   
  

 

 

    

 

 

 

Property, plant and equipment, at cost

     3,649,881         3,518,392   

Less accumulated depreciation and amortization

     1,918,967         1,831,268   
  

 

 

    

 

 

 

Property, plant and equipment, net

     1,730,914         1,687,124   

Goodwill

     1,418,830         1,369,394   

Tradenames

     481,351         456,890   

Other intangible assets, net

     199,827         220,237   

Deferred income taxes and other non-current assets

     110,841         116,668   
  

 

 

    

 

 

 
   $ 6,389,000         6,098,926   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

(Unaudited)

 

     July 2, 2011      December 31, 2010  
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Current portion of long-term debt

   $ 453,185         350,588   

Accounts payable and accrued expenses

     771,297         698,326   
  

 

 

    

 

 

 

Total current liabilities

     1,224,482         1,048,914   

Deferred income taxes

     366,610         346,503   

Long-term debt, less current portion

     1,155,150         1,302,994   

Other long-term liabilities

     93,499         93,518   
  

 

 

    

 

 

 

Total liabilities

     2,839,741         2,791,929   
  

 

 

    

 

 

 

Commitments and contingencies (Notes 12 and 13)

     

Redeemable noncontrolling interest

     32,300         35,441   

Stockholders’ equity:

     

Preferred stock, $.01 par value; 60 shares authorized; no shares issued

     —           —     

Common stock, $.01 par value; 150,000 shares authorized; 79,792 and 79,666 shares issued in 2011 and 2010, respectively

     798         797   

Additional paid-in capital

     1,242,963         1,235,445   

Retained earnings

     2,265,188         2,180,843   

Accumulated other comprehensive income, net

     331,558         178,097   
  

 

 

    

 

 

 
     3,840,507         3,595,182   

Less treasury stock at cost; 11,035 and 11,037 shares in 2011 and 2010, respectively

     323,548         323,626   
  

 

 

    

 

 

 

Total stockholders’ equity

     3,516,959         3,271,556   
  

 

 

    

 

 

 
   $ 6,389,000         6,098,926   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended  
     July 2, 2011     July 3, 2010  

Net sales

   $ 1,477,854        1,400,086   

Cost of sales

     1,095,607        1,025,330   
  

 

 

   

 

 

 

Gross profit

     382,247        374,756   

Selling, general and administrative expenses

     280,547        285,030   
  

 

 

   

 

 

 

Operating income

     101,700        89,726   
  

 

 

   

 

 

 

Other expense (income):

    

Interest expense

     25,760        39,031   

Other expense

     2,963        3,675   

Other income

     (2,567     (3,131
  

 

 

   

 

 

 
     26,156        39,575   
  

 

 

   

 

 

 

Earnings before income taxes

     75,544        50,151   

Income tax expense (benefit)

     13,450        (18,814
  

 

 

   

 

 

 

Net earnings

     62,094        68,965   

Less: Net earnings attributable to noncontrolling interest

     1,191        884   
  

 

 

   

 

 

 

Net earnings attributable to Mohawk Industries, Inc.

   $ 60,903        68,081   
  

 

 

   

 

 

 

Basic earnings per share attributable to Mohawk Industries, Inc.

   $ 0.89        0.95   
  

 

 

   

 

 

 

Diluted earnings per share attributable to Mohawk Industries, Inc.

   $ 0.88        0.95   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Six Months Ended  
     July 2, 2011     July 3, 2010  

Net sales

   $ 2,821,449        2,747,322   

Cost of sales

     2,097,610        2,031,320   
  

 

 

   

 

 

 

Gross profit

     723,839        716,002   

Selling, general and administrative expenses

     566,055        572,655   
  

 

 

   

 

 

 

Operating income

     157,784        143,347   
  

 

 

   

 

 

 

Other expense (income):

    

Interest expense

     52,355        72,939   

Other expense

     6,193        3,837   

Other income

     (5,812     (7,824
  

 

 

   

 

 

 
     52,736        68,952   
  

 

 

   

 

 

 

Earnings before income taxes

     105,048        74,395   

Income tax expense (benefit)

     18,416        (15,840
  

 

 

   

 

 

 

Net earnings

     86,632        90,235   

Less: Net earnings attributable to noncontrolling interest

     2,287        1,616   
  

 

 

   

 

 

 

Net earnings attributable to Mohawk Industries, Inc.

   $ 84,345        88,619   
  

 

 

   

 

 

 

Basic earnings per share attributable to Mohawk Industries, Inc.

   $ 1.23        1.25   
  

 

 

   

 

 

 

Diluted earnings per share attributable to Mohawk Industries, Inc.

   $ 1.22        1.24   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended  
     July 2, 2011     July 3, 2010  

Cash flows from operating activities:

    

Net earnings

   $ 86,632        90,235   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Restructuring

     13,327        8,933   

Depreciation and amortization

     148,597        149,295   

Deferred income taxes

     331        (18,338

Loss on extinguishment of debt

     —          7,514   

Loss (gain) on disposal of property, plant and equipment

     485        (952

Excess tax benefit from stock-based compensation

     —          (162

Stock-based compensation expense

     6,038        3,484   

Changes in operating assets and liabilities:

    

Receivables, net

     (164,107     (117,129

Income tax receivable

     —          79,776   

Inventories

     (84,776     (82,901

Accounts payable and accrued expenses

     30,522        (12,240

Other assets and prepaid expenses

     (7,193     (10,308

Other liabilities

     (1,266     (8,230
  

 

 

   

 

 

 

Net cash provided by operating activities

     28,590        88,977   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (112,519     (47,139
  

 

 

   

 

 

 

Net cash used in investing activities

     (112,519     (47,139
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments on revolving line of credit

     (637,430     —     

Proceeds from revolving line of credit

     890,430        —     

Repayment of senior notes

     (298,248     (199,992

Borrowings (payments) on term loan and other debt

     (125     188   

Debt extinguishment costs

     —          (7,514

Distribution to noncontrolling interest

     (5,428     (2,668

Change in restricted cash

     27,954        —     

Excess tax benefit from stock-based compensation

     —          162   

Change in outstanding checks in excess of cash

     16,788        (3,229

Proceeds from stock transactions

     2,646        1,013   
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,413     (212,040
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     18,547        (18,583
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (68,795     (188,785

Cash and cash equivalents, beginning of period

     354,217        531,458   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 285,422        342,673   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

1. Interim reporting

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 U.S. 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 consolidated financial statements and notes thereto, and the Company’s description of critical accounting policies, included in the Company’s 2010 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

 

2. New pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (“ASU 2011-05”). This update requires that the components of net income, the components of other comprehensive income and the total of comprehensive income be presented as a single continuous financial statement or in two separate but consecutive statements. The option of presenting other comprehensive income in the statement of stockholders’ equity is eliminated. This update also requires the presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

 

3. Receivables, net

Receivables, net are as follows:

 

     July 2, 2011      December 31, 2010  

Customers, trade

   $ 807,317         621,539   

Income tax receivable

     10,804         11,027   

Other

     27,367         27,662   
  

 

 

    

 

 

 
     845,488         660,228   

Less allowance for discounts, returns, claims and doubtful accounts

     47,595         45,755   
  

 

 

    

 

 

 

Receivables, net

   $ 797,893         614,473   
  

 

 

    

 

 

 

 

4. Inventories

The components of inventories are as follows:

 

     July 2, 2011      December 31, 2010  

Finished goods

   $ 675,600         624,082   

Work in process

     98,282         97,257   

Raw materials

     328,887         286,164   
  

 

 

    

 

 

 

Total inventories

   $ 1,102,769         1,007,503   
  

 

 

    

 

 

 

 

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Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

5. Goodwill and intangible assets

The components of goodwill and other intangible assets are as follows:

 

     Mohawk     Dal-Tile     Unilin     Total  

Balances as of December 31, 2010

        

Goodwill

   $ 199,132        1,186,913        1,310,774        2,696,819   

Accumulated impairments losses

     (199,132     (531,930     (596,363     (1,327,425
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          654,983        714,411        1,369,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Currency translation during the period

     —          —          49,436        49,436   

Balances as of July 2, 2011

        

Goodwill

     199,132        1,186,913        1,360,210        2,746,255   

Accumulated impairments losses

     (199,132     (531,930     (596,363     (1,327,425
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —          654,983        763,847        1,418,830   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Tradenames  

Indefinite life assets not subject to amortization:

  

Balance as of December 31, 2010

   $ 456,890   

Currency translation during the period

     24,461   
  

 

 

 

Balance as of July 2, 2011

   $ 481,351   
  

 

 

 

 

     Customer
relationships
    Patents     Other     Total  

Intangible assets subject to amortization:

        

Balance as of December 31, 2010

   $ 106,432        112,520        1,285        220,237   

Amortization during the period

     (23,799     (11,514     (61     (35,374

Currency translation during the period

     4,875        10,076        13        14,964   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of July 2, 2011

   $ 87,508        111,082        1,237        199,827   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended      Six Months Ended  
     July 2, 2011      July 3, 2010      July 2, 2011      July 3, 2010  

Amortization expense

   $ 17,975         16,762         35,374         34,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

6. Accounts payable and accrued expenses

 

     July 2, 2011      December 31, 2010  

Outstanding checks in excess of cash

   $ 16,788         —     

Accounts payable, trade

     416,909         353,387   

Accrued expenses

     157,127         147,595   

Product warranties

     32,052         37,265   

Accrued interest

     36,938         45,696   

Income taxes payable

     4,373         9,301   

Deferred tax liability

     7,894         5,089   

Accrued compensation and benefits

     99,216         99,993   
  

 

 

    

 

 

 

Total accounts payable and accrued expenses

   $ 771,297         698,326   
  

 

 

    

 

 

 

 

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Table of Contents

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

7. Product warranties

The Company warrants certain qualitative attributes of its products for up to 50 years. The Company records a provision for estimated warranty and related costs in accrued expenses, based on historical experience, and periodically adjusts these provisions to reflect actual experience.

The provision for warranty obligations is as follows:

 

     Three Months Ended     Six Months Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Balance at beginning of period

   $ 36,437        53,450        37,265        66,545   

Warranty claims paid during the period

     (17,012     (18,751     (30,747     (43,124

Pre-existing warranty accrual adjustment during the period

     489        —          3,484        —     

Warranty expense during the period

     12,138        9,802        22,050        21,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 32,052        44,501        32,052        44,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

8. Comprehensive income (loss)

Comprehensive income (loss) is as follows:

 

     Three Months Ended     Six Months Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Net earnings

   $ 62,094        68,965        86,632        90,235   

Other comprehensive income (loss):

        

Foreign currency translation

     38,730        (113,126     153,461        (213,113
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     100,824        (44,161     240,093        (122,878

Comprehensive income attributable to the noncontrolling interest

     (1,191     (884     (2,287     (1,616
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Mohawk Industries, Inc.

   $ 99,633        (45,045     237,806        (124,494
  

 

 

   

 

 

   

 

 

   

 

 

 

 

9. Stock-based compensation

The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of the FASB Accounting Standards Codification topic (“ASC”) 718-10. Compensation expense is recognized on a straight-line basis over the options’ or awards’ estimated lives for fixed awards with ratable vesting provisions.

Under the Company’s 2007 Incentive Plan (“2007 Plan”), which was approved by the Company’s stockholders on May 16, 2007, the Company reserved up to a maximum of 3,200 shares of common stock for issuance upon the grant or exercise of stock options, restricted stock, restricted stock units (“RSUs”) and other types of awards, to directors and key employees through 2017. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of the grant and generally vest between three and five years with a 10-year contractual term. Restricted stock and RSUs are granted with a price equal to the market price of the Company’s common stock on the date of the grant and generally vest between three and five years.

The Company granted 76 and 40 options to employees at a weighted-average grant-date fair value of $25.39 and $19.10 per share for the six months ended July 2, 2011 and July 3, 2010, respectively. The Company recognized stock-based compensation costs related to stock options of $450 ($285 net of taxes) and $549 ($348 net of taxes) for the three months ended July 2, 2011 and July 3, 2010, respectively, and $1,009 ($639 net of taxes) and $1,324 ($839 net of taxes) for the six months ended July 2, 2011 and July 3, 2010,

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense for stock options granted to employees and outside directors, net of estimated forfeitures, was $2,835 as of July 2, 2011, and will be recognized as expense over a weighted-average period of approximately 1.8 years.

The fair value of the option award is estimated on the date of grant using the Black-Scholes-Merton valuation model. Expected volatility is based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate option exercise and forfeiture rates within the valuation model.

The Company granted 196 and 89 RSUs at a weighted-average grant-date fair value of $57.35 and $46.94 per unit for the six months ended July 2, 2011 and July 3, 2010, respectively. The Company recognized stock-based compensation costs related to the issuance of RSUs of $1,708 ($1,082 net of taxes) and $1,024 ($648 net of taxes) for the three months ended July 2, 2011 and July 3, 2010, respectively, and $4,979 ($3,154 net of taxes) and $2,075 ($1,315 net of taxes) for the six months ended July 2, 2011 and July 3, 2010, respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense for unvested RSUs granted to employees, net of estimated forfeitures, was $14,596 as of July 2, 2011, and will be recognized as expense over a weighted-average period of approximately 3.8 years.

The Company did not grant any restricted stock awards for the six months ended July 2, 2011. Compensation expense for restricted stock awards for the six months ended July 2, 2011 and July 3, 2010, respectively, was not significant.

 

10. Earnings per share

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 for the period. 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 and unvested restricted shares (units) that were not included in the diluted EPS computation because the price was greater than the average market price of the common shares for the three months ended July 2, 2011 and July 3, 2010 were 1,119 and 1,208, respectively. Common stock options and unvested restricted shares (units) that were not included in the diluted EPS computation because the price was greater than the average market price of the common shares for the six months ended July 2, 2011 and July 3, 2010 were 1,125 and 1,199, respectively.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     July 2, 2011      July 3, 2010     July 2, 2011      July 3, 2010  

Net earnings attributable to Mohawk Industries, Inc.

   $ 60,903         68,081        84,345         88,619   

Accretion of redeemable noncontrolling interest (1)

     —           (3,057     —           (3,057
  

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings available to common stockholders

   $ 60,903         65,024        84,345         85,562   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average common shares outstanding-basic and diluted:

          

Weighted-average common shares outstanding - basic

     68,744         68,585        68,709         68,554   

Add weighted-average dilutive potential common shares - options and RSU’s to purchase common shares, net

     237         204        233         206   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average common shares outstanding-diluted

     68,981         68,789        68,942         68,760   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share attributable to Mohawk Industries, Inc. (2)

   $ 0.89         0.95        1.23         1.25   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share attributable to Mohawk Industries, Inc. (2)

   $ 0.88         0.95        1.22         1.24   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Amount represents the adjustment to fair value of a redeemable noncontrolling interest in a consolidated subsidiary
(2) Basic EPS for the three and six months ended July 3, 2010, includes a decrease of approximately $0.04 (from $0.99 and $1.29, respectively), and diluted EPS for the three and six months ended July 3, 2010, includes a decrease of approximately $0.04 (from $1.29) and $0.05 (from $1.29), respectively, related to the correction of an immaterial error for a change in fair value of a redeemable noncontrolling interest in a consolidated subsidiary of the Company. For more information on this matter, see notes 1(b) and 16 to the notes to the consolidated financial statements in the Company’s 2010 Annual Report on Form 10-K.

 

11. Segment reporting

The Company has three reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The segment’s product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America through its network of regional distribution centers and Company-operated sales service centers using Company-operated trucks, common carriers or rail transportation. The segment’s product lines are sold through Company-owned sales service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate, hardwood flooring, roofing systems, insulation panels and other wood products, primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.

The accounting policies for each operating segment are consistent with the Company’s policies for the consolidated financial statements. 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.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

Segment information is as follows:

 

     Three Months Ended     Six Months Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Net sales:

        

Mohawk.

   $ 758,064        747,582        1,449,229        1,464,165   

Dal-Tile

     379,469        363,618        723,884        705,014   

Unilin

     363,097        308,385        688,929        614,265   

Intersegment sales

     (22,776     (19,499     (40,593     (36,122
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,477,854        1,400,086        2,821,449        2,747,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

Mohawk

   $ 31,201        26,345        48,241        42,973   

Dal-Tile

     32,138        28,124        49,838        43,519   

Unilin

     46,209        42,336        72,459        68,794   

Corporate and eliminations

     (7,848     (7,079     (12,754     (11,939
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 101,700        89,726        157,784        143,347   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     July 2, 2011      December 31, 2010  

Assets:

     

Mohawk

   $ 1,783,630         1,637,319   

Dal-Tile

     1,700,482         1,644,448   

Unilin

     2,717,032         2,475,049   

Corporate and intersegment eliminations

     187,856         342,110   
  

 

 

    

 

 

 
   $ 6,389,000         6,098,926   
  

 

 

    

 

 

 

 

12. Commitments, contingencies and other

The Company is involved in 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 by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

Beginning in August 2010, a series of civil lawsuits was initiated in several U.S. federal courts alleging that certain manufacturers of polyurethane foam products and competitors of the Company’s carpet underlay division had engaged in price fixing in violation of U.S. antitrust laws. Mohawk has been named as a defendant in seven of the 43 cases filed (the first on August 26, 2010), as well as in two consolidated amended class action complaints, the first filed on February 28, 2011, on behalf of a class of all direct purchasers of polyurethane foam products, and the second filed on March 21, 2011, on behalf of a class of indirect purchasers. All pending cases in which the Company has been named as a defendant have been filed in or transferred to the U.S. District Court for the Northern District of Ohio for consolidated pre-trial proceedings under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MDL-02196.

In these actions, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek three times the amount of unspecified damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. In April 2011, the Company filed a motion to dismiss the class action claims brought by the direct purchasers, and in May 2011, the Company moved to dismiss the claims brought by the indirect purchasers. On July 19, 2011, the Court issued a written opinion denying all defendants’ motions to dismiss. The Company denies all of the allegations in these actions and will vigorously defend itself.

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or year.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

The Company recorded pre-tax business restructuring charges of $6,514 and $13,327 for the three and six months ended July 2, 2011, respectively, of which $5,532 and $11,879 was recorded as cost of sales and $982 and $1,448 was recorded as selling, general and administrative expenses for the same periods, respectively. For the three and six months ended July 3, 2010, the Company recorded pre-tax business restructuring charges of $4,929 and $8,933, respectively, of which $4,929 and $8,786 was recorded as cost of sales and $0 and $147 was recorded as selling, general and administrative expenses for the same periods, respectively. The charges in 2011 and 2010 primarily relate to the Company’s actions taken to lower its cost structure and improve the efficiency of its manufacturing and distribution operations as the Company adjusts to current economic conditions.

The restructuring activity for the first six months of 2011 is as follows:

 

     Asset write-
downs
    Lease
impairments
    Severance     Other
restructuring
costs
    Total  

Balance as of December 31, 2010

   $ —          10,983        2,107        420        13,510   

Provisions:

          

Mohawk segment

     6,241        466        3,507        3,113        13,327   

Dal-Tile segment

     —          —          —          —          —     

Unilin segment

     —          —          —          —          —     

Cash payments

     —          (2,258     (1,028     (1,754     (5,040

Noncash items

     (6,241     —          —          (218     (6,459
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of July 2, 2011

   $ —          9,191        4,586        1,561        15,338   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company expects the remaining severance costs, lease impairments and other restructuring costs to be paid over the next five years.

 

13. Debt

On September 2, 2009, the Company entered into a $600,000 four-year, senior, secured revolving credit facility (the “ABL Facility”). On July 8, 2011, subsequent to the balance sheet date, the Company entered into a $900,000 five-year, senior, secured revolving credit facility (the “New Facility”) and terminated the ABL Facility, which was originally set to mature on September 2, 2013. No early termination penalties were incurred as a result of the termination.

ABL Facility

The ABL Facility provided for a maximum of $600,000 of revolving credit, subject to borrowing base availability, including limited amounts of credit in the form of letters of credit and swingline loans. The borrowing base was equal to specified percentages of eligible accounts receivable and inventories of the borrowers under the ABL Facility, which are subject to seasonal variations, less reserves established in good faith by the Administrative Agent under the ABL Facility. All obligations under the ABL Facility, and the guarantees of those obligations, were secured by a security interest in certain accounts receivable, inventories, certain deposit and securities accounts, tax refunds and other personal property (excluding intellectual property) directly relating to or arising from, and proceeds of, any of the foregoing.

At the Company’s election, revolving loans under the ABL Facility bore interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between 2.75% and 3.25%, or (b) the higher of the prime rate, the Federal Funds rate plus 0.5%, or a one-month LIBOR rate, plus an applicable margin ranging between 1.25% and 1.75%. The Company also

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

paid a commitment fee to the lenders under the ABL Facility on the average amount by which the aggregate commitments of the lenders’ exceeded utilization of the ABL Facility equal to 0.65% per annum during any quarter that this excess was 50% or more and 0.50% per annum during any quarter that this excess was less than 50%.

The ABL Facility included certain affirmative and negative covenants that imposed restrictions on the Company’s financial and business operations, including limitations on debt, liens, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. The Company was also required to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that the unutilized amount available under the ABL Facility was less than 15% of the lenders’ aggregated commitments.

As of July 2, 2011, the amount utilized under the ABL Facility was $360,100 resulting in a total of $239,900 available under the ABL Facility. The amount utilized included $253,000 of borrowings, $53,542 of standby letters of credit guaranteeing the Company’s industrial revenue bonds and $53,558 of standby letters of credit related to various insurance contracts and foreign vendor commitments.

Senior Secured Credit Facility

The New Facility is scheduled to mature on July 8, 2016. The New Facility provides for a maximum of $900,000 of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company can terminate and prepay the New Facility at any time without payment of any termination or prepayment penalty (other than customary breakage costs in respect of loans bearing interest at a rate based on LIBOR).

At the Company’s election, revolving loans under the New Facility bear interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between 1.25% and 2.0%, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus 0.5%, and a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.25% and 1.0%. The Company also pays a commitment fee to the Lenders under the New Facility on the average amount by which the aggregate commitments of the Lenders’ exceed utilization of the New Facility ranging from 0.25% to 0.4% per annum. The applicable margin and the commitment fee are determined based on the Company’s Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increases).

All obligations of the Company and the other borrowers under the New Facility are required to be guaranteed by all of the Company’s material domestic subsidiaries and all obligations of borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors. All obligations under the New Facility, and the guarantees of those obligations, are secured by a security interest in domestic accounts receivable and inventories, certain shares of capital stock (or equivalent ownership interests) of the domestic borrowers’ and domestic guarantors’ subsidiaries, and proceeds of any of the foregoing. The amount of the obligations under the New Facility secured by such shares of capital stock and equivalent ownership interests is limited to the lesser of (i) the aggregate amount permitted to be secured under the Company’s Indenture dated as of April 2, 2002 without requiring the notes issued under that Indenture to be secured equally and ratably by such shares of capital stock and equivalent ownership interests and (ii) the aggregate amount permitted to be secured under the Company’s Indenture dated as of January 9, 2006 (as supplemented by that first supplemental indenture dated as of January 17, 2006) without requiring the notes issued under that Indenture to be secured equally and ratably by such shares of capital stock and equivalent ownership interests.

If at any time (a) either (i) the Company’s corporate family rating or senior unsecured rating, whichever is in effect from Moody’s Investors Service, Inc. (“Moody’s”) is Baa3 or better (with a stable outlook or better)

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

and the Company’s corporate rating from Standard & Poor’s Financial Services LLC (“S&P”) is BB+ or better (with a stable outlook or better) or (ii) the Moody’s rating is Ba1 or better (with a stable outlook or better) and the S&P rating is BBB- or better (with a stable outlook or better) and (b) no default or event of default has occurred and is continuing, then upon the Company’s request, the foregoing security interests will be released. The Company is required to reinstate such security interests after release if: (a) both (i) the Moody’s rating is Ba2 and (ii) the S&P rating is BB, (b) (i) the Moody’s rating is Ba3 or lower and (ii) the S&P rating is below BBB- (with a stable outlook or better) or (c) (i) the Moody’s rating is below Baa3 (with a stable outlook or better) and (ii) the S&P rating is BB- or lower.

The New Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter, as defined in the New Facility. The New Facility also contains customary representations and warranties and events of default, subject to customary grace periods.

As of July 8, 2011, the amount utilized under the New Facility was $407,100 resulting in a total of $492,900 available under the New Facility. The amount utilized included $300,000 of borrowings, $53,542 of standby letters of credit guaranteeing the Company’s industrial revenue bonds and $53,558 of standby letters of credit related to various insurance contracts and foreign vendor commitments.

Senior Notes

On January 17, 2006, the Company issued $500,000 aggregate principal amount of 5.75% senior notes due January 15, 2011 and $900,000 aggregate principal amount of 6.125% notes due January 15, 2016. Interest payable on these notes is subject to adjustment if either Moody’s or S&P, or both, downgrades the rating assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $63 per quarter per $100,000 of outstanding notes. Interest rates have been increased by an aggregate amount of 0.75% as a result of downgrades by Moody’s and S&P since 2008. Additional downgrades in the Company’s credit ratings could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future. During the first quarter of 2011, the Company repaid the remaining outstanding $298,248, 5.75% senior notes due January 15, 2011, at maturity with cash on hand and borrowings under the ABL Facility.

In 2002, the Company issued $400,000 aggregate principal amount of its senior 7.20% notes due April 15, 2012.

 

14. Fair value

ASC 825-10, formerly the FASB Staff Position FAS 107-1 and Accounting Principles Board 28-1, “Interim Disclosures About Fair Value of Financial Instruments”, requires disclosures about fair value of financial instruments in interim reporting periods of publicly-traded companies.

 

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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

The fair value and carrying value of our debt instruments are detailed as follows:

 

     July 2, 2011      December 31, 2010  
     Fair Value      Carrying
Value
     Fair Value      Carrying
Value
 

5.75% notes, payable January 15, 2011 interest payable semiannually

   $ —           —           296,459         298,248   

7.20% senior notes, payable April 15, 2012 interest payable semiannually

     410,400         400,000         422,400         400,000   

6.125% notes, payable January 15, 2016 interest payable semiannually

     975,600         900,000         963,000         900,000   

Four-year senior secured credit facility, due September 2, 2013

     253,000         253,000         —           —     

Industrial revenue bonds, capital leases and other

     55,335         55,335         55,334         55,334   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

     1,694,335         1,608,335         1,737,193         1,653,582   

Less current portion

     463,585         453,185         348,799         350,588   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt, less current portion

   $ 1,230,750         1,155,150         1,388,394         1,302,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values.

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these instruments.

 

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Item 2. 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 U.S. and residential applications in Europe with net sales in 2010 of $5.3 billion. The Company is the second largest carpet and rug manufacturer and one of the largest manufacturers, marketers and distributors of ceramic tile, natural stone and hardwood flooring in the U.S., as well as a leading producer of laminate flooring in the U.S. and Europe. In 2010, the primary categories of the U.S. floor covering industry were carpet and rug (55%), resilient and rubber (13%), ceramic tile (12%), hardwood (9%), stone (6%) and laminate (5%).

The U.S. floor covering industry experienced declining demand beginning in the fourth quarter of 2006 that worsened during the latter parts of 2008, and continued to decline in 2009. In the first half of 2010 demand showed signs of recovering, but first half gains were lost in the second half of the year. Overall industry conditions in the U.S. are expected to improve during 2011, although the timing and size of a sustained recovery within the market remains uncertain.

The Company has three reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carrier or rail transportation. The segment’s product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America through its network of regional distribution centers and Company-operated sales service centers using Company-operated trucks, common carriers or rail transportation. The segment’s product lines are sold through Company-owned sales service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate, hardwood flooring, roofing systems, insulation panels and other wood products, primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.

For the three months ended July 2, 2011, net earnings attributable to the Company were $60.9 million, or diluted earnings per share (“EPS”) of $0.88, compared to the net earnings attributable to the Company of $68.1 million, or diluted EPS of $0.95, for the three months ended July 3, 2010. For the six months ended July 2, 2011, net earnings attributable to the Company were $84.3 million, or diluted EPS of $1.22, compared to the net earnings attributable to the Company of $88.6 million, or diluted EPS of $1.24, for the six months ended July 3, 2010. The three and six months ended July 3, 2010 include a tax benefit of approximately $30 million related to the settlement of certain tax contingencies and higher interest expense of $7.5 million related to a premium paid to extinguish approximately $200 million aggregate principal amount of senior notes. In addition to these 2010 impacts, the change in diluted EPS for the three and six months ended July 2, 2011, is primarily the result of the favorable net impact of price and product mix, lower selling, general and administrative costs, primarily as a result of the net benefits of restructuring actions taken in 2009 and 2010, and lower interest costs on outstanding debt, partially offset by higher inflationary costs, primarily related to raw materials.

 

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Table of Contents

Results of Operations

Quarter Ended July 2, 2011, as Compared with Quarter Ended July 3, 2010

Net sales

Net sales for the three months ended July 2, 2011 were $1,477.9 million, reflecting an increase of $77.8 million, or 5.6%, from the $1,400.1 million reported for the three months ended July 3, 2010. The increase was primarily due to the impact of favorable foreign exchange rates of approximately $36 million, the net effect of price and product mix of approximately $25 million and higher sales volume of approximately $17 million.

Mohawk Segment - Net sales increased $10.5 million, or 1.4%, to $758.1 million for the three months ended July 2, 2011, compared to $747.6 million for the three months ended July 3, 2010. The increase was primarily driven by the net effect of price and product mix of approximately $7 million and higher sales volume of approximately $4 million.

Dal-Tile Segment - Net sales increased $15.9 million, or 4.4%, to $379.5 million for the three months ended July 2, 2011, compared to $363.6 million for the three months ended July 3, 2010. The increase was primarily driven by higher sales volume of approximately $9 million, the net effect of price and product mix of approximately $5 million and the impact of favorable foreign exchange rates of approximately $2 million.

Unilin Segment - Net sales increased $54.7 million, or 17.7%, to $363.1 million for the three months ended July 2, 2011, compared to $308.4 million for the three months ended July 3, 2010. The increase was due to favorable foreign exchange rates of approximately $34 million, the net effect of price and product mix of approximately $13 million and higher sales volume of approximately $8 million.

Gross profit

Gross profit for the three months ended July 2, 2011 was $382.2 million (25.9% of net sales) and increased by $7.5 million or 2.0% compared to gross profit of $374.8 million (26.8% of net sales) for the three months ended July 3, 2010. Gross profit was favorably impacted by the net effect of price and product mix of approximately $25 million, lower manufacturing costs of approximately $18 million as a result of cost savings initiatives implemented by the Company and various restructuring actions, including manufacturing facility consolidations, workforce reductions and productivity improvements, the impact of favorable foreign exchange rates of approximately $10 million and higher sales volume of approximately $1 million, partially offset by higher inflationary costs of approximately $45 million, primarily related to raw materials and energy, and approximately $1 million in higher restructuring charges. Gross profit as a percent of net sales was unfavorably impacted by higher inflationary costs.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended July 2, 2011 were $280.5 million (19.0% of net sales), reflecting a decrease of $4.5 million, or 1.6%, compared to $285.0 million (20.4% of net sales) for the three months ended July 3, 2010. The decrease in selling, general and administrative expenses is primarily driven by the benefits of various restructuring actions and cost savings initiatives implemented by the Company, including facility consolidations and productivity improvements, partially offset by unfavorable foreign exchange rates.

Operating income

Operating income for the three months ended July 2, 2011 was $101.7 million (6.9% of net sales) reflecting a $12.0, million, or 13.3%, increase compared to an operating income of $89.7 million (6.4% of net sales) for the three months ended July 3, 2010. Operating income was favorably impacted by lower manufacturing costs and selling, general and administrative expenses of approximately $30 million, as a result of cost savings initiatives implemented by the Company and various restructuring actions, and the net effect of price and product mix of approximately $25 million, partially offset by higher inflationary costs of approximately $46 million, primarily related to raw materials and energy.

 

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Mohawk Segment - Operating income was $31.2 million (4.1% of segment net sales) for the three months ended July 2, 2011 reflecting an increase of $4.9 million compared to operating income of $26.3 million (3.5% of segment net sales) for the three months ended July 3, 2010. Operating income was favorably impacted by lower manufacturing costs and selling, general and administrative expenses of approximately $26 million, as a result of cost savings initiatives implemented by the Company and various restructuring actions, and the net effect of price and product mix of approximately $9 million, partially offset by higher inflationary costs of approximately $29 million, primarily related to raw materials, and approximately $2 million of higher restructuring charges.

Dal-Tile Segment - Operating income was $32.1 million (8.5% of segment net sales) for the three months ended July 2, 2011 reflecting an increase of $4.0 million compared to operating income of $28.1 million (7.7% of segment net sales) for the three months ended July 3, 2010. Operating income was favorably impacted by lower manufacturing costs and selling, general and administrative expenses of approximately $7 million, as a result of cost savings initiatives implemented by the Company and various restructuring actions, the net effect of price and product mix of approximately $3 million and higher sales volume of approximately $1 million, partially offset by higher inflationary costs of approximately $6 million, primarily related to raw materials and energy, and unfavorable foreign exchange rates of approximately $1 million.

Unilin Segment - Operating income was $46.2 million (12.7% of segment net sales) for the three months ended July 2, 2011 reflecting an increase of $3.9 million compared to operating income of $42.3 million (13.7% of segment net sales) for the three months ended July 3, 2010. The increase was primarily driven by the net effect of price and product mix of approximately $14 million and favorable foreign exchange rates of approximately $5 million, offset by higher inflationary costs of approximately $11 million, primarily related to raw materials and energy, higher selling, general and administrative expenses of approximately $2 million and lower sales volume of approximately $1 million.

Interest expense

Interest expense for the three months ended July 2, 2011 was $25.8 million compared to $39.0 million in the three months ended July 3, 2010. The decrease in interest expense for 2011 was due to lower interest costs on the Company’s outstanding debt and lower debt levels. In addition, the 2010 interest expense includes a $7.5 million premium paid to extinguish approximately $200 million aggregate principal amount of senior notes.

Income tax expense

For the three months ended July 2, 2011, the Company recorded income tax expense of $13.4 million on earnings before income taxes of $75.5 million for an effective tax rate of 17.8%, as compared to an income tax benefit of $18.8 million on earnings before income taxes of $50.2 million for an effective tax rate of (37.5)% for the three months ended July 3, 2010. The difference in the effective tax rate for the comparative period is primarily due to the benefit from the settlement of certain tax contingencies of approximately $30 million recorded during the second quarter of 2010 and the geographical dispersion of earnings and losses for the current period.

Six Months Ended July 2, 2011, as Compared with Six Months Ended July 3, 2010

Net sales

Net sales for the six months ended July 2, 2011 were $2,821.4 million, reflecting an increase of $74.1 million, or 2.7%, from the $2,747.3 million reported for the six months ended July 3, 2010. The increase was primarily due to the net effect of price and product mix of approximately $48 million and the impact of favorable foreign exchange rates of approximately $35 million, partially offset by lower sales volume of approximately $9 million, primarily related to continued weakness in the U.S. residential market.

Mohawk Segment - Net sales decreased $14.9 million, or 1.0%, to $1,449.2 million for the six months ended July 2, 2011, compared to $1,464.2 million for the six months ended July 3, 2010. The decrease was primarily driven by lower sales volume of approximately $24 million, primarily related to continued weakness in the U.S. residential market, partially offset by the net effect of price and product mix of approximately $9 million.

 

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Dal-Tile Segment - Net sales increased $18.9 million, or 2.7%, to $723.9 million for the six months ended July 2, 2011, compared to $705.0 million for the six months ended July 3, 2010. The increase was primarily driven by the net effect of price and product mix of approximately $8 million, higher sales volume of approximately $7 million and the impact of favorable foreign exchange rates of approximately $4 million.

Unilin Segment - Net sales increased $74.7 million, or 12.2%, to $688.9 million for the six months ended July 2, 2011, compared to $614.3 million for the six months ended July 3, 2010. The increase was due to the net effect of price and product mix of approximately $31 million, the impact of favorable foreign exchange rates of approximately $31 million and higher sales volume of approximately $13 million.

Gross profit

Gross profit for the six months ended July 2, 2011 was $723.8 million (25.7% of net sales) and increased by $7.8 million compared to gross profit of $716.0 million (26.1% of net sales) for the six months ended July 3, 2010. Gross profit was favorably impacted by the net effect of price and product mix of approximately $56 million, lower manufacturing costs of approximately $38 million as a result of cost savings initiatives implemented by the Company and various restructuring actions, including manufacturing facility consolidations, workforce reductions and productivity improvements, and favorable foreign exchange rates of approximately $9 million, offset by higher inflationary costs of approximately $85 million, primarily related to raw materials and energy, lower sales volume of approximately $7 million, primarily channel mix, and approximately $3 million of higher restructuring charges.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended July 2, 2011 were $566.1 million (20.1% of net sales), reflecting a decrease of $6.6 million, compared to $572.7 million (20.8% of net sales) for the six months ended July 3, 2010. The decrease in selling, general and administrative expenses is primarily driven by the benefits of various restructuring actions and cost savings initiatives implemented by the Company, including facility consolidations and productivity improvements, partially offset by unfavorable foreign exchange rates.

Operating income

Operating income for the six months ended July 2, 2011 was $157.8 million (5.6% of net sales) reflecting a $14.4 million increase compared to an operating income of $143.3 million (5.2% of net sales) for the six months ended July 3, 2010. Operating income was favorably impacted by the net effect of price and product mix of approximately $55 million, lower manufacturing costs and selling, general and administrative expenses of approximately $53 million as a result of cost savings initiatives implemented by the Company and various restructuring actions, including manufacturing facility consolidations, workforce reductions and productivity improvements, and the impact of favorable foreign exchange rates of approximately $3 million, partially offset by higher inflationary costs of approximately $86 million, primarily related to raw materials and energy, lower sales volume of approximately $7 million and higher restructuring charges of approximately $4 million.

Mohawk Segment - Operating income was $48.2 million (3.3% of segment net sales) for the six months ended July 2, 2011 reflecting an increase of $5.3 million compared to operating income of $43.0 million (2.9% of segment net sales) for the six months ended July 3, 2010. Operating income was favorably impacted by lower manufacturing costs and selling, general and administrative expenses of approximately $47 million as a result of cost savings initiatives implemented by the Company and various restructuring actions, including manufacturing facility consolidations, workforce reductions and productivity improvements, and the net effect of price and product mix of approximately $20 million, partially offset by higher inflationary costs of approximately $47 million, primarily related to raw materials and energy, lower sales volume of approximately $8 million and higher restructuring charges of approximately $5 million.

Dal-Tile Segment - Operating income was $49.8 million (6.9% of segment net sales) for the six months ended July 2, 2011 reflecting an increase of $6.3 million compared to operating income of $43.5 million (6.2%

 

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of segment net sales) for the six months ended July 3, 2010. Operating income was favorably impacted by lower manufacturing costs, selling, general and administrative expenses and freight costs of approximately $12 million as a result of cost savings initiatives implemented by the Company and various restructuring actions, including manufacturing facility consolidations, workforce reductions and productivity improvements, and the net effect of price and product mix of approximately $5 million, partially offset by higher inflationary costs of approximately $9 million, primarily related to raw materials and energy and the impact of unfavorable foreign exchange rates of approximately $2 million.

Unilin Segment - Operating income was $72.5 million (10.5% of segment net sales) for the six months ended July 2, 2011 reflecting an increase of $3.7 million compared to operating income of $68.8 million (11.2% of segment net sales) for the six months ended July 3, 2010. The increase was primarily driven by the net effect of price and product mix of approximately $31 million, favorable foreign exchange rates of approximately $5 million, higher sales volume of approximately $2 million, lower restructuring costs of approximately $1 million, partially offset by higher inflationary costs of approximately $35 million, primarily related to raw materials and energy.

Interest expense

Interest expense for the six months ended July 2, 2011 was $52.4 million compared to $72.9 million in the six months ended July 3, 2010. The decrease in interest expense resulted from lower interest costs on the Company’s outstanding debt and lower debt levels. In addition, the 2010 interest expense includes a $7.5 million premium paid to extinguish approximately $200 million aggregate principal amount of senior notes.

Income tax expense

For the six months ended July 2, 2011, the Company recorded an income tax expense of $18.4 million on earnings before income taxes of $105.0 million for an effective tax rate of 17.5%, as compared to a benefit of $15.8 million on earnings before income taxes of $74.4 million for an effective tax rate of (21.3)% for the six months ended July 3, 2010. The difference in the effective tax rate for the comparative period is primarily due to the benefit from the settlement of certain tax contingencies of approximately $30 million recorded during the second quarter of 2010 and the geographical dispersion of earnings and losses for the current period.

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 and credit terms from suppliers.

Cash flows provided by operating activities for the first six months of 2011 were $28.6 million compared to $89.0 million in the first six months of 2010. The decrease in cash provided by operating activities for the first six months of 2011 as compared to 2010 is primarily attributable to the 2010 tax refunds, the timing of receipts and customer mix changes in receivables and timing of disbursements.

Net cash used in investing activities for the first six months of 2011 was $112.5 million compared to $47.1 million in the first six months of 2010. The increase in investing activities primarily relates to higher capital expenditures related to additional extrusion capacity and expanding the Company’s international manufacturing capabilities. Capital spending during the remainder of 2011, excluding acquisitions, is expected to range from approximately $160 million to $180 million and is intended to be used primarily to purchase equipment, add geographic capacity and to streamline manufacturing capabilities.

Net cash used in financing activities for the first six months of 2011 was $3.4 million compared to net cash used in financing activities of $212.0 million in the first six months of 2010. The change in cash used in financing activities as compared to the first six months of 2010 is primarily attributable to lower debt repayments, net of borrowings and restricted cash, and the change in outstanding checks.

On September 2, 2009, the Company entered into a four-year, senior, secured revolving credit facility (the “ABL Facility”). The ABL Facility provided for a maximum of $600.0 million of revolving credit, subject to borrowing base availability, including limited amounts of credit in the form of letters of credit and swingline loans.

 

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As of July 2, 2011, the amount utilized under the ABL Facility was $360.1 million resulting in a total of $239.9 million available under the ABL Facility. The amount utilized included $253.0 million of borrowings, $53.5 million of standby letters of credit guaranteeing the Company’s industrial revenue bonds and $53.6 million of standby letters of credit related to various insurance contracts and foreign vendor commitments.

On July 8, 2011, the Company entered into a five-year, senior, secured revolving credit facility (the “New Facility”) and terminated the ABL Facility, which was originally set to mature on September 2, 2013. No early termination penalties were incurred as a result of the termination. The New Facility provides for a maximum of $900 million of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans.

The New Facility is scheduled to mature on July 8, 2016. The Company can terminate and prepay the New Facility at any time without payment of any termination or prepayment penalty (other than customary breakage costs in respect of loans bearing interest at a rate based on LIBOR).

At the Company’s election, revolving loans under the New Facility bear interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between 1.25% and 2.0%, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus 0.5%, and a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.25% and 1.0%. The Company also pays a commitment fee to the Lenders under the New Facility on the average amount by which the aggregate commitments of the Lenders’ exceeds utilization of the New Facility ranging from 0.25% to 0.4% per annum. The applicable margin and the commitment fee are determined based on the Company’s Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increases).

All obligations of the Company and the other borrowers under the New Facility are required to be guaranteed by all of the Company’s material domestic subsidiaries and all obligations of borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors. All obligations under the New Facility, and the guarantees of those obligations, are secured by a security interest in domestic accounts receivable and inventories, certain shares of capital stock (or equivalent ownership interests) of the domestic borrowers’ and domestic guarantors’ subsidiaries, and proceeds of any of the foregoing. The amount of the obligations under the New Facility secured by such shares of capital stock and equivalent ownership interests is limited to the lesser of (i) the aggregate amount permitted to be secured under the Company’s Indenture dated as of April 2, 2002 without requiring the notes issued under that Indenture to be secured equally and ratably by such shares of capital stock and equivalent ownership interests and (ii) the aggregate amount permitted to be secured under the Company’s Indenture dated as of January 9, 2006 (as supplemented by that first supplemental indenture dated as of January 17, 2006) without requiring the notes issued under that Indenture to be secured equally and ratably by such shares of capital stock and equivalent ownership interests.

If at any time (a) either (i) the Company’s corporate family rating or senior unsecured rating, whichever is in effect from Moody’s Investors Service, Inc. (“Moody’s”) is Baa3 or better (with a stable outlook or better) and the Company’s corporate rating from Standard & Poor’s Financial Services LLC (“S&P”) is BB+ or better (with a stable outlook or better) or (ii) the Moody’s rating is Ba1 or better (with a stable outlook or better) and the S&P rating is BBB- or better (with a stable outlook or better) and (b) no default or event of default has occurred and is continuing, then upon the Company’s request, the foregoing security interests will be released. The Company is required to reinstate such security interests after release if: (a) both (i) the Moody’s rating is Ba2 and (ii) the S&P rating is BB, (b) (i) the Moody’s rating is Ba3 or lower and (ii) the S&P rating is below BBB- (with a stable outlook or better) or (c) (i) the Moody’s rating is below Baa3 (with a stable outlook or better) and (ii) the S&P rating is BB- or lower.

The New Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, investments,

 

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fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter, as defined in the New Facility. The New Facility also contains customary representations and warranties and events of default, subject to customary grace periods.

As of July 8, 2011, the amount utilized under the New Facility was $407.1 million resulting in a total of $492.9 million available under the New Facility. The amount utilized included $300.0 million of borrowings, $53.5 million of standby letters of credit guaranteeing the Company’s industrial revenue bonds and $53.6 million of standby letters of credit related to various insurance contracts and foreign vendor commitments.

On January 17, 2006, the Company issued $500.0 million aggregate principal amount of 5.75% senior notes due January 15, 2011 and $900.0 million aggregate principal amount of 6.125% notes due January 15, 2016. Interest payable on these notes is subject to adjustment if either Moody’s or S&P, or both, downgrades the rating assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $0.1 million per quarter per $100.0 million of outstanding notes. Currently, the interest rates have been increased by an aggregate amount of 0.75% as a result of downgrades by Moody’s and S&P since 2008. Additional downgrades in the Company’s credit ratings could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future. During the first quarter of 2011, the Company repaid the remaining outstanding $298.2 million, 5.75% senior notes due January 15, 2011, at maturity with cash on hand and borrowings under the ABL Facility.

In 2002, the Company issued $400.0 million aggregate principal amount of its senior 7.20% notes due April 15, 2012. The Company believes it will have sufficient cash and cash equivalents and unutilized borrowing availability under the New Facility or through new public debt offerings to repay the senior notes when due. However, there can be no assurances that the Company will be able to complete new public debt offerings, if necessary, to repay the senior notes, prior to the April 15, 2012 maturity date.

As of July 2, 2011, the Company had invested cash of $240.8 million in money market AAA rated cash investments of which $233.3 million was in Europe. The Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its New Facility will be sufficient to meet its capital expenditure, working capital and debt servicing requirements over the next twelve months.

The Company may from time to time seek to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amount involved may be material.

Contractual Obligations

There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 2010 Annual Report filed on Form 10-K.

Critical Accounting Policies and Estimates

There have been no significant changes to the Company’s critical accounting policies and estimates during the period. The Company’s critical accounting policies and estimates are described in its 2010 Annual Report filed on Form 10-K.

 

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Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (“ASU 2011-05”). This update requires that the components of net income, the components of other comprehensive income and the total of comprehensive income be presented as a single continuous financial statement or in two separate but consecutive statements. The option of presenting other comprehensive income in the statement of stockholders’ equity is eliminated. This update also requires the presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

Impact of Inflation

Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses. The Company expects raw material prices, many of which are petroleum based, to continue to fluctuate based upon worldwide supply and demand of commodities utilized in the Company’s production processes. 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 and develop new product innovations 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.

Forward-Looking Information

Certain of the statements in this Form 10-Q, 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 economic or industry conditions; competition; inflation in raw material prices and other input costs; energy costs and supply; timing and level of capital expenditures; timing and implementation of price increases for the Company’s products; impairment charges; integration of acquisitions; international operations, introduction of new products; rationalization of operations; claims; litigation; and other risks identified in Mohawk’s SEC reports and public announcements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes to the Company’s exposure to market risk as disclosed in the Company’s 2010 Annual Report filed on Form 10-K.

 

Item 4. 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), which have been designed to provide reasonable assurance that such controls and procedures will meet their objectives, 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 at a reasonable assurance level for the period covered by this report.

No change in the Company’s internal control over financial reporting occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is involved in 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 by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

Beginning in August 2010, a series of civil lawsuits was initiated in several U.S. federal courts alleging that certain manufacturers of polyurethane foam products and competitors of the Company’s carpet underlay division had engaged in price fixing in violation of U.S. antitrust laws. Mohawk has been named as a defendant in seven of the 43 cases filed (the first on August 26, 2010), as well as in two consolidated amended class action complaints, the first filed on February 28, 2011, on behalf of a class of all direct purchasers of polyurethane foam products, and the second filed on March 21, 2011, on behalf of a class of indirect purchasers. All pending cases in which the Company has been named as a defendant have been filed in or transferred to the U.S. District Court for the Northern District of Ohio for consolidated pre-trial proceedings under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MDL-02196.

In these actions, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek three times the amount of unspecified damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. In April 2011, the Company filed a motion to dismiss the class action claims brought by the direct purchasers, and in May 2011, the Company moved to dismiss the claims brought by the indirect purchasers. On July 19, 2011, the Court issued a written opinion denying all defendants’ motions to dismiss. The Company denies all of the allegations in these actions and will vigorously defend itself.

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or year.

 

Item 1A. Risk Factors

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 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, availability of credit and demand for housing. The downturn in the U.S. and global economies beginning in 2006, along with the residential and commercial markets in such economies, negatively impacted the floor covering industry and the Company’s business. While overall economic conditions and the housing and flooring industries have begun to show signs of recovering, this improvement may be temporary and economic conditions may deteriorate in the foreseeable future. Further, significant or prolonged declines in such economies or 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, interest rate levels, availability of credit and demand for housing. The Company derives a majority of its sales from the replacement segment of the market. Therefore, economic changes that result in a significant or prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company’s business and results of operations.

 

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The floor covering industry is highly dependent on residential and commercial construction activity, including new construction, which is cyclical in nature and currently in a downturn. The downturn in the U.S. and global economies, along with the housing markets in such economies, negatively impacted the floor covering industry and the Company’s business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities have also lagged during the downturn. While overall economic conditions and the housing and flooring industries have begun to show signs of recovering, this improvement may be temporary and economic conditions may deteriorate in the foreseeable future. A significant or prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company’s business and results of operations.

In periods of rising costs, the Company may be unable to pass raw materials, energy and fuel-related cost increases 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 could vary significantly with market conditions. Although the Company generally attempts to pass on increases in raw material, energy 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.

Uncertainty in the credit market or downturns in the global economy and the Company’s business could affect the Company’s overall availability and cost of credit.

Uncertainty in the credit markets could affect the overall availability and cost of credit. Despite recent improvement in overall economic conditions, the impact of the economic downturn on the Company’s ability to obtain financing, including any financing necessary to refinance its existing senior unsecured notes, in the future, and the cost and terms of it, remains uncertain. These and other economic factors could have a material adverse effect on demand for the Company’s products and on its financial condition and operating results. Further, these generally negative economic and business conditions may factor into the Company’s periodic credit ratings assessment by either or both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. A rating agency’s evaluation is based on a number of factors, which include scale and diversification, brand strength, profitability, leverage, liquidity and interest coverage. During 2009, the Company’s senior unsecured notes were downgraded by the rating agencies, which increased the Company’s interest expense by approximately $0.2 million per quarter per $100 million of outstanding notes and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit ratings could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future, and the Company can provide no assurances that additional downgrades will not occur.

The Company has a significant level of indebtedness that must be repaid or refinanced. In addition, if the Company were unable to meet certain covenants contained in the Senior Secured Credit Facility, it may be required to repay borrowings under the Senior Secured Credit Facility prior to their maturity and may lose access to the Senior Secured Credit Facility for additional borrowings that may be necessary to fund its operations.

The Company’s outstanding 7.20% senior notes in the aggregate amount of $400.0 million are due April 15, 2012. On July 8, 2011, the Company entered into a $900 million five-year, senior, secured revolving credit facility (the “New Facility”).The Company believes it will have sufficient cash and cash equivalents and unutilized borrowing availability under the New Facility or through new public debt offerings to repay the senior notes when due. However, there can be no assurances that the Company will be able to complete new public debt offerings, if necessary, to repay the senior notes, prior to the April 15, 2012 maturity date. As of July 8, 2011, the amount utilized under the New Facility was $407.1 million resulting in a total of $492.9 million available under the New Facility. The amount utilized included $300.0 million of borrowings, $53.5 million of standby letters of credit guaranteeing the Company’s industrial revenue bonds and $53.6 million of standby letters of credit related to various insurance contracts and foreign vendor commitments.

 

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During the term of the New Facility, if the Company’s cash flow is worse than expected, the Company may need to refinance all or a portion of its indebtedness through a public debt offering or a new bank facility and may not be able to do so on terms acceptable to it, or at all. If the Company is unable to access debt markets at competitive rates or in sufficient amounts due to credit rating downgrades, market volatility, market disruption, or other factors, it could materially adversely affect the Company’s ability to repay its indebtedness and otherwise have a substantial adverse effect on the Company’s financial condition and results of operations.

Additionally, the New Facility includes certain affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least 3.0 to 1.0 and a Consolidated Net Leverage Ratio of no more than 3.75 to 1.0, each as of the last day of any fiscal quarter, as defined in the New Facility.

The Company faces intense competition in the flooring 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 or others may impact demand which could have a material adverse effect on the Company’s business.

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, polypropylene, triexta and polyester resins and fibers, which are used primarily in the Company’s carpet and rugs business; clay, talc, nepheline syenite and 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. For certain of such raw materials, the Company is dependent on one or a small number of suppliers. An adverse change in the Company’s relationship with such a supplier, the financial condition of such a supplier or such supplier’s ability to manufacture or deliver such raw materials to the Company could lead to an interruption of supply or require the Company to purchase more expensive alternatives. 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.

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 as of the balance sheet date and for the statement of operations accounts using, principally, the Company’s 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. 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 Company’s consolidated financial statements and affect comparability of the Company’s results between financial periods.

 

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The Company may experience certain risks associated with acquisitions, joint ventures and strategic investments.

The Company has typically grown its business through acquisitions. Growth through acquisitions involves risks, many of which may continue to affect the Company after the acquisition. The Company cannot give assurance that an acquired company will achieve the levels of revenue, profitability and production that the Company expects. The combination of an acquired company’s business with the Company’s existing businesses involves risks. The Company cannot be assured that reported earnings will meet expectations because of goodwill and intangible asset impairment, increased interest costs and issuance of additional securities or incurrence of debt. The Company may also 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 may result in:

 

   

maintaining executive offices in different locations;

 

   

manufacturing and selling different types of products through different distribution channels;

 

   

conducting business from various locations;

 

   

maintaining different operating systems and software on different computer hardware; and

 

   

providing different employment and compensation arrangements for employees.

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.

Failure to successfully manage and integrate an acquisition 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 acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise perform as expected, may adversely impact the Company’s financial condition and results of operations.

In addition, we have made certain investments, including through joint ventures, in which we have a minority equity interest and lack management and operational control. The controlling joint venture partner in a joint venture investment may have business interests, strategies or goals that are inconsistent with ours, and business decisions or other actions or omissions of the controlling joint venture partner or the joint venture company may result in harm to our reputation or adversely affect the value of our investment in the joint venture.

A failure to identify suitable acquisition candidates or partners for strategic investments 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 a wide array of potential strategic transactions, including acquisitions of complementary businesses, as well as strategic investments and joint ventures. Although the Company regularly evaluates such opportunities, the Company may not be able successfully to identify suitable acquisition candidates or investment opportunities, to obtain sufficient financing on acceptable terms to fund such strategic transactions, to complete acquisitions and integrate acquired businesses with the Company’s existing businesses, or to manage profitably acquired businesses or strategic investments.

The Company has been, and in the future may be, subject to costs, liabilities and other obligations under existing or new laws and regulations, which could be significant.

The Company and its customers and suppliers are subject to various federal, state and local laws, regulations and licensing requirements. The Company faces risks and uncertainties related to compliance with and enforcement of increasingly numerous and complex federal, state and local laws and regulations. In addition, new laws and regulations may be enacted in the U.S. or abroad that may require the Company to incur additional personnel-related, environmental, or other costs on an ongoing basis, such as recently enacted healthcare legislation in the United States.

 

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Further, 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, recycling and disposal of materials and finished product. 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 and increased costs of its operations. For example, enactment of climate control legislation or other regulatory initiatives by the U.S. Congress or various states, or the adoption of regulations by the EPA and analogous state or foreign governmental agencies that restrict emissions of greenhouse gases in areas in which the Company conducts business could have an adverse effect on its operations and demand for its products. The Company’s manufacturing processes use a significant amount of energy, especially natural gas. Increased regulation of energy use to address the possible emission of greenhouse gases and climate change could materially increase the Company’s manufacturing costs.

The nature of the Company’s business and 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.

The Company’s business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected events.

Many of the Company’s business activities involve substantial investments in manufacturing facilities and many products are produced at a limited number of locations. These facilities could be materially damaged by natural disasters, such as floods, tornados, hurricanes and earthquakes, or by fire or other unexpected events. The Company could incur uninsured losses and liabilities arising from such events, including damage to its reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on its business, financial condition and results of operations.

The Company may be exposed to litigation, claims and other legal proceedings in the ordinary course of business relating to its products, which could affect its results of operations and financial condition.

In the ordinary course of business, the Company is subject to a variety of product-related claims, lawsuits and legal proceedings, including those relating to product liability, product warranty, product recall, personal injury, and other matters that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. Such matters could have a material adverse effect on its business, results of operations and financial condition if the Company is unable to successfully defend against or resolve these matters or if it’s insurance coverage is insufficient to satisfy any judgments against the Company or settlements relating to these matters. Although the Company has product liability insurance, the policies may not provide coverage for certain claims against the Company or may not be sufficient to cover all possible liabilities. Further, the Company may not be able to maintain insurance at commercially acceptable premium levels. Moreover, adverse publicity arising from claims made against the Company, even if the claims were not successful, could adversely affect the Company’s reputation or the reputation and sales of its products.

The Company manufactures, sources and sells many products internationally and is exposed to risks associated with doing business globally.

The Company’s manufacturing facilities in Mexico and Europe represent a significant portion of the Company’s capacity for ceramic tile and laminate flooring, respectively, and the Company’s European operations represent a significant source of the Company’s revenues and profits. The business, regulatory and political environments in these countries differ from those in the U.S. In addition, the Company increasingly sells products, operates plants and invests in companies in other parts of the world. The Company’s international sales, operations and investments are subject to risks and uncertainties, including:

 

   

changes in foreign country regulatory requirements;

 

   

differing business practices associated with foreign operations;

 

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various import/export restrictions and the availability of required import/export licenses;

 

   

imposition of foreign tariffs and other trade barriers;

 

   

political, legal and economic instability;

 

   

foreign currency exchange rate fluctuations;

 

   

changes in foreign country tax rules, regulations and other requirements, such as changes in tax rates and statutory and judicial interpretations in tax laws;

 

   

inflation;

 

   

differing labor laws and changes in those laws;

 

   

work stoppages and disruptions in the shipping of imported and exported products;

 

   

government price controls;

 

   

extended payment terms and the inability to collect accounts receivable; and

 

   

tax inefficiencies and currency exchange controls that may adversely impact its ability to repatriate cash from non-U.S. subsidiaries.

The Company cannot assure investors that it 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 its financial condition and results of operations.

If the Company is unable to protect its intellectual property rights, particularly with respect to the Company’s patented laminate flooring technology and its 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 U.S. 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 the Company 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 U.S. 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.

 

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The Company generally 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.

In the past, companies have claimed 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 U.S. 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 attorney’s 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.

The Company is subject to changing regulation of corporate governance and public disclosure that have increased both costs and the risk of noncompliance.

The Company’s stock is publicly traded. As a result, the Company is subject to the rules and regulations of federal and state agencies and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the Securities and Exchange Commission and New York Stock Exchange, frequently issue new requirements and regulations. The Company’s efforts to comply with the regulations and interpretations have resulted in, and are likely to continue to result in, increased general and administrative costs and diversion of management’s time and attention from revenue generating activities to compliance activities.

Declines in the Company’s business conditions may result in an impairment of the Company’s tangible and intangible assets which could result in a material non-cash charge.

A decrease in the Company’s market capitalization, including a short-term decline in stock price, or a negative long-term performance outlook, could result in an impairment of its tangible and intangible assets which results when the carrying value of the Company’s assets exceed their fair value. In 2008, the Company’s goodwill and other intangible assets suffered an impairment and additional impairment charges could occur in future periods.

 

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The long-term performance of the Company’s business relies on its ability to attract, develop and retain talented management.

To be successful, the Company must attract, develop and retain highly qualified and talented personnel in management, sales, marketing, product design and innovation and operations, and as it considers entering new international markets, skilled personnel familiar with those markets. The Company competes with multinational firms for these employees and invests significant resources in recruiting, developing, motivating and retaining them. The failure to attract, develop, motivate and retain key employees could negatively affect the Company’s competitive position and its operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

No.

  

Description

  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.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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.
    (Registrant)
Dated: August 5, 2011   By:  

  /s/  Jeffrey S. Lorberbaum

            JEFFREY S. LORBERBAUM
            Chairman and Chief Executive Officer
            (principal executive officer)
Dated: August 5, 2011   By:  

  /s/  Frank H. Boykin

            FRANK H. BOYKIN
            Chief Financial Officer
            (principal financial officer)